Paying 2017-2018 income tax in Germany? Read this.

20.12.17
9 minute read
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Tax is rarely simple - and if you're a foreigner working abroad, navigating an unfamiliar tax system can be an additional challenge. It's even trickier if you’re a cross border commuter, a non-resident foreigner living in a different country for a short while, or a freelance or remote worker. However, understanding your tax liabilities is essential - getting it wrong can prove a costly hassle.

What income is taxable in Germany?

When it comes to German tax, income includes:

  • employment earnings
  • rental income
  • money made from investments
  • all sorts of other sources of income like annuities and royalties

Not all types of income attract the same levels of tax, so you’ll need to work out each element to get an overall figure. There are also some sources of income which aren’t taxed, but which are used to determine your taxable income banding. So, for example, if you have income in another country and have already paid tax on it, although you might not have to pay the tax again in Germany, the income itself might count towards setting the tax rate you’re charged.

The process of submitting your tax return can be a bit complicated, particularly if you have multiple income sources. Many people use a tax consultant, called a Steuerberater, to help them sort their tax affairs. They can also submit the tax return on your behalf, making the process much simpler.

(Source, 7 December 2017)

Who has to pay income tax in Germany?

How you’re taxed depends on your personal circumstances. To figure out what you'll owe, you first need to know your tax status - you’ll be classified as either:

  • A resident taxpayer
  • A non-resident taxpayer

Resident income tax

In Germany, the tax year is the same as the calendar year - 1st of January through to 31st of December. You're considered a resident taxpayer if you live in Germany for more than 6 consecutive months during the tax year.

As a resident taxpayer, you have to pay tax on any income you make anywhere in the world to German authorities.

(Source, 7 December 2017)

Non-resident income tax

If you live in Germany for under half of the tax year - so less than 183 days - you might be deemed to have non-resident tax status. This means you pay tax in Germany only on taxable income you’ve earned in Germany.

(Source, 7 December 2017)

In what instances do German residents working abroad need to pay income tax?

Your tax liabilities will depend to an extent on how long you’re away from Germany. If you're in Germany for 6 consecutive months in a tax year - which is the same as the calendar year - then you're probably going to be considered a tax resident in Germany no matter where you are for the rest of the year. In this case you’ll have to pay tax on your worldwide income to Germany.

If you're out of Germany for more than half of the year then you might qualify for non-resident status.

If you split your time across 2 different countries during the tax year, and the country you’re working in has a claim on tax from you, too, then you’ll need to rely on double taxation treaties to make sure you don’t end up paying too much. More on this later.

(Source, 7 December 2017)

What are the income tax rates in Germany in 2017-2018?

Germany has a progressive tax system, so everyone can earn up to a minimum threshold tax-free, and then a progressively higher tax rate is applied based on how much you earn. If you’re married you may be able to file a joint tax return. This means that you and your spouse count your tax affairs as one, and effectively a double allowance of the tax bands is applied across both of you. If one partner earns significantly less than the other, this can bring down your overall tax bill.

If you’re employed in Germany, your employer will deduct money from your wages every month under the pay as you earn (PAYE) tax system. If that’s the only source of income you have then you probably don’t have to submit a tax declaration. However, if you have multiple income sources, or want to claim exemptions and deductions, you’ll probably need to prepare a tax declaration.

The most up to date rates available for Germany are as follows:

Income range Germany income tax rate (%) 2017
up to €8,820 0%
€8,821 - €54,057 14% - 42% for employees 14% for self-employed people
€54,058 - €256,303 42%
over €256,303 45%

On top of these headline rates of tax, there are also some additional taxes to take into consideration. You’ll likely be charged a 5.5% solidarity surcharge (Solidaritätszuschlag)

You might also have to pay a church tax (Kirchensteuer) if you’re affiliated to a church which is registered in Germany. This varies depending on where you live, but can be another 8% or 9%.

(Source, 7 December 2017)

What are the tax exemptions in Germany?

Tax is applied on taxable income - known in Germany as gross adjusted income - only. You start with your entire income, and, to work out your gross adjusted income, you remove any relevant deductions. You are also then able to make use of certain exemptions and allowances to reduce your overall bill. However, as with all things related to tax, it’s quite complicated.

Here are some of the exemptions, deductions and credits that you might need to know about.

Tax classes (steuerklassen)

If you’re paying tax through the PAYE system, you’ll need to know your tax class. The tax class is what determines how much tax your employer withholds from your wages. There are 6 different classes, depending on whether you’re working in a main job or second job, whether you’re married and have children, and so on. This helps make sure that the amount of tax withheld from your wage is correct.

Deductions

Various deductions might be taken into account when calculating the amount of tax owed. These are then knocked off the total amount of income you earn before tax is worked out. Here are a few of them:

  • Deductions for parents of children, including an amount to support their education
  • Deductions for people aged over 64
  • Single parent deductions
  • Deductions for parents of disabled children
  • Deductions of maintenance or support payments paid to divorced or separated spouses
  • Carer deductions, for taxpayers caring for a relative at home

Expenses

You can deduct payments made for certain things such as:

  • study costs
  • insurance premiums
  • school fees
  • pension contributions
  • payments made to registered charities from your taxable income
  • Under some circumstances, and if you have official receipts, you can also make claims for things like the expense of moving home for work, or for commuting

However, some categories have limits and strict rules. For example, although charity donations could be tax deductible, there’s a cap to the total amount you can write off in this way and the institutions which can benefit. There are pages and pages of detail in the guide to the tax system which is produced by the authorities - get advice from a tax consultant (Steuerberater), or make sure you understand the rules properly if you decide to complete your own tax return.

