Detailed explanation of tax types and collection rules in Germany

Germany’s tax system is quite complete, covering personal income tax, corporate income tax, real estate tax, business tax, land purchase tax, customs duties, inheritance tax and gift tax, insurance tax, motor vehicle tax, mineral oil tax, church tax and Solidarity surcharge and many other aspects.

Personal income tax

German personal income tax taxpayers are divided into unlimited taxpayers and limited taxpayers. Unlimited taxpayers are resident individuals who have a permanent residence in Germany or have lived in Germany for at least 6 consecutive months within a year. Such taxpayers need to pay tax on all their domestic and foreign income; limited taxpayers refer to individuals who have no permanent residence in Germany. Non-resident individuals who live in Germany for less than 6 months are only subject to tax on their income sourced in Germany. The scope of personal income tax collection is wide, including but not limited to salary income, freelance income, investment income, etc. Pre-tax deductible items include interest expenses, medical expenses, insurance premiums, etc. German personal income tax implements a progressive tax rate, with the tax rate ranging from 0% to 45%, and the basic tax exemption is 10,347 euros.

In addition, personal income tax is divided into single, married and civil partnership forms, and the basic deductions are different. German personal income tax is divided into six tax brackets, which are respectively targeted at different family and personal situations.

Corporate income tax

German corporate income tax is a federal tax and is also divided into unlimited taxpayers and limited taxpayers. Unlimited taxpayers are subject to corporate income tax on their worldwide income, while limited taxpayers are only subject to corporate income tax on their German-sourced income. The fixed rate of corporate income tax is 15%, and the calculation formula is corporate income tax = corporate profit × 15%.

Business tax

Business tax is a tax levied by local governments on corporate operating income. The calculation method is corporate profits multiplied by the tax rate index and then multiplied by the corresponding tax rate. The unified business tax rate index stipulated by the federal government is 3.5%. The local tax collection rate stipulated by various local governments is usually not less than 200%, and the average tax collection rate is between 350% and 400%.

Land purchase tax

The land purchase tax is levied on real estate, including developed land and cultivated land, as well as developed real estate. The tax rate is different in each state, generally 3.5%, but there are also tax exemptions, such as the purchase of real estate with an estimated basis of no more than 2,500 euros, the transfer of real estate through gift or inheritance, etc.

Tariff

As an EU member state, Germany applies the EU Community customs tax system. No tariffs are levied on the circulation of goods between EU countries. Exported goods are generally zero-tariffed, while imported goods are subject to tariffs at corresponding rates based on the goods code.

Inheritance and gift taxes

Inheritance tax and gift tax apply at the same rate and are determined based on the relationship between the heir or donee and the decedent or donor and the assets acquired.

Insurance tax

Insurance tax is mainly levied on German residents who have paid premiums. The tax rate is usually 19%, but it is levied at a lower rate for certain types of insurance (such as home property insurance).

Motor vehicle tax

Motor vehicle tax is a tax levied based on the exhaust emissions and engine type of motor vehicles. To encourage environmental protection, pure electric vehicles are exempt from paying this tax for ten years after being licensed.

Mineral oil tax

Mineral oil taxes are paid by mineral oil producers and importers, but the actual burden is often passed on to consumers. This tax is intended to reduce motor vehicle use and promote environmental protection.

Church tax

Church tax is levied on formally registered believers with religious beliefs at a rate of 8% or 9% of the personal income tax, depending on the state’s regulations.

Solidarity surcharge

The solidarity surcharge has been implemented since 1991 at a rate of 5.5% to fund German reunification and related support programs.