Tax returns and compliance

Tax rates

Residence rules

Termination of residence

Economic employer approach

Types of taxable compensation

Tax-exempt income

Expatriate concessions

Salary earned from working abroad

Taxation of investment income and capital gains

Additional capital gains tax (CGT) issues and exceptions

General deductions from income

Tax reimbursement methods

Calculation of estimates/prepayments/withholding

General tax credits

Sample tax calculation

All information contained in this document is summarized by KPMG AG Wirtschaftsprüfungsgesellschaft based on the German Income Tax Law 2018 (§§ 1, 2, 3, 8, 9, 9a, 10, 10b, 10c, 17, 19, 20, 23, 32, 32a, 32d, 33a, 37, 38, 39b, 49, 50 EStG; R 9.4 and R 9.11 LStR 2015); Abgabenordenung (§§ 8, 9, 149, 152, 233a, 238, 240 AO); Bundesumzugskostengesetz (BUKG), Auslandsumzugskostenverordnung (AUV), Bundesversicherungsanstalt für Angestellte (BfA); Inheritance and Gift Tax Act (§ 19 ErbStG); Debatin/Wassermeyer, Doppelbesteuerung, Kommentar, Stand Oktober 2017; Guidance issued by the Federal Ministry of Finance on Taxation of Employment Income According to the Double Tax Treaties on 12 November 2014).

When are tax returns due? That is, what is the tax return due date?

31 May.

What is the tax year-end?

31 December.

What are the compliance requirements for tax returns in Germany?

Residents

In general, income tax is assessed by calendar year after filing an individual tax return. Married couples can file tax returns jointly or as separate individuals.

Returns for the preceding calendar year must be filed with the local tax office by 31 May. An extension until 31 December will be granted without application where a professional tax adviser prepares the return. A further extension may be available by special request. However, the tax authorities may request, on an individual basis, that the return be filed before these dates.

If the tax return is not filed on time, the tax authorities may assess penalties. The penalties are at the discretion of the tax authorities but must not exceed 10 percent of the tax.

If the employer is a German company or a foreign enterprise with a permanent establishment or a representative in Germany, the employer is legally obliged to withhold taxes from an employee’s salary and to remit the taxes to the tax office monthly.

From 2004 onwards, a German entity is also obliged to withhold wage taxes from an employee’s salary that is paid abroad if the salary costs are economically borne by the German entity.

The income tax is not payable at the time the tax return is filed. The tax authorities will issue a final tax assessment notice once they have processed the return. Any balance due is payable within one month after receipt of the tax assessment notice. Interest is charged or credited on final payments if the tax assessment notice is not issued within 15 months after the end of the respective calendar year. The applicable rate is 0.5 percent for each full month after the 15th month. Penalties for late payment after receipt of the tax assessment notice are 1 percent per month of the unpaid amount.

The tax office can assess quarterly prepayments based on the prior year’s tax or on estimates of income not subject to withholding tax. These prepayments are due quarterly on 10 March, 10 June, 10 September, and 10 December.

Non-residents

Non-residents are subject to tax on certain categories of income from German sources under the concept of limited tax liability. If the income from employment is subject to wage tax withholding, the tax obligations are fulfilled with the withholdings and no German tax return needs to be filed.

What are the current income tax rates for residents and non-residents in Germany?

Residents

Income tax is calculated by applying a progressive tax rate schedule to taxable income as follows:

Income tax table for 2018

*married couple filing a joint return

In addition to the income tax rates indicated above, the following taxes and surcharges are additionally levied on all types of income:

• solidarity surcharge: 5.5 percent of the income tax
• church tax: 8.0 or 9.0 percent of the income tax – church tax is only levied if the taxpayer is a member of a church that is recognized for church tax purposes

Non-residents

Resident tax rates also apply to non-residents, but the zero percent brackets shown earlier is available only to non-resident employees. Non-residents are generally not allowed to file as married persons (however special EU rules exist).

For the purposes of taxation, how is an individual defined as a resident of Germany?

An individual is considered resident if he/she maintains a domicile or habitual place of abode in Germany. A domicile is a home or dwelling owned by or rented to the taxpayer who has full control over that property. Domicile is a question of fact and is not determined by the intention of the taxpayer.

The habitual place of abode is established when an individual is physically present in Germany on a long-term basis. Long-term is defined as more than six months.

