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Page 1 of 2 The German tax law is very complex and numerous exemptions (and deductions) apply, therefore it is necessary to consult a German tax adviser/accountant in all individual cases. The following information is merely a brief introduction for individual non-resident investors holding property in Germany (as private asset) and must not be viewed as an exhaustive tax guide or tax advice.
Business income and other types of income (German tax law distinguishes seven different forms of income for tax purposes) are out of scope of this brief guide. The following information applies to property held as a private asset only; property held as a business asset is taxed differently.
INCOME TAX (INDIVIDUAL)
Income tax is levied on all German income. As a general guide, the tax is progressive and levied at rates of 15-42%. In addition, a solidarity surcharge (to pay for the former East Germany integration) of 5.5% of the total tax due is payable. (The top rate of 42% is only levied on profits exceeding 52,152 euro.)
There are two types of income tax – tax on wages (Lohnsteuer) and tax on income (Einkommensteuer). The difference is the method of collection; tax on wages is withdrawn at source and paid to the tax office by the employer, while income tax (on income from self-employment, rental income, investments, etc) is paid directly by the individual taxpayer. Based on the previous year’s tax assessment tax payers have to make tax pre-payments in quarterly installments (March, June, September, December). The tax return for the year needs to be filed by 31st May of the year to follow. Adjustments are made for eventual under- or overpayment.
Germany has been undergoing positive changes in its tax law in the last few years. The individual income tax rates have been decreased, from 53% (1998) to 42% (2005) in case of highest rate,and down to 15% from 25.9% as far as lowest rate. (The Merkel government has now agreed on a corporate tax reform to lower the total tax liability of corporations to 29.83% from current 38.65%, possibly effective 1 January 2008. To compensate, some of the many tax avoidance loopholes are to be closed.)
The non-taxable minimum is currently 7,664 euro for single persons (or 15,328 euro for married couples), however, there are some exceptions where this may not apply.
OTHER TAXES
There is a number of other taxes, including VAT (Umsatzsteuer or Mehrwertsteuer), additional sales taxes on certain goods such as alcohol, tobacco, gasoline, etc, other business taxes,church tax, etc. (Church tax of 8% of the income tax is only payable by those officially affiliated with one of the main churches.
VAT is being increased from 16% to 19% (effective 1 January 2007), although a lower rate of VAT applies to certain products, while others (such as medical goods) are exempt.
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