Germany Personal Income Tax

Individuals are subject to tax on their worldwide income if they meet either of the following conditions:

  • They have a domicile in Germany for their personal use.
  • They have a “customary place of abode” in Germany and do not stay only temporarily at this place or in this area. This means that if they are present in Germany for an uninterrupted period of at least six months that may fall in two calendar years, a customary place of abode is given in any case.

The citizenship of a taxpayer usually is not a consideration in determining residency. However, under the provisions of certain tax treaties entered into by Germany, citizenship may be one of the factors to consider if a taxpayer qualifies as a resident under the domestic laws of both Germany and the other treaty country. Individuals not resident in Germany are generally subject to tax on income derived from German sources only.

Nonresidents may elect to be treated as residents if either their income subject to German taxation amounts to 90% or more of their world wide income or their income not subject to German taxation does not exceed the amount of EUR8,652 per calendar year. This provision allows nonresidents to file German income tax returns like residents and to claim all deductions and allow­ances normally granted to residents only.

Income subject to tax. German income tax law distinguishes between 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 overall 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. An individual is treat­ed as an employee if he or she is obliged to follow an em ployer’s directions and is integrated into the employer’s organization as a dependent member.

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 a private employment
  • Pensions and other benefits received from a former employee or the employee’s surviving spouse or descendants, in consider­ation of services performed in the past

Under certain conditions, employment income does not include employer-paid actual moving expenses, education expenses for employees or contributions to a pension plan up to certain limits.

Allowances paid to foreign employees working in Germany, including foreign-service allowances, cost-of-living allow ances and housing allowances, are considered to be employment income and generally do not receive preferential tax treatment.

Education allowances generally provided by employers to their employees’ children must be considered for income tax and social security purposes. Under specified circumstances, on fil­ing a personal income tax return, 30% of school fees is deduct­ible for tax purposes as special expenses (see Deductions). However, this deduction is limited to EUR5,000 for each child.

In addition, two-thirds of child-care expenses (for example, kinder­garten, babysitter and nanny) are deductible for tax purposes as special expenses, up to a maximum deduction of EUR4,000 per year, until the child reaches age 14.

Self-employment and business income. Individuals acting inde­pendently in their own name and at their own risk are subject to income tax on income derived from self-employment or business activities.

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.

Income derived by general or limited partnerships is not taxed at the level of the partnership, but each partner is taxed on his or her attributable profits separately. The compensation that a partner receives from a partnership for services rendered, for loans given or for assets loaned to the partnership is included in the partner’s income from self-employment or business activities.

If a nonresident 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 EUR8,652 is not considered.

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%.

Investment income. Investment income, such as dividends and interest, is taxed at a flat tax rate of 25%, which must be withheld at source by the payer. A solidarity surcharge (5.5% of the flat withholding tax) and church tax, if applicable, (8% or 9% of the final withholding tax, depending on the location) is added. The flat withholding tax 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 gross investment income must be declared in the tax return. Taxpayers with an average personal income tax rate below 25% can apply the lower personal tax rate to investment income by declaring such income in the German income tax return.

Negative investment income cannot be deducted from income of other sources (for example, employment income and self-employment income). However, 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.

Investment income is tax-free in an amount of EUR801 per year for a single taxpayer (EUR1,602 per year for a married couple filing jointly). In general, actual expenses higher than the lump-sum amount cannot be deducted. The investor can provide the investment institution with an exemption order for the applicable lump-sum amount or with a certificate of non-assessment; in both cases, the final withholding tax is not deducted up to the amount of tax-free income.

Income from rentals and leases of real property located in Germany is taxed by assessment.

Taxation of employer-provided stock options. Tradable and non-tradable stock options must be distinguished.

In general, stock options provided by employers are non-tradable. For employer-provided non-tradable stock options, the acceptable tax-filing position is taxation at the date of exercise. German law does not differentiate between qualified and non-qualified stock option plans.

In general, the taxable event occurs at exercise (that is, the time of shift of economic ownership). 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.

The taxable benefit may qualify for a reduction granted for com­pensation received for services performed over a period of sev­eral years (see Personal deductions and allowances). 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. For expatriates, the spread is allocated by reference to the work performed during the period between the grant date and the vesting date if treaty relief is available.

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.

For the capital gains treatment of shares acquired due to stock options, see Capital gains. To determine the amount of the capi­tal gain, the acquisition price is deemed to be the fair market value at the date the option is exercised.

Capital gains

Real estate. Gains derived from the disposal of real estate held not more than 10 years are included in taxable income and taxed at the ordinary rates, unless the property was exclusively used by the taxpayer as a personal residence in the year of sale and the two preceding years. The gain from such disposal is tax-free if the total gains in the calendar year amount to less than EUR600.

Sales of securities. Gains on the sale of shares are not subject to tax if all of the following conditions are satisfied:

  • The shares were acquired before 1 January 2009.
  • The vendor had a participation of less than 1% in the company.

Losses incurred on the sale of shares acquired before 2009 could be deducted from taxable gains from the sale of shares and cer­tain other assets, particularly real estate, until the end of 2013. If losses incurred on the disposal of shares before 2009 were not balanced by 31 December 2013, they cannot be offset against gains from the sale of shares, and they may only be offset against gains from the sale of certain other assets (for example, real estate) as of 2014.

Gains derived from the sale of shares acquired after 31 December 2008 are subject to the 25% withholding tax mentioned in Investment income, regardless of the holding period. The gain is fully taxable. Losses incurred on the sale of shares acquired after 31 December 2008 can only be offset against gains derived from the sale of shares. Any remaining losses can be carried forward to the following calendar year.

