Tax liability in Germany is determined by the concept of residence. An individual is a German resident for tax purposes if he or she has either a permanent home or a habitual abode in Germany. An individual has his or her permanent home in Germany, if he or she maintains a dwelling in Germany under circumstances indicating that he or she will maintain and use such dwelling. An individual’s habitual abode is at the place where he or she stays under circumstances which allow the assumption that the stay is not only temporary. Generally, a person is deemed to have a habitual abode in Germany if he or she spends more than six months in Germany without any significant interruptions. The worldwide income and assets of individuals whose tax residence is located in Germany are subject to income tax. German tax law considers capital gain to be a source of income. Thus, the same applies to capital gains.

Income tax covers income from seven sources:

• income from agriculture and forestry;
• income from trade or business;
• income from self-employment;
• income from employment (salaries and wages);
• income from capital and capital gains;
• income from letting property, especially real property and groups of assets; and
• other income (e.g., income from a pension or leases of movable assets).

The tax rate ranges from 14 to 45 percent progressively with the exception of income from capital and capital gains (see question 3). A solidarity surcharge of 5.5 percent of the tax due was also levied until January 2021.This surcharge was intended to finance the German reunification of 1990. Effective January 1^st 2021, the exemption limits were raised to such an extent that only high-income earners now pay the solidarity surcharge as well as investors who have exhausted their savings allowance. Corporate tax subjects are not benefitting from this tax relief and the solidarity surcharge still applies to capital gains tax.

Unless in case of a withholding tax (see question 3), taxpayers must make advance payments on the 10^th of March, June, September and December.

Individuals with certain business activities may also be considered entrepreneurs within the meaning of the VAT Act. If so, they generally have to submit advance VAT returns on a usually quarterly basis (see also question 11).

The tax year is the calendar year. Tax returns must be submitted by 31^st of July of the following year. However, if the taxpayer is represented by a tax advisor, the deadline is generally prolonged until February 28^th of the year after that. For tax returns for 2022 a deadline extension of 2 months or 3 months, if the taxpayer is represented by a tax advisor, applies. These extensions still result from the corona pandemic, but have been shortened compared to the two tax years before. Therefore, tax returns for the tax year 2022 have to be submitted by 2^nd of October 2023. The deadline for advised tax payers is 31^st of July 2024. The interest run will be adjusted accordingly.

Income from employment and capital is subject to a withholding tax. Whereas income from employment is taxed at the regular progressive rate (see question 2), income from capital is taxed at a flat rate of 25 percent plus solidarity surcharge. Typically, salaries and wages as well as the distribution of corporate gains (dividends) trigger withholding tax.

Germany has signed so-called double taxation treaties with 96 countries as bilateral measures to avoid double taxation for income tax purposes. In addition, double taxation treaties exist with Switzerland, Greece, Sweden, the USA, Denmark and France concerning inheritance and/or gift taxes. Subordinately Germany has taken unilateral measures to credit foreign taxes.

In 1995, the Federal Constitutional Court declared the wealth tax unconstitutional and repealed it at the beginning of 1997. Since then, there have already been numerous impulses in the political landscape for either reintroducing the tax or introducing a one-time wealth fee. This demand could even be found in some of the parties’ election programs for the 2021 federal election. During the corona pandemic and due to the current geopolitical crises, the re-introduction of wealth tax has once again become more prominent in society and politics. Based on the current composition of the federal government, the introduction of a wealth tax is considered rather unlikely.

Transfers by death or gifts are subject to the German inheritance and gift tax (IGT). The tax rates range from 7 to 50 percent, depending on the relationship between the transferor and the transferee, and the value of the share of the estate received. Spouses and descendants pay IGT at a rate of 7 to 30 percent. Transfers between most other relatives are taxed at a rate of 15 to 43 percent. Between unrelated persons, the applicable tax rate is 30 or 50 percent (for more than € 6 million).

The following tax-free allowances apply if either the transferor or the transferee is a resident in Germany:

• spouses receive a personal allowance of € 500,000 and a maintenance allowance of up to a maximum of € 256,000; and
• descendants receive a personal allowance of € 400,000 and an age-dependent maintenance allowance of up to € 52,000.

