The German tax system

In the supermarket, in the café, at the petrol station, with your pay slip - we pay taxes everywhere. They are the state's most important source of revenue, because taxes help the state to fulfill its tasks: Nurseries and schools, universities and hospitals, the construction of roads, the salaries of teachers, police officers, the fire department and politicians - this and much more has to be paid for by the state. Without tax revenue, the state would not be able to fulfill its tasks.

However, taxes are levied for two other reasons. By taxing harmful things, such as cigarettes, the state wants to steer behavior: By making cigarettes expensive through tobacco tax, some people might stop smoking. Taxes are also intended to promote social justice: Those who earn more should pay more tax than people with less money.

What do I need to know?

Who has to pay taxes?

As consumers, we pay sales tax (also known colloquially as VAT) when we shop, so in principle everyone pays taxes. When we talk about "taxpayers", however, the term is usually defined more narrowly and refers to people or companies that generate income, i.e. earn money. So anyone who has income pays income tax. For employees, this tax is called wage tax. Larger companies such as a GmbH or AG pay corporation tax.

Which other taxes are due depends on the individual's circumstances. For example, dog owners pay dog tax for their pets, car or motorcycle owners have to pay vehicle tax and anyone who has registered a business in Germany usually also has to pay trade tax. You can find an overview of all tax types on the website of the Federal Ministry of Finance.

What is the tax identification number?

If you are registered with your main place of residence in Germany or have to pay taxes in Germany, you will receive a tax identification number. This is an eleven-digit number that is assigned to you individually and remains valid for the rest of your life. Newborns receive their own identification number shortly after birth.

The tax identification number is intended to make communication with the tax office easier. Whenever you inform the tax office of something or submit applications, for example, you quote the identification number. You also need the number for your tax return. Sometimes employers, the employment office or health insurance companies also ask for your tax identification number.

If you are registered in Germany, you will have received your tax identification number by post. If you have forgotten the number, you will find it on your annual income tax statement or tax assessment notice, for example. Otherwise, you can request your number from the Federal Central Tax Office using a form.

What is income tax?

Income tax is the most important tax in Germany. It generates the most revenue for the state and is paid by both employees and the self-employed. This means it affects almost everyone. There are seven different types of income on which you have to pay income tax. These are income from

self-employed work
employment as a salaried employee
commercial enterprises
Agriculture and forestry
capital assets
letting and leasing
and other income specified in the Income Tax Act, for example pensions.

You do not have to pay income tax on some income. This includes parental allowance, unemployment benefit, BAföG or scholarships. The same applies if you have a mini-job or your income is below the so-called basic tax-free allowance. The basic tax-free allowance is adjusted every year and is currently €10,908 (as of 2023). If your income is below this amount, you do not have to pay income tax. Otherwise, however, everyone who is resident in Germany and earns money must pay income tax.

Please note: If you are registered in Germany, you must pay tax on all your income in Germany - this may also include income that you have earned abroad. So that you do not have to pay tax twice, there are so-called double taxation agreements. You can find out about these in German on the website of the Federal Ministry of Finance.

What is income tax?

Income tax is a special form of income tax. If you are an employee, you pay income tax. The special thing about wage tax is the way it is levied, as it is automatically deducted from your salary by your employer and transferred to the relevant tax office. Tax allowances and your marital status are directly taken into account by the various tax classes. Depending on whether you are married, single, widowed or a single parent, you will pay different amounts of tax. You can find out more about this in our "Tax return" section.

What are tax brackets?

If you work as an employee, you are classified in income tax brackets. The tax brackets help your employer to calculate your income tax. How much net money you receive each month and how much money goes directly to the tax office depends on your tax class. There are six tax brackets in total. The tax office assigns you to a tax bracket.

Which tax class you are assigned to depends on various factors:

Tax class I: This applies to single people. This includes all employees who are single or divorced, separated or widowed (exception see tax class III).
Tax class II: Single parents are assigned to this class if they live with their child in the same home, are unmarried, are entitled to the child allowance or child benefit and do not live in a so-called household community with another adult. You will only be in tax class II if you were already in this tax class in the previous year. If not, you must apply for this tax class at the tax office using the "Application for income tax reduction" form.
Tax class III: This applies to widows and widowers (in the year of death and the following year). Married couples choose this tax bracket if the partner does not work or earns significantly less. The partner is then automatically assigned to tax class V.
Tax class IV: Standard tax class for married/same-sex cohabiting couples. If you get married, you will automatically be assigned to tax class IV. It is worthwhile if your spouses or partners earn roughly the same amount.
Tax classV: In married couples, if the partner who earns more is in tax class III, the partner who earns less is assigned to tax class V.
Tax class VI: If you have other part-time jobs in addition to your job, you will be assigned to this tax class.

If your circumstances change, your tax class may also change. The tax bracket is adjusted if you separate from your spouse or divorce, if your spouse dies, if you are a single parent with a child, if you take on a part-time job in addition to your main job and if you get married.

