An Employee`S Tax Guide

COMING TO GERMANY AN EMPLOYEE`S TAX GUIDE September 2014 COMING TO GERMANY 3 TABLE OF CONTENTS Table of Contents 3 Taxes and Levies 11 Introduction 4 Income tax 11 The German Tax System 5 Solidarity Surcharge 11 Tax residency rules 5 Church tax 11 The tax year 5 Tax classes 11 Married taxpayers 5 Social Security 12 Taxable income 5 Employees on secondment 12 Special tax relief 6 Social Security Agreements 12 Types of income 6 European Union (EU) / European Economic Area Arriving In Germany 7 (EEA) / Switzerland (CH) 12 EU Nationals 7 Unilateral Social security treaties 12 Non-EU Nationals 7 Other Taxes and Issues 13 Registration 7 Inheritance tax 13 Child benefits 7 Stock options / Share schemes 13 Tax Compliance 8 Company cars 13 Annual income tax return and assessment 8 Double Taxation Agreements 14 Tax liability procedure (taxation of worldwide income) 8 Appendix A 15 Tax liability procedure Sample tax calculation for the year 2014 15 (taxation of German sourced income) 8 Appendix B - Double Taxation Agreements 16 Claiming relief and allowances 8 Appendix C - Social Security Agreements 17 Leaving Germany 10 Reporting departure 10 4 COMING TO GERMANY INTRODUCTION This guide is general in nature and you should not act upon information This guide is intended for contained in it without seeking professional advice based upon your individuals moving to Germany personal circumstances. BDO Germany’s Payroll and Global Expatriate Services practice offers a for employment purposes. It full range of services to employees moving to Germany - whether on a temporary or permanent basis. We would be pleased to discuss any aims to provide an overview of aspect of this guide and provide you with further information. the main German tax Details of our main specialist contact in Germany are listed at the end of this guide and details of our offices in your host country can be found at features and issues that affect www.bdo.de. employees working in Germany and is current as at the date publication. COMING TO GERMANY 5 THE GERMAN TAX SYSTEM Tax residency rules The tax year Residents of Germany are subject to taxation on their worldwide income. The tax year equals the calendar year. Employment income is taxed Individuals not resident in Germany are subject to tax only on income in the year for which it is paid. In deviation of this general rule, special derived from German sources. In a transfer year, the taxable income payments (like one-time payments but not the regular salary) are taxed of the resident and non-resident period has to be added together. in the year in which the payment or benefit is actually received (e.g. Therefore, only one tax return is filed for both periods. For tax purposes, bonus payment 2014 which is paid in January 2015 will be taxed in 2015). individuals are considered as German residents if: Married taxpayers a. they obtain a dwelling in Germany (irrespective of whether it is Married taxpayers may choose between filing jointly (“Splitting- rented or their own property) and retain and use it as a dwelling or Verfahren”) or separately. Generally, it is more advantageous to file b. they have their habitual place of abode in Germany. This means a jointly if the income of the spouses differs considerably. However, the continuous presence of more than six months (e.g. from October tariff for married couples is only granted if both husband and wife are 1st to April 15th, even with three weeks of Christmas holidays in residents of Germany (an exception is available for EU-nationals under the home country). certain conditions - see above). Income earned by dependent children is not included in the joint tax return. They are liable to file their own tax In case an employee moves to Germany within the calendar year, the return if their income exceeds certain thresholds. foreign income earned before becoming a German resident will have to be considered for progression clause purposes. This means that such Taxable income foreign income is not directly taxed in Germany, but it will increase the Taxable income covers income from: individual’s personal tax rate. The same applies if the employee leaves y Agriculture and forestry; Germany during the calendar year. y Trade or business; Non-residents can elect to be treated like a resident if their income y Independent professions; from German sources is either at least 90 % of their worldwide income y Employment; or if the non-German source income does not exceed the basic tax free y Capital investment; threshold of € 8,354 (€ 16,708 for married couples). y Rents and royalties and As a result, the non-resident can file a German income tax return and y Other income (as defined by tax law). some, but not all, deductible items available for residents can be claimed. Any income not falling under these categories is not taxable (e.g. lottery The