Different Types of Tax for the Self-Employed Individuals in Germany

Taxes rules for businesses and entrepreneurs in Germany

Business owners and self-employed individuals who work in Germany are to be registered at tax offices in order to submit their annual tax return in Germany.

If you have started your own business as an entrepreneur in Germany, you are subject to apply for a tax identification number through which you can then submit your annual tax return forms. In addition to tax registration, you should also obtain health and pension insurance as a self-employed individual in Germany.

The information given here is rather more general about the tax system in Germany, but we really advise you to receive a professional consultancy regarding tax issues and financial matters when starting your business in Germany.

Paying taxes in Germany

If you own a business in Germany or work as a freelancer, you should proceed with registering yourself with tax authorities in the same area you are residing. You will then receive a tax identification number which you need to apply to all your bills. Businesses are required to receive a company registration number in addition to tax identification number. A person who owns a business or works as a freelancer in Germany is subject to filing his annual tax returns and calculating the amount of the tax you owe. It is advised to have enough balance in your account by the end of the first year to be able to pay your balancing payment after the tax calculations.

Unlike employees, self-employed individuals in Germany exempt from contributions to social security shares such as nursing insurance, unemployment insurance and disability insurance (You can choose to pay on your own will)

Most self-employed individuals, especially traders who come to Germany by business registration, are subject to pay retirement insurance for at least five years.

Registering at Tax authorities

Tax registration varies in procedure depending on the type of your business. If you are a freelancer (doctor, business consultants, tax advisor, lawyer, etc.), you will be directly registered at tax authorities by receiving a tax identification number which you will be using almost everywhere such as writing an informal or formal bill or when filing a tax return form.

If you are a business owner, you will be registered at a trade office and they will pass your details to tax authorities. Later, you will receive either a tax identification number or a trades registration number depending on the type of your business.

Tax types in Germany

Income Tax

Income tax (Einkommensteuer): All earnings in Germany are subject to an income tax which is paid quarterly. The amount depends on your income and your tax category. As mentioned earlier, unmarried individuals with maximum annual income of 8,130 and for those in civil partnership with maximum annual income of 16,620 are exempted from paying taxes. The taxation rate varies from 14% to 42% depending on your wage. Therefore, it is very important to get to know your tax category and how to file your income and expenses to achieve the best balance. Our team is ready to advise you professionally regarding this matter. 

Value added tax (known as Mehrwertsteuer or Umsatzsteuer in German)

If your gross annual income excesses 17,500 euros or you may experience an income raise in the coming year reaching higher than 50.000 euros, you are subject to pay value added tax. Some specific services and objects are exempted from VAT payments:

• Exporting goods to non-EU countries
• Services offered by some specific types of freelancers (medical services and so on)
• Financial and insurance services
• Real estate trading

Most of the time, the added value tax is 19% except for some special services such as translation, journalism, food trades, and art works. The value added tax must be stated on customer bills. Also due to the Corona situation, the value added tax is temporarily set to 16%. 

German government is the responsible authority for receiving the value added tax. settling VAT payment must be done by 10^th of every month. If your value added tax is less than 7,500 euros per year, you are not subject to pay the VAT monthly in the coming year. You can simply declare your taxes every three months. In this case, you can declare your taxes by 10^th of the fourth month for the previous 3 months.

There are a lot of business- related costs that you can claim for your tax return and get back 19% of the tax return from the government. Costs such as phone bills, computers, and other business-related essentials are possible to declare.

If you are not subject to VAT in Germany, you don’t have to state it on the invoices.

VAT and trading inside EU

If you have registered your business in Germany which is subject to VAT and you are intending to export your services or goods to other EU countries, you are not object to pay VAT since the end user/customer will pay the VAT anyhow in their own country. You can contact the Federal Central Tax Office to know more on this topic. In case you are exporting your goods or services to Non-EU countries, you are subject to pay VAT which you can claim later in your tax settlements. If as a consumer, you purchase goods from other European countries in Germany, you are subject to pay VAT based on German VAT rules. If you are intending to start a business, you need to apply for a VAT number in addition to Tax Identification Number (USt-IdNr)

Our professional tax advisors will proceed with your registration on both matters. For further information, you may contact us. 

Trade Tax (Gewerbesteuer)

Trade taxe is only subject to businesses that trade goods in Germany. Organizations or individuals who are involved in professional services (doctors, start-ups, taxes, etc.) are exempted from business tax.

Trade Tax applies to all business trades in different industries, in production and in commercial affairs. The amount of trade tax is set by federal states in Germany, ranging from 7 to 17.5%. Trade tax is normally higher in cities compared to villages in Germany. It is also important to mention that you are only subject to pay trade tax when your income range in exclusive ownership and cooperation exceeds 24,500 euro. The trade tax is then calculated by applying a multiplier to the base tax amount.

Trade tax is to be paid in advance and per quarter in installments set by tax authorities in Germany. Calculations are settled by the end of each year to set-off the account balance.  

Our tax advisors will provide you with all necessary information to settle your trading affairs. For further information, you may contact us. 

Solidarity Surcharge Tax (Solidaritätszuschlag)

Solidarity Tax was set to aim for German reunification, and it is levied at a rate of 5.5% of your income tax or your company’s profit. (please note that solidarity tax is 5.5% of your income tax and not your income, so it is really a minor amount)

Filing tax returns: (register, declare and tax payments)

You should file your tax return by the end of every tax year but normally you still have time till the end of the next coming May (5 months after the end of tax year) to lodge your final tax returns. For example, the deadline to file and declare a tax return for 2016 is until May 31^st ,2017.

Social Security

Business owners and self-employers do not favor free social services in Germany (Unlike unemployed or disabled German citizens). This means that every self-employed individual who enters Germany must arrange his insurance including medical services, pension, unemployment and disability insurance. The only compulsory insurance for self-employment in Germany is health insurance but it is important to know that according to paragraph 20 of immigration law, self-employed individuals are subject to minimum five years of pension insurance at their arrival to Germany. Keep in mind that healthcare insurance contributions are among the tax deductible business costs which you can consider at your tax return to save some money!

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