Germany’s Tax System

-POINT 2, 3, 9 -Youssef Ahmed Salem 17105351

-POINT 7, 11 -Mostafa Mohamed arafa 17105813

-POINT 1, 8 - Mohamed samaha 17104222

-POINT 4, 5 -Mahmoud teleb 15106880

-POINT 6, 10 -Ehab Weal Abdel Fattah 17204085

Point No. 1

Tax Objectives

-Taxes objective in Germany is to raise revenue because taxes are the main source of fund for the
government to perform its duties. By raising revenue from taxation the German government is supporting
a lot of departments, the German government is responsible for funding Kindergartens and schools,
universities and hospitals, construction of roads, the salaries of teachers, police officers, firefighters,
politicians and much more. So without taxes the government wouldn’t have the source to fund these
departments

There are also two main reasons for taxation in Germany, first the taxation of harmful things, such as
cigarettes, the state tries to improve behaviors. The cigarettes are expensive as a result of the tobacco tax;
so that some give up smoking due to its high cost. Second taxation help the government achieve social
objective by redistributing the wealth in the society, those who earn more must pay more taxes than
people with less income.

German government offers a number of project financing incentives to all investors regardless of their
nationality, which helps the government achieve economic growth.

Reference: https://handbookgermany.de/en.html

Point No. 2

Why do we impose tax?

-We impose tax to make sure to achieve:

1. Financial Objectives.
2. Economic Objectives.
3. Social Objectives.

Reference: Lecture & Slides.

Point No. 3

Classification imposed of taxes

1. VAT.
2. Direct & Indirect.
3. Specific tax.
4. Individual tax & corporate income tax.
5. Sales tax.
6. Estate tax.
7. Real Estate tax.
 Reference: https://en.wikipedia.org/wiki/Taxation_in_Germany#:~:text=Tax%20revenue%20is
%20distributed%20to,known%20as%20%22shared%20taxes%22.

Point No. 4

Tax Rate Structure

Germany income tax system is progressive and that means as the income of the individual increases the
taxes also increases. Paying taxes on your income in Germany is also required when you are earning
money from a job or you run your own business, you are submitted to pay an annual tax return on your
income to the government. Therefore most of the employers pay their taxes through payroll deduction of
their monthly income.

Income Tax Rate

Less than 9.408 euros 0%

9.408 - 57.051 euros 14% to 42%

57.051 - 270.500 euros 42%

More than 270.500 euros 45%

Reference: https://www.sigmarrecruitment.eu/blog/2019/04/tax-system-in-germany

Point No. 5

Tax Rate Forms

A. Average Tax Rate :

The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal
tax rate means that 10 cents of every next dollar earned would be taken as tax.

B. Marginal tax rate

Under a marginal tax rate, taxpayers are most often divided into tax brackets or ranges, which
determine the rate applied to the taxable income. As income increases, what is earned will be
taxed at a higher rate than the first dollar earned. As an illustration, the first dollar earned will be
taxed at the rate for the lowest tax bracket, the last dollar earned will be taxed at the rate of the
highest bracket for that total income, and all the money in between is taxed at the rate for the
range into which it falls.

C. Effective tax rate

The effective tax rate is the percent of their income that an individual or a corporation pays in
taxes. The effective tax rate for individuals is the average rate at which their earned incomes,
such as wages, and unearned income, such as stock dividends, are taxed. The effective tax rate
for a corporation is the average rate at which its pre-tax profits are taxed, while the statutory tax
rate is the legal percentage established by law.

Reference: https://www.iamexfrom pat.de/expat-info/taxation-Germany/German-tax-system

https://www.taxback.com/blog/your-bullsht-free-guide-to-taxes-in-germany

https://tradingeconomics.com/germany/personal-income-tax-rate

https://tradingeconomics.com/germany/corporate-tax-rate

Point No. 6

Tax Chargeable Events

Chargeable event: In Germany as a member of Eurozone a value-added tax (VAT) becomes

chargeable when the tax authorities acquire the legal right to claim payment. The legislation on
chargeable event and chargeability of VAT is in Title VI (Articles 62-71) of the VAT Directive.
The chargeable event occurs on the date on which ownership of the goods passes or on which
the services are performed as follows:

Supply of goods/services: VAT becomes chargeable when the goods or services are supplied
(Article 63 VAT Directive).

