Germany payroll and tax overview.

Germany is a central European country and the continent’s largest economy. Bordered to the west by Switzerland, France, Luxembourg, Belgium, and the Netherlands, to the north by Denmark, and to the east by Poland, the Czech Republic, and Austria, Germany has become a significant global economic power and a popular location for foreign investment. Rich in natural resources, Germany experienced a period of significant economic growth in the latter half of the 20th century: in 2019, Germany’s GDP reached an estimated $3.9 trillion with a growth rate of 0.6%. Modern Germany offers a highly developed and diverse business landscape: significant industries include healthcare, IT, electrical equipment manufacturing, aerospace, and automotive engineering, with the service sector contributing around 70% of GDP. With a large, well-educated population, high living standards, low unemployment, and a geographic location at the heart of Europe, Germany is an attractive place to set-up a business, offering organisations from around the world the resources, skills and innovation to succeed and grow. In 2019, over 22,000 enterprise organisations maintained a presence in Germany, taking advantage of road, rail, and air links to the rest of Europe and the world. Germany is a member of the UN, NATO, the G7, and the OECD, and was ranked 22 on the World Bank’s Ease of Doing Business Survey 2019.

Why Invest in Germany?

Germany is ranked 17 on the World Bank’s ‘Ease of Doing Business’ survey, and its growing economy offers plenty of opportunities for investment:

• With a 2019 GDP of €3.861 trillion, Germany’s economic strength is an encouraging factor for foreign investors. Germany’s economy is the fourth largest in the world (the largest in the EU), and the second-largest in terms of exports.
• EU Status: As a leading member of the European Union, and with the largest population, Germany is an influential financial force, with access to a vast regional marketplace. It also benefits from trade agreements with the rest of the world.
• Germany’s geographic location at the heart of Europe makes it one of the continent’s busiest trade hubs. With excellent energy, communication and transport infrastructure, Germany represents a gateway to the world for many investors.
• Germany’s workforce is amongst the most skilled and innovative in the world, with over 81% of the population holding a university or vocational qualification. Research and development in Germany receives billions of euros in federal funding every year.
• As the largest population in Europe, Germany is a huge market for consumer goods, including high-technology products and machine tools. Renewable energy is also a popular foreign investment target.

Foreign Direct Investment in Germany

The German government has been a driver, innovator, and beneficiary of an ever more globalised economy. Germany is amongst the three largest exporters in the world, with exports accounting for over one third of GDP. Foreign and local investors are treated equally and are both eligible for investment incentives. Any entrepreneur who wishes to start a business in Germany may do so, there are generally no restrictions limiting the establishment of new companies.

Registrations and Establishing an Entity in Germany

In the establishment phase of a company and prior to assumption of commercial activities, a company only has to be registered in the public commercial register (Handelsregister) and the local trade office (Gewerbe-/Ordnungsamt).

For companies that are looking to process payroll in Germany, the company registrations to the tax and social security authorities include:

• Employer Company Number with Employment Agency (Betriebsnummernstelle)
• If no German company exists, a copy of the Foreign Company Registration is necessary
• Applying for Statutory Accident Insurance (Berufsgenossenschaft)
• Employer Tax Number for withholding tax purposes

The timeline for processing depends on the registering authority. According to experience, this can take up to six weeks.

The key legislative authority in Germany varies depending on where the employer is located and the purpose of the business:

• Tax authorities
• Health insurance company
• Statutory accident insurance

Business Banking in Germany

It is not mandatory to pay employees from an in-country bank account. Salary and third-party payments can be made on behalf of the client. Bank transfers are used to pay both employees and the local authorities in Germany. Any transfers that are made between banks in Germany are usually complete within a day. International bank transfers can take at least three working days.

What Are the Working Days and Working Hours in Germany?

The working week in Germany is Monday to Friday and is generally a 40-hour week. However, depending on some union agreements, some companies work a 37.5 - 38-hour week.

Basic Facts about Germany

Germany is situated in central Europe, and represents a historic gateway between the East and the West. Bordered by Poland and the Czech Republic to the east, Austria and Switzerland to the south, and France, Luxembourg, Belgium and the Netherlands to the west, Germany connects the continent in a variety of ways, including trade, transport and culture. Since the reunification of East and West Germany in 1990, and the founding of the European Union in 1993, the country has become one of the world’s leading financial powers, with a reputation for technological innovation and manufacturing. Bordered by the North Sea, Germany has a temperate climate and a diverse geography ranging from rocky, southern Alpine regions to more verdant, forested northern regions.