Gains derived from a disposal of shares of a corporation are con­sidered to be business income rather than investment income if the vendor has held a direct or indirect participation of at least 1% of the corporation in the last five years.

Sales of certain other assets. Gains derived from the disposal of certain other assets are not subject to tax in Germany if the indi­vidual holds them for more than one year. However, if the indi­vidual realizes income from these assets in at least 1 calendar year, the tax-relevant period is extended to 10 years. If the indi­vidual sells the assets before the expiration of the 10-year period, the gain derived from the disposal is subject to tax in Germany. A potential loss from the sale is subject to certain restrictions. Convenience goods, which are necessities or goods for day-to-day use, are not covered by this rule even if the holding period is less than one year.

Deductions

Deductible expenses. Expenditure incurred by an employee to create, protect or preserve income from employment generally is deductible.

Income-related deductible expenses include the following:

  • Cost of travel between home and workplace
  • Expenses connected with maintaining two households for busi­ness reasons (rent, home trips, per diems and moving costs, to a certain extent)
  • Professional books and periodicals
  • Membership dues paid to professional organizations, labor unions and similar bodies
  • Child-care expenses (subject to certain limitations; see Employ­ment income)

The following significant changes to the tax rules regarding the deduction of work-related travel expenses are effective from 1 January 2014:

  • The legal definition of “primary place of work” (replaces the term “regular workplace”) describes a fixed central location of the employer, an affiliated company or a third party determined by the employer to which the employee is permanently assigned.
  • Per diems are determined by a two-tiered scale of flat fees, which are set at EUR12 and EUR24 (generally for less than three months). For one-day business trips (absence of up from 8 to 24 hours), the per diem is EUR12. The per diem for the arrival and departure day of a multiday business trip equals EUR12, while the per diem for an absence of 24 hours equals EUR24. For meals granted by employers, the standard per diems are reduced by a certain percentage referring to the meal granted to the employee by the employer (or by a third party at the request of the employer) during a business trip. The percent­ages are 20% for breakfast and 40% each for lunch and dinner.
  • For job-related maintenance of two households in Germany (that is, the maintenance of a personal household at the place of residence and lodging at the workplace and job-related inducement), the expenses can be deducted as income-related expenses up to a general limit of EUR1,000 per month.
  • Lodging expenses during assignments outside the primary workplace can be deducted as income-related expenses without restriction for up to 48 months.

A standard deduction of EUR1,000 per year for employment-related expenses is granted without any further proof. However, an employee can claim a larger deduction if he or she proves that the expenses actually paid exceed the standard deduction.

For retirees, the standard deduction is EUR102 per year.

Premiums under contracts for life, health, accident or liability insurance, regular payments to German building societies and compulsory payments to various forms of social security are deductible as special expenses within certain limits. Payments to foreign insurance companies are deductible only if the respective company has a registered office or an executive board in the European Union (EU) or a contracting member state of the European Economic Area (EEA) and is authorized to perform its insurance services in Germany. Other foreign insurance compa­nies are required to hold a permit to operate in Germany.

The deductions will be increased over the next years, correspond­ing to the increase in taxation of future benefits. Eighty-two percent of the employees’ portion of the following payments, limited to an annual total of EUR20,000 less the tax-free employ­er’s contribution, is deductible:

  • Compulsory state old age insurance
  • Certain professional group pension plans
  • Qualifying life annuity pensions

Premiums for basic health care services under German social security law are deductible only as special expenses. Fees for additional services relating to private health care plans are gener­ally not deductible.

Contributions under contracts for nursing care insurance entirely qualify as deductible special expenses.

In addition, taxpayers may claim deductions for contributions to health and nursing care insurance paid for spouses subject to unlimited taxation, common-law spouses and children for whom the taxpayer is entitled to receive child-care allowances under German regulations. The deduction is subject to the above-mentioned restrictions.

Other insurance contributions under contracts for unemployment, disability, accident, liability and life insurance are deductible only up to EUR1,900 for employees (EUR2,800 for all others), provided that this limit has not already been reached by contribu­tions to health and nursing care insurance.

For an interim period up to 2019, the total deduction for insur­ance premiums available under the new law is compared to the total deduction under the law before 2010, and the highest pos­sible deduction is granted.

Other items that may be claimed as special deductions include church tax and donations. Instead of itemizing these deductions, a standard deduction of EUR36 (EUR72 for married couples fil­ing jointly) per year is granted.

Personal deductions and allowances. The following tax benefits are granted to individuals:

  • A basic tax-free allowance of EUR8,652 is available for single individuals (EUR17,304 for married couples filing a joint return).
  • The income tax on compensation received in one year for ser­vices performed over a period of several years (for example, a long-term bonus or termination pay) is calculated by reference to a special formula. Under this formula, tax is calculated both for income less the one-time payment and for income less the one-time payment plus one-fifth of the one-time payment. The difference between the two results is multiplied by five. This tax relief is also granted to individuals who are nonresidents for tax purposes.
  • Private use of a company car is generally subject to income tax. However, it benefits from preferential tax treatment.
  • Income derived on business days spent in foreign countries may be exempt from tax in Germany under the progression clause generally contained in tax treaties entered into by Germany. However, proof of actual foreign tax paid or a waiver of the taxation of such income by the foreign tax authorities is required.

