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The German tax system

Germany has several different tax types. The types are income tax, business tax, church taxes, sales taxes, property taxes, taxes for income made by investments, gift and inheritance tax, final tax, vehicle tax, and insurance tax.

In this article, we explain to you the tax types which are related to freelancing and entrepreneurship.

Everybody who needs to pay taxes in Germany receives a tax identification number (Steueridentifikationsnummer). This number you will keep lifelong and is valid through all parts of Germany. Additionally, you receive a local tax number allocated by your tax department. This local tax number may change if you move or change your civil status.

The income taxes are normally assigned in tax class according to various categories. The 6 tax classes (Steuerklassen) differ on your civil status, if you have children if you live with your partner in the same household if have one or more different jobs, and other facts.

As long as you´re employed the tax gets calculated by your employer and also sent directly to the tax department. Usually, you don´t have to pay more than what is calculated and if you have some expenses and fill out the tax report you will get a refund. It becomes more complex if you have several income sources, and might cause additional payments.

When you become self-employed you usually pay in the first year every quarter a first installment based on your income estimates. In the following year, you fill out your tax report, and depending on your total income and your expenses the tax department calculates the final amount of your tax payment.

If you found a company like for example a GmbH the company needs to pay business taxes. The business tax is related to the profit of the company. Depending on the legal form and your business you may also need to pay an extra tax to the city or village your company is located. (Gewerbesteuer) The percentage depends on the city, so it might be interesting to check the conditions before you decide in which area you will locate your business.

Church taxes are additional taxes on your income if you affiliate with one of the churches in Germany. The tax will get calculated based on your income. It´s around 8 or 9%.

The sales tax is called Mehrwertsteuer or Umsatzsteuer and is depending on the goods you buy or sell 7 or 19%. 7% will get charged for most of the groceries, books and magazines, public transport, cultural activities like concerts, and more. 19% VAT will get charged for most of the other goods, like for example, clothes, furniture, electronic devices, services, consumption in restaurants, and more.

If you own property that you rent out you might need to pay tax on this type of income. Also, if you sell your properties within the first 10 years you will usually need to pay tax on the sales profit. When you buy property, you also will get charged with a tax called “Grunderwerbsteuer”.

If you generate income on the stock exchange, invest your money in funds, insurances, or other investment methods you will usually need to pay taxes on the income you generate through these investments.  If you need to pay tax on the income depends on several facts, like the type of investment, the timeline of investment, the amount of income, and other details.

Filling out the tax report

In general, it´s not mandatory to fill out the yearly tax report if you´re employed. But as soon as you work for more than one employer, have a different income receive child support, or other reasons you will need to do the yearly tax report. Even if you don´t need to, it might be recommended as you probably will get a refund. The tax report has to be done latest until 31st of July of the following year, if you hire a tax advisor the deadline expires on the 31st of December of the following year.

Note: This article should give you a first overview and does not have a claim to completeness and does not replace tax advice.

Do you wish to get support in setting up your business in Germany? Find out how the Expat Business Club can help you.

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