References and tips

The German tax system – a case study

The German tax law is very complex with numerous regulations and exemptions. Reliable sources state that from the tax literature published all over the world a percentage of 60 % to 70 % is published in German language.

Therefore, if one decides to become a German resident this needs to be planned well with regards to the tax and social security status.

The regulations and implications can be shown in the following example:

If a UK national establishes a place of residency in Germany, first of all he has to register at the local authorities/town hall (“Einwohnermeldeamt”) as a German resident. With this registration he can also apply for a wage tax card (“Lohnsteuerkarte”) that is necessary for a German employer to calculate the monthly wage tax withholding.

If the UK national is assigned to Germany from a UK employer, it needs to be reviewed if the UK employer or a German subsidiary of this employer needs to calculate and withhold German wage tax.
This withholding obligation depends on the business of the employer (e.g. labour lease) or the kind of subsidiary in Germany.
In case no wage tax withholding obligation is given, the UK national needs to apply for quarterly income tax instalment payments at the responsible tax authorities.

A UK national that has a local contract or has an employer with a wage tax withholding obligation is taxed according to the parameters shown in his wage tax card.

The wage tax card includes for instants a wage tax class that depends on the family status. Tax class VI is the most expensive tax class, tax class III the most beneficial one.

Employment income in Germany is taxed at progressive tax rates starting at 14% and slightly increasing up to 42%.
In addition to this, solidarity tax of 5.5 % on the income tax needs to be paid. If the UK national is member of an in Germany registered church, he is also liable to church tax of 8 % or 9 % (depending on the German state he is living in).

Assuming the UK national is working only in Germany, he will in general be liable to the German social security scheme, too.  Employer and employee will each need to pay appr. 20 % of the salary into the German social security scheme.

When summarizing the German tax and social security burden, the UK national will end up with a major cut in net salary compared to earnings that are taxable in the UK.
However, if the UK national is assigned to Germany, it might be recommendable to check if the assignment is in compliance with the EU directive 883/2004.

In this case, the employer or the employee can apply for a form E 101 which confirms that the employee remains liable to the UK national insurance. Once an E 101 is received the salary will be exempt from German social security contributions.

Furthermore, the tax situation of the employee needs to be reviewed with regards to business expense and other expense deductions. These deductions might lower the German tax burden significantly.

Typical business expenses are

  • Relocation expenses
  • Double household expenses
  • Travelling expenses

If the UK national has a non-working spouse living in Germany or in the EU it is also recommendable to apply for the married tax table and to opt for tax class III in the German wage tax card.
In this case, the German tax burden will be lowered significantly, too.

The deduction of business expenses and other expenses and the married tax table can be claimed either in a wage tax relief application or in the annual tax return.

The German tax year is the calendar year.

Based on the German residency status, Germany has the right to tax the worldwide income of the UK national.
However, double tax treaties that Germany has negotiated with other countries might source the right of taxation of outside income to an other country.  For instants, if this UK national receives a British army pension, this pension will be taxed in the UK and is tax exempt in Germany. Nevertheless, Germany will use this income to determine his tax rate.

A taxpayer that has only income from employment that is subject to German wage tax withholding in general doesn’t need to file a German tax return but can do so on a voluntary basis.

The following taxpayers are obliged to file a German tax return (examples only):

  • Employees that earn income that is not subject to German wage tax withholding
  • Taxpayers with other income than income from employment (more than 410 € per year)
  • Married couples, both employed, that opted for wage tax classes 3 and 5
  • Taxpayers that have outside income that is taxable in Germany or tax exempt but used to determine the tax rate (e.g. employment income received before moving to Germany)

Based on the complexity of German tax and social security law it is recommendable to contact a tax advisor that reviews the tax and social security status before or at the beginning of establishing a residency in Germany. Only in this case all planning opportunities are given to maximize one’s net salary.

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Tax saving possibilities for employees
by Martin Brune: Tax advisor – Expert advisor for international tax law – Duisburg

On February 2nd 2011, the German government finally agreed to increase the lump sum business expense deduction for employees in 2011 from 920 € per year to 1,000 € per year. This was a result of long-winded negotiations between the governing parties. The increase of lump sum business expense deduction results in a tax saving of up to 3 Euros per month for employees.
Tax advisor Martin Brune gives an overview of 3 interesting tax saving possibilities for employees that can result in a higher tax saving.

