German income tax law distinguishes among several categories of income, including income from employment, self-employment, investment, business and real estate. Income from each of the categories may be combined, and taxable income is then determined by subtracting special deductions. However, income from investment is generally taxed at source with a flat tax rate.
Employment income - Employed persons are subject to income tax on remuneration received from employment. Employment income includes the following:
- Salaries, wages, bonuses, profit participations, and other remuneration and benefits granted for services rendered in a public office or in private employment
- Pensions and other benefits received by a former employee, his or her surviving spouse, or descendants in consideration of services performed in the past
Allowances paid to foreign employees working in Germany, including foreign-service allowances, cost-of-living allowances and housing allowances, are considered to be employment income and generally do not receive preferential tax treatment.
Self-employment and business income - Business income includes income from activities performed through a commercial entity or partnership, while self-employment income includes primarily income from professional services rendered (for example, as doctors, dentists, attorneys, architects, journalists and tax consultants).
In general, all income attributable to self-employment or business, including gains from the sale of property used in a business or profession, is subject to income tax.
Business income is subject both to income tax and trade tax. Trade tax rates vary, generally ranging from 7% to 18.5%, depending on the location. Trade tax is not levied on income from self-employment.
If a non-resident carries on a business through a permanent establishment in Germany, taxable income is computed in the same manner as for a resident individual and is taxed at the same income tax rates. However, the basic tax-free allowance in the amount of €10,908 (2023) is not considered.
Tax losses from one of the categories of income, except for losses from investment income and losses incurred on the sale of shares acquired after 31 December 2008, are offset against gains realised from one or more categories of income. Remaining tax losses up to €1 million (€2 million for married taxpayers filing jointly) may be carried forward indefinitely and are offset against gains realised in the following years. For losses exceeding the amount of€1 million (€2 million for married taxpayers filing jointly) only 60% of the remaining gains is offset. The difference of 40% is considered within the assessment for losses carried forward and can be used in the following years, subject to the above mentioned rules. For income tax purposes (but not trade tax purposes), losses may be carried back for two years, subject to certain limitations that ensure minimum taxation. The overall maximum loss carry back amount is €1 million (€2 million for married taxpayers filing jointly) annually. A taxpayer has a right to choose whether a loss is carried back or carried forward to the following years.
Directors’ fees - Remuneration received as a supervisory board member of a corporation is treated as income from self-employment. A member of a supervisory board is regarded as an entrepreneur and is generally subject to value-added tax at a rate of 19% on fees received.
Investment income - The flat withholding tax on investment income is generally the final tax. In general, investment income taxed at source does not have to be declared in the German income tax return. However, if the investment income was not subject to the flat tax withholding at source (in particular, capital investment income from foreign sources), the total annual investment income must be declared in the tax return. Taxpayers with an average personal income tax rate below 25% can apply the lower tax rate to the investment income that is declared in the German income tax return.
A net investment loss can be carried forward to be credited against future positive investment income. A special loss consideration rule applies to capital gains derived from the sale of shares.
Income from rentals and leases of real property located in Germany is taxed by assessment.
Taxation of employer-provided stock options -German tax law does not differentiate between qualified and non-qualified stock option plans.
In general, stock options provided by employers are non-tradable. In this case, the acceptable tax-filing position is taxation at the date of exercise.
In general, the amount equal to the difference between the fair market value of the stock at the date of exercise and any price paid by the employee (grant price and transaction cost) must be included as employment income. This amount is generally subject to tax at the ordinary personal progressive tax rates and may qualify for treaty relief.
In some circ*mstances the taxable benefit may qualify for relief and special tax exemption. This is a complex area of taxation and professional advice should be sought.
The grant of non-tradable options is considered to be an additional incentive for future services. Consequently, such grant is considered to be compensation for services rendered during the period between the grant date and the date of vesting. Tradable options may result in taxation either at time of grant or exercise depending on the details of the stock option plan. In both cases, for expatriates, a certain portion might not be taxable in Germany and may qualify for treaty relief.
