Taxation

Introduction to Accounting in Germany

The German way of doing the accounts, can be different to what you know back home. This page wants to give you a guide in a nutshell.

When do I best start with the accounting? I have some much work to do in setting up my business; I would love to take care of this when business quiets down during the summer.

The best time to start is before you really “going public” with your business. Assuming you are subject to VAT, you will have to submit monthly pre-returns as a start – no exception. Start a binder in which you store all your incoming and outgoing invoices. It is a good idea to further sort these invoices, for how they were paid (cash, bank transfer, credit card, etc.).
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Heck, I am starting from scratch; I don’t have that much money to hire a tax consultant to do everything for me. Can’t I do anything myself and save money?

Well yes, such is imaginable. However, you will either have to do all by yourself and trust hints of business friends which might be wrong or you will have to negotiate with your consultant if he is flexible enough to match your financial abilities. In order to have good records, it is recommendable that you have your consultant set up the accounts for you, give you an initial training of how to book with the system and then at the end of the year, only have him check everything. The initial training and set-up as well as the controlling at the end of the year should each last about an hour. If your consultant insists doing everything himself, look for another one.
N.B. This is only true for freelancers or smaller businesses. The bigger your business will be from the start, the more services of the tax consultant you ought to hire.
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Do I have to use an accounting program?

No law will demand that you do so. It is legal just to use a spreadsheet. However, this is only true for freelancers! Corporations must have orderly bookkeeping from the first day.
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What documents do I have to keep? I get so much advertisement every day, I guess with German bureaucracy as is, I am supposed to keep the like, too.

This is simple to answer. You have to keep everything that is seriously related to any income or expense! So advertisement, offers and the like can be gladly dumped as recycling paper. It is generally permissible to store all such receipts digitally on your hard disk drive. When doing so, do make sure that these documents can easily be opened. Best would be to use standard formats like .TIFF and .PDF. It is your responsibility to maintain the legibility. The key to professional accounting is solid and complete documentation, especially original receipts, inter-company invoices and proper inter-company agreements for all transactions. When hiring employees, you have to keep precise records on how much you have paid and with what (cash vs. things). In German such payroll journal is called “Lohnjournal”.
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Can I pay my employees in cash? You know, my business is so much cash driven that it would save a lot of efforts to always punctually hit the bank to be able to transfer the salaries on time.

Generally, it is up to you when and how you pay your employees. However, it is customary to pay the staff on one the last days before the month ends and that to their bank account. Bank payment has the advantage of having evidence of payment. If paying cash then make triple sure that you have exact receipts of the payments! “Exact” hints in this relation to the wording on the receipt. For tax law, it is sufficient when it reads "salary for John Doe" but not for civil law to have proof of payment.

The written receipt should show all important details:

  • Recipient’s full name,
  • reason for payment (e.g. “salary January 2013”),
  • date of payment,
    and
  • the recipient’s signature.
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Grand! That is already a great relief that I can pay employees in cash. What about the authorities? Do they accept cash payment?

Sorry, neither tax offices nor health insurances accept cash payments! If you insist in cash payment, you will have to go to one of their banks and pay directly into their account. Expect that you will be “fined”, um, “charged” for this extra work. And yes, this will is a deductible. However, get a bank account! It saves a whole lot of hustle!
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Do I have to use a German bank account or can it be my home bank?

The accounts of these authorities are widely open for any incoming monies. It is legally irrelevant if the account is in Germany or abroad. The only practical downs are: It takes longer for the money to reach the German account. The authorities must receive payment in Euro – even if that is not the currency of your account. Inside SEPA system, it is only a matter of a few days to make payment inside this system.
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Any language hints? I mean, can’t I just add as reference “income tax”.

The language of German authorities is German. Period. The bookkeeping assistants at the relevant authorities are not typically trained to deal in other languages. Besides, you also carry the responsibility that your transfer is understood. Be as precise as possible! Don’t just write “income tax John Doe” as paying the wage tax for your employee John Doe. Correct would be: “Lohnsteuer Februar John Doe”. If they need “ages” to book your payment to your account, this is your problem. Fines and default interest will typically be fined if you pay late.
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Appeals in Taxation Matters

Paying taxes is something everyone "hates" but paying too much taxes is something even more worse. This page will give you some hints on what to do when you believe the assessment is wrong.