Taxpayers with children receive children-related deductions, such as for the following:

  • Each child under 18 years of age
  • Each child under 21 years of age if the child is jobless and registered as seeking work
  • Each child under 25 years of age who is attending school, col­lege or university, is receiving vocational training or is doing voluntary work in the social or ecological sector

The children allowance equals EUR192 for each child for each month of eligibility. Parents filing a joint return receive an allow­ance of EUR384 per child per month. The allowance in the amount of EUR384 also applies to a single parent if the spouse dies before the beginning of the calendar year or if one parent lives outside Germany during the entire calendar year. A monthly child-care allowance of EUR110 (EUR220 under the circumstances men­tioned above) is also granted for each eligible child. German tax residents and foreign individuals with certain residence permits are entitled to a monthly child subsidy payment of EUR190 per child for the first two children, EUR196 for the third child and EUR221 for the fourth child and each additional child. The subsidy described above relates to children who are resident in the EU/ EEA and qualify for the deductions mentioned above. Taxpayers who are entitled to claim child subsidy payments cannot benefit from both the child-related deductions and the child subsidy pay­ments. When the income tax return is filed, the tax authorities determine automatically whether the child-related deduct ions or the child subsidy payments are more favorable to the taxpayer. The child-related deductions are not considered for wage tax withholding purposes, but they are considered in calculating the solidarity surcharge and church tax (if applicable), which is with­held via the payroll.

Business deductions. In general, all business expenses are deductible from gross income. Living or personal expenses are not deductible unless they are incurred for business reasons and the amount is considered reasonable.

Rates. Individual tax rates for 2016 gradually increase from an effective rate of 14% to a marginal rate of 42%. The top rate of 45% applies only if taxable income is EUR254,447 (EUR508,894 for married taxpayers filing jointly) or more. For taxable income from EUR53,666 (EUR107,332 for married couples filing jointly) up to EUR254,446 (EUR508,892 for married couples filing jointly), the top rate is 42%.

The following tables present the tax on selected amounts of tax­able income in 2016.

Single taxpayers and married taxpayers filing separately

Taxable Effective Marginal Tax
income tax rate tax rate due*
EUR % % EUR
30,000 18.23 31.33 5,468
40,000 22.07 35.84 8,826
50,000 25.27 40.34 12,636
60,000 28.01 42.00 16,805
70,000 30.01 42.00 21,005
80,000 31.51 42.00 25,205
100,000 33.61 42.00 33,605
120,000 35.00 42.00 42,005

Married taxpayers filing jointly

Taxable Effective Marginal Tax
income tax rate tax rate due*
EUR % % EUR
30,000 8.50 24.57 2,550
40,000 12.80 26.82 5,120
50,000 15.83 29.07 7,914
60,000 18.23 31.33 10,936
70,000 20.26 33.58 14,182
80,000 22.07 35.84 17,652
100,000 25.27 40.34 25,272
120,000 28.01 42.00 33,610

* Excluding solidarity surcharge and church tax, if applicable.

Certain income that is not taxable is taken into account when determining the tax rate on German taxable income. This inclu­sion rule is known as the “tax exemption under progression clause.” For example, individuals who transfer to or leave Germany within the calendar year must take into account foreign income earned either before becoming a German resident or after leaving Germany when determining the tax rate on their German taxable income.

To help finance the costs related to German unification, a 5.5% solidarity surcharge continues to be imposed on the income tax liability of all taxpayers. If a German tax resident is a member of a registered church in Germany entitled to impose church tax, church tax is assessed at a rate of 8% or 9% on income tax liabil­ity, depending on the location.

Business income is subject to both income tax and trade tax. Trade tax rates vary, generally ranging from 7% up to 17.5% depending on the location. Income tax is partially reduced inso­far as the income tax is allotted to business income (business income is subject to income tax and trade tax; however, for trade tax already paid on business income, a certain tax credit on income tax is granted). Trade tax is not levied on income from self-employment or professional services.

Salaries of nonresidents employed by domestic employers are subject to withholding tax (that is, wage taxes and solidarity surcharge) at rates that apply to residents who have single tax­payer filing status. However, no church tax is due. The withhold­ing tax generally constitutes the final income tax liability. The withholding tax on directors’ fees is 30%.

Relief for losses. 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 realized from one or more categories of income. Remaining tax losses up to EUR1 million (EUR2 million for married taxpayers filing jointly) may be carried forward indefi­nitely and are offset against gains realized in the following years. For losses exceeding the amount of EUR1 million (EUR2 million for married couples filing jointly), only a further loss carryfor­ward in the amount of 60% of the remaining gains is possible. For income tax purposes (but not for trade tax purposes), losses may be carried back for one year, subject to certain limitations that ensure minimum taxation. The overall maximum loss carryback amount is EUR1 million (EUR2 million for married taxpayers filing jointly) annually. A taxpayer may choose whether a loss is carried back or carried forward to the following years.

Inheritance and gift taxes

A tax is imposed on transfers of property at death or by gift. Decedents and donors are considered transferors, and beneficia­ries and donees are considered transferees.

