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.e., income from farming and forestry, trade or business or self-employed activity as - according to the reasons for the introduction of the new law - these activities bear a specific business risk. However, the tax benefit for profit income is only applicable for the assessment period 2007 as it takes into consideration the planned corporate tax reform 2008. For the calculation of the tax benefit at first the ratio of the profit income has to be determined. This ratio multiplied with the taxable income exceeding EUR 250,000 is the tax base for the tax benefit. The tax benefit is then 3 percent of this tax base. For spouses assessed jointly, the tax benefit is double the amount of the tax benefit that would be applicable for half of their common taxable income.

Example: A taxpayer, single, has in 2007 profit income and employment income each of EUR 250,000. His taxable income amounts to EUR 450,000. The surtax is 3 percent of EUR 200,000 (EUR 450,000 minus EUR 250,000) = EUR 6,000. The tax benefit has to be calculated as follows: The ration of the profit income is 50 percent (250,000 of 500,000). The portion of the taxable income exceeding EUR 250,000 is EUR 200,000. The tax base is then 50 percent of EUR 200,000 = EUR 100,000. The tax benefit is 3 percent of EUR 100,000 = EUR 3,000.

As a result of the tax benefit for profit income, only employment income, income from capital investments and rents will be affected by the surtax of 3 percent. Thus, the rich man's tax affects practically only employed rich people as for example high level managers. For expatriates that have a net wage agreement the new regulations will have no implications as the employer has to bear the tax burden and, therefore, has to pay the surtax.

October 2006

Katrin Köhler is Senior Manager International Assignment Services at Deloitte & Touche GmbH, Düsseldorf.  Daniele Sendler is a Manager in the same office.

Subject: German tax laws, tax in Germany