TaxResidence and domicile
How does an individual become taxable in your jurisdiction?
Tax liability in Germany is determined by the concept of residence. An individual is a German resident for tax purposes if he or she has either a permanent home or a habitual abode in Germany. Tax residence is assessed using objective criteria. The concept of domicile is not recognised in Germany.
The worldwide income and assets of individuals whose tax residence is in Germany (hereinafter referred to as residents) are subject to:
- income tax; and
- inheritance and gift tax (IGT).
What, if any, taxes apply to an individual’s income?
An individual’s income is subject to income tax. Income tax covers income from seven sources as follows:
- income from agriculture or forestry;
- income from trade or business;
- income from self-employment;
- income from employment (salaries and wages);
- income from capital investments;
- income from letting property, especially real property or groups of assets; and
- other items of income, for example, income from leases of movable assets.
Income is generally taxed at a progressive tax rate, ranging from 14 to 45 per cent. In addition, a solidarity surcharge of 5.5 per cent of the tax due is still being levied. This surcharge was intended to finance the German reunification of 1990. As of 1 January 2021, the solidarity surcharge was completely abolished for 90 per cent of income taxpayers. Currently, only high earners, investors who have exhausted their savings allowance, limited liability companies and other corporations are still subject to the surcharge.
Income from capital investments is subject to withholding tax at a flat rate of 25 per cent. In addition, the solidarity surcharge continues to apply as its abolition does not extend to capital gains. The tax burden, therefore, amounts to a total of 26.375 per cent plus church tax, if any.Capital gains
What, if any, taxes apply to an individual’s capital gains?
An individual’s capital gains are subject to income tax. Income from capital investments is subject to withholding tax at a flat rate of 25 per cent plus the solidarity surcharge (a total of 26.375 per cent plus church tax, if any).Lifetime gifts
What, if any, taxes apply if an individual makes lifetime gifts?
Lifetime gifts are taxable in accordance with transfers on death under the German Inheritance and Gift Tax Act.Inheritance
What, if any, taxes apply to an individual’s transfers on death and to his or her estate following death?
Each transferee is generally liable for IGT on the value of the assets transferred, regardless of his or her personal wealth. The tax rates range from 7 to 50 per cent, depending on the relationship between the transferor and the transferee and the value of the share of the estate received. Spouses and descendants pay IGT at a rate of 7 to 30 per cent. Transfers between most other relatives are taxed at a rate of 15 to 43 per cent. Between unrelated persons, the applicable tax rate is either 30 or 50 per cent for a value of more than €6 million.
The following tax-free allowances apply:
- spouses receive a personal allowance of up to €500,000 and a maintenance allowance of up to a maximum of €256,000; and
- descendants receive a personal allowance of up to €400,000 and an age-dependent maintenance allowance of up to €52,000.
There is no IGT on a lifetime transfer of the family home to a spouse, nor on an equalisation of the gains accrued during a marriage where the statutory matrimonial property regime of the community of surplus (as provided for by the German matrimonial regime or a similar foreign regime) applies.Real property
What, if any, taxes apply to an individual’s real property?
A real estate transfer tax with differing regional rates ranging from 3.5 to 6.5 per cent applies to:
- the acquisition of real property;
- the acquisition of a substantial shareholding in a company holding real property; and
- the change of shareholders of a company holding real estate.
In 2021, the legislature passed a real estate transfer tax reform that toughens some of the major rules of the Real Estate Transfer Tax Act. As of 1 July 2021, the rules that deem a transfer of real property in the event of a change of ownership of a partnership holding real property are extended to corporations. In addition, the relevant shareholding level in the case of share deals and changes of ownership was lowered from 95 to 90 per cent and the holding period was extended to 10 years.
In addition, an annual property tax may be due on the value of real property (based on an assessed uniform value that is often less than the fair value of the property) at the discretion of the relevant local authority. Although the assessed uniform value is quite low, property tax is becoming more and more significant because of the continuously rising rates of assessment. Furthermore, the German Federal Constitutional Court held that property values that were last assessed in 1964 or 1935 are inconsistent with the constitutional principle of equality of taxation. In June 2019, the federal government therefore sent a draft to the German parliament that is supposed to change how the assessment of property values is conducted by local authorities from 1 January 2022 onwards. Due to the new tax law, more than 30 million properties must be reassessed. Therefore, property owners recently had to submit tax returns. For this, each federal state requested different information from taxpayers, which further complicated the matter. The process is ongoing, but this can lead to very different tax burdens, including significant increases in the real estate tax burden in different parts of the country.
Income from real property is subject to income tax at the standard rates.Non-cash assets
What, if any, taxes apply on the import or export, for personal use and enjoyment, of assets other than cash by an individual to your jurisdiction?
The import of assets to Germany may trigger value added tax (VAT). There are different rules for transactions within the European Union and transactions to or from non-EU states.
The import of goods for personal use and enjoyment from non-EU states by an individual into Germany triggers import turnover tax. The import turnover tax rate equals the VAT rates of 19 or 7 per cent and must be paid to the customs authority. The import turnover tax cannot be refunded as input tax if the imported assets are not used for business but for personal use and enjoyment. The export of such goods to countries outside the European Union is generally VAT-free in Germany.
The import of assets for personal use and enjoyment from EU member states by an individual does not trigger VAT. However, Germany levies VAT on goods exported for personal use and enjoyment into EU member states.Other taxes
What, if any, other taxes may be particularly relevant to an individual?
Wealth tax has not been levied in Germany since 1997 owing to it being declared unconstitutional by the German Federal Constitutional Court. Since then, there have already been numerous impulses in the political landscape for either reintroducing the tax or introducing a one-time wealth fee. This demand could even be found in some of the parties' election programs for the 2021 federal election. Based on the current composition of the federal government, the introduction of a wealth tax is considered unlikely.