Transfers of worldwide net property are taxable if either the transferor or the transferee is resident in Germany at the time of the decedent’s death or at the date on which the gift is made. If neither the transferor nor the transferee is resident in Germany, the tax applies only to transfers of property located in Germany. Depending on the family relationship between the transferor and transferee, personal exemptions ranging from EUR20,000 (no familial relationship) to EUR500,000 (spouse or common-law spouse of transferor) are granted. Nonresidents may claim a per­sonal exemption in the amount of EUR2,000. The tax rates are graduated, depending on the family relationship and on the value of taxable property transferred. For example, in 2016, the rates include the following:

  • Spouse, common-law spouse, children and parents (only in case of acquisition for the reason of death) of the transferor: up to 30%
  • Parents (in other cases), siblings and grandchildren: up to 43%
  • No family relationship: up to 50%

To prevent double taxation, Germany has entered into estate tax treaties with Denmark, France, Greece, Sweden, Switzerland and the United States.

Social security

Coverage. Social security taxes comprise the following five ele­ments:

  • Old-age pension
  • Unemployment insurance
  • Health insurance
  • Nursing care insurance
  • Accident insurance

Old-age insurance, unemployment insurance, health insurance and nursing care insurance contributions are required for all employees, unless they are otherwise exempt under EU regula­tions or a social security totalization agreement. The same rule applies to accident insurance contributions, which are required to be paid by the employer only.

Contributions. Compulsory old-age pension and unemployment insurance coverage exists for all employees working in Germany, regardless of how much they earn. For 2016, contributions amount to 21.7% (18.7% for old-age pension and 3% for unem­ployment insurance) of employment income, up to EUR74,400 (special contribution ceilings apply to the Eastern German fed­eral states) a year. Income exceeding EUR74,400 (special contri­bution ceilings apply to the Eastern German federal states) is not subject to these contributions. One-half of the contributions must be paid by the employer. Employees’ portions must be withheld by employers from their monthly compensation.

Health insurance coverage is compulsory if an individual’s annual employment income does not exceed EUR56,250 for 2016. The rate of the contribution is 14.6%. Health insurance contributions must be paid on employment income up to EUR50,850 for 2016. One-half of the contribution must be paid by the employer. In addition, as of 1 January 2015, the employee must bear an individual surcharge. The rate of the individual surcharge is determined by each state health insurance provider.

Individuals who earn more than EUR4,687.50 a month and con­tribute to a private health insurance plan must pay the full pre­mium and may then claim a refund from their employer for half the premium, up to the amount they would receive under the compulsory scheme (maximum of EUR309.34 per month).

Every employee is asked to contribute to nursing care insurance. If an employee’s income is less than EUR56,250 in 2016, cover­age is compulsory. If an employee has private health insurance coverage, the employee must also contribute to the private nurs­ing care insurance. Nursing care insurance contributions are levied at a rate of 2.35% and are shared equally by employer and employee. Contributions of childless employees are increased at a rate of 0.25%. The increase is borne solely by the employee.

A health insurance reform in Germany entered into force on 1 January 2009. Employees who are assigned to Germany may be affected by this reform and be required to pay additional contri­butions for private health insurance in Germany.

Totalization agreements. To provide relief from double social security taxes and to assure benefit coverage, Germany has entered into totalization agreements that usually apply for a maximum period of two to five years with the following countries.

EU countries                     India                              Switzerland

Australia                           Israel                              Tunisia

Brazil                                Japan                             Turkey

Canada                              Korea (South)                Uruguay

Chile                                 Macedonia                     United States

China                                Morocco                        Yugoslavia*

* Germany honors the totalization agreement with Yugoslavia with respect to the successor countries, except for Croatia, Macedonia and Slovenia.

EC Regulation No. 883/2004 took effect on 1 May 2010. This regulation determines, among other items, which social security legislation applies to employees posted to other EU member countries. The new regulation applies to the EU member coun­tries. Effective from 1 January 2011, the coverage of the new social security regulation is extended to non-EU nationals (third-country nationals) moving within the EU, with the exception of Denmark and the United Kingdom. As of 1 April 2012, Switzerland has adopted EC Regulation No. 883/2004.

Effective from 1 June 2012, EC Regulation No. 883/2004 applies also to assignments to European Free Trade Association (EFTA) states (Iceland, Liechtenstein and Norway). For non-EU citizens under certain conditions, the former totalization agreements entered into with each of the EU/EFTA countries or Switzerland continue to apply.

Tax filing and payment procedures The tax year in Germany is the calendar year.

In general, annual tax returns must be filed by 31 May of the year following the tax year. However, extensions for filing are granted automatically until 31 December of the year following the tax year if the return is prepared with the assistance of a tax adviser. Extensions beyond 31 December are granted only in very excep­tional cases.

Married persons or persons living in a civil union are taxed either separately or jointly, at their election, on all types of income. The election to file a joint return is restricted to married persons and persons living in a civil union who are both residents of Germany and who are not permanently separated at the beginning of the tax year or during the course of the tax year. Nonresidents are gener­ally not allowed to file joint income tax returns.

A special provision applies to EU citizens and citizens of EEA countries. On application, married EU and EEA citizens or citi­zens who are living in a civil union may file joint returns, even though their spouses are not German residents, but are living in an EU or EEA country. On qualification, the favorable tax rates for married persons filing jointly apply (see Rates).

Employers must withhold income tax (known as wage tax) as well as solidarity surcharge and church tax, if applicable, on wages. In addition, social security contributions must be withheld.

Nonresidents may file an income tax return only if they have income that is not subject to withholding tax. If a nonresident’s income is subject to withholding tax, such as income from depen­dent work or investment income, an income tax return generally cannot be filed. However, a nonresident can file a German income tax return if he or she is a citizen of an EU/EEA member state. Nonresidents are subject to the individual income tax rates but the basic tax-free allowance in the amount of EUR8,652 does not apply to income other than employment income.