IGT applies if either the transferor or the transferee is a resident in Germany. It must be declared and paid upon request by the fiscal authorities. However, the transferee is required to inform the authorities about the transfer within three months. Each transferee is liable for IGT on the value of the assets transferred, regardless of his or her personal wealth. In case of a gift, the transferor must inform the authorities and is liable for IGT as well, even though the transferee is to be charged primarily.

There is no inheritance and gift tax (IGT) on a lifetime transfer of the family home to a spouse and on an equalisation of the gains accrued during the course of a marriage, where the statutory matrimonial property regime of the community of surplus (as provided for by the German matrimonial regime or a similar foreign regime) applies.

Additionally, IGT relief applies when transferring business assets. The transferee can generally choose between the basic relief and the optional relief model. According to the basic relief, up to 85 percent of the business assets do not form part of the tax base. If the taxpayer chooses the optional relief, up to 100 percent of the business assets are not considered part of the tax base. The amount of relief depends on the value of the transferred business assets. The relief is, however, conditional upon the continuing operation of the business for five or seven years (depending on whether basic or optional relief apply) and the preservation of jobs. Regarding the preservation of jobs, depending on the relief model chosen and the number of employees, after the retention period, the total payroll has to amount to at least 250 to 700 percent of the payroll before the transfer. Passive non-operating assets are exempt from the IGT relief. This includes for instance leased real estate, minority shareholdings of 25 percent or less, securities, certain movables like artworks, antique cars and yachts, and liquid funds if they exceed, after deduction of debt, 15 percent of the total value of the business assets. These passive non-operating assets are fully taxable at the regular rate, so far as their value exceeds 10 percent of the total business assets.

Donations to charitable foundations or other charitable organisations can be deducted from income respectively corporate and trade tax if certain requirements are met.

Deductibility for donations is limited to 20% of the total annual income or 4 per thousand of the total turnovers and for wages and salaries spent in the business year.

Donations to political parties are subject to special maximum amounts.

A real estate transfer tax with differing regional rates ranging from 3.5% to 6.5% applies to:

• the acquisition of residential real property; and
• the acquisition of a substantial shareholding (at least 90%) in a company holding residential real property.

Since the base for real estate transfer tax is the purchase price, no official valuation is necessary. Subject to the tax claim is, whoever is participating in the transfer.

The real estate transfer tax was reformed with effect from 1^st July 2021. Significant changes include the lowering of the tax-relevant participation threshold for the transfer of shares to 90% (previously 95%) and the extension of the minimum holding period from 5 to 10 years, which applies to the transfer of shares as well as property.

In addition, an annual property tax may be due on the value of real property (based on an assessed uniform value that is often less than the fair value of the property) at the discretion of the relevant local authority. The assessed uniform value used to be quite low, but property tax is becoming more and more significant because of the continuously rising rates of assessment. Furthermore, the German Federal Constitutional Court held that property values that were last assessed in 1964 or 1935 are inconsistent with the constitutional principle of equality of taxation. In June 2019, the German parliament passed an amendment to change how the assessment of property values is conducted by local authorities from 1^st of January 2022 onwards. Due to the new tax law, more than 30 million properties must be reassessed. Therefore, property owners recently had to submit tax returns. For this, each federal state requested different information from taxpayers, which further complicated the matter. The process is ongoing, but this can lead to very different tax burdens, including significant increases in the real estate tax burden in different parts of the country.

Ownership of the residential property establishes tax liability, regardless of the owner’s residence.

Currently, there are no specific tax rules addressing digital assets, so digital assets are taxed according to the existing general tax law rules. In May 2022, the German Federal Ministry of Finance published a decree regarding the treatment of virtual currencies and tokens under income tax law. During the second half of 2023 some federal states (Bundesländer) issued information requests to persons other than the participants like crypto exchanges to gather yet unknown facts about tax payers trading with crypto currencies and other digital assets.

VAT applies to the net turnover of the entrepreneur at a tax rate of 19% or 7% (for certain tax-privileged turnover, e.g. food).

Any business operating through a permanent establishment in Germany, with the exception of independent personal services, is liable to trade tax. The tax rate is determined by the local authorities of the relevant municipality. However, trade tax may generally be credited against the individual’s personal income tax.

Church tax is also levied on church members as a supplement to income tax. The tax rate varies between 8% and 9% depending on the federal state.

