Salaries paid under the German payroll are subject to wage tax, which is withheld by the employer and credited against the final annual income tax charge. Account is taken of the personal situation by the application of certain tax classes and certain deductions are applied.
Salaries that are paid by a foreign employer (who does not have a permanent establishment in Germany) but are recharged to the German company are also subject to wage tax withholding. The same applies as of 2020 for salary that is not actually recharged but should have been recharged under an arm's-length perspective. The German company is deemed to be the 'economic employer' and thus required to calculate and transfer the appropriate wage tax to the tax office on a monthly basis.
Salaries that are paid by a foreign employer and are neither charged to a German company nor should have been recharged under an arm's-length perspective to a German company are generally not subject to wage tax withholding. As with other income, tax for these employees is levied by assessment generally following the first annual return. Pension income is also taxable, subject to further allowances.
Stock options are basically taxable when exercised. Taxable income is computed at the time of exercising the option, normally as the difference between the market price of the shares and the exercise price. Tax exemption may be granted if during the period between grant and vesting employment was not performed in Germany and thus the employment income was not taxable in Germany. The stock option benefit is sourced based on workdays between grant and vesting.
Shares provided free of charge or at a low-price may be tax-free up to an amount of EUR 1,440 per annum if certain conditions are fulfilled. This relief is granted for shares of the employing company and of the parent company controlling and consolidating its subsidiary.
A favourable tax rate may apply if the period between grant and exercise exceeds 12 months and if the employee is employed with the granting company at least for the first 12 months of this period. In the case of a limited taxpayer status, the application of the favourable tax rate in payroll leads to an individual income tax filing obligation for the non-resident taxpayer, including progression impact of otherwise tax-exempt income.
Tax on net income from professional activities or from carrying on a trade or business is collected by assessment. Quarterly instalments might be assessed on an estimated basis and credited against the final income tax burden.
Capital gains from financial investments (e.g. sale of shares) are subject to a flat tax rate of 25% plus 5.5% solidarity surcharge (in total 26.375%, plus church tax if applicable), which is basically withheld at source. Related expenses cannot be deducted. Capital gains qualify for the 'investor's allowance' of EUR 801 (EUR 1,000 as of assessment period 2023) per taxpayer and year for the total of all financial investment income. This amount is doubled in the case of married taxpayers filing jointly. Special rules apply on the taxation of capital gains from the sale of a significant interest in a corporation (1% or more).
Special partial tax exemptions apply on capital gains from the sale of mutual funds units, depending on the nature of the fund.
Other capital gains are taxable in Germany at individual progressive rates only if the sale is within one year (for movable assets) or ten years (for real property) after the purchase date. These capital gains are only taxable if the profit exceeds EUR 600 per year in total. Further tax relief may be applicable under specific conditions if the property was used for private purposes.
The German Foreign Tax Act contains regulations concerning an exit taxation for individuals if certain requirements are met. If the individual has been subject to unlimited tax liability in Germany for a certain time and holds at least 1% in a corporation as private asset, they could qualify for exit tax. The exit tax will be triggered in case the unlimited tax liability in Germany is terminated (e.g. in most cases due to relocation of the shareholder). As a result, the capital gain of a deemed sale of the shares will be taxed under German income tax regulations. The exit taxation could, in some cases, be avoided by appropriate structuring.
Dividend income is subject to a flat tax rate of 25% plus 5.5% solidarity surcharge (in total 26.375%, plus church tax if applicable), which is basically withheld at source. Related expenses cannot be deducted. Dividend income qualifies for the annual investor's allowance of EUR 801 (EUR 1,000 as of assessment period 2023) per taxpayer for the total of all financial investment income. This amount is doubled in the case of married taxpayers filing jointly.
Special partial tax exemptions apply on distributions of mutual funds, depending on the nature of the fund.
Mutual funds retaining their profits can trigger deemed income to be taxed at the investor level even if no actual distributions are made.
Interest income is subject to a flat tax rate of 25% plus 5.5% solidarity surcharge (in total 26.375%, plus church tax if applicable), which is basically withheld at source. Related expenses cannot be deducted. Interest income qualifies for the annual investor's allowance of EUR 801 (EUR 1,000 as of assessment period 2023) per taxpayer for the total of all financial investment income. This amount is doubled in the case of married taxpayers filing jointly.
Note that the investor's allowance is only provided one time for the total of interest and dividend income and capital gains.
Rents received less allowable expenses form part of taxable income. Under treaty provisions rental income from sources abroad is mostly exempt. Tax exemption with progression will be applicable if sources are not located within the EU/EEA.
Employment income connected to special construction, engineering, or consulting work outside Germany, lasting at least three months, might be exempt if:
- The employee works abroad for a German employer or an employer located in the European Union.
- There is no tax treaty with the foreign country.