Which factors bring an individual within the scope of tax on income and capital gains?
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. An individual has his or her permanent home in Germany, if he or she maintains a dwelling in Germany under circumstances indicating that he or she will maintain and use such dwelling. An individual’s habitual abode is at the place where he or she stays under circumstances which allow the assumption that the stay is not only temporary. Generally, a person is deemed to have a habitual abode in Germany if he or she spends more than six months in Germany without any significant interruptions. The worldwide income and assets of individuals whose tax residence is located in Germany are subject to income tax. German tax law considers capital gain to be a source of income. Thus, the same applies to capital gains.
What are the taxes and rates of tax to which an individual is subject in respect of income and capital gains and, in relation to those taxes, when does the tax year start and end, and when must tax returns be submitted and tax paid?
Income tax covers income from seven sources:
- income from agriculture and forestry;
- income from trade or business;
- income from self-employment;
- income from employment (salaries and wages);
- income from capital and capital gains;
- income from letting property, especially real property and groups of assets; and
- other income (e.g., income from a pension or leases of movable assets).
The tax rate ranges from 14 to 45 percent progressively with the exception of income from capital and capital gains (see question 3). In addition to that, solidarity surcharge of 5.5 percent 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. Unless in case of a withholding tax (see question 3), taxpayers must make advance payments on the 10th of March, June, September and December.
The tax year is the calendar year. Tax returns must be submitted by 31st of July of the following year. However, if the taxpayer is represented by a tax advisor, the deadline is generally prolonged until February 28th of the year after that. For the tax year of 2019, the due date will even be prolonged until March 31st of 2021 due to the Covid-19 pandemic.
This Q&A ist part of the global guide to Private Clients and was first published in: The Legal 500 Country Comparative Guides, Chapter Germany, 2021
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