The German Tax System What taxes must be paid in Germany and who must pay?
Each time we go to a supermarket or café, drop by at a gas station or receive a payroll, we are paying taxes. Taxation is the primary source of revenue for the state and enables the government to perform its duties. The German state is responsible for funding Kindergartens and schools, universities and hospitals, construction of roads, the salaries of teachers, police officers, firefighters, politicians and much more. Without tax revenues, the state could not fulfil such responsibilities.
Collecting revenue, however, is not the only reasons for taxation. There are, in fact, two other grounds for taxation. Through the taxation of harmful things, such as cigarettes, the state tries to improve behaviours. The cigarettes are expensive as a result of the tobacco tax; so that some give up smoking due to its high cost. Furthermore, social justice should be promoted through taxation: those who earn more must pay more taxes than people with less income.
Who has to pay taxes?
When shopping, we pay sales tax ("Umsatzsteuer", colloquially also known as "Mehrwertsteuer"), so actually, we all pay taxes all the time. When the term "taxpayer" ("Steuerzahler") is mentioned, however, it generally has a more confined meaning and refers to people or firms earning an income, i.e. those who make money. Ultimately, everyone who has an income pays income tax ("Einkommenssteuer"). For employees, income tax means payroll tax ("Lohnsteuer"). Larger companies such as Limited Liability Companies (GmbH) or Public Limited Companies (AG) pay corporate income tax ("Körperschaftssteuer").
The other types of taxes which may incur depends on individual circumstances. For instance, dog owners pay dog tax ("Hundesteuer") for their pet, car and motor vehicle owners pay car tax ("KFZ-Steuer") and those who register a trade in Germany, must usually pay trade tax ("Gewerbesteuer")
What is a Tax Identification Number ("Steueridentifikationsnummer")?
Those who register Germany as their primary place of residence and others who must pay taxes in Germany are issued a tax identification number ("Steueridentifikationsnummer"). A tax ID number is an 11-digit number specifically assigned to you, which will remain valid throughout your life. Newborns get their tax ID number shortly after birth. The tax ID number is designated to facilitate communication with the Tax Office. For instance, whenever you report something to the Tax Office or apply for a service, you need to provide your tax ID number. Same is the case for your tax return. Employers, the Employment Office or your health insurance may also ask for your tax ID number.
If you are registered in Germany, you must have received your tax ID number per mail. You can also find it on your annual income tax statement ("Lohnsteuerbescheinigung") or tax assessment note ("Steuerbescheid").
What is an Income Tax ("Einkommenssteuer")?
Income tax is the most significant tax collected in Germany. It makes up most of the state revenue and is paid by both employees and self-employed individuals, so it applies to almost everyone. There are seven different types of income for which you have to pay income tax in Germany. These are incomes generated through:
* self-employed work
* employment
* business entities' ventures
* agriculture and forestry
* capital assets
* Rent and Lease
and other types of income mentioned in the income tax law, for instance, pensions.
There are also earnings on which you do not have to pay any income tax. These include parental allowance ("Elterngeld"), unemployment benefits’, BAföG and scholarships. The same applies if you have a mini-job or your income is below the so-called basic exemption level ("Grundfreibetrag"). The basic exemption level is adjusted annually and currently amounts to 9, 984 euro (As of 2022). If your income is below this amount, you do not have to pay income tax. Otherwise, however, anyone who resides in Germany and earns money must pay income tax.
Please note: If you have registered your place of residence in Germany, you must pay taxes. This applies to all of your income, including what you may earn abroad. However, there are so-called double taxation agreements ("Doppelbesteuerungsabkommen") between Germany and some other countries to protect taxpayers from double-taxation.
What is "Umsatzsteuer" (colloquially also known as "Mehrwertsteuer")?
"Umsatzsteuer" or sales tax applies to everyone- as we all go shopping, get haircuts and buy train tickets. Sales tax is one of the essential sources of revenue for the state. The basic idea behind Sales Tax is that all goods and services which are sold must be taxed. In everyday language, sales tax is also called "Mehrwersteuer". Sales Tax amounts to 19% (or a reduced 7%) which is directly added to the price of the product or service and paid by the customer. We, therefore, do not notice that part of what we pay is, in fact, Sales Tax. The company (seller/service provider) then withholds the Sales Tax paid by the customer and transfer it to the Tax Office.
Please note: As a self-employed person, in principle, you have to pre-register your Sales Tax ("Umsatzsteuer-Voranmeldung") at Tax Office until the 10th of each month.