A simple guide to taxes in Germany
Germany is home to more than 40 different types of taxes. This article will highlight the ones that are relevant to you—and explain why they exist in the first place.
6 min read
You may have heard of value-added tax, but what about coffee tax? And since we’re on the subject, why do we need to pay taxes in the first place? If the German tax system has your head spinning, fear not. We’ll give you the information you need about the various kinds of taxes in Germany and what they mean for you.
What are taxes?
Taxes have been a part of life for almost as long as humans have been around. Ancient Egyptians needed to pay a harvest tax, medieval travelers had to pay road tolls, and the residents of 18th-century Germany were even charged a sparrow tax.
Simply defined, taxes are financial contributions that taxpayers make to the state. They’re intended to benefit the general public—for example, by funding the construction of roads. Funds from state taxes might also go towards public infrastructure, social programs, or community services.
Kinds of taxes in Germany
Even though the purpose of taxes might seem simple, it’s more complex in practice. Germany is home to more than 40 different kinds of taxes. And, it’s not just the federal government that charges taxes—they’re also levied by federal states, municipalities, and the church. Plus, there are different tax rates at play. But don’t worry—we’ve got a handy outline for you here to demystify the system.
The tax system in Germany
Germany has a multi-tax system, and various types of tax fall under three major areas:
- Transaction taxes relate to economic transactions. Value-added tax, which is charged when goods are purchased, is one of the most important transaction taxes. Vehicle tax, levied when you own a car, or insurance tax on contribution payments are classed as transaction taxes, too.
- Consumption taxes include electricity tax, the so-called “sparkling wine” tax, or that coffee tax we mentioned earlier. As the name suggests, these taxes are levied on the consumption of certain goods, like electricity and luxury foodstuffs.
- Property taxes cover things like business tax, inheritance tax, or real estate tax. Whether you’ve got your own house with a little garden, or you receive an annual salary, you’ll also pay taxes on what you own or earn. Here, a distinction is made between capital taxes (which apply to your existing assets) and earnings taxes (which are charged on your income, for example).
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What kinds of taxes are there?
Don't worry—we’re not going list all 40 here. After all, Germany charges some ultra-specific taxes—like supervisory board tax, lottery tax, or fishery tax—that aren’t important for most of us. Other taxes might be surprisingly relevant to you, though, like dog tax, beer tax, or air traffic tax.
The most important taxes in Germany are the ones the state generates the most income from, such as:
- Value-added tax (on goods and services)
- Income tax and wage tax (on salaries and income from self-employment)
- Energy tax (on electricity, gas, biodiesel, etc.)
- Import turnover tax and customs duties (on imported goods)
What are direct and indirect taxes?
We can also distinguish between direct and indirect taxes. As the name suggests, direct taxes are levied directly against taxpayers themselves, which is why they’re also referred to as “tax at source.” For companies, they include capital gains tax (a kind of business income tax) that the company pays straight to the tax office. Wage tax is also a direct tax that’s deducted from your gross salary.
Indirect taxes, conversely, are passed on to the end consumers. A good example of this is value-added tax (also known as VAT). Companies are usually responsible for paying value-added tax to the tax authorities. Before they do so, companies bump up their net prices—on goods, by 19%, and on services, by 7%. That’s why receipts and invoices always list the net and gross amounts, to show the different costs before and after VAT has been applied.
Who needs to pay what taxes?
Drive a car and have a dog? Then you’ll pay dog tax and vehicle tax. People with cats or bikes, on the other hand, don’t pay these taxes. None of us can avoid fees like value-added tax, energy tax, or insurance tax—as end consumers, we pay them indirectly.
It’s a different story for income tax, where there’s a tax-free allowance, which is updated every year. If you earned less than €9,744 in 2021, for example, you won’t pay a cent of tax on this amount for that tax year. Beyond this allowance, you’ll pay a tax rate ranging from a minimum of 14% to a maximum of 45%, depending on your annual salary.
Employees pay income tax via “wage tax,” which is deducted from your gross salary every month and passed to the tax office by your employer. Freelancers pay income tax themselves once a year. Even pensioners need to pay taxes on their pensions if they exceed the applicable tax-free allowance (a good reason to start saving for retirement early on!). Students only pay taxes if their part-time job pays more than the tax-exempt amount, or if they are classed as employees and subject to compulsory insurance. If you receive unemployment benefits, you don’t pay any income tax.
Do I need to submit a tax return? If so, when?
If you’re an employee, you’ll automatically pay wage tax. Unlike freelancers, you don't need to submit a tax return. That said, it’s still worth doing a tax return because there are various things you can offset against the taxes you paid, like travel or application costs. They’re credited against the wage tax you’ve already paid, and, if you’re lucky, you might even get some money back from the tax office. You need to submit your tax return for the previous year by July 31st of the current year. This article gives you a rundown of the deductions you might be able to use to reduce your taxes.
Even if we don’t pay sparrow tax anymore, some taxes are still part of daily life. We often don’t even notice them—like when you're drinking a cup of coffee, for example. But hopefully, if tax funds are used for projects like repairing public roads, we’ll notice the improvements that we all benefit from.
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