Taxes in Germany – how does it work?
I. „Small but mighty“ or rather „small and mighty“?
Whether entrepreneur or consumer, employer or employee, company, or partnership, they always arise and come unannounced. We are talking about taxes. Taxes can be incurred and levied in many ways. Most people therefore find it difficult to keep a general overview of the individual types of tax. For example, entrepreneurs are subject to more taxes than ordinary consumers. On the contrary, in most everyday transactions the consumer no longer even notices that he is still actively paying taxes. The following is therefore intended to illustrate the German tax system somewhat and provide the recipient with a rough overview.
II. Fundamentals of Tax Law
In addition to the basic legal foundations of tax law, such as the Fiscal Code (AO, Abgabenordnung) or the Income Tax Act (EStG, Einkommenssteuergesetz), etc., legal ordinances, directives or administrative regulations must also be observed. As part of public law, the regulations give rise to discretionary powers, which means that current court rulings can often play a role – but now let’s take it from the beginning. What is a tax?
1 – How are taxes subdivided?
In finance, a tax as defined in § 3 AO is seen as a sovereign measure without a claim to consideration to cover a financial need of the state. This means that the tax subdivision initially depends on the legal concept of § 3 AO.
If the focus is on the fact that the tax is levied as a „sovereign measure“ by a federal or state corporation – to cover a state financial need – one regularly speaks of a „tax sovereignty“.
If, on the other hand, one focuses on who or what the tax is levied on, one speaks of a so-called „personal or property tax“. The personal tax is linked to the individual capacity of a person, considering individual circumstances such as the amount of total income, age, marital status, etc. The tax is levied on the person’s income. Depending on the standard of living, personal taxes can be further subdivided into so-called „property tax“ and „consumption tax“. On the other hand, taxes on property include real taxes (such as a dwelling) which can be assessed according to external characteristics, as well as transaction taxes, whose subject matter focuses on economic transactions (such as land transfer tax when purchasing a house).
In addition to the tax sovereignty and personal or property taxes, so-called „expenditure taxes“ may also apply. These affect the expenditure on goods, such as hunting or dog tax.
Finally, „import and export duties“ can be levied on the import and export of goods and commodities, which are also levied as taxes in the narrow sense.
2 – Which taxes are important for companies?
Sole traders and partnerships (such as OHG, KG and GbR) are subject to so-called income tax on their income per calendar year. Income tax is calculated based on the direct profit for the company and the individual entrepreneur. However, so-called tax advantages are also considered, such as personal allowances, special expenses, but also the general basic allowance. If the taxable income is below the statutory tax-free amount, the income earned does not have to be taxed.
In contrast, corporations (such as the GmbH and AG), unlike partnerships, are subject to corporate income tax. Corporate profits are currently taxed at a rate of 15%. Distributed shares and dividends as well as profit shares from GmbH participations are subject to capital gains tax of 25% plus solidarity surcharge of 5.5% and church tax.
It is therefore clear that a lot of taxes can be due, and it does not stop with VAT. The principle applies that „the bigger the cake, the bigger the piece to be handed over“. This is often unpleasant at first for the person it affects, but the individual situation can be made as pleasant as possible with a good overview and contacting the right experts.
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