Withholding Taxes

In Germany, source taxes (Abzugsteuern) are withheld as part of profit taxation from the income of resident taxpayers (unlimited tax liability / resident alien) and also that of non-resident taxpayers (limited tax obligation / non-resident alien).

General

Withholding of source tax is intended to simplify the taxation process and reduce administration costs. Especially in cases of limited tax obligation, i.e. for persons and companies not resident in Germany, source taxes also serve to ensure the state's tax income, because the tax has already been applied to the (liquid) liable person's income who is now responsible for payment to the tax office.

Source tax deduction for resident taxpayers

For resident taxpayers, source tax deduction is applied to the following types of income:

  • Salary tax on income from salary (Lohnsteuer) at the level of that person's tax rate
  • Capital gains tax on capital gains (Abgeltungssteuer / Kapitalertragsteuer) at a level of 25 percent
  • Construction deduction tax (Bauabzugsteuer) at 15 percent

Salary tax and capital gains tax have a basic compensation effect, i.e. it is not necessary to submit an income tax return if there was no other income. However, it is possible to submit voluntarily, especially to apply tax-reducing expenses. There are also many special regulations which make it a requirement to submit a tax return in spite of source tax deduction.

Source tax deduction for non-resident taxpayers

For non-resident taxpayers, source taxes are withheld from the following income types:

  • Salary tax on income from salary (Lohnsteuer) at the level of that person's tax rate
  • Capital gains tax on capital gains (Abgeltungssteuer / Kapitalertragsteuer) at a level of 25 percent
  • Construction deduction tax (Bauabzugsteuer) at 15 percent
  • Source tax on remunerations to the supervisory board (Aufsichtsratsverguetungen) at 30 percent
  • Source tax on professional athletes' and actors fees at 15 percent

Except for the construction deduction tax, the withholding source tax has a compensation effect, i.e. it is not necessary for a tax-liable person with limited obligations to submit an income tax return. However, here also there is the possibility in some circumstances that a tax return may be submitted voluntarily so as to apply tax-reducing expenses.

Construction deduction tax (Bauabzugsteuer)

The construction deduction tax is a special case. It is only applied to ensure the tax revenue and to avoid high losses in tax revenue especially in the case of construction companies becoming insolvent and when foreign subsidiaries become involved.

Therefore it is possible to apply for an exemption certificate. As soon as the certificate is presented to the client, he is released from having to adhere to the construction deduction tax.

The certificate is not issued back-dated, i.e. the tax payment may only be omitted if there is a valid exemption certificate at the time of the payment.

For construction deduction taxes which have already been withheld, the servicing company may apply for a refund from the jurisdictional tax office. However, this process takes a very long time, which is why you should apply for an exemption certificate in any case, as soon as construction begins or when calculations are to be made after the certificate is issued.

An application for an exemption certificate by a foreign company can take between four to six weeks.