Taxation in Germany
Taxes in Germany are levied by the federal government, the 16 states, and municipalities. The system combines direct and indirect taxes and has been reshaped by reunification in 1990 as well as Germany’s membership in the European Union. Today, the largest sources of revenue are income tax and value-added tax, which together fund a wide range of public services, infrastructure, and social welfare programs.
The constitutional framework is defined by the Basic Law, which allocates taxing rights between the federation, the states, and local authorities. Some taxes are collected exclusively at the federal level, such as customs duties and certain excise taxes, while others are shared between levels of government. Municipalities retain the right to levy local taxes, including property tax and trade tax.
Germany’s tax system covers both residents and, under specific conditions, non-residents with income generated in the country. Corporations, both public and private, are subject to corporate taxation, while exemptions exist for certain non-profit organizations and religious institutions. Additional revenues are derived from real estate transfer tax, inheritance and gift taxes, capital gains tax, the air passenger tax, and motor vehicle taxes.
Example of tax calculation
Single taxpayer
In 2024, a single individual with annual gross income below €11,604 pays no income tax in Germany. Above this threshold, the income tax rate starts at 14% and rises progressively to 42% for income above €66,760. A top rate of 45% applies to income above €289.300Married couple
Married couples may benefit from income splitting, in which their combined income is divided equally and taxed as if each spouse earned half. For example, if one spouse earns €60,000 and the other €40,000, the taxable income of €100,000 is split into two portions of €50,000 each. This can reduce the applicable progressive rate compared to taxation as two single individuals.Freelancer
Self-employed individuals and freelancers are subject to the same progressive income tax rates, but may deduct allowable business expenses. For instance, a freelancer earning €80,000 annually with €20,000 in deductible expenses has a taxable income of €60,000. Standard progressive rates then apply to this adjusted figure.Corporate tax
Corporations in Germany are taxed at a flat corporate income tax rate of 15%. For a company reporting €200,000 in taxable profit, the corporate tax amounts to €30,000. In addition, the solidarity surcharge and municipal trade tax apply, which vary depending on the municipality and increase the effective tax rate.Terminology and concepts
Terminology
The German word for "tax" is Steuer, derived from the Old High German word stiura, meaning "support".According to §3 of the German Tax Code, taxes are defined as monetary payments that are imposed by a public authority to generate revenue, without constituting direct consideration for a specific service. The law also notes that generating revenue may be an ancillary purpose.
Constitution
The Grundgesetz is the German constitution, formally titled Grundgesetz für die Bundesrepublik Deutschland.Administrative structure
Tax authority in Germany follows the general structure of public administration, which operates at four levels: federal, state, district, and municipality. Most taxing powers and revenues are concentrated at the federal and state levels.Institutions
The fiscal administration, also known as the tax administration, is responsible for determining and collecting taxes. The Federal Central Tax Office is the federal agency responsible for several areas of tax administration. It was established as a separate authority from the Federal Ministry of Finance in 2006.Taxation principles
The Basic Law sets out the constitutional principles of taxation in Germany. These include:- Ability-to-pay principle: Tax liability is determined in accordance with personal circumstances, such as deductions for special expenses or extraordinary burdens. This principle encompasses horizontal equity and vertical equity. It underlies Germany’s system of progressive income taxation.
- Equality in taxation: Equal treatment requires that taxpayers in comparable situations are subject to the same rules.
- Lawfulness of taxation: Taxes may only be levied on the basis of legislation.
- Welfare state principle: Taxation reflects the constitutional mandate that Germany is a social state.
Distribution of taxing powers
- The federation has exclusive power to legislate on customs and most excise duties.
- The federation and the states share power over most taxes, with federal law prevailing in practice.
- The states may legislate on certain excise taxes.
- Municipalities and districts may levy local taxes such as the dog tax.
Distribution of revenues
- The federation receives revenue from customs, excise duties, insurance tax, and the solidarity surcharge.