 

My tax office seems to be a bit whacky! They gave me a totally wrong tax assessment. Can I appeal a tax assessment?

Yes. This must be done in writing and at least generally point out the reasons. Quickly contact me if this happened. If you want to take the first step yourself, write a sentence like: “Hiermit lege ich Einspruch ein gegen den Bescheid vom [date]. Die Begründung des Widerspruchs bleibt einem gesonderten Schreiben vorbehalten, das ein von mir beauftragter Rechts­an­walt / Stuerberater einreichen wird. (I hereby object the decision of [date]. The reasons for this objection will be put forward by an attorney / tax consultant I will hire.)”. It is usually wise to hire an attorney to fight for your rights and interests against an administrative office.
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You know this sound so nice about appealing a tax return. Since I'm not a German or European, I guess this will torpedeo my visa. Is this true?

No! Appealing your tax assessment will absolutely not touch your residential status because it is your right to believe that the fiscal administration erred. Whenever you exercise a right you are entitled to then you have no reason to be anxious. As Irina Zlotina, of www.interkulturell.eu, correctly describes during an interview of BAMIK's International Forum on Expat Tax 2012: "To appeal a tax assessment is no revolution!"
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How much time do I have to appeal for a correct assessment?

You have one month time to appeal the tax office’s decision (§355 AO) starting after receipt.
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Gee, I got sick during the appellation period. Can I get some kind of grace?

Yes, there is a slim chance to receive such grace. Technically it is called, “Wiedereinsetzung in den vorherigen Stand (restitution into the previous status)”. This is provided in §110 AO. You will be entitled to such reinstatement when you were without fault hindered from keeping the objecction period. N.B. Do not treat it lightly! Come up with some kind of convincing proof like a physician’s letter. Sorry, but “wishful thinking” will not help at all. This is best to be done by an expert!
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After recovering, how much time do I have to apply for grace?

You have one month time after the reason for your hindrance ceases to contest the authority’s decision. When claiming grace, you have to show and prove that you were unable to punctually contest the tax assessment (§110 II AO). If you have been prevented for more than one year, then also you will forfeit this right (§110 III AO)!
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Operational Deductions

Tax law in Germany strictly distinguishes between operational expenses, "Betriebsausgaben", and special expenses, "Sonderausgaben". Some of these special or personal expenses are deductible in full and some only partially. For simplification reasons, the distinctions of the special expenses will not be extensively discussed here. Your tax attorney or tax adviser will professionally deal with this. The difference between both kinds of deduction is that only income-related expenses can create a negative result for taxation. Sonderausgaben do not create negative income. A typical example will be if you are laid off. You have no income but expenses for job applications. These application costs can give you negative income. Supposing you are doing your taxes yourself, then just claim all special deductions in full and let the tax office do the subtracting. This is a lean but mean approach – but legal.

As I understand, my taxable income is the difference between income minus operational expenses. What are these?

Generally, expenses for traveling to work (single / monthly / yearly public transportation tickets, or car mileage [after deducting private mileage]), books, equipment, further education etc. can be deducted. It also depends on what your profession is and how you present it to the tax office. A sports teacher, for example, might have a problem deducting a computer but not an English teacher. Glasses for computer work (computer-glasses) are normally not deductible because glasses are typical private expenses (medical costs). But you could ask your boss to reimburse you for the glasses and the reimbursement will be tax-free if an eye test shows that you need the glasses to work effectively at the computer (BMF, Letter of February 3, 2000, IV C 2 – S 2144 – 10/00).
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Commuting by car daily to and from office. Are these costs deductible?

Generally, yes. However, the costs of private life are not deductible. You have two methods to deduct the private share of motorization costs. You may subtract 1% of the list price (Listenpreis) as a flat coverage of your private share in the care or keep a logbook and then deduct the real costs.
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How is this “list price” determined?

The list price is the domestic price of a car at the date of its first registration. You can deduct, following this method, 0.03% of the list price for each calendar month. This will only be problematic if you got yourself a used car. Your tax attorney or tax consultant will have this information.
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What constitutes a log-book?

Should you decide to keep a logbook, you must detail all trips with date, mileage and reason of travel. If you are traveling privately, just put in “private” and that suffices. The tax authority has no right to demand knowledge of your private life! There are forms available in stationary shops. You have to use a driver’s logbook to determine the actual costs for deduction.
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I read somewhere that there are many exceptions in tax law. What are the most important exceptions of deductible operating expenses?

