Germany charges a tax on the income earned by physical persons. The income tax is an annual tax applied to the income earned in a calendar year (assessment period) from:
- Agriculture and forestry
- Business operations
- Dependent employment
- Capital assets
- Rentals and leases, and
- The other income stated in § 22 of the German Income Tax Act (EStG)
(e.g. income from a pension drawn from the legal pension insurance fund or income from private sales)
*) Self-employment / Dependent employment as per § 2 Paragraph 1 of the German Income Tax Act (EStG)
German income tax law distinguishes between two types of tax liability: full income tax liability and partial income tax exemption.
At the end of a calendar year, you have the option of applying to the tax office for income tax adjustment at your place of residence, so you may have part of the tax you have paid refunded. The filing of a tax return is obligatory.
Consult a tax adviser for more information. You will have to pay for this, but a tax adviser can help you to set up a tax return.
Full liability to pay income tax in Germany
If your primary place of residence is in Germany, you are fully liable to pay income tax here. This means that all your income, regardless of whether you earned this within Germany and/or abroad, must be taxed in Germany (principle of global income).
When you move to Germany for professional reasons, you might be surprised after you get a look at your first payslip: your gross monthly income and the net salary you actually receive often differ considerably. For example, in 2012, a childless, single, 37-year-old expat employee living in western Germany would earn a gross salary of €5,000 a month; but they would only get back around €2,875 after PAYE taxes. However, this difference isn’t due to taxation alone: some contributions for social security schemes are directly deducted from most employees’ wages in Germany. The country still has a fairly extensive welfare state, though recent reforms to cut both costs and benefits sparked various heated debates in the media. The German social security system as well as local taxation sometimes involve quite a bit of red tape. If you’re lucky, the financial advantages will outweigh the hassle, though.
In addition to Lohnsteuer, you have to pay the so-called solidarity surcharge (5.5% of your income tax) as well as church tax (Kirchensteuer). However, the latter kind of tax in Germany only applies if you are a registered member of the Catholic or Lutheran-Protestant religion in Germany.
Tax-relevant information on employees, such as their number of children or their religious affiliation, is registered in their electronic tax card (elektronische Lohnsteuerkarte). You just need to provide your employer with your tax identification number and date of birth, and then they can access all your relevant tax information from the German central revenue service (Bundeszentralamt für Steuern) and add you to the company payroll.