Intra-EU acquisition of goods: The chargeable event for an intra-EU acquisition occurs when
the acquisition is made. (Article 68 VAT Directive)

Importation of goods from outside the EU: The chargeable event occurs – and VAT becomes
chargeable – when goods are not for free circulation in the EU or goods from EU territories not
covered by EU VAT rules that are in free circulation. (Article 70 VAT Directive)

The EU country may choose to make VAT chargeable at the date the VAT invoice is issued or the
date the payment is received. (Article 66 VAT Directive)
Reference: https://ec.europa.eu/taxation_customs/business/vat/eu-vat-rules-topic/chargeable-event-
chargeability_en

Point No. 7 Source of Tax System

Tax law in German:

Germany imposes a flat rate tax on private income from capital and capital gains, which called the
Abgeltungsteuer. The tax rate is 25% plus 5.5% solidarity surcharge. The tax is levied at German sources
as capital yields tax. A tax refund is allowed if the personal income tax rate is less than 25%.

Tax department:

The Federal Central Tax Office (German: Bundeszentralamt für Steuern, abbreviated BZSt) is a German
federal agency responsible for conducting several sections of the country's tax code. It was produced by
its current parent agency, the Federal Ministry of Finance, on 1 January 2006.

Tax office:

Tax administration in Germany

two agencies are Responsible for taxation in Germany

The Bundeszentralamt für Steuern (Federal Central Tax Office or BZSt) is a branch of the German
Federal Ministry of Finance. It handles national tax matters,

The Finanzamt (tax office) is a local authority that conduct taxes (except of customs duties)

The B.F.G. is the superior court in tax and customs matters within German jurisdiction

Reference: https://www.iamexpat.de/expat-info/organisations-agencies-germany/german-tax-offices-
finanzamt-bzst

Point No.8

Tax Avoidance & Tax Evasion

-Employees who work in Germany on a long term or are going to stay in Germany have a lot of deferred
compensation or private pension plan to reduce the German tax burden. According to German tax law,
there are a handful of options exist to pay into a pension plan and lower your tax payments. That’s how
you could avoid high taxation without doing any crime.

-Tax evasion in Germany is a serious crime and anyone who tax evasion could face a fine or a prison
sentence. The prison sentence can be up to 5 years or even up to 10 years in the case of more serious tax
offences. The offence of tax evasion is providing the authorities with incorrect information concerning
their financial situation.
-Germany has a well-established system and practice of disputes and litigation in tax matters, where a
taxpayer deems a tax claim asserted against them by the tax authorities to be unlawful, they are
constitutionally entitled to have the governmental action in question reviewed by the courts.

Reference: https://www.lexology.com/library/detail.aspx?g=9d5f13b8-9a3a-4b63-bc1a-
c921198476d3#:~:text=The%20German%20Act%20on%20Tax,total%20maximum%20of%20EUR
%20500%2C000.

https://se-legal.de/criminal-defense-lawyer/tax-offences-in-germany-criminal-law/?lang=en

Point No. 9

Double Taxation

-There is only Legal double taxation: meaning that the same taxpayer subjected to tax more than once on
the same income or capital.

-There is no Economic double taxation, International double taxation, internal double taxation, & that’s
according to the treaties Germany made with other 98 country which allows you to only pay tax in one
country.

Reference: https://www.lowtax.net/information/germany/germany-tax-treaty-introduction.html?
fbclid=IwAR3HJAHPYX6m6c63Ty6bx34kg43fjA7b-QT84yr0f7BF-MHQ9odCj1eXnoU

Point No.10

Tax Accounting

According to Germany Federal Central Tax Office, all businesses are required to file annual tax
returns electronically by 31st July of the year following the tax year; extension are available
however it is strictly subject to the approval of the tax authorities.

