German Tax Law

Each country has its unique tax system governed by different authorities, who are entrusted with the task of formulating policies and tax laws. According to German tax law, taxes can be collected by the Municipalities, States and the Federation. There are many varieties of direct as well as indirect taxes, which are levied on the people who are German citizens as well as foreign nationals residing in Germany.

German Tax Law is based on several principals which take into account the ability to pay and the money so collected to be used for the welfare of the state. The tax has to be lawful levied by the proper authority and there should be an equality in the rate of taxation. The top authority for taxes in Germany is the Federal Central Tax Office and is responsible for allocating a number to every taxable person or entity, for easy identification.

The years 2001 and 2008 saw major reforms happening in the German Tax Law and the tax system has undergone many changes in rates for companies and individuals. The tax rates have lessened considerably and are now more equitable. Taxation on individual income is on a progressive scale like in most countries. At present individual income up to EUR 7,834 is free of taxation. Then the rate increases progressively for each income bracket. For individual income between EUR 7,835 and 52,552 there is a 14% tax. The next income bracket is for 52,553 to 250,400 for which 42% is charged as tax. The last bracket is for income over 250,401, for which 45% is charged. An individual who is termed as a Permanent Resident will be subject to this tax structure even if he is working overseas. Foreign nationals who are working in Germany also come under the same tax structure of rates.

For companies there is corporation tax paid to the federation and a business tax which is paid to the municipality. A company can categorise the business tax as an expense while calculating the taxable income for paying the corporation tax.

According to German Tax Law, an individual whose only source of income is salary, need not file any annual return. The employer is responsible for deducting the tax every month and paying it to the authorities. Self-employed individuals have to make advance tax payments every quarter and file an annual return, every May end. For limited companies, there are four, advance tax payments and submission of financial statements by the end of May.