Individual Income Tax in Germany

Subject to individual income tax is every individual (also a partner of a partnership) in Germany either with its world-wide income (unlimited tax liability) or only with its German income (limited tax liability). The limited tax liability applies to foreigner with no permanent residence in Germany.

System of individual income tax in Germany:

Wages and salaries for employees are subject to payroll withholding taxes by the employer on a monthly basis. The employer has the duty to pay the withholding tax directly to the fiscal authorities.

The system of withholding taxes is also applied to capital gains whereas banks are obligated to deduct and remit the taxes. Taxes on other types of income have to be declared by the taxpayer and often involves quarterly tax pre-payments. The tax authorities calculate the pre-payments based on the prior year’s tax or on estimates of income not subject to withholding tax.

In general taxpayers have to file an annual return by 31 May of the following year. Married couples can file tax returns jointly or as separate individuals. Income related expenses as well as special expenses are deductable from the income. Due to a change in German tax law capital gains are subject to a 25 % settlement tax.

Taxes owed have to be paid within one month after the tax authorities issued the corresponding tax assessment.

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