They are written in §4 V EStG:

  1. Presents to non-employees which do not exceed € 35 per person during the whole year. N.B. You must keep a list on who gets what.

    2.) Entertainment expenses up to 70% of that what can be commonly considered as appropriate. The amount and operational motive are to be proved in writing in an obligatory format. Seeing it practically, normally you will only have write on the bill of the restaurant the persons who you dined and wined, and wardrobe fees/tip since better restaurants take care to meet these requirements set up by law. The lawful requirements are: name and address of restaurant, date of entertainment, kind and amount of service, billing amount, names of persons dined and wined. N.B.: The restaurant’s bill must be machine-made and machine-registered – otherwise the amount cannot be deducted at all.
  2. Additional expenses for food during domestic business trips. For each day that you are away, you can deduct for a period up to 14 hours but more than 8 hours € 6, for a period from 8 to less than 14 hours € 12 and for 14 up to 24 hours € 12 and for 24 hours € 24. No flat sums for accommodation expenses can be deducted, only the really accrued costs. Additional expenses for operationally motivated keeping of a double household, as long as the double household is kept for more than two years at the same place.
  3. Additional expenses for food during foreign business trips will de deducted according to a special table.
  4. You can deduct as traveling costs with your own motor vehicle to the positive difference between 0,03% of domestic list price at the time of first registration per distance kilometer between home and your business site; and only 0,02% for visiting home while having a double household. € 0,40 by use of motorbike per kilometer of the distance between home and business site/work. The distance between home and business site has to be the shortest usable distance.
  5. Expenses for a working room at home and the costs for its furnishing can be deducted up to € 1,250. This applies only if the operational or professional use of the working den is less than 50% of all operational or professional activities or if no other place can be provided as a working den. If you use this room to 100% for professional purposes then you can deduct these costs in full.
    N.B. The tax office is pretty picky about home offices!
  6. Operating expenses, which also affect private living, whenever they are commonly considered as inappropriate. It has practical relevance for very expensive things like pieces of art, oriental carpets.
  7. Fines, penalties in money from courts or authorities of Germany or organs of the EC are not deductible at all. Interest on evaded taxes according to §235 AO are not deductible at all.
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Let us give you some numbers as an example for the above.

1.) Let us say you wined and dined for € 100 (excluding VAT, tips etc.). This means you can deduct as net expenses € 70. The remaining € 30 on net expenses cannot be deducted at all and will be considered as a fictive income (Eigenverbrauch or own consumption). If you received a handwritten “Quittung über Essen und Getränke” just throw it away after having left the restaurant. You cannot use it for taxation purposes.


2.) While traveling to meet some customers you were so hungry you virtually ate twice as normal or in a number € 40. It does not matter if you even spent € 100, you can only deduct the statutory rate. Period.


3.) This is a typical example of how complicated German tax law can become. The choice is either between the legal fictive or actual calculation. Actual computation of your vehicle costs means putting all occurred costs into relation with the professional mileage. To determine the mileage you are to keep a driver’s logbook showing the mileage at begin, end, date reason, and destination of your trip’s course. If you are “lazy” or do not want to go into that trouble of documenting all expenses, you can use the 1% rule. Both alternatives are equally legal.


4.) If you work in a home office, you can deduct your “office”. This separate room in your apartment may not be between two other rooms and may not be furnished with a bed and/or closet. A couch (for “relaxing”), however, is okay. You must be doing your business at the minimum of 50% in that room. Translators, journalists, piano teachers typically can have an office at home – but only as a second room. These persons can deduct 100% of the room costs if they have no other place to do their work.
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I just bought some new expensive items, like a car for my business and also for private reasons. I still have my ol’ jalopy. Do I now understand correctly that I can deduct my new car totally?