Income tax is assessed based on the tax return filed, and any additional amount due is charged by means of an assessment notice. The balance due must generally be paid within one month after receipt of the notice. Refunds are paid immediately after the issuance of the assessment. After a grace period of 15 months, which begins at the end of the year to which the tax relates, assessment interest is imposed at a rate of 0.5% per month in the case of outstanding payments and refunds.

Quarterly tax prepayments are levied by the tax authorities based on the last assessed taxable income if the withholding is not suf­ficient to cover the annual income tax assessed or if the personal income subject to taxation is declared.

Double tax relief and tax treaties

German income tax law provides that foreign taxes, up to the amount of German income tax payable on foreign-source income taxable in Germany, may be credited against German income tax (foreign tax credit). This unilateral relief applies primarily to income from those countries with which Germany has not entered into a tax treaty.

Tax treaty provisions override German income tax law, usually by excluding certain foreign-source income from German taxation. This includes income from real estate, business income from a foreign permanent establishment and income from personal ser­vices performed in a foreign country if certain requirements are fulfilled. However, some treaties provide that foreign taxes (up to the amount of German income tax payable on foreign-source income taxable in Germany) may be credited against German income tax. Several treaties contain a subject-to-tax clause, which excludes foreign-source income only if the taxpayer proves that he or she paid foreign tax on this income. Under the “national subject-to-tax clause,” Germany excludes foreign-source employment income only if the taxpayer provides proof showing that he or she paid foreign tax on this income. In addi­tion, Germany does not exempt foreign-source income from tax if the taxpayer does not qualify to be a resident for tax purposes in the other country or if the other country interprets the double tax treaty in a different manner that results in the income being exempt from tax or subject to limited tax. Foreign-source income exclud­ed from German taxation may be considered for purposes of determining the effective tax rate on other taxable income (see Section A for an explanation of the tax exemption under progres­sion clause).

Germany has entered into double tax treaties with the following jurisdictions.

Albania                               Ireland                       Romania

Algeria                               Israel                         Russian

Argentina                           Italy                           Federation

Australia                             Jamaica                     Singapore

Austria                               Japan                         Slovenia

Azerbaijan                          Jersey                        South Africa

Bangladesh                         Kazakhstan                Spain

Belarus                               Kenya                        Sri Lanka

Belgium                              Korea (South)           Sweden

Bolivia                                Kuwait                      Switzerland

Bulgaria                              Kyrgyzstan                Syria

Canada                               Latvia                        Taiwan (e)

China (a)                            Liberia                       Tajikistan

Costa Rica                          Liechtenstein             Thailand

Côte d’Ivoire                      Lithuania                   Trinidad and

Croatia                                Luxembourg             Tobago

Cyprus                               Macedonia                Tunisia

Czechoslovakia (b)             Malaysia                   Turkey

Denmark                            Malta                         Ukraine

Ecuador                              Mauritius                  USSR (c)

Egypt                                  Mexico                      United Arab

Estonia                               Mongolia                  Emirates

Finland                               Morocco                   United Kingdom

France                                Namibia                    United States

Georgia                              Netherlands               Uruguay

Ghana                                 New Zealand             Uzbekistan

Greece                                Norway                     Venezuela

Hungary                             Pakistan                    Vietnam

Iceland                                Philippines                Yugoslavia (d)

India                                   Poland                       Zambia

Indonesia                            Portugal                    Zimbabwe

Iran

a) The treaty with China does not cover the Hong Kong and Macau Special Administrative Regions (SARs).

b) Germany honors the Czechoslovakia treaty with respect to the Czech Republic and the Slovak Republic.

c) Armenia, Moldova and Turkmenistan have agreed to honor the USSR treaty.

d) Germany honors the Yugoslavia treaty with respect to Bosnia and Herzegovina, Kosovo, Montenegro and Serbia.

e) Because Germany has never recognized Taiwan as a sovereign state, this agreement is not a treaty under international law. Instead, it was completed in accordance with the practice that other Western states have followed with respect to Taiwan. It is an agreement between the head of the German Institute in Taipei and the director of the Taipei Representative Office in Germany.

The treaties mentioned above are applicable for 2016. For the application of the treaty in previous years, it needs to be deter­mined which version of a treaty is effective. Germany is negotiat­ing double tax treaties with Colombia, Cuba, Ethiopia, the Hong Kong SAR, Jordan, Oman, Qatar, Rwanda, Serbia, Tanzania and Turkmenistan.

Entry into Germany

In general, an individual needs a visa to enter Germany. For a stay exceeding the duration of three months or a stay for work pur­poses regardless of the duration, a residence permit is regularly required. However, nationals of certain countries are exempt from the visa requirement if they want to enter Germany for tourist or business trip purposes only. EU citizens are generally exempted from visa regulations.

EU nationals from old member states and certain other states. EU nationals from the old EU member states (Austria, Belgium, Denmark, Finland, France, Greece, Italy, Ireland, Luxembourg, the Netherlands, Portugal, Sweden, Spain and the United Kingdom) and the new member states that joined the EU later (Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Latvia, Malta, Poland, Romania, the Slovak Republic and Slovenia) face no restrictions from an immigration point of view when entering, staying permanently or temporarily, or working in Germany. These EU nationals are protected by the right of free movement in full scope. Consequently, they do not need visas to enter Germany. The passport or identity card is sufficient for entering the country but must generally be valid throughout the entire length of stay. The same treatment also applies to nationals of Iceland, Liechtenstein and Norway (members of the EEA).