Is there a de De minimis number of days rule when it comes to residency start and end date? For example, a taxpayer can’t come back to the host country for more than 10 days after their assignment is over and they repatriate.

No. The habitual place of abode is established when the individual is physically present in Germany for a continuous timeframe of more than six months. A continuous abode is established and maintained if the interruptions are for a short period only (such as holidays, journey home, and business travel), so that the stay is still regarded as one continuous stay.

What if the assignee enters the country before their assignment begins?

For determining the habitual abode, the continuous period of six months will be considered as explained above.

Are there any tax compliance requirements when leaving Germany?

Before leaving Germany, an individual must inform the registration office (Einwohnermeldeamt) in the town where he/she lived and he/she should verify he/she has a current passport which is valid until the end of his/her expected foreign stay. No exit requirements exist for tax purposes, i.e. no declaration has to be filed with the tax office before leaving the country.

There are no special payment procedures on termination of residence, and no tax clearance is required. After leaving Germany, the employee is no longer subject to unlimited German taxation, but may be taxed as a non-resident on income from German sources, such as on bonus payments for the assignment period.

There is no special filing requirement on termination of residence. In the year following the termination of residence, the taxpayer has to file an income tax return for the prior year under the normal rules covering the residence period and the period after the move during the tax year.

If the taxpayer receives income from German sources as a non-resident in later years, he/she must file an annual tax return covering this income, unless it was subject to withholding tax.

What if the assignee comes back for a trip after residency has terminated?

If the journey is actually in connection with the previous stay, these days will also be added to the previous stay for the determination of the habitual place of abode.

For treaty purposes, the German tax authorities have now officially adopted the OECD-approach on counting the 183 days in cases of changing treaty residence.

Communication between immigration and taxation authorities

Do the immigration authorities in Germany provide information to the local taxation authorities regarding when a person enters or leaves Germany?

No.

Filing requirements

Will an assignee have a filing requirement in the host country after they leave the country and repatriate?

There is no special filing requirement on termination of residence but he/she has to file a German income tax return for the tax year of departure.

Do the taxation authorities in Germany adopt the economic employer approach¹ to interpreting Article 15 of the OECD treaty? If no, are the taxation authorities in Germany considering the adoption of this interpretation of economic employer in the future?

Yes.

De minimis number of days?

Are there a De minimis number of days before the local taxation authorities will apply the economic employer approach? If yes, what is the De minimis number of days?

No. However, if an assignee works for the host company for only three months or less, there is a tendency to assume that the host company should not be regarded as the individual's economic employer, unless the individual was fully integrated in the host company's business operations during this time.

What categories are subject to income tax in general situations?

As a rule, it can be stated that all types of remuneration and benefits received by an employee for services rendered constitute taxable income. These include, but are not limited to, the items below:

• reimbursements/payments of foreign and/or home country taxes
• reimbursements/payments of school tuition fees
• reimbursements/payments of tax return preparation fees
• reimbursements/payments of home leave costs
• cost-of-living allowances
• expatriate premiums
• housing allowances and the imputed value of housing provided directly by the employer
• benefits-in-kind generally form part of taxable compensation

1. Certain benefits, however, are subject to a favorable method of taxation, including company cars and life insurance premiums up to certain limits. Where a company car is provided, the private use of the car represents a fringe benefit to the employee, which must be included in the monthly salary calculation. The taxable benefit may be assessed by calculating one percent per month of the list price of the new car plus an additional amount for commuting.

• incentive compensation in certain circumstances

1. If Foreign Service premiums or bonuses are paid as inducements to accept an assignment before the tax year in which the individual arrives in Germany and becomes a resident, such payments are taxable at non-resident rates. If the foreign premiums or bonuses are paid in the same calendar year in which the individual becomes resident, these payments are taxable at resident rates together with other income earned in the year.
2. Stock option plans or other kinds of equitiy compensation have become common features of German compensation schemes. German income tax law does not recognize the granting as a taxable event. Instead, the exercise of a stock option or receipt of other equity compensation generates ordinary income from employment. The taxable value of stock options is the difference between the fair market value at the date of exercise of the shares and the option price. If a tax treaty applies, sourcing is determined in the timespan “grant to vest”. A favorable tax rate may apply on such income (one-fifth method).

Are there any areas of income that are exempt from taxation in Germany? If so, please provide a general definition of these areas.

The following categories of income are exempt from tax:

• Certain payments from health or accident insurance.
• certain social security benefits including unemployment benefits and maternity grants.
• kindergarden fees if certain conditions are met.
  

