Income tax assessment in Germany

A lot of countries such as the USA and the UK adopted a self-assessment regime in order to collect income tax. This means that an individual has to declare tax relevant items such as taxable income and deductible expenses. Every taxpayer has to calculate his own income taxes. There are deadlines for filing tax returns and paying taxes.

Germany imposes another system on its taxpayers -the tax assessment. Taxpayers in Germany have to file income tax returns. They have to declare their taxable income and deductible expenses. There are certain deadlines for filing tax returns. But from hereon the system works differently. German taxpayers do not have to calculate their own taxes. After handing in the tax returns they wait for a tax assessment note. No tax has to be paid before the taxpayer receives an official note from the tax office (Finanzamt). