Residence 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 located 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 the 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. Recently, the government decided on the gradual abolition of the surcharge, with the aim to have it completely abolished by 2021; however, high-income earners will not benefit from this tax relief.
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).
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).
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.
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 per cent 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 the course of 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.
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; and
- the acquisition of a substantial shareholding (at least 95 per cent) in a company holding real property
In May 2019, a legislative proposal was launched to reform the real estate transfer tax. In particular, share deals should become subject to further restrictions, for example, longer holding periods and lower relevant thresholds. In view of the pandemic and the upcoming federal election in 2021, it is likely that the reform will not come into force before 2021.
In addition, an annual property tax may be due on the value of real property (on the basis of 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, the property tax is becoming more and more significant because of the continuously rising rates of assessment. Furthermore, the German Federal Constitutional Court recently held that the property values that were last assessed in 1964 or 1935 are inconsistent with the constitutional principle of equality of taxation. Therefore, in June 2019, the German government sent a draft bill to the German parliament, which is supposed to change how the assessment of property values will be conducted by local authorities from 1 January 2022 onwards. On 18 October 2019, the draft was accepted by the German parliament. According to the bill, the federal states will have the possibility of regulating the property assessment individually by implementing their own assessment methods and criteria. This could lead to very different tax burdens, including significant increases in the real estate tax burden, in different parts of the country. The new real estate tax law is supposed to come into effect on 1 January 2025.
Income from real property is subject to income tax at the standard rates.
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 per cent or 7 per cent and has to 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.
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.
VAT applies to the net turnover of an entrepreneur at a tax rate of either 19 per cent 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?
Trusts, domestic as well as foreign, are not recognised in Germany. However, the following can trigger IGT or income tax, or both:
- foreign trusts created by residents;
- the transfer of assets located in Germany to a trust; and
- a distribution to beneficiaries during the trust period or on the trust’s dissolution if the beneficiary is a German resident or as far as assets located in Germany are distributed.
German corporation tax may apply to:
- income received by a foreign trust from German sources; and
- the worldwide income of a foreign trust if its place of management is in Germany and if certain other conditions are met.
Income received by a foreign trust can be attributed to the settlor or the beneficiaries if they are German residents.
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.
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 be 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 the relief to shareholders of corporations that have been established solely to allow such a relief.
Income of an offshore family foundation or trust may be allocated to the settlor or the beneficiaries if they become residents in Germany.
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.
To prevent money laundering and the financing of terrorism, the German Anti-Money Laundering Act contains provisions that require certain corporations, registered partnerships and other legal entities, such as trusts and foundations, to disclose information about their beneficial owners in a transparency register from the beginning of October 2017. Certain exemptions apply, for example, to stock corporations and to companies that are already listed on other registers, such as the register of companies. The obligation generally only arises concerning beneficiaries with an interest exceeding 25 per cent of the shares or of the voting rights, or who exercise similar control. The information must include the name, date of birth and home address of the beneficiary, and the nature and value of the beneficial interest. Non-compliance may result in administrative fines of up to €1 million.
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 obliges intermediaries to notify the tax authorities of cross-border tax arrangements first implemented after 24 June 2018.
Law stated date
Give the date on which the information above is accurate.
1 September 2020.