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.
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%.
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.
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
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.
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.
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):
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.
Tax saving possibilities for employees
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.
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:
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
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.
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:
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.
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.
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.
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.