The tax terms that every expat in Germany needs to know

Tax time is confusing, and it can be even more confusing in Germany, when you have to deal with a foreign language and a bewilderingly complex tax system.

Redhead woman using computer laptop at home stressed with hand on head, shocked with shame and surprise face, angry and frustrated. Fear and upset for mistake.
Redhead woman using computer laptop at home stressed with hand on head, shocked with shame and surprise face, angry and frustrated. Fear and upset for mistake.

The Local sat down with tax expert Daniel Niessing from Taxfix to demystify and define some of the most common terms expats may come across when doing their taxes in a glossary.

‘Even many Germans can’t understand how the German tax system works – but you shouldn’t be afraid of it. If you make an honest mistake, tax authorities are more than willing to work with you’, he told us, continuing “Getting an understanding of the basics, and some of the most common terminology, can get you a long way there.”

Your pay before tax is taken.

Germany’s tax return lodging portal. Often described as confusing even by Germans, as there’s very little guidance on what you may need. Taxfix circumvents this by asking tailored questions to make sure you can lodge your tax return and receive every euro you may be entitled to under the law.

Your local ‘finance office’. This is your local authority that deals with all matters in relation to finance, and who is responsible for taxation in your area. These are the only taxation authorities that any individual in Germany is likely to deal with.

Take the confusion out of lodging your German tax return by using Taxfix – available on the web, iOS and Android apps. 

Home Office Pauschale
The ‘home office lump sum’, was passed by the government last year in response to the coronavirus pandemic. It means that you can claim €5 a day for setting up a new home office in your home, to a maximum of €600. If you already had a room exclusively dedicated to work, you can’t deduct this expense, but there are other deductions you can make.

Literally, ‘short work’. This program, introduced during the Weimar Republic to keep people in work, reduces working hours for workers, while still maintaining a regular salary that is supplemented by the government. If you were, or are placed on ‘kurzarbeit’ during the pandemic, you need to do a tax return.

A document sent to you by your employer each year that tells you how much tax you’ve paid. If you change employers in the course of a year, you’ll receive more than one. You’ll need each of these when lodging your return.

Taxes got you stumped? Get 15 percent off your tax return withTaxfix before July 31st with the code TX_TheLocal15

Your pay after tax is taken.

This means ‘proviso safeguarding provision’ – not that it makes much more sense in English. What it means is that if you are placed on ‘kurzarbeit’, or you access social benefits, this non-taxable income is treated as taxable for working out your ‘steuersatz’ (see below). Most of the time, this is nothing to worry about, and you might even get a refund because of it. Sometimes, however, if your income increases, you may end up having to pay more tax.

The German term for a tax return.

Much like the British National insurance Number, or the American Social Security Number, this individually-assigned number is meant to be used across a range of government services. However, with the slow process of digitization in Germany, there is still a way to go with achieving this. You will need this number when you lodge your return.

This number is assigned to you by your local ‘finanzamt’ (see above) and is used in all your dealings with them. These numbers can often change however, for many more reasons than we can list here. Just make sure you have your most up to date ‘steuernummer’ handy when lodging your return.

This is the applicable tax rate for a worker. Depending on how much you’re earning, it can be anywhere from 15 to 45 percent of your earnings.

The German term for ‘professional costs’, that can be deducted when lodging a tax return. German tax law defines these costs as expenses accrued in getting, keeping or progressing in a job. One thousand euros are applied automatically, Deductions can also be made for those moving to Germany. This is €860 for every adult, and €573 for every subsequent dependent.

A lot to take in? We think so. However, there is an easy solution for those dreading doing their taxes. Using Taxfix can save expats time, and offers a flat rate for lodging a German tax return. For a return of under €50 euros, it is free, and €39,99 otherwise.

Take control of your taxes and  starting using Taxfix today – recieve 15 percent off your return using the code TX_TheLocal15

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EXPLAINED: The legal steps for starting a business in Germany

Whether it's a small start-up or a much bigger venture, there's obviously legal steps to bear in mind when starting up a for-profit business in Germany.

EXPLAINED: The legal steps for starting a business in Germany

Starting up a for-profit company in Germany follows different procedures than either forming a non-profit foundation (a Verein) or registering as self-employed.