In case a secondary household is established in Germany for business purposes, the following payments are exempt under certain circumstances:

• home trips (once per week)
• meal allowances up to certain amounts and subject to certain time limits
• rent at the place of work (actual costs but limited to EUR 1,000 per month).

If certain other conditions are met, rental cost incurred for the employee, meal allowances and commuting expenses can be reimbursed tax-free, in general.

Are there any concessions made for expatriates in Germany?

German income tax law does not provide for special deductions or tax-free expatriate premiums. The German Constitution stipulates that German nationals and foreigners must be treated equally for tax purposes.

Is salary earned from working abroad taxed in Germany? If so, how?

The taxable salary of residents cannot be reduced by allocating income to foreign business trips except where exclusions are available under tax treaties. Such exclusions generally require a foreign employer or a permanent establishment in the other country. Split payrolls are possible.

In the absence of a double tax treaty or depending on the provisions of the applicable treaty, a managing director of a German company may be subject to German income tax even if he/she is a non-resident of Germany and is not physically present in Germany while performing the services.

Are investment income and capital gains taxed in Germany? If so, how?

Worldwide investment income is subject to German income tax at 25 percent plus solidarity surcharge plus church tax (where applicable). The tax is generally withheld at the source. The tax withheld is final unless one of the following applies.

• The taxpayer's income tax rate is lower than 25 percent.
• Not all investment income was subject to withholding (such as foreign investment income).
• Church tax was not considered in the withholding although applicable.

A standard annual deduction of EUR801/EUR1,602 (single/married) is offset against the taxable part of worldwide investment income. Investment income includes interest, dividends, and gains from the sale of shares purchased after 31 December 2008.

Special rules are in place for mutual funds which do not fulfil the registration / publication requirements in Germany.

Gains derived by an individual from the sale of non-business property other than shares are not subject to tax, except in cases where the asset has not been held for the required holding period or where certain thresholds are exceeded. For real property, tax will be due on the gain if on the date of sale the property has been held 10 years or less (exemptions exist for the sale of the taxpayer's residence). Even if the asset has not been held for the required holding periods mentioned earlier, the gain will be tax-free if all gains in a calendar year are less than EUR600 in total.

Dividends, interest, and rental income

See earlier for taxation of dividends and interest.

Rental income is taxable unless exempt under a double tax treaty.

Gains from stock option exercises

Note: Sourcing under a tax treaty follows the “grant to vest” method. 

Foreign exchange gains and losses

Depending on certain circumstances, foreign exchange gains will be treated as a speculative transaction, which is taxable. 

Capital losses

The use of capital losses for tax purposes is subject to various restrictions and limitations.

Gifts

Inheritance and gift tax is levied on transfers of property by reason of death, gifts during lifetime, and transfers for certain specified purposes (gift tax), as well as on the net worth of certain family foundations and trusts. The tax is generally assessed on the net worth of the property transferred after deducting certain exemptions as well as personal exemptions depending on the family relationship. Taxable transfers of property are subject to tax at graduated rates (ranging between 7 percent and 50 percent).

Are there additional capital gains tax (CGT) issues in Germany? If so, please discuss?

See above explanations for investment income and capital gains 

Are there capital gains tax exceptions in Germany? If so, please discuss?

Pre-CGT Assets

No.

Deemed disposal and acquisition

No. Special rules apply if a taxpayer holds one percent or more of the shares in a corporation.

What are the general deductions from income allowed in Germany?

The following are standard deductions for each of the specified types of income:

The following are standard deductions for each of the specified types of income:

Furthermore, a series of non-income related deductions are granted. The most important are:

• standard deductions apply (see earlier charts)
• payments to public, mandatory pension insurance (cap)
• payments to public or private health and nursing insurances for basic insurance coverage
• expenses for the taxpayer's professional education
• thirty percent of contributions to private schools up to a maximum amount of EUR5,000 (on certain conditions)
• church taxes
• charitable contributions to German charities and charitable activities abroad if certain conditions are met (limited to the lesser of the amount incurred or 20 percent of income from different classes)
• alimony payments to the ex-spouse (limited to the lesser of the amount incurred or EUR13,805), if the payments are taxed at the level of the recipient
• under special circumstances, further deductions are available. For example certain education expenses, supporting expenses, and deductions for disabled individuals as well as additional insurance contributions.

What are the tax reimbursement methods generally used by employers in Germany?