A special advantageous tax regime to attract e.g. skilled labour to Germany currently does not exist.

Upon establishing residency in Germany, the taxpayer is generally considered fully tax liable. Therefore, the length of his stay is irrelevant for tax purposes. However under some circumstances, taxpayers fall under the regime of limited tax liability. This may occur, when the individual has neither a permanent home, nor a habitual abode in Germany, but gains income from a source (see question 2) from within Germany.

In order to avoid inheritance and gift tax (IGT), any gifts should be made before any of the individuals involved establish residency in Germany.

Due to the fact that an individual becomes subject to German income tax with his or her worldwide income, any income (in particular capital gains) should be realised before entering Germany in cases where the individual finds himself or herself in a more advantageous tax situation before his relocation.

A (foreign) corporation may be subject to German corporate tax if the company has a fixed place of business or place of management in Germany. Working for a foreign business whilst residing in Germany may result in adverse tax consequences for the company. If the individual moving to Germany holds a position of a director of a (holding) company, there is a risk that the company itself acquires German residency for corporate income tax purposes due to establishment of a place of management in Germany.

Settlors and beneficiaries of trusts or foundations may be subject to adverse tax rules in Germany. Additional tax filing obligations may be applicable. Furthermore, the income of the trust or foundation might be attributed to German beneficiaries or remaindermen, regardless of whether or not actual distributions are made. Individuals who move to Germany should review existing trust or foundation agreements prior to moving.

German law grants testimonial freedom. The testator is therefore free to choose his heirs and how his estate shall be distributed. He or she is, however, not obliged to make a Will. In that case, the legal rule of succession is as follows:

(each of the following categories precludes the subsequent heirs from receiving a share of the deceased’s estate):

• children of the deceased and, subordinated, their descendants;
• parents of the deceased and, subordinated, their descendants;
• grandparents of the deceased and, subordinated, their descendants; and
• great-grandparents of the deceased and, subordinated, their descendants.

Relatives within a particular category inherit in equal shares (succession per stirpes).

There is a forced heirship regime. Descendants, spouses, civil partners and parents are entitled to make a monetary claim for a compulsory share of the deceased’s estate if they are excluded from the testator’s will or if the share granted to them is less than their compulsory share. A relative’s compulsory share generally amounts to 50% of the value of that relative’s share on intestacy.

Three matrimonial regimes are possible:

• Under the community of accrued gains, the spouses’ property does not become common property. However, accrued gains, that spouses acquire during the marriage are equalised if the marriage ends. The community of accrued gains regime applies, when there is no marriage contract in effect. This regime affects succession in that the surviving spouses share is increased by a quarter of the estate.
• The spouses can by contract agree on a separation of assets. The surviving partner’s statutory share of the estate depends on the number of children the deceased had. In case of one child, the surviving partner inherits ½, in case of two children, ⅓, and more than two children he or she always inherits ¼. If there are no children, the surviving spouse will receive the legal share.
• In case of a joint property regime, which can also be agreed upon by contract, the deceased’s spouses share in the common property remains part of the estate. Thus, general provisions apply.

As of 17^th August 2015, the conflict of laws rules of the EU Succession Regulation apply. They are valid in all EU member states except Denmark and Ireland. According to the Regulation, the deceased’s habitual residence at the time of his or her death is relevant for the question of which succession law is applicable, instead of his or her nationality.

According to the EU Succession Regulation, if it is obvious that the deceased had a closer relationship to another state, that state’s law will apply under certain circumstances. There is, however, the opportunity to opt for the succession law of an individual’s nationality by a Will, a joint Will or by an agreement as to succession. In addition, provisions on legal jurisdiction, recognition and enforcement of decisions and authentic instruments and on the European certificate of succession are part of the Regulation. As a general rule, the legal jurisdiction shall be determined by the habitual residence at the time the individual dies. The EU Succession Regulation is not applicable to trusts, hence the respective national conflict of law regime applies.

Even if the EU Succession Regulation does not apply directly vis-à-vis third states, from the German point of view its provisions with regard to the determination of the applicable law apply accordingly.

