Our tax experts from Deloitte's offices in Germany provide a guide to Germany's new 'rich man's tax.'

In July 2006, the German government released a new tax law that - amongst many other changes in the German tax law - also introduces a so called "Reichensteuer" (rich man's tax), demanded by the Social Democrats. For each euro exceeding EUR 250,000 (EUR 500,001) the taxpayer has to pay a surtax of 3 percent from 2007 onwards. Thus, the marginal tax rate for income tax at these amounts will be increased to 45 percent again. 

With this surtax, the most financially strong social classes shall finance Germany's public services and consolidate the public households. According to the reasons for the introduction of the new law, this corresponds to the principle of the "taxation according to economic ability", that is laid down in the German constitution.

However, the new rich man's tax has been hotly debated in Germany; several experts believe it to be a violation of German constitutional law. As the rich man's tax just applies to employment income, income from capital investments and rents, it is a change in German tax law that might also be of far reaching significance for expats. Below is a short survey of the new regulation.

· Surtax of 3 percent

According to the previous German tax law, the top tax rate is 42 percent of the taxable income. For extra high income the top tax rate will be increased from 2007 onwards for taxable income of EUR 250,001 (singles)/EUR 500,002 (spouses assessed jointly) onwards by a surtax of 3 percent up to 45 percent. The new top tax rate will also be considered for the wage tax withholding.

Example: A taxpayer, single, has in 2007 a taxable income of EUR 400,000. The income exceeding EUR 250,000 amounts to EUR 400,000 minus EUR 250,000 = EUR 150,000. This results in a surtax of EUR 150,000 x 3 percent = EUR 4,500.

· Tax benefit for profit income

The new law provides for a tax benefit for so called profit income, i.

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