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The Basics of Germany's Tax System

September 01, 2021
It's no secret that Germany is one of those places that many would want to relocate to. The country itself is stable, it has a more open society, and they're more welcoming compared to other European nations. If you do have plans of living here and starting a new life, the important thing to remember is that you'll become a taxpayer. When you move to Germany and become a legal resident, especially if you work here, you will need to pay your due taxes. How will you be able to do that if you're not familiar with the country's tax system? Here are some basics you need to know.

The Basics of Germany's Tax System


Income Rates in Germany

The most basic of taxes you'll face in Germany is, of course, your income tax. This is required of all citizens, legal residents, and those who earn income from Germany-based businesses. How much you pay for this depends on your income tax rate, which itself depends on how much you earn in a year. Just like those in France, Italy, and other neighboring European countries, Germany's income tax operates on a progressive tax rate, wherein the more your earn annually, the higher your income tax rate. As of 2021, income tax rates range from 0% (those earning less than €9,744.00 a year) to 45% (those earning more than €274,613.00 a year).


Germany's Social Security

A good portion of your taxes in Germany also goes to social security. Now, even though Germany doesn't consider itself a socialist country, its social welfare is one of the best in the world. And it's all thanks to the social security payments that all those who live and work in Germany contribute. This tax pays for healthcare (Krankenversicherung), pension insurance (Rentenversicherung), unemployment insurance (Arbeitlosenversicherung), and senior care (Plegeversicherung). For the most part, only around 20 to 22% of your income is deducted for social security and oftentimes, your employer has already taken it out this share when you get paid every month.

The Basics of Germany's Tax System



Business Taxes in Germany

Since Germany has one of the more stable economies in the world, it's become a good place for various businesses in the long run. In turn, the country has established a myriad of business taxes to keep them in check. Apart from the income tax and VAT, business owners also have to pay trade tax, corporate tax, payroll tax, and Church tax. In terms of each specific tax rate, similarly to the income tax rate, this will depend on how much a business has earned in a year. As long as these taxes are paid, business and freelance workers won't have anything to worry about.


Germany's Property Taxes

Germany has also imposed property taxes on those who own their own land in the country. Firstly, there's there real property tax, which is imposed by the municipality of your property. How much you pay can be calculated by your property's value with the local tax rate (typically ranges from 0,26% to 1%). There's also the inheritance tax for when you inherit property in Germany. This tax rate varies from 7% to 50% depending on your inheritance's value. And finally, there's the capital gains tax, imposed on the profit you made when you sell your property. The rate for this tax is a flat 25%.

The Basics of Germany's Tax System



The Church Tax in Germany

Now, in Germany, you might commonly face what's called the 'Church Tax.' Just as it sounds, this tax will be based on your religious beliefs. When you relocate to Germany, you'll be asked to declare your religion. The institutions of your said religion will then tax you as a member of its organization in the country. Do note that his only applies to Catholics, Protestants, and the Jewish community in Germany. And as for your Church tax rate, this will depend on both your religion and the provincial rate. For instance, according to I Am Expat, Bavaria's Church tax rate is 8%.


Paying Taxes for Your Dog

Yes, you read that right! When you own a dog, Germany will require you to pay a 'Dog Tax' (Hundesteuer) for it. Whether you brought your own dog with you or you bought a new pup in the country, you will need to register him/her in your local tax office and pay for his/her license. Only then will your dog get his/her tag and you, your right as his/her owner. As for how much you'll need to pay, it mostly ranges from €90.00 to €150.00 a year for each dog. Any additional dogs will incur higher taxes. This is to discourage residents from having too many pets.

The Basics of Germany's Tax System



What are Tax Deductible in Germany?

With all these different taxes you have to face in Germany, surely there will be deductibles when it's time to declare your annual tax returns, right? Correct! You can reduce your tax liability in the country by declaring various deductibles and tax credits. They include social security contributions, relocation payments, childcare benefits, costs for education, contributions to German charities, mortgage interest payments, alimony payments (for divorces/separated couples), and your Church tax. You can also add employment expenses only if your employer hasn't reimbursed you for them. Do note that you have to declare them in their actual prices when you submit your tax returns.


Germany's Value-Added Tax

Finally, there's Germany's Value-Added Tax (VAT). As of 2021, the country's VAT rate is a flat 19% for most goods and services. It's whittled down to 7% for numerous necessities ranging from food and medicine to books, hotel accommodations, cultural services, and more. For the most part, the VAT will already be deducted from the retail price of the goods and services you've purchased. There's no need for you to make extra payments for such.

The Basics of Germany's Tax System


When you move and work in Germany, you'll automatically become a taxpayer here. But are you familiar with Germany's tax system? If not, these are the basics of what you need to know, ranging from the different types of taxes to tax rates you'll need to pay.

Once you have all your taxes in Germany in check, it'd be easier for you to begin your new life here. And a good place to start is getting a luxury home!




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