There are two valid forms of wills: the holographic and the public will. The holographic will has to be handwritten, dated and signed by the testator. The public will has to be signed before and certified by a notary public. Neither form of will requires a witness. Should there be no Will or should a Will not meet the formal requirements, the statutory rule of inheritance applies (see question 13). An individual should make a Will, if he or she in any way does not wish to have the statutory rules of inheritance to be applied to his or her estate.

If an individual has no residency in Germany but owns residential property, he or she generally does not fall under German inheritance law (see question 15 and 16), so the formal requirements for making a Will can differ.

The deceased’s estate is generally administered by the heirs. A testator can appoint an executor, who shall be responsible for executing the testator’s testamentary dispositions. In case of such appointment, the executor has the power of disposal and the duty to effect a partitioning of the estate among the heirs.

Trusts are generally not recognised in Germany as Germany did not ratify the HCCH Convention on the Law Applicable to Trusts and on their Recognition 1985. Structures commonly used in Germany to hold assets are corporations, partnerships and foundations.

Corporations provide limited liability, as shareholders are not liable for the corporation’s debts. They can be found for any purpose permitted by law and can therefore be used for business and charitable (if the corporation meets certain criteria – see question 29) purposes.

There are various ways in which a partnership can be set up. The governance of partnerships is very flexible and is often used as a vehicle for a family’s assets.

Foundations (family foundations or charitable foundations) are legal entities, which are not based on an association of people, created to fulfil a specified purpose by means of assets permanently dedicated to that purpose. They have no shareholders, but endowment property. The foundation is managed by its board, who is for the first time appointed by the founder.

A corporation must be registered with the German trade register, which generally provides a list of the shareholders with personal information. The register also contains information about the share capital and the managing directors. Corporations are required to report their ultimate beneficial owners to the transparency register.

Most kinds of partnerships need to be registered with the trade register as well. Further, in certain scenarios partners must also be listed as ultimate beneficial owners in the transparency register.

Besides type and scope of the relevant economic interest the transparency register must show the name, date of birth, nationality and place of residence of the ultimate beneficial owner. Previously, the transparency register only contained entries if there were no entries available in other registers, such as the trade register. Now, all companies must positively report their beneficial owners to the transparency register regardless of whether the company is already subject to reporting obligations under other public registers. Since the implementation of the 5th EU Money Laundering Directive there is an extended public access to the Transparency Register without the need for a legitimate interest. However, inspection is limited to certain data while public authorities and, in some cases, credit institutions and others have a full right of inspection.

A private foundation can be voluntarily listed in the index of German Foundations and is listed in the register of the associated federal state (so-called ‘Stiftungsverzeichnis’). According to the reform of the German law of foundations which came into force on 1^st of July 2023, a national register of foundations visible to the public will be installed as of 2026 (so-called ‘Stiftungsregister’). The national register of foundations will also make it mandatory for foundations to register by the end of 2026. Registration with the transparency register along with their beneficial owners is compulsory, if the foundation’s registered office is in Germany.

A corporation is subject to German corporate tax, which amounts to 15% plus solidarity surcharge. In addition, a trade tax is levied. A foreign corporation with income from German sources might be subject to German corporate tax. If a foreign corporation has a branch in Germany that constitutes a permanent establishment, the corporation will be subject to German corporate tax and trade tax on all income effectively connected to this permanent establishment. Distributions to shareholders are subject to income tax.

Partnerships are fiscally transparent in Germany for income tax purposes. The partners are subject to income tax at their individual tax rates plus the solidarity surcharge, whereby the new regulation of the solidarity surcharge with an increase in the exemption limits also leads to partial or even complete relief here (see question 2). If the partnership is engaged in trade or business, the partnership itself is subject to trade tax. Trade tax levied from the partnership is (to a large extent) credited against the income tax of the partners if they are individuals. As a partnership you can also opt for an (opaque) corporate taxation since 2021.

Charitable foundations are tax privileged. The formation of a charitable foundation neither triggers any inheritance or gift tax, nor real estate transfer tax if real property is transferred gratuitously to the foundation. A charitable foundation is released from almost every current form of taxation, especially corporate tax and trade tax. In contrast, a family foundation is not tax-privileged. Taxation of a family foundation generally complies with the taxation of corporations, however, a family foundation can receive income not only from trade or business but any type of income. Distributions to beneficiaries are subject to income tax.