Full Name: Federal Republic of Germany

Population: 83.05 million (Eurostat, 2019)

Capital: Berlin

Major Language: German

Major Religion: Christianity

Monetary Unit: 1 euro = 100 cents

Main Exports: Motor vehicles, electrical machinery, metals and pharmaceuticals

Internet Domain: .de

International Dialling Code: +49

The tax year runs from 1 January to 31 December in Germany.

Income Tax in Germany

Germany has a progressive tax rate currently ranging from 14% to 42%. If a taxpayer receives income above the ceiling of € 274,613 (€ 549,226 for married couples), a special tax rate of 45%, the so called “rich tax” applies. In addition, Germany levies a solidarity surcharge amounting to 5.5% of the income tax liability and church tax of 8% or 9% if the taxpayer registers with a German church.

Effective as of January 2021, the German government announced that the solidarity surcharge will be largely discontinued. The solidarity surcharge tax rate of 5.5% is levied on the actual income tax amount, however since January 2021, it is only payable if income tax is above the tax exemption limit.

Withholding tax statement and payments are due to be paid to the authorities by the 10th of the following month.

The typical penalty awarded for late submission is a maximum 10% of the assessed tax. Interest due for late payment is 6% per annum. Tax Free Allowances in Germany

Tax Free Allowances in Germany

In Germany there are various tax-free allowances (other than the basic tax-free amount) as below:

Wage Tax Allowance

Individual wage-tax allowances for the calendar year 2021, based on individual losses can be applied for at the tax office responsible for the employee’s place of residence. With the allowance, the monthly net pay will increase, as less wage tax will be withheld.

Child Tax Free Allowance

From January 2021, the amount will increase from 5.172 euros to 8,388 euros. If it works out as a better deal for a family, parents can receive this allowance instead of child benefit (Kindergeld). The tax office automatically checks which allowance pays more for parents when income tax is paid.

Child Benefit (Kindergeld)

In order to help families with the additional costs of having children, the German state provides parents and guardians with a monthly Kindergeld for children under the age of 18. The benefit may continue up to the age of 25 provided the child is pursuing higher education.

Child benefit is paid monthly. Effective as of 1 January 2021, the child benefit payment is:

For the first two children - €219 each

For the third child - €225

For every further child - €250

Child Supplement (Kinderzuschlag) in Germany

The child supplement will benefit parents who can cover their own needs, in principle by earned income, but do not have sufficient financial resources to meet the needs of their children. The amount of child supplement depends on parents’ income and assets, with a maximum of €185 per child per month in addition to the regular child benefit (Kindergeld).

Child Education in Germany or Abroad

Parents can deduct within the German tax return a deduction for children in education in Germany or abroad (within limitations) who are older than 18 years and living outside the parent’s household amounting to €924 per annum. For children living abroad the amount may be reduced by the standard of living of the appropriate country.

Social Security in Germany

Any person working in Germany is required to contribute a percentage of their wage to social security up to a maximum income threshold. Principally, the social security contributions are divided 50-50 between the employer and employee. Only the costs for company accident insurance are paid in full by the employer.

Reporting in Germany

Monthly

• Social Security Statements (Beitragsnachweise)
• Withholding Tax Statement (Lohnsteueranmeldung)

Yearly

• Certificate of wages for each employee (Lohnsteuerbescheinigung) latest by February payroll of the following year
• Social Security Statement for each employee (Sozialversicherungsmeldung /DEÜV) – with the January payroll of the following year but latest by 15th February of the following year
• Statutory Accident Insurance (Berufsgenossenschaftsmeldung) – employer – February following year
• Statement for persons with disabilities – employer statement – 31st March following year

New Employees in Germany

Each employee has to arrange health insurance themselves; a Private Health Insurance or a Statutory Health Insurance is possible, depending on the annual base salary.

After the set-up of the Government Pension Scheme, Unemployment and Statutory Accident Insurance will be implemented into the payroll.

The start date of an employee has to be registered with the first payroll run and at the latest within six weeks after beginning employment. There are, however, special registrations; employers working in branches such as restaurants, construction businesses etc., must register new starters on the first day of employment.

To set up a new starter a “New Employee Particular Form” must be completed by the employer to register the new employee with the authorities (social security).

For expats, the following must be obtained:

• Work Permit (if applicable)
• Residence Permit
• Certificate of Coverage

Leavers in Germany

Legislative specifications regarding the employee’s final payment in Germany suggests that employees must receive final payments within the normal payroll run. Any additional payments i.e. bonus or special payments need to be paid in line with the work contract.

The leaving employee in Germany is automatically de-registered through the payroll system. The employee himself/herself has to send notification to the health insurance company four weeks before ending and de-register with the registry office.

The employer must provide employees with payslips and it is legally acceptable in Germany to provide employees with online payslips.

By law, payroll information/reports should be kept for six years. Bookkeeping information should be kept for 10 years.