VAT applies to the net turnover of an entrepreneur at a tax rate of either 19 or 7 per cent (for certain tax-privileged turnover, such as food).Trusts and other holding vehicles
What, if any, taxes apply to trusts or other asset-holding vehicles in your jurisdiction, and how are such taxes imposed?
Neither domestic nor foreign trusts are recognised in Germany. Germany does not have its own trust law. Germany did not ratify the Hague Convention on the Law Applicable to Trusts and on their Recognition of 1985. Trusts can, however, trigger inheritance and gift tax (IGT) in several ways. The establishment of a trust by residents or of a trust comprising assets located in Germany is considered a transfer of assets that is taxable in accordance with the Inheritance and Gift Tax Act. Distributions to beneficiaries during the trust period or on the trust’s dissolution may trigger income tax and gift tax as well if the beneficiary is a German resident or if German situs assets are distributed. The relationship between gift tax and income tax regarding trust distributions has not yet been ultimately clarified by the courts.
In addition, corporate tax can be triggered if income is received by a foreign trust from German sources. The worldwide income of a foreign trust may be subject to corporate tax if the trust’s management is in Germany and if certain other conditions are met. For example, the trust´s management is in Germany if the effective management of a trust is vested with the trustee in Germany.
Undistributed income received by a foreign trust can be attributed to the settlor or the beneficiaries if they are German residents. In this case, it can be subject to the settlor’s or the beneficiary’s personal income tax.
Instead of trusts, corporations, fiscally transparent partnerships and foundations are used as asset-holding vehicles in Germany.
Corporations and non-charitable foundations are subject to corporation tax at a rate of 15 per cent plus a solidarity surcharge of 5.5 per cent of the tax. An additional trade tax of approximately 15 per cent (at the discretion of the competent local authority) is due for all corporations. Foundations are subject to trade tax only to the extent that they are engaged in trade or business.
Partnerships are treated as fiscally transparent; the income is attributed to the partners according to their interest in the partnership and subject to income tax at their level. The partnership itself may be subject to trade tax; the partners will receive a tax credit for their personal income tax for any trade tax levied at the partnership’s level. IGT is levied if a non-charitable foundation is created or endowed with assets.Charities
How are charities taxed in your jurisdiction?
Charities are tax-privileged in Germany. Recognition as a charitable foundation or corporation requires that the charity’s activities are dedicated to the altruistic advancement of the general public in material, spiritual or moral respects. These purposes must be pursued altruistically, exclusively and directly. The formation of a charity does not trigger IGT, nor does it trigger real estate transfer tax if real property is transferred gratuitously to the charity. A charity is exempt from almost every current form of taxation, especially corporate tax and trade tax.
Special rules apply for charitable foundations. For example, a charitable foundation may use one-third of its income for the maintenance of the founder and his or her family. In addition, an endowment of up to €1 million made to increase the capital stock of the foundation may be deducted from the assessment basis for income tax purposes in addition to the deductions that can be made for gifts to other charities.Anti-avoidance and anti-abuse provisions
What anti-avoidance and anti-abuse tax provisions apply in the context of private client wealth management?
For persons who have become established in Germany by tax residency, controlled foreign corporation rules may apply for offshore corporations controlled by them. For shareholders of foreign corporations claiming a relief from withholding tax, the Income Tax Act provides for a substance test to avoid granting relief to shareholders of corporations that have been established solely to allow such a relief.
The income of an offshore family foundation or trust may be allocated to the settlor or the beneficiaries if they become residents in Germany.
In addition, the Defence against Tax Havens Act came into force on 30 June 2021. This act prohibits the deduction of business expenses and work-related expenses arising from business transactions with individuals, corporations, partnerships or assets domiciled in a non-cooperative tax jurisdiction. Moreover, the controlled foreign companies rules are tightened where intermediate companies are resident in tax havens. Furthermore, stricter withholding tax measures will also apply, for example in cases where interest payments are made to persons who are resident in tax havens. For the purposes of the Tax Oasis Defence Act, 'non-cooperative tax jurisdictions' are all countries on the EU blacklist.
The EU’s Anti-Tax Avoidance Directive (ATAD) obliged all member states to implement a minimum standard for additional taxation in national tax law. Based on the Directive, the rules of the Foreign Tax Act (AStG) have been amended. The amended law is in force from 1 January 2022. In particular, the taxation of hidden reserves for departing natural persons with capital shares was tightened (exit tax). If an individual has owned shares in a corporation of more than 1 per cent within the past five years and has been subject to unlimited tax liability in Germany for at least seven years in the 12 years prior to departure, the disposal of the shares is feigned. The increase in the value of the shares is taxed without realisation (dry income). Any deferral and returner rules were tightened because of the amendment. Payment of exit tax is now due immediately. Upon request, payment can be made in seven annual instalments. Usually, a deferral is granted only upon the provision of a collateral. In practice, tax offices often do not accept shares in the tax-triggering company as a collateral. Often this is also not possible due to the articles of association. Violation of certain rules of conduct may lead to the immediate maturity of the tax payment. The tax claim expires if the taxpayer returns to Germany within seven years and has not transferred their shares in the meantime. An intention to return must be made credible in the tax return.
If no specific anti-avoidance rule applies, a general provision in the Fiscal Code of Germany may apply to prevent the avoidance of taxes. According to this general provision, legal constructions are invalid if they are not intended by law and are therefore legally inappropriate and if they lead to a tax advantage for the taxpayer or a third party.
Furthermore, on 21 December 2019, the German parliament transposed the Council Directive (EU) 2018/822 into national law with effect from 1 January 2020. The new provisions oblige intermediaries to notify the tax authorities of cross-border tax arrangements first implemented after 24 June 2018.