- The states receive revenue from inheritance tax, real estate transfer tax, the beer tax, gambling taxes, and the fire protection tax.
- Municipalities receive revenue from property tax and other local levies, such as the dog tax and innkeepers’ tax.
File:Germany-Tax-Revenues-As-GDP-Percentage-.JPG|thumb|right|upright=1.6|Tax revenues 1975–2005 as a percentage of GDP for Germany, compared with the OECD and the EU 15
Structure and basic information
Administration
Germany's fiscal administration is divided into federal tax authorities and state tax authorities. The local tax offices belong to the latter. They administer the "shared taxes" for the federation and the states and process the tax returns. The number of tax offices in Germany totals around 650.As a result of discussions in 2006 and 2009 between federation and states, the Federation also administers some taxes. The competent authority is the Federal Central Tax Office which is also competent authority for certain applications of tax refund from abroad. Since 2009, the BZSt allocates an identification number for tax purposes to every taxable person.
Jurisdiction
There is at least one Fiscal Court in every state. Appeals against the decisions of the Fiscal Courts are heard by the Federal Fiscal Court in Munich.Fiscal code
The common rules and procedures applying to all taxes are contained in the fiscal code as so-called general tax law. The individual tax laws regulate in which case tax is incurred.The German Fiscal Code is divided into nine parts, which essentially reflect the chronological sequence of the taxation procedure. The introductory provisions explain the basic tax concepts that apply to all taxes.
Tax identification numbers
From 2009 onward, every German resident receives a personal tax identification number. Businesses also receive a business identification number. The competent authority is the Federal Central Tax Office. A taxpayer in Germany gets two types of tax numbers - Tax ID and Tax Number. Tax ID is issued by the Federal Central Tax Office and the Tax Number is assigned by the local tax office.Tax revenue
According to the latest Revenue Statistics report published by the Organisation for Economic Co-operation and Development, Germany has seen a significant increase in its tax-to-GDP ratio. In 2021, the ratio stood at 39.5%, up 1.6 percentage points from 37.9% in 2020. This increase is higher than the average for OECD countries, which rose from 33.6% to 34.1% between 2020 and 2021.Looking at the longer-term trend, Germany’s tax-to-GDP ratio has been steadily increasing since 2000 when it was at 36.4%. In comparison, the OECD average has also risen over the same period, from 32.9% in 2000 to 34.1% in 2021. The highest tax-to-GDP ratio recorded in Germany was in 2021 at 39.5%, while the lowest was in 2004 at 34.3%.
During 2021 Germany was ranked 10th in OECD tax-to-GDP ratio out of 38 OECD countries.
Compared to the OECD average, Germany’s tax structure is distinguished by significantly higher revenues from social security contributions and personal income taxes, profits and gains. On the other hand, Germany has a lower proportion of revenues from corporate income and gains taxes, property taxes, value-added taxes, and goods and services taxes. Additionally, Germany does not generate any revenue from payroll taxes.
Community taxes made up the largest share of the total at EUR 626.0 billion, or 82.3 percent. Compared with the previous year, they increased by 15.0 percent or EUR 81.8 billion. The main contributors were taxes on sales and income- and profit-related tax types such as corporate income tax, assessed income tax and payroll tax.
Tax revenue is distributed to Germany's three levels of government: the federation, the states, and the municipalities. All of these are jointly entitled to the most important types of tax. For this reason, these taxes are also known as shared taxes. Tax revenue is distributed proportionately using a formula prescribed in the German Constitution.
Taxes on income
Income tax for residents
Individuals who are resident in Germany or have their habitual abode there are subject to unlimited income tax liability. Residence is defined as maintaining a dwelling under circumstances indicating a non-temporary stay. Habitual residence is deemed to exist after a continuous stay of more than six months, excluding short interruptions.Under the principle of world income, all income earned by residents, both in Germany and abroad, is taxable in Germany. Persons without residence in Germany may still be subject to tax if they earn certain types of domestic income, known as limited tax liability.