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Tax liability (income tax)

    Doing the taxes

    Doing the taxes
    (© Jens-Ulrich Koch/ ddp)

    Germany charges a tax on the income earned by physical persons. The income tax is an annual tax applied to the income earned in a calendar year (assessment period) from:

    • Agriculture and forestry
    • Business operations
    • Self-employment*
    • Dependent employment
    • Capital assets
    • Rentals and leases, and
    • The other income stated in § 22 of the German Income Tax Act (EStG)
      (e.g. income from a pension drawn from the legal pension insurance fund or income from private sales)

    *) Self-employment / Dependent employment as per § 2 Paragraph 1 of the German Income Tax Act (EStG)

    German income tax law distinguishes between two types of tax liability: full income tax liability and partial income tax exemption

    Full liability to pay income tax in Germany

    If your primary place of residence is in Germany, you are fully liable to pay income tax here. This means that all your income, regardless of whether you earned this within Germany and/or abroad, must be taxed in Germany (principle of global income).

    Partial income tax exemption in Germany

    If your primary place of residence is not in Germany, you are entitled to partial income tax exemption if you earn a certain domestic income in Germany, i.e. you are only taxed in Germany for this particular income (e.g. from an employment contract).

    However, regardless of the place of residence, full income tax liability exists in Germany

    • for German staff sent abroad, who are part of a public-law employment contract with a public domestic (German) legal entity, and who receive a wage from a public domestic (German) fund.

    For this to take effect, the person must only be liable to pay an income tax amount equivalent to a partial income tax exemption in their country of residence. This so-called »extended full income tax liability« also applies to family members in the same household, who are German citizens or earn no income, or who only earn an income exclusively liable to German income tax.

    • at your request, if you earn almost all your income in Germany

    For this to apply, at least 90 percent of your income must be subject to German income tax, or the income not liable to German income tax – for the years up to 2007 – must not exceed the limit of EUR 6,136 or – for the years 2008 onwards – the limit corresponding to the so-called basic exemption:

    • 2008: EUR 7,664
    • 2009: EUR 7,834
    • 2010–2012: EUR 8,004
    • from 2013: EUR 8,130

    The limit amount may be reduced to ¾, ½ or ¼ depending on the conditions in your country of residence. You must prove your foreign income by providing documentation from the relevant foreign tax authority.

    Foreign income / Income tax liability abroad

    If you earn foreign income and are fully liable to pay income tax in Germany, this income is

    • included in the total income (if necessary offsetting the foreign taxes) or
    • only included when calculating the progressive tax rate applied to the remaining income (progression clause)

    in Germany.

    For example: Income considered tax-free in Germany according to a double taxation convention.

    If, on the other hand, you are not fully liable to pay income tax in Germany, nor are you eligible for partial income tax exemption, your entire income is not subject to German tax law.

    Find out which tax law applies in your foreign place of residence or work, and the extent to which your income is subject to this. The relevant embassies/consulates or finance ministries will provide information on this.

    Double Taxation Convention

    Tax claims between the respective states are settled using the so-called Double Taxation Convention, which prevents any double taxation for the same income. You should enquire about any double taxation convention existing between Germany and your foreign place of residence or work.

    Income tax assessment / Income tax return

    Income tax in Germany is assessed at the end of the respective calendar year, based on the income earned by the taxpayer that year. The assessment process is usually started by the taxpayer declaring the income they have earned during the relevant year (income tax return).

    NOTE: In the event of partial tax exemption, the income tax on income which is subject to wage tax or capital gains tax, or which is subject to the tax deduction stated in § 50a of the German Income Tax Act (EStG), is considered as being covered by said tax deduction.

    Tax deduction for domestic income from dependent employment

    For employees, the income tax on their wage is charged throughout the calendar year by virtue of deductions from their wage (wage tax), insofar as the wage is paid by a registered, taxpaying employer*. The wage tax is therefore a special type of income tax.

    The registered taxpaying employer must calculate the wage tax, withhold it from every wage payment, and pay it directly to the finance authority. The employee’s personal taxation criteria are definitive here. These are generally stored in a central database as part of the »Electronic Wage Tax Criteria« (ELStAM), and provided to the employer electronically. 

    *) German employer or foreign hirer as per § 38 Para. 1 of the German Income Tax Act (EStG)

    ELStAM retrieval

    When entering into an employment contract, you must advise your employer of certain details for the purposes of retrieving electronic wage tax deduction criteria (ELStAM). You will need to provide your tax ID number, date of birth, and information on whether it is your primary or an additional employment contract (in the case of the latter, you also need to advise whether a set exemption is to be applied, and if so, how much).

    Transition rule for 2013

    Your employer can switch from the previous wage tax card/paper document to the electronic process during the course of 2013. Until this switch, you must provide them with all official wage tax documents stating your wage tax deduction criteria (2010 wage tax card or 2011/2012/2013 substitute document).

    Your employer will always need these documents in 2013, even in the ELStAM process, to ensure they can register themselves as your primary employer (primary employment contract with tax category I, II, III, IV or V).

    Certification for persons not needing to register themselves in Germany

    Are you a commuter from over the border with no permanent place of residence in Germany, but who earns a wage in Germany? If, as per this example, you are not fully liable to pay income tax in Germany according to § 1 Paragraph 1 of the German Income Tax Act (EStG), and have not been assigned a tax ID number, you cannot yet participate in the ELStAM process. You must instead ask the finance authority responsible for your employer’s establishment to issue you with a »Wage tax deduction document as per § 39 Paragraph 3 EStG«, which you then provide to your employer.

    In future, the finance authority should be able to issue a tax ID number for persons not needing to register themselves in Germany. They will also be able to participate in the ELStAM process at a later date.

    Legal bases

    • § 1 German Income Tax Act (EStG) – Income tax liability

    • § 2  German Income Tax Act (EStG) – Scope of taxation, income

    • § 25  German Income Tax Act (EStG) – Assessment period, mandatory tax return

    • § 56 German Income Tax Ordinance (EStDV) – Mandatory tax returns

    • § 32b  German Income Tax Act (EStG) – Progression clause

    • § 34c  German Income Tax Act (EStG) – Tax discount for foreign income

    • §§ 38 ff.  German Income Tax Act (EStG) – Wage tax deduction

    • § 49  German Income Tax Act (EStG) – Domestic income in the event of partial income tax exemption

    • §§ 50 ff.  German Income Tax Act (EStG) – Special rules for persons entitled to partial income tax exemption

    • § 52b  German Income Tax Act (EStG) – as it appears in the Annual Tax Act (JStG 2010) – Transition rules until the electronic wage tax deduction criteria take effect

    • § 8 German Tax Code (AO) – Place of residence

    • § 9  German Tax Code AO) – Usual place of residence

    Release note

    State Chancellery of Saxony. As at: 1/1/2013