(Source, 7 December 2017)

What sort of double taxation agreements are there with Germany?

Double taxation agreements are set up to make sure that nobody has to pay tax on the same income twice.

That’s because it’s technically possible for someone to be liable to pay tax in 2 countries - if you’re a cross-border commuter for example. Both the country in which you work, and the country in which you live might decide that you should pay them tax, depending on how the individual states impose taxes.

If that’s your situation, you don’t have to panic. Many countries have what ‘s known as double taxation agreements precisely to deal with this sort of problem. These agreements help to ensure that you only pay tax once on your earnings.

Germany has double taxation agreements with the following countries:

Germany double taxation agreements
Armenia Korea
Austria Latvia
Azerbaijan Lithuania
Aruba Luxembourg
Argentina Liberia
Antigua and Barbuda Liechtenstein
Andorra Macedonia
Albania Morocco
Algeria Moldova
Australia Mongolia
Bahrain Malaysia
Bahamas Mexico
Bolivia Malta
Bosnia and Herzegovina Monserrat
Bangladesh Mauritius
Barbados Monaco
Belarus Netherlands
Belgium New Zealand
Bermuda Namibia
Bulgaria Norway
British Virgin Islands Oman
Brazil Paraguay
Cayman Islands Philippines
Cook Islands Pakistan
Cameroon Poland
Colombia Portugal
Croatia Panama
Cyprus Qatar
Canada Romania
China Russia
Caico Islands Saudi Arabia
Costa Rica St Kitts and Nevis
Chile Singapore
Dominica Slovenia
Denmark Slovakia
Egypt South Africa
Ecuador San Marino
Estonia Serbia
Finland Spain
France St Lucia
Ghana St Vincent and the grenadines
Guernsey Syria
Grenada Sri Lanka
Gibraltar Sweden
Georgia Switzerland
Greece Taiwan
Hungary Trinidad and Tobago
Hong Kong Tajikistan
Ivory Coast Turks
Isle of Man Turkey
Israel Turkmenistan
Indonesia Tunisia
Ireland Thailand
Iceland Ukraine
India UAE
Italy Uruguay
Japan UK
Jamaica USA
Jersey Uzbekistan
Kuwait Venezuela
Kyrgyzstan Vietnam
Kazakhstan Yemen
Kosovo Zambia
Kenya Zimbabwe

( Source, 7 December 2017)

How do I pay income tax in Germany?

You can submit your tax declaration either in paper form or online. You can collect the forms from your local tax office, or print them out from the tax authorities website, and submit paperwork in hard copies by snail mail, or do the whole thing online if you prefer.

(Source, 7 December)

Paying income taxes online

You can pay your tax return online, which is usually quicker and easier than if you were using the paper forms.

Once you‘ve filed your return, you’ll have to actually pay your taxes. If you’re an expatriate, you might need to do so using a bank account held in a different country or currency. You’ll then need to take into consideration any charges that will be added to the transfer you make to pay your taxes. These can add to the costs significantly.

As well as the upfront charges, check the exchange rate used when your bank or the money transfer service converts your money from a different currency to euros. Because so many transfer and exchange services use poor rates, it could cost you more than you think - especially if a service claims that it offers fee free exchange. That’s because banks and exchange services often don’t use the real, mid-market rate, which you’d find on Google. Instead, to protect their profit, they mark up the exchange rate they use, normally by 4-5%. They keep the difference, and you end up out of pocket.

A great alternative is to use TransferWise. You can get your money transferred quickly and safely, using the real exchange rate, and just a transparent, upfront fee.

There’s no magic involved here. It’s usually cheaper than traditional services, because TransferWise works differently than banks. Because TransferWise don’t use the pricey international SWIFT system for making bank transfers, the cost of making international transfers is reduced - and the savings are passed on to the customer.

You might be able to pay your taxes directly using a TransferWise transfer. Or if you don’t already have a bank account in Germany, why not transfer the payment to a friend or family member who does, to bring down the costs.

If you often have to move your money between different currencies, you could benefit from a TransferWise borderless multi-currency account. This account lets you hold your money in any one of dozens of different currencies - including euros - and then switch between them whenever you need to. It’s easy to check your balance across all currencies at a glance, and can save you money. There’s no ongoing fee to pay, and you get the real exchange rate every time, with only a small transparent fee when you choose to make an exchange.

Taxes aren’t fun. But they are inevitable. It’s your responsibility to understand what you owe, and where - even though this can be complicated if you’re an expatriate working abroad, or if you juggle life between different countries. Get professional advice to make sure you’re paying the right amount.

This publication is provided for general information purposes only and is not intended to cover every aspect of the topics which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content is the publication is accurate, complete or up to date.

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