The Tax System

1. Administration and Collection of Taxes

In the Federal Republic of Germany, taxes are levied by the Federal Government, the states, and the local authorities. The tax administration is predominantly the responsibility of the individual states with only local taxes being collected directly by the local authorities.

The assessment of taxes due is performed by the local Internal Revenue Service Offices on the basis of tax returns filed by the tax payer. On this basis, the Internal Revenue Service or the Local Authority issues a formal tax assessment which indicates the amount of tax due. In addition to the assessment of taxes due, the deduction of taxes at the source is an important part of the German tax system. Tax retentions are prescripted on wages and salaries and dividends, as well as on artistic royalties and interest.

2. Extent of Tax Liability

The extent of one´s tax liability in the Federal Republic is determined not by one´s citizenship, but rather by one´s place of residence. Foreign citizens who maintain their permanent domicile or residence in the Federal Republic are subject to unlim­ited tax liability, in that they are required to pay taxes on their total, worldwide earnings. In the case of businesses, the location of the head office or the location of the registration of the management office determines the tax liability. Tax liability may be limited by double taxation agreements with other countries.

For individuals with no permanent domicile or residence in Germany, as well as businesses with neither their head office nor the registration of their management offices in Germany, only the domestic income is subject to tax. Special regulations pertaining to many countries in accordance with double taxation agreements may apply.

3. Accounting Obligations

All tradesmen, as defined by the Commercial Register Code, are required to keep records of and report on all business transactions and assets and to prepare a balance sheet. An exemption exists for registered sole proprietors who have profits of under 50,000 euro and a turnover of under 500,000 euro in two consecutive financial years. In addition, the tax law requires that even small businesses which do not require a commercial organisation and, therefore, no registration in the Commercial Register, maintain records of the annual profits and draw up the balance sheet if their profits exceed 50,000 euro or if turnover exceeds 500,000 euro. Even if permanent establishments are not required to maintain account records, records of transactions, subject to sales tax, must be kept. All taxpayers in Germany, that do not have to draw up a balance, are required to calculate their tax due using the net income method, which is simpler than preparing a balance sheet.

Foreign business´ permanently established in Germany have the same duties as Germans.