Swiss citizens are also protected by the right of free movement within the EU in full scope. However, in contrast to EU nationals, for a stay exceeding three months, they must apply for a special German residence permit for Swiss citizens with the responsible local foreigners’ office.

Nationals of preferred countries. In addition to EU nationals, citi­zens of almost 40 jurisdictions, including major Western coun­tries, may enter and stay in Germany for up to three months without German visas or residence permits under an exemption in the German immigration law. This measure applies to citizens of Albania, Andorra, Antigua and Barbuda, Argentina, Australia, Bahamas, Barbados, Bosnia and Herzegovina, Brazil, Brunei Darussalam, Canada, Chile, Colombia, Costa Rica, Dominica, El Salvador, Grenada, Guam, Guatemala, Honduras, the Hong Kong SAR, Israel, Japan, Korea (South), the Macau SAR, Macedonia, Malaysia, Mauritius, Mexico, Moldova, Monaco, Montenegro, New Zealand, Nicaragua, Palau, Panama, Paraguay, Peru, Puerto Rico, Samoa, San Marino, Serbia, Seychelles, Singapore, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Taiwan, Timor-Leste, Tonga, Trinidad and Tobago, the United Arab Emirates, the United States, the US Virgin Islands, Uruguay, Vanuatu and Venezuela. This exemption applies only if these nationals do not work in Germany. For example, the exemp­tion applies to individuals traveling for tourist purposes or stay­ing in Germany for business trip activities exclusively. Individuals staying for a period of longer than three months or for regular work purposes must apply for a German residence permit. In all cases, a valid passport is required when entering Germany. In addition, for some countries, the exemption applies only to hold­ers of biometric passports. Because this list may change, it should be verified close to the date of the intended travel.

Nationals of non-preferred countries. Citizens from non-preferred countries need a valid passport and a German visa before enter­ing Germany.

Visas, residence permits, notification of residence and registration

Visas. The following are the types of German visas:

  • Schengen visa, which allows a stay in Germany for specific purposes (for example, business activities) up to three months per half year. A Schengen visa is issued by the national author­ities of the member states of the Schengen treaty, which are Austria, Belgium, the Czech Republic, Denmark, Estonia, Fin­land, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, the Netherlands, Norway, Poland, Portugal, the Slovak Republic, Slovenia, Spain, Sweden and Switzerland.
  • National visa, which allows a stay exceeding a three-month period or a stay for beginning employment in Germany.

All nationals who are not from EU countries (see Section F), including individuals who are not required to obtain a visa for visiting purposes, must apply for a residence visa for work pur­poses (national visa) before starting to work regularly in Germany. A visa is represented by a stamp on the passport that allows entry to Germany. The visa must include the intended purposes of the stay in Germany. If the stay is for work purposes, the national visa usually includes the job title as well as the com­pany for which the employee is performing his or her work in Germany.

Only citizens from most preferred countries (Australia, Canada, Israel, Japan, Korea [South], New Zealand and the United States) may apply directly for a residence permit for work purposes in Germany at the local German Foreigners’ Office.

Citizens from all other countries who intend to enter Germany for work purposes must apply for a German national visa at the German embassy or at the German consulate-general in their country of residence abroad. These individuals must apply for a national visa even if they are exempted from visa requirements for tourist and business trip purposes.

Registration. For any stay, registration with the German registra­tion office is required for each person resident in Germany, regardless of the person’s nationality (this also applies to German citizens). Details of the registration process depend on the loca­tion of the stay and may vary significantly among towns. In general, foreign nationals, including EU member citizens, who enter Germany for a period of more than three months must reg­ister with the registration office (Einwohnermeldeamt) within one week after establishing residence in Germany.

Subsequent changes in residence must be reported to the registra­tion office within one week after the change. Failure to register properly with the appropriate authorities may result in the assess­ment of fines.

Residence permits. After entry into Germany and completion of the registration, a foreigner generally must visit the foreigners’ office in person to apply for the final residence permit. If a national visa for work purposes has been granted, the application for the final residence permit is only necessary if the stay exceeds the validity of the national visa. Employees of the preferred coun­tries must visit the foreigners’ office to apply for the final resi­dence permit and for obtaining a preliminary residence permit before starting to work in Germany. The German immigration

law stipulates a “one-stop government” procedure. Under this procedure, the residence permit granted by the foreigners’ office also includes the work permit in one document.

The residence permit is granted as an electronic residence permit (elektronischer Aufenthaltstitel, or eAT) in a credit card format equipped with a contact-free chip inside the card on which bio­metric features (photograph and two fingerprints), ancillary conditions (special requirements) and personal data are stored. In addition, the chip is capable of being used as an electronic iden­tity document and a qualified electronic signature. In some cases, the authorities grant a supplementary sheet document containing specifications or limitations of the permit, such as a note specify­ing the allowed purpose of the stay, the kind of work allowed and, in particular, the name of the employer.

Under the German immigration law, various types of residence permits are available.

Temporary residence permit. A temporary residence permit (Aufenthaltserlaubnis) is granted primarily in connection with stays for working and education purposes, for family reasons and for humanitarian and political reasons. The residence permit for working purposes requires, in general, the approval of the labor office. The approval of the German labor office is ensured by the internal participation of the foreigners’ office, which reviews requests for residence permits.

