The German tax system is one of the most complex in the world . Every resident registered in Germany from birth or who moved from abroad has a tax identification number, enabling them to enjoy their rights and fulfill their obligations.
Having a tax identification number from birth
Infants receive child allowance through their individual tax identification number (TIN). Most businesses, even sole proprietorships, often seek tax consulting services rather than preparing tax returns themselves due to the complexity of the forms. Individuals who file their taxes using apps also need time to learn how to use and input data from each app.
Germany has various types of taxes, such as income tax, trade tax, and sales tax. Taxes are the most important source of revenue for the German government, which funds expenditures for the common good – such as social security, education , healthcare, or transport infrastructure. The German tax system is based on efficiency, transparency, and fairness. Value-added tax (VAT) consistently accounts for the highest tax revenue in Germany (in 2020, this figure was €219 billion). The tax on common goods and services is 19%, while some items, such as books, agricultural products, and food, are taxed at 7%, which is quite low compared to many other EU countries such as Spain (21%), Poland and Portugal (23%), Italy (22%), and France (20%).
Income tax applies to almost everyone, starting from €9,168 per year. The tax is based on affordability through a progressive tax rate system, meaning the higher the income, the higher the tax rate. Salaried employees pay tax depending on their family circumstances (single/married, with/without children, supporting parents, etc.). Employers deduct payroll tax and social security contributions from total wages and pay it to the tax authorities before paying net wages to employees. Payroll tax, also known as income tax, is usually estimated and collected in advance. At the end of the year, taxpayers file a tax return with the tax authorities, and any overpayment is refunded.
From 2024 onwards, companies with annual revenue of €800,000 or annual profit of €80,000 or more will be required to file profit and loss statements. The basic taxes businesses need to pay are sales tax (19%), employee payroll tax (employer pays 50% - employee pays 50%), corporate tax (3.5% of revenue), and corporate income tax.
Tax payment limit
In Germany, the wealthiest 10% own more than half of the population's total wealth. However, there are loopholes in the tax system that the rich can exploit. Assets and inheritances are not taxed as heavily as businesses or salaries. Property tax in Germany was suspended in 1996. Inheritances are taxed, but there are high allowances and many ways to avoid inheritance tax.
Income tax, insurance, and other additional costs in Germany are very high; an average income earner must spend around 30%-35% of their total income on social security contributions. However, this is limited to a certain amount, known as the contribution threshold. Anyone earning more than a certain amount is not required to pay any additional social security contributions for anything exceeding that amount. For example, for pension insurance, the threshold in East Germany is €7,100 per month and in the West it is €7,300. Similar thresholds exist for nursing care, health insurance, and unemployment insurance.
But this also means that the more you earn, the lower your social security contribution rate. That's why millionaires in Germany don't pay more taxes than doctors' families. The typical super-rich in Germany don't have income from work but from business profits, capital gains, and real estate income. The average tax rate paid by millionaires is 24% – much lower than that of those with average incomes. This is due to significantly lower capital gains tax rates compared to income tax and the ability to settle rental income or profit sharing through subsidiaries.
Every individual and business needs to keep invoices and accounting records for 10 years. Tax authorities can inspect them at any time, even if the business has ceased operations. Every business must have a cash register using licensed accounting software; all invoices issued through the computer are sent and stored on the tax authority's server and cannot be deleted or modified. Businesses can also keep handwritten records, but they must be detailed and specific for each day.
DANG MINH LY, from the Federal Republic of Germany
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