As the end of the tax year fast approaches, Thomas Kausch of PricewaterhouseCoopers explains the steps to take.

Annual income tax return and assessment

A further registration with the tax office is not required other than the registration at the local registration office. After the end of the first calendar year in Germany a tax return must be filed with the local tax office. Normal deadline is 31 May, which is automatically extended to 30 September if the return is prepared by a tax professional. Further extensions may be granted. Each tax return filer will receive an assessment from the local tax office.

Claiming reliefs and allowances

The following expenses are deductible in the year in which they are actually incurred.

Expenses connected with employment income

Income-connected expenses (Werbungskosten) are deductible if they are effectively connected with the employment in Germany, documented, not reimbursed by the employer, and incurred during the period of German tax liability. In any event, a standard deduction of DM 2,000 per annum is granted.

Examples include contributions to employee associations, tuition for advanced training or language lessons, personal business equipment, business telephone fees, daily commuting and business trips (see Appendixes D and E). Other allowable expenses include bank account fees up to a specified limit, moving expenses to Germany not reimbursed by the employer, and certain expenses connected with a temporary need to maintain two households. The above are all subject to certain conditions and restrictions.

Special expenses

The following expenses are deductible without limitation:

• Church taxes;

• tax consultancy fees for domestic and foreign taxes; and

• annuities due to legal obligations not connected with income.

In any event a standard deduction of DM108 for a single person and DM216 for a married couple filing jointly is allowed without providing documentary evidence.

Within limits, the following items are deductible:

• 30 percent of tuition fees (except for housing, care and food) of an Ersatz-/Ergänzungsschule (government approved private school) if special tax relief for children is granted. International schools may be recognised as such schools;

• charitable donations for approved German institutions;

• support for a spouse living in Germany after divorce or separation; up to DM 27,000 per annum. In certain cases this also applies for spouses living abroad;

• life, health, accident, liability insurance premiums to qualified domestic and foreign insurance companies;

• an employee's Social Security payments in Germany and abroad;

• salaries for household help; up to DM18,000 per annum, provided compulsory contributions to the German social security system are made in respect of this engagement (under certain conditions only).

Extraordinary burdens

Extraordinary burdens, such as medical expenses, are deductible within limits.

Standard deductions are allowed for extraordinary burdens such as:

• Subsistence for parents and children with low income (documentary evidence of low income is required) if entitled by law. The maximum deduction is DM13,500 and may be reduced by the standard of living of the country and the personal income situation of the beneficiaries;

• deductions for children in education in Germany or abroad (within limitations); for children under 18 the deduction is DM1,800 if they live outside the parent's household; for children aged 18 to 27 the deduction is DM2,400 if they live at home and DM4,200 if they live away from home; child's income of more than DM3,600 will reduce the deductions;

Further deductions may be granted, for example, for handicapped family members and expenses for a household help.

Special tax relief for children

A standard deduction of DM3,456 per annum, (DM6,912 for married couples) is granted for each child up to 18 years old, or even up to 27 years old if the child is still in education or is handicapped.

Otherwise a monthly tax-free payment (Kindergeld) of DM270 for the first and second children, DM300 for the third child and of DM350 for the fourth child and children thereafter is granted under certain conditions. For children under 16 years an additional deduction of DM3,024 is available. Tax authorities will automatically assess the standard deductions if they are more beneficial than the tax-free payments.

Unlimited tax liability procedure

After the end of each calendar year an income tax return must be filed with the tax office if tax refunds or a certain tax situation is given.

A tax refund could result if the employee is entitled for instance:

• To claim itemised deductions exceeding the standard deductions; and /or

• to balance the difference between the higher preliminary monthly wage tax withholdings and the final annual income tax.

The individual is usually assessed within three to six months after filing the return.

Limited tax liability procedure

If the employee has only a limited tax liability, he/she does not get a wage tax card. Instead, he/she must present a special certificate of the Tax Authority to his/her employer for wage tax purposes.

On application, this certificate will cover the personal deductible items. Tax withholdings normally settle the tax obligations. No return is normally filed and an assessment does not arise. However, an EU national is entitled to file a return and to receive an assessment.

Furthermore, non-residents can apply to be treated like a resident if his/her income from German sources is either at least 90 percent of his/her worldwide income or his/her non-German source income is less than DM12,000 (24,000 for married couples).

In this case most, but not all, deductible items available for residents can be claimed. If you are an EU/EEA national you will be entitled to claim exactly the same deductions as German residents. Under certain conditions, the splitting tariff for married non-resident couples can also be claimed for EU nationals.

Thomas Kausch is tax advisor with PricewaterhouseCoopers in Germay. Email him at thomas.kausch@de.pwcglobal.com

Published July 2003

Copyright Expatica 2003

Subject: German tax