Last updated on 7 de April de 2023
We analyze the most important Taxes in Germany, Europe’s largest economy, in an easy-to-understand manner. How much tax do workers, companies, investors and consumers pay in Germany?
Content
- Introduction
- Taxes on Earned Income
- Capital Income Taxes
- Wealth Taxes
- Real Estate Transfer Tax
- VAT
- Corporate Tax
- Conclusion
Introduction
Germany is the largest economy of Europe, the European Union and the Eurozone. It is also the fourth largest in the world, only behind the United States, China and Japan. And it is home to some world-famous industrial companies.
German manufacturing is renowned for its quality and attention to detail. The best example is the automobile sector, with several German corporations among the favorite in the world.
All this makes Germany a very interesting place to visit and know. For those considering relocating to Germany though, understanding its tax system is of crucial importance. This is what we will analyze here.
When it comes to the cost of living in Germany, according to the comparison website WorldData.info, prices are 8% lower than in the United States and about 17% lower than in the United Kingdom.
Of course, the cost of living will depend on the city where we live. Places like Munich or Düsseldorf are more expensive than Dresden or Leipzig.
Taxes on Earned Income
We will first analyze how earned income is taxed in Germany. It is subject to both social security contributions as well as income tax.
Social Security
Both the employer and the employee have to make social security contributions in Germany. These will depend on the employee’s gross salary.
In 2023, both the employee and the employer pay the same percentage. On average, each party pays the equivalent of 19.425% of the gross salary. If we break down this percentage, we will see that 9.3% is for the pension system, 1.3% for unemployment insurance, 7.3% for health insurance and 1.525% for elderly care and other services.
The maximum amount on which these contributions are paid varies by region.
The maximum base to calculate contributions to the pension system and unemployment insurance is €87,600 per year in most federal states (Bundesländer), and €85,200 in those federal states that were once part of Eastern Germany.
The maximum base used to calculate health insurance and elderly care payments is €59,850 annually in the entire country.
The following table summarizes all payments mad to the social security in Germany:
Income Tax
The German income tax (Einkommensteuer) can be highly complex, just like the word for it in German. There are many optional deductions and allowances, which depend on the individual’s life circumstances.
There are also numerous tax credits for those who have children. In that sense, Germany is a country that tries to make things easier for parents. In addition to that, the German tax authorities allow taxpayers to deduct their commuting costs.
If you are interested to know how much income tax you would have to pay in Germany depending on your life circumstances and income level, I will leave you a very useful link at the end of this post.
Germany has a progressive income tax system where higher income levels are taxed at higher rates. The following brackets apply to 2023:
- €0 to €10.909€: 0%
- €10,909 to €62,809: between 14% and 42% (rising progressively)
- €62,810 to €277,826: 42%
- More than €277.826: 45%
In addition, those with gross annual salaries above €75,000 also have to pay the solidarity surcharge, known as Soli or Solidaritätszuschlag. This additional payment is used to finance the economic development of those regions that were part of Eastern Germany until 1989.
The surcharge is 5.5% of what we would have to pay in income taxes. Consequently, if we would have to pay €10,000 in income tax before the Soli, the final amount payable would be €10,550.
Finally, those affiliated with a church will also have to pay an additional 8-9% as church tax. If we use the sample example we saw with the Soli, those with an applicable income tax of €10,000 would have to pay an extra €800-900 to the church. This could make their final payment €11,450 after both Soli and church tax have been added.
Comparison between cost per employee, gross salary and net salary
The best way to understand the total level of taxation on earned income is by comparing how much a company has to spend to employ someone with that worker’s net salary. This will tell us how much money is taken by the tax authorities and how much ends up in the worker’s bank account.
The following table analyzes exactly that. The first table, the total employer cost, includes the social security contributions made by the employer. We then see the employee’s gross salary as well as the net salary after paying for social security and income tax. Finally, the column on the right shows the total tax burden on earned income.
For these calculations we consider a taxpayer who is not married and has no children:
As we can see, the total tax burden for earned income in Germany is extremely high. Low-income people pay over a third in various forms of taxes and contributions. For their part, the middle and upper classes pay about half of their output in taxes.
Capital Income Taxes
Although capital income is just another form of income, it is often treated differently from a tax perspective. Capital and savings tend to be more mobile than labor. And their real value is eroded with inflation. Consequently, they usually face lower tax rates.
The tax-exempt amount of capital income in Germany is €1,000 in 2023. If our capital income is higher than that, we would have to start paying taxes.
The general tax rate for capital income in Germany is 25%. However, the resulting amount is increased by a further 5.5% to pay for the solidarity surcharge and, depending on the federal state and church affiliation, an additional 8-9% will have to be paid in church tax.
Thus, the effective rate for capital income taxes, after applying these surcharges, will be somewhere between 26.375% and 28%:
Wealth Taxes
Wealth taxes tend to be problematic because they effectively tax the same pot of money for a second time: it was taxed when it was earned, and its mere existence is being taxed again.
Because of that, Germany eliminated its wealth tax in 1997. The justification given at the time was that people with high incomes already pay about 50% of what they earn in taxes. Taxing those people again for accumulating wealth would disincentive saving and investing and harm the productive capacity of the country in the long term.
The majority of countries in Europe scrapped their wealth taxes in the late 1990s and early 2000s.
Real Estate Transfer Tax
The purchase of real estate in Germany is also subject to the payment of taxes. There are two taxes that need to be paid.
On the one hand, the Grunderwerbsteuer, taxes the purchase of real estate with a fixed rate determined by the federal state in which the property is located. The tax ranges between 3.5 and 6.5% of the value of the transaction.
At the same time, buyers of real estate in Germany also have to pay for the Grundbucheintrag, a fee related to the property register. This usually costs around 0.5% of the value of the transaction.
Thus, the purchase of a property in Germany is subject to taxes of between 4 and 7% of its value, depending on our federal state.
VAT
Value added tax has to be paid when we buy a product or service. It is one of the most important revenue sources for the government as it is something everyone pays on a daily basis. In German, the VAT is known as MwSt (Mehrwertsteuer).
The VAT in Germany has 3 categories (general, reduced and exempt) with different tax rates. The table below shows those rates as well as some of the goods and services for which they are used:
The rates of VAT in Germany are very much in line with those of most European countries.
Corporate Tax
Corporate tax in Germany has two tranches, federal and municipal, set by different government levels. As a result, a company’s effective tax rate will be determined by where its headquarters are located.
The federal tranche, which is applicable throughout the country, is 15%. However, the German government adds a solidarity surcharge of 5.5% on top of that, making the effective federal rate 15.825%.
The corporate municipal rate is set by each municipality in the country. In general, it is between 8% and 20%, with the average around 14%.
For this reason, the effective corporate tax rate in Germany is between 23.8% and 35.8%. The average tax rate is close to 29.8%.
Conclusion
I hope you have gained a good understanding of how taxes work in Germany. This is very important to comprehend why things operate the way they do.
Germany is a high-tax country for everyone. Workers, investors, corporations, and consumers face high tax rates.
The best way to conclude our analysis is to assess the state of the German public finances. To that end, we will look at the level of public debt relative to the country’s gross domestic product:
This graph shows that the situation in Germany is stable, although there is room for improvement. Given investors consider German government bonds the safest euro-denominated assets available, they command a premium. This translates into the lowest financing costs of all countries in the Eurozone.
If you liked this analysis on taxes in Germany, I encourage you to subscribe to my newsletter:
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And, as promised before, here is the link to a website that will allow you to calculate your net salary in Germany based on your gross salary and your personal circumstances:
Brutto Netto Rechner
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