Sorry, you are wrong for several reasons. Since a car is a long-term asset, you can only write it off during the usual years of usage. Long-term assets are such that will remain more than a year in the company. By having this car as professional property you will have the disadvantage of having a lot of own consumption meaning fictive income. It might be a good idea to keep this car as private (and not professional) property and only deduct the real professional use. Discuss this with your tax attorney or consultant!
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Inferior Assets and Depreciation – at a glance
 
Old Rules Until
December 31, 2007
New Rules Since
January 1, 2008
immediately deductible in full
Assets with sales price or production costs up to € 410 (net)1
Assets with sales price or production costs up to € 150 (net)
in the „pool“ – i.e. to be deducted over a period of 5 year
N/A
Assets with sales price or production costs from € 150 to €1,000 (net) 2
according to depreciation table, deduction over a certain period of years
Assets with sales price or production costs above € 410 (net)3
Assets with sales price or production costs above €1,000 (net)
1 = must be accounted separately as “geringwertiges Wirtschaftsgut = GWG”
2 = must be accounted separately as “pooled”
3 = to be accounted as: Anlagevermögen
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Corporate Tax

This page will introduce you to corporate taxation in Germany. In other words, you will find out who is subject to Körperschaftssteuer.

What constitutes a corporation in German tax law?

Corporation tax is a particular type of income tax for juristic persons, associations and funds/estates (§1 KStG. Just like income tax for private persons, the corporation tax belongs to the direct taxes and is a personal tax, which cannot be deducted from the income. Subjects for corporate tax are:

  • joint stock company (Aktiengesellschaft, AG),
  • limited liability corporation (Gesellschaft mit beschränkter Haftung, GmbH),
  • entrepreneurial corporation (Unternehmergesellschaft, UG, € 1 GmbH),
  • association (Verein, e.V.),
  • partnership companies (Partnerschaftsgesellschaft, PartG, "... & Partner"),
  • private partnership limited by shares (Kommanditgesellschaft),
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So my GbR will be also subject to corporate tax?

No, certainly not. Corporations are associations based on the membership of persons; they are organized on a membership basis and exist independent of the change of the individual members. The legal form "corporation" is a legal person, whose "body" exists of individual natural or other legal persons. A GbR is mixture exactly between a collaboration and a legal entity at all. This is also true for an oHG. When it comes to "levying taxes" on a GbR, the individual members will be liable for their own taxes though the profit will officially in an individual proceeding. In other words, a "joint P&L for the group" is to be submitted, while the individuals are taxed based upon their personal circumstances. The assessment arising thereupon is basis for the personal taxation of the individual members.
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What is the fiscal year in Germany? Is it also January to February?

Yup. The first year, i.e. the year of founding, however may be shorter.
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What are the general requirements for a corporation like GmbH, UG and the like for taxation purposes?

GmbHs, and UGs as trading companies are required to keep account books and issue financial closings at the end of the year. This is one of the managing director’s main statutory duties. Financial closings consist of P&L (profit & loss), and balance sheets. The balance sheets are to be issued pursuant the principles of orderly bookkeeping and show a real picture of the property, financial position of the company and the results of its operation and its cash flows (§§242, 243 HGB). In certain cases, an amendment with explanations will be needed (§ 264 HGB). All this must be submitted in German (§244 HGB). N.B. The bookkeeping itself, can be in any living language but not the financial closings!
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I heard something that my company will not only need to hire a tax consulting expert but also an auditor. Huh? Is Germany so broke that it cannot afford its own auditor?

The opinion, if Germany should or could afford any more auditors from inside the authority, is a question that is heavily discussed. The law provides that the financial closings and the amendments are to be tested by independent auditors (Wirtschaftsprüfer maybe also vereidigte Buchprüfer). This is true for mid-sized and large corporations (§316 HGB) – have a milliion or more turnover. These auditors have to be shown everything (books, cash box slips, lists of securities, etc.. They have to issue a non-partisan, written report on their test after discussing the results with you – their client. If you have no differing arguments, they will affirm the good records of your company. Just as all lawyers, tax consultants, their professional law demands them to maintain strict privacy.
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A creditor of mine threatened to tell a tale on me just because my company did not publish its annual closings. What the heck… I understand and respect that the tax authorities want to know everything, but my company’s closings are none of his business. What arguments do you have that I can shut him up?

Sorry, but we have to disappoint you! It is indeed a legal duty to disclose your annual closings. They are to be electronically submitted to the Federal Gazette (§325 HGB). Neglecting to obey this obligation can make the company as wells as the managing director liable for fines from 2,500 up to 25,000. No, this fine is not a crime but a misdemeanor and does not lead to expulsion.
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How do we determine the taxable income?