Married tax table even if spouse lives abroad

Married couples with both spouses being resident in Germany can apply for the married tax table. Normally, this is done within the German wage tax card system when the high earner opts for tax class 3 and the low earner opts for tax class 5. However, even if the married status is not considered during the year a taxpayer can apply for the married tax table when filing a German tax return.

The married tax table is in general beneficial if the two partners have a different level of taxable earnings, as this table reduces the impact of German progressive tax rates. A simplified example shows the impact of the married tax table, using an annual taxable income of 60,000 € for spouse A and 20,000 € for spouse B:

Annual German income tax for spouse A based on single tax table: 17,028 €  
Annual German income tax for spouse B based on single tax table: 2,701 €  
Overall annual German income tax for both: 19,729 €  
Annual German income tax based on joint tax table: 18,014 €  
Tax saving because of joint tax table: 1,715 €
  per year

Even if only one spouse is working in Germany and the other spouse is living outside of Germany the spouse working in Germany can apply for the German married tax table if

  • the spouse living outside of Germany has EU citizenship and
  • at least 90 % of the overall annual income of both spouses is taxable in Germany or if the amount that is taxable outside of Germany is less than 16,007 € per year.

According to latest German case law the 90% / 16,007 € regulation doesn't apply if one spouse is registered as a German resident. Therefore, if for instance the husband is on assignment to Germany and has a German residency and his wife (with EU citizenship) remains in the home country, the husband can apply for the German married tax table regardless of the amount of income his wife earns abroad. However, outside income of both spouses that isn't taxed in Germany is used to determine the tax rate.

As the married tax table is beneficial in most - but not in all - cases, it is recommendable to contact a German tax advisor and ask for tax comparisons before filing a tax return.

Salary split

If an employee is working for his employer regularly in different countries and this employer has branches or affiliated companies in these countries, a salary split situation is worth reviewing.

With this salary split the taxable income is sourced to more than one country in order to benefit from lower tax rates and from free amounts.

The basis of this salary split are the double tax treaties that Germany has signed with other countries. In general, these double tax treaties include one clause stating that if an employee is working in one country and his salary is paid by an employer from this country, this salary will be taxable in this country, too.

One simplified example:
In case one employee is regularly working, for instance, 180 days per year in Germany for his German employer and 50 days per year in the UK for the UK daughter company of the German employer, his salary will be taxable in Germany completely if it is paid and borne by the German company only.

However, if that part of remuneration that relates to UK workdays is paid and borne by the UK daughter company, 50 out of 230 workdays will be taxable in the UK and tax exempt (with progression clause) in Germany.
In this scenario, the employee will benefit from both the German and the UK tax free amounts and might also benefit from a lower progressive tax rate on the UK taxable income.

As the contractual set-up of a salary split is complex and the tax savings need to be compared with additional administrative expenses (e.g. filing of tax returns in two countries), it is recommendable to discuss this with a qualified tax advisor in advance.

Deferred compensation/pension plans

Employees who are assigned to Germany on a long term basis or who intend to stay in Germany can use a deferred compensation or private pension plan to reduce the German tax burden. According to German tax law several options exist to pay into a pension plan and lower your tax payments.

One option is that an employee can ask the employer to pay parts of the gross salary into a pension plan. If for instance a salary increase of 100 € per month is added to a gross salary of an employee that is in the highest tax bracket, this will result in an additional net payment of 55.69 € only - before deduction of German social security contributions.

If these 100 € are paid by the employer into a pension plan instead, the payment might be tax free so that 100 € will reach the pension plan account and yield interest.
The pension that results from the pension plan will be taxed once it is paid out and gives the opportunity to benefit from a lower tax rate, as normally the income after retirement is lower than before and, therefore, a lower progressive tax rate applies.

Other options are private pension plans which an employee can contribute into out of his net salary. These payments can be considered in the annual tax return and might lower the German tax burden.
Typical private pension plans on the German market are the so-called "Riester-Rente" or "Rürup-Rente" plans.

It is recommendable to ask a qualified insurance broker for a pension or deferred compensation plan that meets the requirements of German tax law and either allows to contribute into this plan tax free or qualifies for a deduction in the German tax return.

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