Some of the few people in Germany not currently obsessed with the World Cup are the members of the Bundesrat, who are preparing to adopt the latest tax reform acts before the summer break. Expatica's tax advisor Martin Brune outlines the changes which will effect the pocket of almost every tax payer.

Whereas most German football supporters these days are enjoying the World Cup, the members of the Federal Council of Germany (Bundesrat) are preparing to adopt the latest tax reform acts before the summer break. These tax reforms will influence the net-in-pocket of almost every taxpayer. Below is a description of the most important changes which are planned and which have already happened.

1. Accompanying budget law 2006 (Haushaltsbegleitgesetz 2006)
 
The draft of the tax reform act ( "Haushaltsbegleitgesetz 2006" ) was agreed on 22 February 2006 by the government. The tax reform act is to be adopted by the Federal Council of Germany (Bundesrat) on 16 June 2006. Most likely, the Bundesrat will agree to the tax changes mentioned below. 
 
Income tax: Supplemental allowances for work performed on Sundays, on public holidays and during night time will remain tax free. However, these allowances will become liable to social security contributions if the hourly remuneration exceeds EUR 25. This change shall become effective on 1 July 2006.

The new changes will affect practically everyone who pays German tax

Mini-Jobs: The lump sum contribution rate for so-called 400-Euro-Jobs (Mini-Jobs) shall rise from 25 percent to 30 percent, starting 01 July 2006. This lump sum contribution will then include 15 percent for pension insurance, 13 percent for health insurance and 2 percent lump sum tax.

Value Added Tax (Umsatzsteuer): The general rate for VAT shall rise from 16 percent to 19 percent, starting 1 January 2007. The reduced rate will remain at 7 percent. Due to the increase of VAT, the contribution to the unemployment insurance will be reduced from 6.5 percent to 4.5 percent.

Insurance tax (Versicherungssteuer): Following the VAT rate the insurance tax rate shall rise from 16 percent to 19 percent on 1 January 2007.
 
 
 
2.  Tax reform act 2007 (Steueränderungsgesetz 2007)
 
The draft of the tax reform act 2007 was agreed upon on 10 May 2006. The tax reform act is to be adopted by the Federal Council of Germany (Bundesrat) on 7 July 2006. 
 
All changes mentioned in the tax reform act 2007 will become effective on 1 January 2007.

Income tax:

The lump sum deduction for commuting from home to work (business expenses) shall only be considered for distance kilometres that exceed a distance of 20 kilometres.

Expenses for home offices are no longer deductible if the home office is not the centre of the overall professional activity.

The marginal tax rate shall increase from 42 percent to 45 percent for those taxpayers that exceed a taxable income of EUR 250,000 (single) / EUR 500,000 (married). Income from farming, trade and business and freelance business is excluded from this rule.

The savers free amount shall be lowered from EUR 1,370 / EUR 2,740 (single/married) to EUR 750 / EUR 1500.

Child payments and child allowance shall only be granted for children up to 25 years (until now: 27 years).



3.  "Relief of small businesses" act (Mittelstandsentlastungsgesetz)
 
The draft of the act for relief of small businesses tax reform act 2007 was agreed upon on 25 April 2006. The tax reform act is to be adopted by the Federal Council of Germany (Bundesrat) before the summer break.

Value Added Tax (Umsatzsteuer): The limit for invoices that need to include only basic requirements (so called small amount invoices) shall increase from 100 EUR to 150 EUR starting 1 January 2007.

General tax code (Abgabenordnung):  The legal obligation to keep records shall start with an annual revenue of EUR 500,000 (until now: EUR 350,000) from 1 January 2007 onwards. 
 
 
 
4. Other planned changes

You're worth up to EUR 1,800 a month, kiddo

Parents' allowance:
Starting 1 January 2007 all parents shall receive an allowance for every child that is born after 31 December 2006. The monthly allowance shall amount to 67 percent of the last net income up to a maximum amount of EUR 1,800/month.

The parents' allowance is paid out for a period of 12 months to the spouse that waives his/her work. The payment period is extended for 2 months if the father waives his work for these two months and takes care of the new-born child.

The minimum amount to be paid out to parents, irrespective of the previously received income, is EUR 300/month.
 
 
5.  Overview of changes that have already agreed upon and that came into effect on 1 January  2006 
 
Company car taxation: 
Since 1 January 2006, for self-employed taxpayers the 1 percent lump sum taxation for the benefit in kind of private use has been limited to company cars that are used for business purposes for more than 50 percent.

The proof of more than 50 percent business use is now up to the taxpayer. Therefore, this new rule might make it necessary for most of the self-employed to prepare a drivers logbook, at least for a certain period as a sample.

Note: The benefit in kind taxation for employees is not effected by this change.

Deduction of expenses for childcare:

1. Single parents and couples with two working spouses:
Expenses for childcare can be deducted from the taxable income as business expenses with 2/3. The maximum deduction per child and year is 2/3 from 4,000 EUR.

2. Couples with one working spouse:
Expenses for childcare can be deducted from the taxable income as special expenses with 2/3 if the child is between 3 and 6 years old. The maximum deduction per child and year is 2/3 from 4,000 EUR.

The following expenses are excluded from the childcare deduction:
- Teaching of special skills
- Sports and other leisure activity

To claim this deduction it is necessary to keep the invoice (i.e. the assessment of Kindergarten fees) and a proof of non-cash payment.

Depreciation:
The declining depreciation for assets is changed for the period 1 January 2006 to 31 December 2007: For assets purchased during this period an amount of linear depreciation times 3, maximum 30 percent, will be deductible (before: linear depreciation times 2, maximum 20 percent).

Declining depreciation for rented out buildings is abolished for buildings purchased after 31 December 2005

Renovation and refurbishment expenses:
For services that relate to self-used owned or rented houses and apartments 20 percent of the expenses can be deducted from the final income tax. The deductible amount is limited to EUR 3,000. Only the service expenses, not material costs, are supported. To claim this tax deduction it is necessary to keep the invoice and a proof of non-cash payment.

Severance payments:
The tax deductible free amounts from severance payments have been abolished.

Severance payments that are agreed upon before 1 January 2006 and suspensions before 1 January 2006 that are still pending might benefit from a transitional arrangement if the severance payment is paid out before 1 January 2008.

Tax advice:
Costs for tax advice are no longer deductible as special expenses. A deduction as business expenses is still possible. However, the cost of tax advice now need to be split up into costs relating to income (i.e. preparation of profit-and loss-calculation, preparation of “Anlage N”) that remain deductible and general cost (i.e. preparation of cover pages of the income tax return (“Mantelbogen”) or “Anlage Kind”) that are not deductible.

These changes will effect tax returns for the tax year 2006 and following years.

Home owners allowance:
The home owners allowance for homes that are used for private living is abolished. This will effect homes that are purchased after 1 January 2006 or homes with a building application later than 31 December 2005.

The home owners allowance for all homes that are purchased before this date will remain and will be paid out up to 8 years.

This article contains information of a general nature and should not be considered as legal advice.

Although the greatest care has been taken in drafting this article, it is possible that certain information may have become outdated or inaccurate since its publication. Martin Brune cannot be held liable for the consequences of actions or omissions based on the content of this article.
To read more about Martin Brune you can click on Ask our accountant  or Financial - Advisors under Expatica's business directory.

Send a question to Martin Brune at germany@expatica.com

14 June 2006

Copyright Expatica 2006

Subject: German tax law, taxation in Germany