Taxable income is based on the result of the commercial accounting in accordance to the Commercial Code and corrected by Income Tax Act. What is deemed income and what deductible is determined by the Income Tax Act. In addition, there are some special regulations of the corporate income tax act that must also be considered. In particular, constructive dividends (verdeckte Gewinnausschüttungen = vGA) must be taken into consideration. The basis of taxation for corporation tax is - just as for income tax – the taxable income, which has been accrued within the fiscal year.
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How are the partners or shareholders of a corporation taxed for their dividends? I heard of a half-income method. Does this mean that the partner’s income will be halved and the fiscal authority pays half of the tax bill?

Smart alec! When the profit leaves the corporation to be distributed to a physical person, the half-income method applies. On the level of the shareholders, the prior corporate tax burden of distributed profits is taken into consideration by the fact that only half of the dividends are included to compute the taxable income for this person’s income tax return (so-called half-income method, Halbeinkünfteverfahren). Profits from the sale of shares are also subject to the half income method.
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Tax Return and Declaration Duties for Employers

Employers are not only to pay the salary but also have to take care of some tax and social security duties of their employees. Non-compliance can mean personal liability of the employer ...

For which taxes am I liable? What about social security premiums?

You are liable not only for your own taxes and personal social security payments but also for income tax advances, and social security premiums of your employees. It is your responsibility to withhold and forward the wage tax and social security premiums to the relevant authority. Employees are always taxed at the source, i.e. they receive their monthly salary usually only after deduction of wage tax, solidarity surcharge and any church tax, as well as social security contributions (see www.Deutsche-Sozialversicherung.de).
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Hiring my first employee here in Germany, what does German law consider as a salary? What is really subject to taxation?

The employer’s main concern is to understand what the employee’s salary is and all the formalities and duties tied to paying a salary. All income that an employee receives from his or her employment is considered as “salary” and is generally subject to taxation (§2 I EStDV, §19 EStG). It is irrelevant how this income is classified or named. This income can be in cash, kind, or paid services, etc. In other words, anything received as a reward or in consideration for the work on behalf of the employment is to be treated as a salary.
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Oops. I just noticed that I missed the tax office’s pay day and forgot to pay the payroll tax. Are there any penalties?

The statutory consequences of late payment are “late surcharge” of 1% p.a. on the late tax amount downwardly adjusted to next amount dividable by 50 (§240 AO). Taking a look at the practical side, when a payment is late: The tax office does not have to sue you but the assessing officer will consult a different department of the same office to collect. You will usually only receive one reminder before collections start.
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How do I determine how much the income tax and unemployment and welfare premiums will be?

§39b EStG requires that the employee submits to his employer his tax identification number at employment or at the begin of a calendar year. As long as the employee does not submit his tax details to the employer, the employer is obliged to treat the employee as if he belonged into tax class VI – the highest tax class (§39c EStG). The employer will have to adopt the wage tax deductions in the next possible month after having received the tax card.
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What formalities do I have to obey?

The employer has recording duties (§41 EStG). Each and every employee is to be accounted in a separate payroll which reflects the personal details of the employee, his income, including tax free payments, the withheld payroll tax and any assumed wage tax. Pursuant to §41a EStG, the employer has to electronically submit a wage tax return latest ten calendar days after a month of employment has passed. N.B. all employers are expected to submit their return exclusively electronically. Though the law does mention the case of an exception in cases of undue hardship, it has not yet been granted. The employee is entitled to receive his wage slip at the end of every month.
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How long are we liable for the wage tax and so on?

Your liability is limited to three years for contributions to social security carriers. In other words, these authorities can collect three years of withheld premiums. This will especially be interesting, when you outsourced a former employee into his own business and this activity turns out to be only “dummy entrepreneurship (Scheinselbständigkeit)”.
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How and when do I submit the wage tax return and social security premiums?

You are expected to declare the relevant declarations electronically! The wage tax of all employees is to be paid in one sum either monthly, quarterly or annually to the tax office competent for your business. Further details about the employees to which the paid wage tax refers are not demanded.
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Heck I just survived a wage tax audit and the tax office determined that I am to pay wage tax and social security premiums. Can't I collect anything from my employee?

Oh sure you can be reimbursed - though only partially. Forget the idea of any "damages", that will not work. You can be reimbursed from your personnel for the employee's share of social security premiums. You can collect the wage tax in full as this is not yours, the employer's debt, but that of the employee.
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