EU Blue Card. The EU Blue Card was introduced in September 2012 in Germany to facilitate labor market access for highly qualified third-country nationals. The prerequisites for obtaining a blue card are:

  • Foreign higher education qualification comparable to a German university degree or a German university degree or a proven track record of at least five years of professional experience or equivalent qualification
  • Approval of the Federal Employment Agency
  • Minimum level of annual salary (minimum amount is pub­lished annually by the Federal Employment Agency; EUR49,600 per year for 2016)

Permanent residence permit. Another type of residence permit is the permanent residence permit (Niederlassungserlaubnis). The permanent residence permit is an unlimited residence permit, which includes an unlimited work permit. This permit does not limit the duration and type of work. The permanent residence permit is generally granted if a foreigner holds a valid temporary residence permit for more than five years and fulfills further conditions. At the discretion of the authorities, the permanent residence permit may be granted to certain individuals with spe­cial qualifications, in particular, scientists, professors and other scientific professionals.

Other residence permits. An unlimited German residence/work permit, known as Daueraufenthalt EG, may be granted to non-EU citizens if they meet several conditions, including, but not limited to, the following:

  • They have lived in Germany for more than five years.
  • They can arrange for their subsistence.
  • They have basic German language skills.
  • They have enough living space.

After the Daueraufenthalt EG is granted, a foreign national is allowed to work in Germany without time or local restrictions.

Non-EU citizens who intend to enter Germany for more than a three-month period and who have been granted the Daueraufenthalt EG status in another EU country are issued a residence permit for work purposes from the local German foreigners’ office.

Approval of the labor office and self-employment

General. As discussed in Section G, the permission to work is included in the residence permit for working purposes. The work permission in the residence permit usually mentions the name of the employer as well as the profession of the employee. Consequently, a change of employer, including a change within a group of companies, generally requires a change of the residence permit.

Application process for obtaining a residence permit for work pur­poses for non-EU citizens. Except for the exempt categories dis­cussed below, all non-EU employees who want to work in Germany must obtain the approval of the labor office when applying for a German residence permit with the foreigners’ office.

Specific conditions need to be fulfilled to obtain the work permit. In particular, a so-called public interest must often be demon­strated. In general, the new German immigration law facilitates the entry to the German labor market of qualified professionals. As a result, an information technology (IT) specialist, a high-level specialist professional and a leading employee with person­nel responsibility should receive a positive decision. An individ­ual can also receive approval if he or she participates in an international assignment project. In all cases, the labor office may exercise discretion when reviewing the request.

In general, the approval of the labor office is granted only if the employment of a foreign national is deemed to be necessary. Supply and demand in the German labor market is taken into account; approval is not granted if the employment of a foreign national may adversely affect the availability of jobs for qualified German nationals or foreign employees with preferred status (particularly EU nationals). As a result, the local labor offices may require the employer to prove that efforts were undertaken to find German or privileged foreign national employees for the job. Even if German candidates are not available, the foreign national may be precluded from receiving a work permit for other reasons. Approval is easier to obtain for transfers of experienced employ­ees with university degrees within an international operating company (that is, transfers from the parent company, which must be located in the employee’s home country, to the German sub­sidiary). In certain cases, it may be required that the foreigner be employed by a German company.

In addition, the labor office determines whether the foreign employee receives a comparable salary to a peer German employ­ee. As a result of German law changes, effective from 1 January 2015, the minimum wage law is in effect in Germany and accord­ingly must be considered when applying for a work permit in Germany.

The application of a non-EU national must be accompanied by specified documents.

Normally, a regular residence permit for working purposes is initially valid for one year, and is generally extended on applica­tion for each additional year. The employment of individuals without valid residence permits is punishable under German law with severe fines.

Many uncertainties may arise in the initial planning stages of an expatriate’s assignment. The procedure for obtaining residence permits for working purposes is particularly difficult. Also, lan­guage barriers and time limitations may present obstacles. Since 2015, practice with the authorities has indicated that the authori­ties are interpreting German immigration law more restrictively.

The duration for receiving a German residence permit is usually 6 to 12 weeks if the application is made from abroad. If the appli­cation is made from inside Germany, the duration is generally three to six weeks.

Simplification rules. Foreign employees may not need to obtain the approval of the labor office in certain circumstances and, on application, may receive a residence permit for work purposes without the involvement of the German labor office in a simpli­fied procedure. For example, approval is not required in the fol­lowing circumstances:

  • The residence permits are granted as a result of international treaties.
  • The individuals have special professional qualifications, such as scientists employed at universities, artists, athletes and models.
  • The individuals are legal representatives of German corpora­tions, partners of private or commercial partnerships in Germany, representatives of German liaison offices of foreign companies or leading employees with the general power of attorney to represent the employer.
  • The individuals are journalists and correspondents, members of airplane and ship crews or truck drivers engaged in cross-border traffic.

Simplification rules that may result in the possibility of entering and staying in Germany without a residence permit for work purposes are available for several activities of foreign employees in Germany, which do not exceed 3 months within a period of 12 months. These activities are in the area of internal training and after-sales services.

In addition, if a stay involves the rendering of specified services by foreign employees who are assigned by an employer resident in an EU member state and if the employee belongs to the perma­nent staff of the company, simplification rules may apply.

For business trips and for stays for seeking employment, it is not necessary to apply for a residence permit. Foreign nationals con­ducting business negotiations on behalf of a foreign company and business executives may stay in Germany for three months or less per year without applying for a German residence permit.

Students holding a German residence permit for study purposes in Germany may work without the approval of the labor office if the work period is limited to 120 days per year or 240 half-days per year or if the student is employed part-time at a university (without time limit).