German employers often conclude net salary agreements with their assignees from abroad. Consequently, the German tax allocable to company income is borne by the employer and tax refunds allocable to company income are also due to the employer.

How are estimates/prepayments/withholding of tax handled in Germany?For example, pay-as-you-earn (PAYE), pay-as-you-go (PAYG), and so on.

Wage tax needs to be withheld on salary by the employer, whereas prepayments can be assessed by the authorities for all other categories of income.

When are estimates/prepayments/withholding of tax due in Germany? For example: monthly, annually, both, and so on.

The wage tax is due monthly and is arranged by the employer. If applicable, tax prepayments are due on a quarterly basis and need to be paid by the individual.

What are the general tax credits that may be claimed in Germany? Please list below.

The withholding tax from German investment income (interest, dividends, gains from shares sold) will be credited against the German tax on investment income if investment income is included in the assessment. The foreign withholding tax on investment income (if taxable in Germany) can also be credited against the German tax on investment income. The credit is limited to the percentage allowed by the applicable double tax treaty.

This calculation assumes a married taxpayer resident in Germany with two children whose three-year assignment begins 1 January 2017 and ends 31 December 2019. The taxpayer’s base salary is USD 100,000 and the calculation covers three years.

Exchange rate used for calculation: USD1.00 = EUR0.858.

Other assumptions

• The calculation has been generated based on KPMG LINK Cost Projector, Version 2017.5 (calculations are based on 2018 rates as most recent rates incorporated into KPMG LINK Cost Projector).
  
• All earned income is attributable to local sources.
  
• All allowances are paid gross.
• Bonuses are paid at the end of each tax year, and accrue evenly throughout the year.
• The company car is used for business and private purposes and the gross list price is amounting to USD 50,000. 
• The employee is deemed resident throughout the assignment.
• Tax treaties and totalization agreements are ignored for the purpose of this calculation (i.e. German social security contributions do apply).
• The employee is not subject to German church tax.
• The housing allowance is provided in cash.
• Only standard deductions have been considered.
• All moving expenses can be proven by receipt/invoices.
  

Calculation of taxable income

Calculation of tax liability

*In many cases assignees are entitled to receive child subsidy (cash payments) from the authorities. To eliminate a double benefit/advantage by claiming on top the child allowance deduction in the tax return, the child subsidy must be paid back together with the income tax.

¹Note that an additional taxable benefit for the use of the company car for commuting between the home and the office may arise. The amount depends on the distance between the taxpayer's home and office.

Is there a requirement to declare/report offshore assets (e.g., foreign financial accounts, securities) to the country’s fiscal or banking authorities?

German resident taxpayers are taxable with their worldwide income. Tax residents have generally to declare their worldwide investment income, including income generated by investments in foreign (i.e. non-German) entities or investment vehicles such as trusts, partnerships, funds and the like. Treaty provisions might provide tax relief, if the taxpayer remains resident in another country based on Article 4 of the OECD Model Convention.

The following should be noticed:

1. German tax law includes CFC rules according to which income received in a separate foreign legal entity might – if certain conditions are met – become taxable at the level of the shareholder itself (“looking through approach”).
2. The taxation of foreign Trusts follows special regulations. In short, such vehicles are very often regarded as “transparent” for German tax purposes thus triggering an income tax liability for the German tax resident beneficiary even if no distributions are paid by the trust itself.
3. The taxation of investment income derived by foreign investment funds is complex and not straight forward. If lthe fund itself does not fulfil certain publishing requirements (i.e. officially reports and publishes its earnings / losses / etc. in the German “Bundesanzeiger” in accordance with German tax GAAP), the fund will be regarded as “non-transparent” for tax purposes. The German taxation of such non-transparent Funds at the level of the individual investor is very unfavourable. Assessment basis will be the sum of all disbursements, unrealised profits and 70% of the difference between the repurchase prices (first price at the beginning of the year / last price at the end of the year); but 6% of the latest annual repurchase price at the minimum.

Furthermore, German residents are obliged to report their participation and the acquisition of foreign companies/partnerships/vehicles if

• They hold at least 10% or more of the shares in a legal entity or
• The acquisition costs of all shares exceed EUR 150,000 in total.

Last but not least there is an obligation to inform the German tax authorities whether the taxpayer maintains “business and/or financial relations with foreign jurisdictions” in the German income tax return itself (“yes” or “no” question). This information shall enable the authorities to follow up.