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An individual present in Germany for more than 183 days in a tax year is considered a resident and is subject to German tax. Ownership of a house or apartment, or simply a physical presence in circumstances that suggest an intention to remain in Germany, also might trigger resident status. A simple departure from Germany is enough to end tax residence, although taxation of German-source income may continue for a nonresident.

Taxable income and rates
Residents are liable to income tax on their worldwide income, while nonresidents are generally liable to tax only on certain German-source income.

The tax rates for resident individual taxpayers range from a minimum of 15% on income exceeding EUR 7,664 to a top rate of 45% for income exceeding EUR 250,000 (EUR 500,000 for married couples). A solidarity tax of 5.5% of income tax paid also is levied on personal income.

For individual shareholders, a "semi-income" system applies to dividends and capital gains, since the tax system moved from a split rate system to a classical system of taxation in 2001. Under the semi-income system, only 50% of the profits of a corporation distributed in the form of dividends and only 50% of the capital gains resulting from the sale of corporate shareholdings are included in a domestic individual shareholders' taxable income. The taxable portion of dividends and capital gains will be increased to 60% from 2009. Gains from the sale of non-business assets by individuals are not taxable if the assets are held long enough for the gain to be considered non-speculative (e.g. 10 years for real property and one year for securities). The sale of a shareholding in a corporation which amounts to 1 % or more by a private individual will always be taxable under the semi-income system, irrespective of the holding period.

Nonresidents are taxed at a flat rate of 20% on income from freelance journalistic or writing labour, artistic works or sports as well as from licences, unless the income is exempt under an applicable tax treaty.

Determination of taxable income
German residents are taxed on all income from domestic and foreign sources derived from wages and salaries, capital gains and other types of income. Nonresident individuals are subject to income tax only on German-source income. In this case, tax is generally levied by way of withholding at source, which is a final tax. Each resident taxpayer is entitled to a personal exemption of EUR 7,664 (EUR 15,328 for a married couple filing a joint return).

Individual taxpayers may take deductions for the following items: 

•           Premiums or contributions to private life, accident, property and health insurance up to a total of EUR 1,500 (EUR 3,000 for a married couple);

•           Costs of professional training up to EUR 4,000 per year;

•           Donations to registered charities, cultural or sports organisations;

•           Alimony up to EUR 13,805 paid to a divorced partner; and

•           Taxes paid to the German Protestant or Catholic Church.

There also are deductions for children. Eligible taxpayers automatically receive a monthly child benefit of EUR 154 for each of the first three children and EUR 179 for the fourth and each additional child. At the end of the year the tax authorities calculate whether the child benefit or child tax allowance is more advantageous for the taxpayer and automatically adjust the final tax. Nonresident taxpayers may claim the child allowances if they are subject to extended unlimited taxation (i.e. taxed as a resident in Germany).

A 30% withholding tax on interest applies to taxpayers resident in Germany. There is an allowance of EUR 1,370 (EUR 801 from 2009) for single persons and EUR 2,740 (EUR 1,602 from 2009) for married couples (upon a request filed with the bank). From 2009, private capital investment income is subject to a 25% (26.375%, including the solidarity surcharge) final withholding tax.

Personal capital gains derived from the following sources are aggregated with personal income and subject to income tax: disposal of shares or bonds (other than tax-exempt fixed-interest bonds) within one year of acquisition, and disposal of shares if the shareholder has held 1 % or more of the shares in a company in the past five years. For these, the semi-income system applies. From 2009, 60% of the capital gain derived from the sale of shares is taxable. An amount of EUR 512 (EUR 600 from 2009) per tax year remains tax-exempt. Gains from the sale of bonds and the sale of shareholdings of less than 1% are subject to a 25% (26.375%, including the solidarity surcharge) flat tax from 2009. Gains from the disposal of immovable property are taxed within 10 years of acquisition (on gains exceeding EUR 512 during the tax year). However, the latter tax is dropped for residential buildings where the taxpayer has lived in the tax year and the two preceding years. Capital gains derived from the sale of non business assets are tax-exempt if they are held long enough to be considered non-speculative (e.g. 10 years for real property, one year in most other cases).

Special expatriate tax regime
There is no special expatriate tax regime in Germany. The taxation of seconded staff follows the general domestic rules or an applicable tax treaty.

Capital taxes
Germany eliminated the net worth tax in 1997. The Inheritance and Gift Tax Act is under revision, with the revised Act expected to come into force in 2008. The existing law will remain valid until the new Act enters into force.

A real property tax is levied annually at the local level on immovable property owned by private individuals or companies.


Source: Deloitte

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