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Tax Issues
To any newcomer interested in investment in Germany, one of the most daunting aspects is the German tax system. From types of taxes to tax rates to tax payments, it’s understandable why this can be a bit off-putting. But it doesn’t have to be. Purchasing a property in Berlin and investing in Germany with IMOINVEST International is the way to go. Our knowledgeable real estate investment consultants are here to help you each step of the way. As a property owner, you will be subject to many different types of tax, including local taxes, individual income taxes, capital gains taxes, and sales taxes. There are a number of aspects that will determine the amount of tax you will pay, and this is why it’s important to have experts like the investment consultants of IMOINVEST by your side. We will explain the German taxation system including real estate taxes and German property tax, and how this effects investment in Germany. All of these details will be discussed with you during the property search process with your IMOINVEST agent.
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Know about the local taxes you're responsible for
Germany is now undergoing an extensive tax reform, one that should wind up putting more money in the pockets of individual taxpayers and having a positive effect on investment. Some claim that the extensive changes give the taxpayer in Germany one of the best "bottom lines" in the European Union. (Federal tax rates may be higher, but Germans have no provincial income tax requirements.)
The maximum rate for individuals has been decreased. It was 53% in 1998 and is 42% in 2005, while the minimum rate has been reduced from 25.9% to 15%. The "solidarity surcharge" of 5.5% of the tax, to cover the costs of integrating the states of the former East Germany, is still in effect. The corporate tax rate, which was thought to discourage investment in Germany, will decrease from 30%-40% to only 25%.
The most stimulating news for corporations though is the exemption from capital gains taxes when selling holdings in industrial companies. Large banks and insurance companies have been holding vast quantities of such shares for decades, but have been reluctant to sell them due to the significant capital gain liabilities that would have been assessed. The reform, which applies to shares held longer than a year, is expected to free up considerable amounts of capital for young, promising enterprises and business start-ups.
Individual Income Taxes
In Germany you can be subject to tax if you either have German source income or if you are a German resident. However, there are various exemption rules that must be considered in every single case. The German tax system is similar to the structures in other western countries. You pay income taxes throughout the year, usually with an employer deducting tax from each paycheck. Adjustments would then be made at the end of the year for possible under or overpayments.
Deductions from compensation are also made for three social programs; retirement, unemployment and health insurance. Payments for these programs are borne equally by the employer and the employee. The employer's share of contributions is not considered as taxable income to the employee and the employee's portion is tax deductible up to a certain limit.
If an individual is subject to German tax, generally most sources of income are then taxable. The Lohnsteuer (wage tax), which alone accounts for a third of the German government's revenue, is withheld at source from compensation. Income from other sources (e. g. self-employment, fees for services, rent collections, investments and the like) are covered by the Einkommensteuer (income tax).
The Lohnsteuer differs from the Einkommensteuer only by the method of collection. The Lohnsteuer is collected at source and paid directly to the Finanzamt (tax office) by the employer while the individual must pay the Einkommensteuer himself. Therefore the Lohnsteuer is comparable to the income tax withholding shown on the U.S. Form W-2 (Lohnsteuerkarte).
Based primarily on your final payment for the previous year, the Finanzamt will estimate your tax for the current year and require you to make prepayments (Vorauszahlungen) of a quarter of the tax on March 10, June 10, September 10 and December 10. The total tax liability is determined by filing an income tax return, which includes all types of income from all sources. Wage tax withholding as well as provisional payments are deducted from this total tax liability so that a refund or final tax payment is assessed. The tax assessment is usually issued by the Finanzamt between two and six months from the date the return is filed. No payment will be due before receipts of the tax assessment notice.
Every tax return is under audit, therefore, if the tax assessment is issued and is not preliminary, the assessment can only be changed in the future by the occurrence of extraordinary circumstances (e. g. tax evasion).
As a rule, the income tax return (Einkommensteuererklärung) should be filed by May 31 of the year following the one in which the income was received. If you use the assistance of a tax consultant, you have an automatic extension to file until September 30. There may be penalties and interest assessed if the return is filed late.
Single persons who earned €7,664 or less in 2004, and married persons who earned €15,328 or less, usually have no tax liability. There are a few situations where the taxpayer is required to pay taxes even though the income is less than the personal allowance, especially when tax-exempt income (such as foreign-sourced income) must be considered for the determination of the applicable income tax rate (progression clause). Taxes are then assessed based on a sliding scale.
Deductions are granted for circumstances such as children under 18 (or under 27 if still attending school and without earnings), specified insurance premiums, charitable and political contributions to German entities up to certain limits and unavoidable extraordinary expenses above a certain limit (such as illness).
Other Taxes
In addition to the various forms of income tax there is also a series of sales taxes that significantly impact both individuals and businesses. The major tax is the Mehrwertsteuer (value added tax), which accounts for a quarter of the government's revenue and is second only to the Lohnsteuer in this regard. The Mehrwertsteuer assesses a levy on each step in the production and delivery of most items available for purchase. It applies to services as well as goods and the standard rate is 16%. A reduced rate of 7% applies to certain products, including food and printed material. Medical and insurance services are generally exempt, as are exports of goods abroad and services rendered abroad.
Numerous other items, including gasoline, alcoholic beverages, tobacco products, tea and coffee, carry sales taxes in addition to the Mehrwertsteuer. There is also a church tax (Kirchensteuer), of 8% to 9% of the Einkommensteuer/Lohnsteuer. But you are not required to pay the tax unless you wish to be officially affiliated with one of Germany's established churches; usually Catholic or Protestant (Evangelisch).
All in all there are approximately 30 different types of taxes, including taxes on inheritances, real estate and motor vehicles. There is even a tax on the gross amounts received by the state-run lotteries, though the distributions to the lucky lottery winners are tax-free.
Due to the complexity of the German tax system, it is always recommended that you hire a tax consultant (Steuerberater/CPA) to guide you through the intricacies involved in filing returns as well as provide some ease of mind during your stay abroad. In addition, the German Finanzamt will give you tax advice at no charge. If you are interested in further information about the German tax system, refer to www.bundesfinanzministerium.de
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