If you are married, a special rule applies to you. In this case, you can choose between tax brackets and thus save tax. This can be worthwhile, for example, if one partner earns significantly more than the other. Tax advisors or an income tax assistance association can tell you which combinations may be worthwhile for you. You can find an initial overview and a tax class calculator on the website of the income tax assistance association Vereinigte Lohnsteuerhilfe e.V.. The form "Antrag auf Steuerklassenwechsel bei Ehegatten/Lebenspartnern" for changing your tax class can be found online. You must complete the application and submit it to the tax office. Please note that you can generally only change your tax class once a year - by November 30 at the latest.

Please note: Self-employed persons do not pay wage tax, but income tax. They are therefore not assigned to income tax brackets. However, if you are self-employed, the tax brackets may become relevant for you if your spouse works as an employee.

What is sales tax (value added tax)?

We have all come into contact with sales tax, whether when shopping, at the hairdresser or when buying a train ticket. It is one of the most important sources of income for the state. The basic idea behind this tax is that all goods and services that are sold are taxed. In common parlance, sales tax is also known as VAT. It is 19% (7% reduced) and is added directly to the price of the product or service and paid by the customer. In most cases, we therefore do not even realize that we have paid VAT. It is the company that withholds the VAT and passes it on to the tax office. However, the consumer has to pay it.

Please note: As a self-employed person, you generally have to pre-notify your VAT to the tax office by the 10th of each month. You can find out more about this in our chapters "Starting abusiness as a freelancer" and "Starting a business as a tradesperson".

What is corporation tax?

Corporation tax is relevant for you if you set up a company and choose a corporation as your legal form. Corporations - for example stock corporations or a limited liability company - are legal entities and do not pay income tax, but rather corporation tax. In simple terms, corporation tax is the income tax for legal entities. The basis for corporation tax is the income generated by the company as a legal entity in a calendar year. You can find out more about this in our chapter "Starting a business as a trader".

What is trade tax?

If you have registered a business, you generally have to pay trade tax. In this respect, trade tax is important for many self-employed people. The only exception is for freelancers, such as lawyers, doctors, journalists, graphic designers and artists. Those who work as freelancers do not have to pay trade tax. Trade tax is the most important source of income for local authorities. It is a kind of consideration that companies pay to the local authorities in return for the fact that the local authorities build or repair roads, for example, or create parking spaces, i.e. provide infrastructure from which the companies benefit. You can find out more about this in our chapter "Setting up a business as a tradesperson".

What is church tax?

Church tax is a levy that various religious communities collect from their members. It is the main source of income for the major Christian churches in Germany. You must pay church tax if you are a member of a religious community that is allowed to levy church tax and you are resident in Germany. Your nationality is irrelevant.

The condition for a religious community to be allowed to levy church tax is its status as a "public corporation". Not only the Catholic and Protestant churches have this special status, but also many other religious and ideological communities, for example free churches, Jewish communities, Jehovah's Witnesses, the Salvation Army or Orthodox churches.

Some of the eligible churches or religious communities collect church tax themselves or do not collect church tax at all. In all other cases, the tax office takes care of the church tax. In Bavaria and Baden-Württemberg, church tax is eight percent of annual income tax, in all other federal states it is nine percent.

If you live abroad for a while and give up your residence in Germany, you no longer have to pay church tax. However, if you remain registered as a resident in Germany, you are still liable for church tax. If you leave your religious community or earn less than 10,908 euros a year, you no longer have to pay church tax.

Incidentally, you can deduct church tax from your tax bill as a special expense.

Do Muslims also pay church tax?

Church tax may be levied by religious communities that are recognized by a federal state as a "public corporation". This now also applies to some Muslim communities in Germany. However, they do not demand church tax from their believers. Other Muslim communities do not have this status and are therefore not allowed to levy church tax. Muslims therefore do not have to pay church tax.

How are imported or exported goods taxed?

If you want to export goods from Germany or import them from abroad, you will come into contact with customs offices and authorities. Before you import or export goods, you should find out exactly what restrictions apply and what taxes you have to pay on the products you are trading. You can find helpful information on this on the Federal Government's website www.amtlich-einfach.de. The requirements that apply to you depend on the goods you trade in and the countries you trade with: Non-EU countries or EU member states.

In principle, the movement of goods, i.e. the import and export of goods within the European Union, is free. However, certain goods, such as plants, antiques, weapons, chemicals or medicines, are subject to strict rules, which you must find out about from customs. You must also observe the tax regulations, such as applying for a VAT identification number and submitting an advance VAT return to the tax office. You can find out more about this at zoll.de and under Import / Export.
If you want to import or export goods from a non-EU country, you must contact customs and apply for an EORI number. Which authorities you also need to contact depends on the goods you want to trade and where they come from. You should contact customs, the chambers of industry and commerce or the chambers of trade to find out what rules apply and what restrictions there are. The following also applies here: weapons, ammunition, some chemicals and medicines, for example, cannot simply be imported into Germany. Anyone wishing to export certain goods such as weapons or narcotics from Germany requires an export license.

Important

You must ensure that you pay your taxes and declare your income properly to the tax office. You can find out more about this in our chapters "Tax return", "Starting a business as a freelancer" and "Starting a business as a trader". Tax evasion is not a trivial offense, but a criminal offense. Tax evaders face fines and, in serious cases, prison sentences of up to 10 years.

Source: handbookgermany.de