Who needs to pay income taxes in Germany?
Under German tax law, the first question is whether you are a tax resident in Germany.
There are two criteria that can trigger tax residency:
- You have established a permanent home that is available to you in Germany, or
- You are spending more than a half a year (183 days) in Germany.
If you meet either criterion, you will be a tax resident in Germany, and your worldwide income needs to be reported in your income tax return. Please note that continuing to have a tax residence in your home country (which may even be the primary residence of your family) does not exempt you from compliance with German tax rules.
The tax year is identical to the calendar year. Therefore, you will have to report your entire income from Germany, your home country and other countries for each tax year where you are a tax resident in Germany.
If you are not a tax resident, but have income from German sources, special rules (called limited taxation) apply.
What types of income are taxed in Germany?
Expats in Germany are taxed on various types of income. The most relevant include:
- Employment income (including salary, bonus, RSU and other benefits)
- Self-employment income or freelance income
- Rental income
- Income from investments (such as interest, dividends, capital gains)
- Pension and retirement income
- Other income (including crypto)
Usually, income is earned in the year when it is realized, generally meaning when it is received or credited. However, for certain types of income and circumstances special rules may apply.
How much income tax will expats pay in Germany?
Germany uses a progressive income tax rate which means your tax rate increases as your income rises. There is a tax-exempt basic allowance of approximately €12,000 per year per person, meaning income below that amount is taxed at 0%.
The highest tax rate of 42% will be reached at a taxable income of approximately €70,000, which means every euro you earn in excess of that threshold will be taxed at 42%. For taxable income exceeding approximately €280,000 the tax rate will climb to 45%. Due to the progressive tax rate and the basic allowance, the average tax rate at an income level of €70,000 is only 26%.
If you want to find out what your individual tax rate is, you can use the official calculator from the Federal Ministry of Finance (BMF). In some cases, additional taxes like the solidarity surcharge or church tax will apply. Furthermore, for most employees, mandatory contributions to health insurance, retirement, and general social security will be charged. These mandatory contributions can amount to approximately 20% of gross salary.
Do expats need to file a tax return in Germany?
Most expats are required to file an electronic income tax declaration in Germany.
Some exemptions apply under German income tax law (§ 25 EStG), if your investment income and employment income has entirely been subject to sufficient tax withholding.
For expats, usually filing a tax return is mandatory because foreign income needs to be reported in the German income tax declaration. Other reasons which require filing a German tax return include:
- Income from self-employment
- Rental income
- Other income, not subject to tax withholding
- Change of employers during the year, or
- Receipt of government benefits (Elterngeld, Krankengeld, Arbeitslosengeld, etc.)
Even if tax filing may not be mandatory, it can still be beneficial to obtain a tax refund by claiming tax deductions.
What deductions can reduce your taxes as an expat?
Certain expenses that are directly related to your taxable income can be claimed as a deduction in your income tax return. In our experience, the following deductions often provide significant tax savings for expats:
- Moving expenses (some restrictions apply)
- Double household expenses for second work-related home
- Work-related expenses, such as travel, office supplies, IT equipment, professional insurance
- Fees for private schools (30%, maximum €5,000 per child)
The German tax office will usually require proper documentation for each deduction to be included in the tax declaration or to be provided upon request.
How to avoid double taxation on foreign income
Germany applies the worldwide income principle which means that your foreign income is generally subject to taxation in Germany. Therefore, many expats worry that their foreign income will be taxed twice.
Germany has double taxation agreements (DTAs, tax treaties) with many countries to avoid double taxation. Usually, there is no complete exemption of foreign income from taxation in Germany. Rather, a mechanism of income tax progression or the foreign tax credit method can be applied to ensure income is not taxed twice.
Reporting requirements for foreign income are complex and depend on the classification of foreign income under double taxation agreements. To ensure proper application, the German tax office will usually require proper documentation for foreign income and proof of taxation in the country of source.
Tax filing deadlines and tax compliance
The general tax deadline in Germany is the end of July of the year following the tax year. For taxpayers who are filing with the assistance of a certified tax consultant (Steuerberater), there is an automatic extension until the end of February of the second year following the tax year. Late filings may result in:
- Late filing penalties
- Interest charges
- Administrative fines
If a taxpayer does not comply with the filing deadline or refuses the request from the German tax office, they may also estimate taxes at their discretion.
Why professional tax advice matters
Expat tax situations often involve:
- Multiple countries
- Different tax systems
- Language barriers
- Complex reporting requirements
Mistakes can lead to penalties or double taxation. In serious cases, incorrect or incomplete tax filings can lead to penalties or even tax criminal proceedings if a tax declaration was incomplete or incorrect which has resulted in an inaccurate reduction of the tax burden.
Do you need help with your German tax declaration?
If you are unsure about your tax residency, filing requirements, or cross-border income, professional guidance from Prinz.tax can help ensure compliance and avoid unnecessary tax burdens.