Taxes are levied by the federal government, and municipalities. Tax administration is shared
between two taxation authorities (The Federal Central Tax Office and the approximately 650
regional tax offices.

 The German tax system operates a progressive tax rate in which the tax rate increases with
taxable income. Most people will pay income tax through payroll deductions by their employer.
If you have multiple professions, run your own business or are self-employed in Germany, you
will be required to submit an annual tax return to work out your income tax
 German income tax rates 2020: The tax base of an asset or a liability is the amount attributed
to that asset or liability for tax purposes. The income tax brackets for 2020 are as
follows:

Income Tax Rate

Less than 9.408 euros 0%
9.408 - 57.051 euros 14% to 42%
57.051 - 270.500 euros 42%
More than 270.500 euros 45%

Types of business tax in Germany

 Trade tax (Gewerbesteuer)

 Corporation tax (Körperschaftsteuer)
 Income tax (Einkommensteuer)
 VAT (Umsatzsteuer)
 Payroll tax (Lohsteuer - if you have employees)
 Church tax (Kirchensteuer)

Company’s whom fail to lodge the tax on time will be subjected to a late filling penalty on the
tax due. Tax payers whom do not comply with the transfer pricing documentations will be
subjected to penalties as well.

Accounting Rules: European companies listed on the stock exchange must establish their
annual consolidated accounts on the basis of IAS/IFRS standards. SMEs can use German GAAP
(requirements of the German Commercial Code) or, in their consolidated financial statements,
IFRS Standards as adopted by the EU.

Accounting Law: The main legal sources of German accounting are:

- The Stock Corporation Law of 1965 (AktG)
- Book III of the German Commercial Code (Handelsgesetzbuch - HGB).

Companies using can use either one of the two following methods:

The cash method: Small businesses in particular, income isn't recognized until received, just as
expenses aren't deducted until they're paid. Accounts receivable aren't counted as revenue. a
company doesn't have to pay taxes on outstanding unpaid invoices, but only on money it's
already received.
The accrual (realized) method: Larger companies use the accrual method to track and report
income. Income is recognized as soon as a transaction takes place, regardless of whether the
money is received. It will recognize the amount in question as long as it has reason to believe it
will be paid what it's owed. It will have to pay taxes on any recognized income it records,
regardless of whether that income has been received at the time its taxes are due.

Reference: https://santandertrade.com/en/portal/establish-overseas/germany/tax-system

https://www.tetraconsultants.com/jurisdictions/germany-company-registration/accounting-tax/

Point No. 11

Standards for a good tax

(The sufficiency)

Everyone has to pay agreed unit of tax that is round off at 5.5% of income tax. This was directed to
improve the economic situation and infrastructure in the 5 'new' eastern states of Germany.

In Germany there are different kinds of taxes, Einkommensteuer (income tax), Gewerbesteuer (trade tax)
and Umsatzsteuer (value added tax).

This is used to fund spending for healthcare, social security, transport infrastructure, education.

(Fairness)

Taxpayers should be able to know and see that the types and levels of taxes which they pay are fair, that
known as the principle of equability which leads them to accept and pay their taxes.

(Transparency)

Every person can be able to understand taxation laws, administration and regulations.

(Suitable)

Individuals only pay tax if you earn over 9,168 euros per year. The government thus grants parents an
annual tax credit of 7,620 euros per child.

(Efficiency)

The tax is used to depress the purchase and use of products that produce risk to health, such as alcohol
and tobacco.

Reference: https://www.mondaq.com/germany/withholding-tax/896624/german-supreme-tax-court-
rules-in-favor-of-taxpayer-us-german-repatriation-non-taxable-#:~:text=The%20B.F.H.%20is%20the
%20supreme,has%20its%20seat%20in%20Munich.