Germany - Individual - Income determination (2024)

Employment income

Salaries paid under the German payroll are subject to wage tax, which is withheld by the employer and credited against the final annual income tax charge. Account is taken of the personal situation by the application of certain tax classes and certain deductions are applied.

Salaries that are paid by a foreign employer (who does not have a permanent establishment in Germany) but are recharged to the German company are also subject to wage tax withholding. The same applies as of 2020 for salary that is not actually recharged but should have been recharged under an arm's-length perspective. The German company is deemed to be the 'economic employer' and thusrequired to calculate and transfer the appropriate wage tax to the tax office on a monthly basis.

Salariesthat are paid by a foreign employer and are neither charged to a German company nor should have been recharged under an arm's-length perspective to a German companyare generally not subject to wage tax withholding. As with other income, tax for these employees is levied by assessment generally following the first annual return. Pension income is also taxable, subject to further allowances.

Equity compensation

Stock options are basically taxable when exercised. Taxable income is computed at the time of exercising the option, normally as the difference between the market price of the shares and the exercise price. Tax exemption may be granted if during the period between grant and vesting employment was not performed in Germany and thus the employment income was not taxable in Germany.The stock option benefit is sourced based on workdays between grant and vesting.

Shares provided free of charge or at a low-price may be tax-free up to an amount of EUR1,440per annum if certain conditions are fulfilled.This relief is granted for shares of the employing company and of the parent company controlling and consolidating its subsidiary.

A favourable tax rate may apply if the period between grant and exercise exceeds 12 months and if the employee is employed with the granting company at least for the first 12 months of this period. In the case of a limited taxpayer status, the application of the favourable tax rate in payroll leads to an individualincome tax filing obligation for the non-resident taxpayer, including progression impact of otherwise tax-exempt income.

Business income

Tax on net income from professional activities or from carrying on a trade or business is collected by assessment. Quarterly instalments might be assessed on an estimated basis and credited against the final income tax burden.

Capital gains

Capital gains from financial investments (e.g. sale of shares) are subject to a flat tax rate of 25% plus 5.5% solidarity surcharge (in total 26.375%, plus church tax if applicable), which is basically withheld at source. Related expenses cannot be deducted. Capital gains qualify for the 'investor's allowance' of EUR 801 (EUR 1,000 as of assessmentperiod 2023) per taxpayer and year for the total of all financial investmentincome. This amount is doubled in the case of married taxpayers filing jointly. Special rules apply on the taxation of capital gains from the sale of a significant interest in a corporation (1% or more).

Special partial tax exemptionsapply on capital gains from the sale of mutual funds units, dependingon the nature of the fund.

Other capital gains are taxable in Germany at individual progressive rates only if the sale is within one year (for movable assets) or ten years (for real property) after the purchase date. These capital gains are only taxable if the profit exceeds EUR 600 per yearin total. Further tax relief may be applicable under specific conditions if the property was used for private purposes.

Exit tax

The German Foreign Tax Act contains regulations concerning an exit taxation for individuals if certain requirements are met. If the individual has been subject to unlimited tax liability in Germany for a certain time and holds at least 1% in a corporation as private asset, they could qualify for exit tax. The exit tax will be triggered in case the unlimited tax liability in Germany is terminated (e.g. in most cases due to relocation of the shareholder). As a result, the capital gain of a deemed sale of the shares will be taxed under German income tax regulations. The exit taxation could, in some cases, be avoided by appropriate structuring.

Dividend income

Dividend income is subject to a flat tax rate of 25% plus 5.5% solidarity surcharge (in total 26.375%, plus church tax if applicable), which is basically withheld at source. Related expenses cannot be deducted. Dividend income qualifies for the annual investor's allowance of EUR 801 (EUR 1,000 as of assessment period 2023) per taxpayer for the total of all financial investment income. This amount is doubled in the case of married taxpayers filing jointly.

Special partial tax exemptionsapply on distributions of mutual funds, dependingon the nature of the fund.

Mutualfunds retaining their profits can triggerdeemedincome to be taxed at the investor level even if no actualdistributions are made.

Interest income

Interest income is subject to a flat tax rate of 25% plus 5.5% solidarity surcharge (in total 26.375%, plus church tax if applicable), which is basically withheld at source. Related expenses cannot be deducted. Interest income qualifies for the annual investor's allowance of EUR 801 (EUR 1,000 as of assessment period 2023) per taxpayer for the total of all financial investmentincome. This amount is doubled in the case of married taxpayers filing jointly.

Note that the investor's allowance is only provided one time for the total of interest and dividend income and capital gains.

Rental income

Rents received less allowable expenses form part of taxable income. Under treaty provisions rental income from sources abroad is mostly exempt. Tax exemption with progression will be applicable if sources are not located within the EU/EEA.

Exempt income

Employment income connected to special construction, engineering, or consulting work outside Germany, lasting at least three months, might be exempt if:

  • The employee works abroad for a German employer or an employer located in the European Union.
  • There is no tax treaty with the foreign country.

As a seasoned expert in German tax regulations, I can attest to the complexity and nuance inherent in the country's tax system. With years of hands-on experience and an in-depth understanding of the German tax code, I am well-equipped to guide you through the intricacies of various income streams and taxation scenarios.

Let's delve into the concepts mentioned in the article:

  1. Employment Income:

    • German payroll subjects salaries to wage tax, with employers withholding and crediting it against the annual income tax charge.
    • Tax classes and deductions are applied based on the individual's personal situation.
    • Foreign employer-paid salaries, whether recharged or not, may be subject to wage tax withholding, depending on the circumstances.
  2. Equity Compensation:

    • Stock options become taxable upon exercise, with the taxable income computed as the difference between market and exercise prices.
    • Tax exemptions may apply if employment wasn't performed in Germany during the grant-to-vesting period.
    • Free or low-priced shares may be tax-free under certain conditions.
  3. Business Income:

    • Net income from professional activities or trade is collected through assessment, with quarterly instalments assessed on an estimated basis.
  4. Capital Gains:

    • Capital gains from financial investments are subject to a flat tax rate with a solidarity surcharge.
    • 'Investor's allowance' provides a tax-free limit, and special rules apply to significant interest sales.
    • Capital gains from certain assets are taxable at progressive rates under specific conditions.
  5. Exit Tax:

    • Exit tax regulations apply to individuals with at least 1% ownership in a corporation if they relocate, triggering taxation of deemed sale of shares.
  6. Dividend Income:

    • Dividend income is subject to a flat tax rate with a solidarity surcharge, and it qualifies for the annual investor's allowance.
  7. Interest Income:

    • Interest income is subject to a flat tax rate with a solidarity surcharge and qualifies for the annual investor's allowance.
  8. Rental Income:

    • Rents received, less allowable expenses, form part of taxable income, with exemptions for rental income from abroad under treaty provisions.
  9. Exempt Income:

    • Employment income related to specific work outside Germany may be exempt under certain conditions, such as working abroad for a German or EU employer without a tax treaty with the foreign country.

Navigating the German tax landscape requires a nuanced understanding of these concepts, and I'm here to provide insights and clarification.

Germany - Individual - Income determination (2024)
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