If you need to register as a corporation, the first step is to figure out which of two general company types your venture would fall into in Germany. The first is a Gesellschaft mit beschränkter Haftung (GmbH), which is a limited liability company. This is by far the most common option. Another is an Aktiengesellschaft (AG) – or a joint stock company or corporation. While these two tend to be the most common, there are a few others as well.

EXPLAINED: How to start up your own verein in Germany

Setting up a GmbH

A GmbH is very common in Germany – and under it shareholders in the company aren’t personally responsible for the firms debts. You can set up a GmbH with only one person or shareholder. If you have more than one, you’ll need to draw up a notarised agreement between them.

A GmbH must also appoint at least one Managing Director (Geschäftsführer). The Managing Director is allowed to have shares in the company and is entitled to represent the company legally, whereas other board members are ordinarily not able to.

Shares in a GmbH are ordinarily only represented in notarised documents. There are no certificates which confirm that you have shares and those shares cannot be listed on stock exchanges. Shares, however, can be transferred through notarised documents.

The minimum start-up capital needed to form a GmbH in Germany is €25,000. If founders don’t have this, they can start up as an Unternehmergesellschaft – or entrepreneurial company – for €1. However, these are considered as vehicles to get to the financial capital of a GmbH. As such, UG’s are expected to set aside at least 25 percent of any annual surplus as savings. Once they hit the €25,000 mark, they need to change to a GmbH.

A GmbH is generally the most common type of corporation in Germany because the capital and administrative requirements tend to be less onerous – making it suited for small enterprises, for example. As soon as a GmbH enters the Commercial Register (Handelsregister), it legally exists as a company.

READ ALSO: Everything you need to know about becoming a freelancer in Germany

Grounding an AG

A German AG is a company at a different level – and tends to be more for mid-sized to larger-sized business ventures.

In contrast to a GmbH – which needs only one member – an AG needs to have a minimum of five members.

The capital requirements are also twice as much as for setting up a GmbH. You’ll need €50,000 for an AG. These shares can be listed on stock exchanges – although they don’t have to be.

Choosing which legal model of company for your business in Germany depends on its size, your available capital – and how much liability you’re comfortable with. Photo: Getty Images

You’ll need articles of association, authenticated by a notary, to set one up too. As with a GmbH, an AG legally exists when it enters the commercial register.

An AG must also have a managing board (Vorstand). Members are officers of the company and make its day-to-day decisions. They do, however, answer to a supervisory board (Aufsichtsrat). They must also hold general meetings (Hauptversammlungen) to allow for shareholders to exercise control over overall policy.

READ ALSO: What’s the outlook for the German job market in 2024?

Other types of German companies

In general, GmbH and AG companies are the most common ones you’re going to see in Germany. But other – mostly more complex models – exist.

These include an Offene Handelsgesellschaft (OHG), or General Partnership. This would often be for a company of two partners who had each contributed half the capital. They would share in half the profits but also each be liable for the firm’s debts – to an unlimited amount. You may find that certain family-run businesses use this model. The risk here is that the partners would be personally liable – down to their own assets – for the firms debts.

A variation of this is a Kommanditgesellschaft (KG) – or a limited partnership. This happens when one partner is entirely liable for the firms debts – down to their personal assets, while the other one is not. The limited liability partner would still be liable for the firm’s debts up to and including the amount they had invested in the company itself though. This model might be common for family-owned businesses that bring in outside experts to run day-to-day administration – for example.

Another complex arrangement is a combination of a GmbH and a KG – to a GmbH & Co. KG. Essentially this joins a GmbH and a KG together in a partnership agreement. While very complex and not often used, this kind of partnership may serve as a way to limit the recourse a company creditor has to go after a company member’s personal assets – with more liabilities tied up in the GmbH, which has limited liability.

More complex arrangements are available too for companies that want to have a presence in Germany but their head office might be abroad. These include a subsidiary (Töchtergesellschaft) and Zweigniederlassung – or a branch office. If you’re dealing with these kinds of entities, it’s recommended you seek tax and compliance advice to confirm which one is necessary. In general though, a subsidiary will manage many of its own affairs apart from its parent company. A branch office is likely to have only a small presence in Germany while the bulk of administrative tasks are handled elsewhere.

Knowing which one is applicable is important as it helps establish whether you need to make an entry in the commercial register or not – and what taxes will have to be paid.

Articles in The Local are not meant to replace professional legal or tax advice. We recommend speaking to an appropriated professional in case of further questions.