citizenship of the taxpayer is usually not relevant for determining gains). residency. However, under German tax law a special regulation for EU citizens or EEA member state citizens (Norway, Iceland and Liechten- The gross income received during a calendar year can generally be stein) exists. Upon application, an EU/EEA citizen who is considered tax reduced by income related expenses during the same period for each resident in Germany can file a joint tax return although his/her spouse of the above categories. Losses from one of the seven basic income is not a German resident but living in an EU or EEA member state. In categories - except capital investment - can be fully offset against such case, the favourable married filing jointly tax tables will become income from another income category (exceptions for “other income” applicable. may apply). 6 COMING TO GERMANY The total income after deductions in each category represents the married couples filing a joint tax return. There is no possibility of deducting adjusted gross income, which may be further reduced by lump sum expenses in connection with the investment income. Foreign tax on deductions or, within limits, by actual payments for special expenses, investment income may be credited against the withholding tax when such as insurance payments or extraordinary burdens, to arrive at the filing an income tax return. taxable income. For the better understanding you can find a sample tax Nevertheless it is possible to declare investment income in the income calculation in Appendix A. tax return if the personal income tax rate is below 25 %. The tax office applies the lower personal tax rate and offsets the tax deduction against Special tax relief the tax liability (so-called most favoured-test). If a Double Tax Treaty is available (see Appendix B), special relief (tax exemption or tax credit) is granted as well to avoid a potential double Investment income will be subject to the individual tax rate if this taxation. income belongs to another income category (e.g. trade or business). Types of income Rental income Employment income Rents received less allowable expenses form part of taxable income. Under tax treaty provisions rental income from sources abroad is mostly Salaries paid or borne by a German employer or a German permanent exempt from taxation in Germany. Tax exemption with progression will establishment of a foreign employer are subject to wage tax, which is be applicable if sources are not located within EU/EEA. withheld by the employer and credited against the final annual income tax charge. Salaries which are paid by a foreign employer and recharged Capital gains to a German company are as well subject to withholding tax. The German company is deemed to be the “economic employer” and is The withholding tax with compensation effect on investment income obliged to calculate and transfer the appropriate wage tax to the tax also applies for capital gains deriving from the sale of shares, warrants, office on a monthly basis. Salaries which are paid by a foreign employer bonds etc. bought after December 31, 2008, irrespective of the holding but not recharged to a German company are generally not subject to period. withholding tax as long as there is no permanent establishment of the foreign employer in Germany. Tax for this income is levied by assessment Special rules apply where a taxpayer has an interest of 1 % or more in a generally following the first annual return. corporation. Self-employment income As a rule, any other sale transactions are taxable in Germany at individual progressive rates only if the sale is within one year (for Tax on net income from professional activities or from carrying on a trade movable assets) or ten years (for real estate property) after the purchase or business is collected by assessment. Quarterly prepayments might be date. These sale transactions are only taxable if the profit exceeds assessed on an estimated basis and credited against the final income tax € 600 per annum. Further tax relief may be applicable if the real estate burden. property was used for private purposes. Investment income On investment income a withholding tax with compensation effect is applicable. The flat tax rate amounts to 25 % income tax and 5.5 % solidarity surcharge on income tax. Church tax might be levied as well (8 % or 9 % of the income tax). There is, however, a tax free amount for investment income of € 801 for single filers and € 1,602 for COMING TO GERMANY 7 ARRIVING IN GERMANY EU Nationals Child benefits EU / EEA and Swiss nationals coming to work in Germany benefit from Generally, an international secondee assigned by a foreign employer the privilege of the free movement of workers within the EU member to work temporarily in Germany could be entitled to child cash benefit states.

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