Germany's tax system is strict and fair.

The tax system of the Federal Republic of Germany is one of the most complex tax systems in the world. Every resident who is registered in Germany from birth or from abroad has a tax code to enjoy benefits and fulfill their obligations.

Have tax code from birth

Newborns receive child benefits through their individual tax identification numbers (MST). Most businesses, even sole proprietorships, often go to tax consulting offices to use tax reporting services and rarely do their own tax reports due to the overly complicated nature of the statements. Individuals who file their own taxes through apps also need time to learn how to use and input data for each app.

%8B.jpg — Public works in the capital Berlin, Germany are all preserved and developed with the people's tax money. Photo: NAM VINH

Germany has many different types of taxes such as income tax, commercial tax or sales tax. Taxes are the most important source of income for the German state, from which the state finances expenditures for the common good - such as social security, education, health or transport infrastructure. The German tax system is based on efficiency, transparency and fairness. Value added tax always accounts for the highest tax revenue in Germany (in 2020, this figure was 219 billion EUR). Ordinary goods and services are 19%, there are items subject to a tax rate of 7% such as books, agricultural products, food, which is quite low compared to many other EU countries such as Spain 21%, Poland, Portugal 23%, Italy 22%, France 20%...

Income tax is levied on almost everyone from €9,168 per year. Taxation is based on ability to pay through a linear progressive tax schedule, meaning that the higher the income, the higher the tax rate. Salaried employees pay tax depending on their family status (single/married, with/without children, parental support, etc.). Employers deduct payroll tax and social security contributions from gross wages and pay them to the tax authorities before paying the net salary to the employee. Payroll tax, also known as income tax, is usually estimated and collected in advance. At the end of the year, taxpayers submit a tax return to the tax authorities and if they overpay, they are refunded.

From 2024, companies with an annual turnover of EUR 800,000 or a profit of EUR 80,000/year or more will need to file a profit and loss report. The basic taxes that businesses need to pay are turnover tax (19%), payroll tax for employees (employers pay 50% - employees pay 50%), corporate tax (3.5% of turnover), and corporate income tax.

Tax payment limit

In Germany, the richest 10% own more than half of the total wealth of the population. However, there are loopholes in the tax system that the rich can exploit better. Property and inheritance are not taxed as heavily as businesses or wages. The wealth tax in Germany was suspended in 1996. Inheritance is taxed but at a heavily subsidized rate and there are ways to avoid inheritance tax.

Income tax, insurance and other additional costs are very high in Germany, with a normal income earner spending around 30%-35% of their total income on social security and mutual aid. But only up to a certain limit, called the contribution assessment limit. Anyone who earns more than a certain amount will not have to pay any additional social security contributions for anything above that amount. For example, for pension insurance, the limit in eastern Germany is 7,100 EUR per month and in the west it is 7,300 EUR. There are similar limits for nursing care, health and unemployment insurance.

But this also means that the more you earn, the lower your social security contributions. That is why millionaires in Germany do not pay more tax than doctors' families. The typical super-rich person in Germany does not earn their income from work, but from business profits, capital gains and income from real estate. The average tax rate for millionaires is 24% - much lower than that of middle-income earners. This is due to the significantly lower tax rate on capital gains compared to income and the ability to dispose of rental income or profit sharing through subsidiaries.

Every individual and business must keep invoices and accounting books for 10 years. The tax authority can inspect at any time, even if the business has stopped operating. Every business must have a cash register using licensed accounting software. All invoices when ordered on the computer are sent and saved on the tax authority's server and cannot be deleted or edited. Businesses can also keep their own handwritten books, but must be specific and detailed for each day.

DANG MINH LY, from Germany

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