Want to know what your tax burden in Germany is like? The exact amount depends on many factors. In this article, you’ll learn about the most common tax types that a self-employed person must expect. We explain which tax types are relevant for whom and how the tax burden is composed. Learn more about how you, as an entrepreneur, can save taxes.
- What taxes do you have to pay when self-employed?
- Tax declarations & the self-employed
- What options do I have to lower my taxation?
- Would you like to know more?
The tax types that you have to pay as a self-employed person depend on the legal form of your company. For example, sole proprietorships and Freiberufler businesses have different tax obligations than those for corporations or partnerships.
In Germany, the following taxes apply to companies:
- Income tax (Einkommensteuer)
- Corporation tax (Köperschaftssteuer)
- Solidarity tax (Solidaritätszuschlag)
- Church tax (Kirchensteuer)
- Capital gains tax (Kapitalertragssteuer)
- Value-added tax or VAT (Umsatzsteuer)
- Trade tax (Gewerbesteuer)
Income tax (ESt) is applied to the income of natural persons. It, therefore, concerns the income of freelancers/Freiberuflern, sole proprietors/Einzelunternehmen and partnerships/Personengesellschaften. Corporations do not have to pay income tax as they are legal entities. Instead, corporate tax (Körperschaftsteuer) applies here, which will be explained below.
Income is profit minus business expenses (Betriebsausgaben), special expenses (Sonderausgaben) and extraordinary charges (außergewöhnlichen Belastungen). The legal basis for income tax is the Income Tax Act (EStG). The income tax is levied from an income of €8,600 per year. This limit is the basic tax-free allowance (Grundfreibetrag). If the income is above the basic allowance, the tax rate depends on the amount between six and 42%.
In Germany, the tax is calculated as follows:
Taxable income * Income tax rate = income tax burden
Corporations pay corporation tax (KSt) instead of income tax (German article). Corporation tax is governed by the Corporation Tax Act (KStG). In contrast to income tax, a flat rate applies – 15% of taxable income plus a solidarity surcharge of 0.825%. The amount of income does not matter, no allowance is applied.
This is how the corporation tax is calculated:
Taxable income * 15.825% = corporation tax burden including solidarity surcharge
The solidarity surcharge (Soli) is added to income tax or corporation tax (Körperschaftssteuer) and capital gains tax (Kapitalertragsteuer). The solidarity surcharge is paid by all self-employed persons and amounts to 5.5% of income tax or corporation tax. However, a tax free-threshold of €972 applies to the solidarity surcharge.
If a self-employed person is a member of a religious community, which is registered as a public corporation (Körperschaft öffentlichen Rechts – KöR), the church tax (KiSt) must be paid in addition to income tax or corporation tax and capital gains tax. The church tax is used to finance the community work of recognised religious communities. It’s regulated at the state level, so each federal state in Germany has its own church tax law. The tax rate is 9% in most federal states, but only 8% in Bavaria and Baden-Württemberg. For families with children, the child allowance is taken into account, so they have to pay a lower tax rate.
The following religious communities may levy church tax in Germany:
- Protestant Church in Germany (Evangelische Kirche in Deutschland – EKD)
- Bishoprics of the Roman Catholic Church (Bistümer der Römisch-Katholischen Kirche)
- Katholisches Bistum der Alt-Katholiken in Deutschland (Catholic bishopric of the old Catholics in Germany)
- Freely religious communities (Freireligiöse Gemeinden)
- Unitarische Religionsgemeinschaft Freie Protestanten (Unitarian Religious Community Free Protestants)
- Jüdische Gemeinden (Jewish communities)
Kirchensteuer is considered a special expense and can be a tax deduction.
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The capital gains tax (KapESt) is only paid by corporations if dividends or distributions are made to the shareholders. Strictly speaking, capital gains tax is not a tax of its own but a form of income taxation. Like income tax, capital gains tax is regulated in the EStG. As with income tax, the solidarity surcharge and, if applicable, church tax are added to the capital gains tax burden. The tax rate is 25% plus church tax and solidarity taxes.
How to calculate capital gains tax:
Investment income * Tax rate = capital gains tax
(Kapitalerträge * Steuersatz = Kapitalertragsteuerlast)
Value-added tax (USt) is applicable to every product and service sold in Germany. It’s collected on sales by dealers and borne by consumers. The statutory basis for value-added tax is the value-added tax act (Umsatzsteuergesetz – UStG). The standard tax rate is 19%.
