German Income Tax Law

The Einkommensteuergesetz and Its Structure

German income tax is governed by the Einkommensteuergesetz (EStG), which traces its origins to the Prussian income tax of 1891 and the Reich income tax of 1920. The EStG imposes income tax on the taxable income (zu versteuerndes Einkommen) of natural persons who are resident in Germany (unlimited tax liability, unbeschränkte Steuerpflicht, § 1 EStG) and on certain non-residents who derive German-source income (limited tax liability, beschränkte Steuerpflicht, § 1(4) EStG). Residence is defined as having a domicile or habitual abode in Germany; a stay exceeding six months creates a habitual abode. The EStG adopts a schedular system: income is classified into seven categories under § 2(1) EStG, and each category has its own rules for calculating income. The seven categories are agricultural and forestry (Land- und Forstwirtschaft), commercial business (Gewerbebetrieb), self-employment (selbständige Arbeit), employment (nichtselbständige Arbeit), capital investment (Kapitalvermögen), rental and leasing (Vermietung und Verpachtung), and other specified income (sonstige Einkünfte), including annuities, capital gains from private sales, and alimony. The total income from all categories, after deductions, is aggregated to form the taxable income, to which the progressive rate is applied. The principle of ability to pay (Leistungsfähigkeitsprinzip), derived from Article 3(1) GG (equality), requires that taxation be proportional to economic capacity, and the Federal Constitutional Court has struck down numerous provisions that violated this principle.

Progressive Tax Rates and the Ehegattensplitting

The German income tax rate is progressive. The 2025 rate structure (as indexed annually) begins at 0 percent up to the basic allowance (Grundfreibetrag) of approximately €11,784 for single filers, rises through a progressive zone from 14 percent to 42 percent, and applies a top rate (Spitzensteuersatz) of 45 percent for taxable income exceeding approximately €277,826. A solidarity surcharge (Solidaritätszuschlag, 5.5 percent of the income tax) is payable by higher-income taxpayers, though the surcharge has been phased out for all but the top 5 percent of earners following the Federal Constitutional Court’s guidance in SolZG 2021. The Ehegattensplitting (joint assessment for married couples) under § 26b EStG is one of the most distinctive features of German income tax: married couples who are not permanently separated may file jointly, and their combined income is split equally for the purposes of applying the progressive rate. The effective tax burden for a couple with unequal incomes is thus lower than for two single filers with the same combined income. The splitting advantage (Splittingvorteil) has been the subject of repeated constitutional challenge and political debate; the Federal Constitutional Court has consistently upheld its constitutionality under Article 6(1) GG (protection of marriage), most recently in BVerfGE 165, 1, but held that it must also be available to registered civil partners, which was implemented in 2013.

Income Types and Calculation

For each income category, the EStG defines specific rules for calculating profit or surplus. Employment income (Einkünfte aus nichtselbständiger Arbeit, § 19 EStG) — the most common category — is taxed on a gross basis, with an employee allowance (Arbeitnehmer-Pauschbetrag, currently €1,230) deducted automatically. The employer must withhold payroll tax (Lohnsteuer) at source under §§ 38–42a EStG and remit it to the tax office. Commercial income (Einkünfte aus Gewerbebetrieb, § 15 EStG) and self-employment income (Einkünfte aus selbständiger Arbeit, § 18 EStG) are taxed on a net profit basis. Capital investment income (Einkünfte aus Kapitalvermögen, § 20 EStG) is subject to a flat-rate withholding tax (Abgeltungsteuer) of 25 percent plus solidarity surcharge, introduced in 2009 to simplify the taxation of investment income and improve tax compliance. The flat rate is final for most individual investors; higher-rate taxpayers may elect to be assessed at their personal marginal rate if this results in lower tax. The Sparer-Pauschbetrag (saver’s allowance) of €1,000 (single filer) exempts the first tranche of investment income from tax. Capital gains from the sale of private assets (shares held less than one year, real estate held less than ten years) are treated as “other income” under § 23 EStG, though since 2009 gains from share disposals are subject to the Abgeltungsteuer regardless of the holding period.

Deductions and Allowances

The EStG provides an extensive system of deductions (Werbungskosten for employment-related expenses, Betriebsausgaben for business expenses, and Sonderausgaben for personal expenses) and special allowances (Freibeträge). Advertising expenses (Werbungskosten, § 9 EStG) include travel costs, professional literature, home office expenses, and double-household costs (doppelte Haushaltsführung). The home office deduction (Homeoffice-Pauschale), significantly expanded following the COVID-19 pandemic, allows taxpayers to claim up to €1,260 per year for working from home. Special expenses (Sonderausgaben, §§ 10–10c EStG) include pension contributions, health insurance premiums, charitable donations (up to 20 percent of total income), and church tax (Kirchensteuer). The extraordinary burden deduction (außergewöhnliche Belastungen, §§ 33–33b EStG) allows taxpayers to deduct expenses that are unavoidable and exceed a reasonable self-contribution threshold, including medical expenses, disability-related costs, and care home fees. The child allowance (Kinderfreibetrag, currently €3,192 per child) and child benefit (Kindergeld, €250 per month per child) operate as a parallel system: the tax office calculates whether child allowance or child benefit produces the greater advantage and applies the more favourable option automatically. The assessment procedure (Veranlagungsverfahren) requires taxpayers with non-wage income exceeding €410 per year to file an annual tax return (Einkommensteuererklärung); for pure wage earners, voluntary filing is common to reclaim overpaid tax due to deductible expenses.