Trusts are generally not recognised in Germany (see question 19). Income received by a foreign trust may be attributed to the settlor or the beneficiaries if they are German residents.

Even though trusts are not recognized, they can, however, trigger inheritance and gift tax in several ways. The establishment of a trust by residents or of a trust comprising assets located in Germany is considered to be a transfer of assets that is taxable in accordance with the Inheritance and Gift Tax Act. Distributions to beneficiaries during the trust period or on the trust’s dissolution may trigger income tax, if the beneficiary is a German resident or if German situs assets are distributed. Corporate tax can be triggered if income is received by a foreign trust from German sources. The worldwide income of a foreign trust may be subject to corporate tax if the trust’s management is in Germany and if certain other conditions are met; for example, if the effective management of a trust is vested with a trustee resident in Germany. Undistributed income received by a foreign trust can be attributed to the settlor or the beneficiaries if they are German residents. In this case, it can be subject to the settlor’s or the beneficiary’s personal income tax.

Recent decisions by the German Federal Fiscal Court on matters of inheritance and gift tax (IGT) with regard to foreign trusts resolved some previous ambiguities about the gift tax treatment of trusts in Germany. The Court has clarified and confirmed criteria under which a trust qualifies as opaque or transparent for inheritance and gift tax purpose. The crucial factor is how much power over the transferred assets still lies with the settlor. Generally speaking, a trust is transparent if the settlor can access its funds or assets like his or her bank account. Transparent trusts are effectively considered non-existent by German Tax Law. Therefore, the trust’s assets are attributed to either the settlor or the beneficiaries (depending on the specific circumstances). Consequently, upon their decease, IGT is levied on the trust’s assets. Opaque trusts, on the other hand, are treated similar to foreign foundations.

In certain cases, distributions by a trust to its domestic beneficiaries may even be subject to double taxation with gift and income tax.

Where assets governed by foreign property law have been transferred to an irrevocable trust effectively formed under foreign trust law, the trust can shelter these assets from the settlor’s or beneficiary’s creditors.

Since private foundations are recognised, they generally are an appropriate means to shelter assets from creditors.

Minors can hold assets directly. In order to legally obtain an asset by contract from a parent or grandparent, a family court must typically appoint a legal guardian. Thereafter, it is generally the parents’ duty to administer the asset.

Testators typically provide for executorship (see question 18) with regard to assets that are inherited by minors. For lifetime gifts, family companies can be used to control the minors’ rights with regard to the assets, e.g. through golden shares for the donor.

When a person loses mental capacity, generally a guardian has to be appointed to represent that person in all legal matters, under supervision by a court. This can usually be avoided by providing a valid power of attorney which empowers a person to full legal representation.

There are three main forms of charitable organisations:

• Registered associations;
• Charitable foundations; and
• Charitable limited liability companies (“gGmbH”).

Charitable organisations in Germany are fully tax privileged. Their recognition requires that the organisation’s activities are dedicated to the altruistic advancement of the general public in material, spiritual or moral aspects. There purposes must be pursued altruistically, exclusively and directly.

New information sharing systems are continuously being developed and implemented, especially in the financial area. These information sharing systems are usually based on bilateral or multilateral treaties. Bilateral legal bases arise primarily from double taxation treaties and Tax Information Exchange Agreements. Another well-known example is the FATCA-Agreement, which is based on the Foreign Account Tax Compliance Act, an US-American tax law. Multilateral legal bases also form a pillar in the complex information sharing systems, for example the EU Mutual Assistance Directive with its latest implementation of Council Directive (EU) 2018/822 (“DAC 6”) in Germany in 2020.

The German Act to Modernize the Law on Partnerships (MoPeG) will fundamentally reform the legal treatment of partnerships as of 2024. This civil law reform will also have an impact on real estate transfer tax law. Without specific amendments of the real estate transfer tax law, MoPeG will automatically lead to the loss of (existing and future) tax benefits of partnerships. The German Federal Ministry has recognized the need for change and published a draft to reform the Real Estate Transfer Tax Act. There are different solutions and ongoing political discussions about this matter.

In October 2023, the German parliament passed a reform of the Lobby Register Act. The amendments to the law that have already been adopted will primarily result in further registration obligations.