Fast-track procedure. Simplified rules can apply to internal trans­fers within a company under certain conditions, including the following:

  • A comparable number of employees of a corporate group are assigned from Germany to work abroad.
  • A foreign employee is assigned to Germany for project work in Germany. For example, certain employees make preparations in Germany for a certain project abroad and the employees them­selves will participate in the realization of the project in the future.

Under the fast-track procedure, a special department of the labor authorities may decide quickly without checking the German labor market, and the local labor offices do not get involved.

Self-employment. In general, self-employed foreign non-EU nationals must have a residence permit to enter and stay in Germany if they intend to remain longer than three months. However, ex ceptions may apply in certain circumstances. Before a residence permit is issued, the local Foreigner’s Office consults the appropriate local Commercial Office (Gewerbeamt) and busi­ness and professional associations. These rules may also apply to managing directors who hold a relevant stake in the company of which they are managing directors.

Self-employed persons are not required to obtain the approval of the labor office when applying for a residence permit because they are not considered employees under the legal definition.

Any person wishing to begin a trade or business in Germany is required to report his or her intention to the local Commercial Office (Gewerbeamt). This local authority then provides a cer­tificate confirming that the trade or business is duly registered, while simultaneously informing the German tax authorities. Cer­tain trades also require special permits.

Individuals intending to begin a specialized trade or business subject to legal restrictions must show particular qualifications and personal reliability. In certain circumstances, even if the applicant is unable to produce proof of sufficient knowledge of the subject, a certificate may be granted if the applicant has passed an examination conducted by an appropriate German board.

Self-employed persons must apply for a residence permit for the purpose of self-employment. The following are the main conditions:

  • The respective activity is within the economic interest of Germany.
  • The means of subsistence are guaranteed.
  • Proof of sufficient investment capital (amount varies for each case) exists.

Family and personal considerations

Family members. Spouses and children, younger than 18 years, of EU nationals employed in Germany are entitled to stay perma­nently in Germany after registration of residence with the Foreigner’s Office even if they are non-EU nationals. For exam­ple, a US national married to an Italian national does not need to apply for a residence permit for working purposes if the Italian national stays in Germany. The US national needs only to register with the Registration Office and to report his or her residence to the Foreigner’s Office to obtain the certificate of residence.

The spouse and dependents of a non-EU national must apply for their own residence permits for family unification purposes sepa­rately. As a result of changes in German immigration law in 2013, third-county nationals’ family members are usually allowed to work in Germany.

In general, residence permits for the spouse and children young­er than 16 years old are granted if the foreign national holds a residence permit and if sufficient income and housing for all family members are ensured. Other dependents may receive resi­dence permits if unreasonable hardship would otherwise exist.

Spouses of non-EU citizens may not stay in Germany on a depen­dent residence permit if they are less than 18 years old. In addi­tion, they must have basic German language skills or a higher education before their entry into Germany.

Marital property regime. In general, German marital property laws apply only to persons whose domicile is in Germany, not to expatriates residing in Germany on temporary assignment. How­ever, under certain circumstances, foreign nationals residing in Germany may elect to be covered under German community property laws.

Under the German community property regime, during a mar­riage, each spouse independently owns property owned prior to the marriage. Any additional wealth (except gifts and bequests) acquired during the marriage with the income of one spouse is nominally considered to be owned during the marriage by that spouse. However, upon termination of the marriage, each spouse is solely entitled to the property he or she brought to the marriage and to one-half of any wealth accumulated during the marriage, including income earned on separate property.

A married couple may elect out of marital property laws by a written agreement, signed by both parties and notarized.

Forced heirship. German inheritance law provides that direct lin­eal relatives (parents and children) and spouses have the right to inherit 50% of the value of their statutory pro rata share of their deceased relative’s estate, regardless of the provisions of any will or testament to the contrary.

Driver’s permits. Citizens of EU and EEA member countries may use their home-country driver’s licenses until the expiration date of the licenses for the entire length of their stays in Germany without applying for German licenses. However, the citizen must be at least 18 years old.

Other foreign nationals on assignment in Germany may drive for a maximum of six months if they have valid foreign driver’s licenses. A foreign national must apply for a German license with the Public Affairs Office (Ordnungsamt) within three years after the date of entry into Germany. Citizens of the following jurisdic­tions can apply for a German driver’s license without a new examination.

Andorra                              Japan                               New Zealand

Croatia                                Jersey                              San Marino

French Polynesia                Korea (South)                  Singapore

Guernsey                            Monaco                           South Africa

Isle of Man                         Namibia                           Switzerland

Israel                                  New Caledonia                Taiwan

Australian, Canadian and US citizens may apply without exami­nation if they hold specified state driver’s licenses (for example, Alabama, Arizona, Ohio and Utah in the United States). However, even if an individual described in this paragraph applies for a German driver’s license, he or she may not drive in Germany with his or her home-country driver’s license after a six-month period beginning with the date of entry into Germany.

The following documents are necessary to obtain a driver’s license:

  • Valid passport and residence permit.
  • One photograph.
  • Translation of the foreign driver’s license by a qualified sworn translator or by one of the major German automobile clubs. This rule does not apply to citizens of EU or EEA member countries, the Hong Kong SAR, New Zealand, Senegal and Switzerland.
  • Original and photocopy of the foreign driver’s license.
  • Name of the German driving school that the foreign national wishes to attend to prepare for the practical and theoretical exam (only if exam is required).

After a three-year period, proof of eye examination and a certifi­cate for training in first aid procedures are required.