German Tax Law

Sources of German Tax Law

German tax law (Steuerrecht) is grounded in the Basic Law (Grundgesetz, GG), which distributes tax legislative powers between the Federation (Bund) and the Länder under Articles 105–108. The procedural cornerstone is the Fiscal Code (Abgabenordnung, AO 1977), governing tax assessment, collection, appeals, and penalties. Substantive tax statutes include the Income Tax Act (Einkommensteuergesetz, EStG), the Corporation Tax Act (Körperschaftsteuergesetz, KStG), the Trade Tax Act (Gewerbesteuergesetz, GewStG), the VAT Act (Umsatzsteuergesetz, UStG), and the Inheritance and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz, ErbStG). The Federal Ministry of Finance issues administrative decrees (Verwaltungsanweisungen) binding on tax authorities. Tax disputes are adjudicated by the Finance Courts (Finanzgerichte) at the Länder level, with appeals to the Federal Fiscal Court (Bundesfinanzhof, BFH) in Munich.

Individual Income Tax

Einkommensteuer is imposed on seven categories of income enumerated under § 2 EStG: agriculture and forestry, commercial activity, self-employment, employment, capital investment, rental and leasing, and other income (including pensions and private sale transactions). Married couples benefit from income splitting (Ehegattensplitting), whereby their combined income is taxed as if each spouse earned half, substantially reducing the effective rate for couples with disparate incomes. The tax rate is progressive, with a base rate of 14% rising to 42% (the Spitzensteuersatz) at approximately €62,810 (2024), and a top rate of 45% applied to income exceeding about €277,826 (the Reichensteuer). A solidarity surcharge (Solidaritätszuschlag) of 5.5% applies to the assessed tax, though most taxpayers are exempted by an allowance introduced from 2021. The basic tax-free allowance (Grundfreibetrag) of €11,604 (2024) ensures subsistence-level income is untaxed. Special expenses (Sonderausgaben) include church tax (Kirchensteuer) at 8% or 9% of assessed income tax, alimony payments, and certain insurance contributions. Extraordinary burdens (außergewöhnliche Belastungen) cover medical expenses and disability costs. Employment-related advertising expenses (Werbungskosten) are deductible as a lump sum of €1,230 or actual expenses. Child benefit (Kindergeld) of €250 per month per child and a child allowance (Kinderfreibetrag) of €6,384 per parent provide parallel tax relief mechanisms, with the more favourable applied.

Corporation Tax

Corporations are subject to Körperschaftsteuer at a uniform rate of 15%, plus a 5.5% solidarity surcharge, yielding an effective rate of approximately 15.825%. Partnerships are transparent entities; partners are taxed individually at their personal rates. The trade tax (Gewerbesteuer) is an additional municipal levy on business profits, applied through a multiplier (Hebesatz) set by each municipality (typically 200% to 500%). The combined effective corporate tax burden, including trade tax and solidarity surcharge, ranges from approximately 29% to 32%. The corporate income tax base is computed under EStG principles with modifications, including the non-deductibility of 25% of certain financing expenses.

Trade Tax

Gewerbesteuer is levied on all commercial enterprises operating within a municipality. The tax base is the trade income (Gewerbeertrag), calculated by adding back and deducting specified items from the commercial profit determined under EStG. Add-backs include 25% of interest on debt, 25% of rental and royalty payments, and 25% of lease payments. A basic allowance of €24,500 applies. The federal uniform tax rate is 3.5% (Steuermesszahl), multiplied by the municipal Hebesatz to determine the effective rate.

Value Added Tax

The standard VAT (Umsatzsteuer) rate is 19%, with a reduced rate of 7% on food, books, hotel accommodation, and public transport. Certain supplies are exempt, including financial services, insurance, and health services. The VAT system follows the EU VAT Directive. The input VAT deduction allows businesses to recover VAT paid on business purchases.

Inheritance and Gift Tax

Erbschaftsteuer and Schenkungsteuer are levied on transfers at death and inter vivos gifts. The rate depends on the value of the acquisition and the tax class determined by the relationship between decedent and heir: Class I (spouses, children, parents), Class II (siblings, nieces, nephews), and Class III (all others). Rates range from 7% to 50%. Generous allowances apply, including €500,000 for spouses and €400,000 for children. Business succession benefits include preferential valuation and payment deferrals under §§ 13a–13c ErbStG.

Tax Procedure

Tax is assessed by notice (Steuerbescheid), which may be challenged by objection (Einspruch) within one month, followed by an appeal to the Finanzgericht. Tax advisers (Steuerberater) represent taxpayers before tax authorities and courts. The AO governs audits, including the external audit (Außenprüfung).