For certain categories of goods and services, a reduced rate of 7% applies, including:
- Food stuffs
- Milk and mixed milk drinks
- Transfer of copyright (Übertragung von Urheberrechten)
- Newspapers, books and magazines
- Public transport for distances shorter than 50 km
- Accommodation in hotels, hostels or campsites
- Rental of living spaces
- Tickets for theatres, concerts or museums
- Circus performances and showman activities
- Activities as a dental technician
Furthermore, agricultural and forestry products are excluded from the standard rate of taxation. The following rates apply to these products:
- Agricultural products: 10.7%
Forestry products: 5.5%
Some product and service groups are even completely exempt from VAT:
- Sea and air transport
- Foreign deliveries
- Credit brokering
Sales tax is calculated as follows:
Sales * VAT rate = VAT
(Umsatz * Umsatzsteuersatz = Umsatzsteuerlast)
Directly related to VAT is the pre-tax defined in § 15 UStG (VAT Act), it’s the part of the sales tax that companies pay for needed investments. The pre-tax is repaid after the sales tax return from the tax office (Finanzamt). Read more about vVAT here.
Anyone who runs a business has to pay trade tax. This tax is regulated in the trade tax law (Gewerbesteuergesetz – GewStG). For sole proprietorships and partnerships, a tax-free threshold of €24,500 applies to their revenue. In the case of trade tax, the rate of levy differs depending on the municipality. The figure of 3.5% is a fixed factor, which is also added as a multiplier.
The trade tax is calculated as follows:
Trade income * 3.5% * rate of levy = trade tax
(Gewerbeertrag * 3,5 % * Hebesatz = Gewerbesteuerlast)
Since freelancers are not traders, they generally do not have to pay any trade tax. However, if they work as a sole proprietor or in a partnership, where commercial activities are also carried out, they are subject to trade tax.
Since 2011, all self-employed persons are obliged to submit their tax returns electronically to the tax office. As a self-employed person, you fill out the attachment S (Anlage S – Einkünfte aus selbstständiger Arbeit). Then enter income and expenses into the Einnahmen-Überschuss-Rechnung or EÜR (cash method of accounting) attachment – provided you are entitled to use this method. All necessary forms can be found online in the ELSTER portal.
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Using the Kleinunternehmerregelung
If you don’t have much turnover, use the Kleinunternehmerregelung (small business regulation). With a projected total turnover of less than €17,500 per year and a planned turnover of €50,000 in the following year, you can waive the VAT. You can also have the VAT refunded for business expenses. However, you must show the sales tax in your invoices. The revenue and expenditure associated with VAT must be reported quarterly to the Finanzamt, in some cases even monthly. A disadvantage of the small business regulation is that the input tax is not refunded by the tax office, because it was not collected. In other words, you pay more than you would if you were not using the Kleinunternehmerregelung.
Tax deducting company cars
Business expenses can be declared to reduce your tax liability. For example, if you own a company car and only use it commercially, you can deduct all the costs associated with the car from your taxes. However, if you also use the car privately, you must monitor your usage very closely.
Keep a special log book to record when you’re on personal time and when you are on business trips. The logbook is checked by the tax office for consistency with the real conditions. In addition, it’s best to keep all evidence of car costs, including fuel and toll receipts. This method is particularly worthwhile if you have to travel at least 60 kilometres per working day.
Alternatively, you can apply the 1% rule (1-Prozent-Regelung). This requires that you use the company car for at least 50% commercial use. Then you can tax the rides on a flat-rate basis without having to keep a logbook. In this way, the monetary advantage is set at one% of the gross list price of the car in the registration year.
Accounting: More basics
Deduction on low-value assets (GWG)
You can also specify the low-value assets (geringwertigen Wirtschaftsgüter – GWG) to reduce profit. GWG means purchases whose value is less than €410 plus VAT. These purchases are not used up, but gradually worn out. You can completely write off the GWG right in the year of purchase, even if you continue to use them in the next few years.
Investment deduction amount (IAB)
The investment deduction amount (Investitionsabzugbetrag – IAB) is a profit-reducing reserve. With this reserve, you can record an investment that you have planned within the next three years. However, it’s assumed that you will actually make the investment during that period. Otherwise, you have to refund the tax office the tax savings with 6% interest. If you liquidate the investment deduction amount, your profit will be increased retroactively up to the year of formation. This leads to a large tax back payment! So think twice about whether the investment deduction amount is a lucrative option for you, and whether your planned investment will pay off in the future.
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Need Special write-offs
If your business assets amount up to €235,000, you can make use of special write-offs. It works in a similar way to the investment deduction amount: The deduction is made for a planned investment. The value is 20% of the total expenditure. Make sure that the investment has actually been made, otherwise, you will have to make tax back payments.
We’re building a library of accounting-related articles in English to help you understand what’s involved in managing a business’s finances in Germany. The Master List can be found here, here’s a sampling that may be useful:
- Everything you need to know about income tax in Germany
- Optimising taxes with holding structures in Germany
- Profit distribution and taxation of a GmbH