German Income Tax

Residents are liable for income tax in Germany on their worldwide income; non-residents are liable on their German-source income only. Individuals are deemed resident in Germany if their domicile or habitual place of abode is in Germany, i.e. if they stay for an uninterrupted period of 6 months, which may fall across two years.

Income tax is levied on several categories of income such as from employment, self-employment, business and real-estate. Employment income includes any amount in cash or in kind received by the employee for their work. The employer has to withhold income tax at source together with a solidarity surcharge of 5.5% on the tax amount due.

In general, expenses incurred to create or maintain income are deductible. The employee is entitled to a lump-sum deduction of EUR 920 without receipts. Furthermore the following expenses are deductible: cost of travel between home and workplace (in excess of the first 20 km, this has been challenged and will be decided by the Constitutional Court), expenses connected with maintaining two households, professional books and periodicals and membership fees paid to professional organisations or trade unions. There are complicated rules for the deduction of insurance contributions. 66% of contributions (up to a maximum of EUR 13’200 or double for jointly assessed spouses) to the obligatory State pension scheme and to certain private pension schemes are deductible in 2008 if the scheme provides monthly payments or a lifelong annuity not before the age of 60. Contributions to health, accident, unemployment and liability insurance and to the insurance for nursing care may also be deducted up to a limit of EUR 2’400 if the taxpayer pays the total of these insurances himself. For taxpayers who do not pay the total themselves, the limit is EUR 1’500. Finally there are a few other tax free allowances such as a basic allowance of EUR 7’664, a child allowance of EUR 1’824 and an allowance for child care of EUR 1’080 (each are doubled for jointly assessed spouses). If the child benefit a taxpayer received is more or the same as the potential relief from the deductions, they are not applied. Income tax is imposed at progressive rates using complex tables. The lowest rate in 2008 is 15%. It goes up to 42% for income over EUR 52’151 and up to EUR 250’000 for a single person (double for jointly assessed spouses). Since 2007 a special rate for the “rich” (“Reichensteuer”) of 45% for income over EUR 250’000 for single persons (double for jointly assessed spouses) is applied. Taxpayers have to file a tax return by 31 May the following year.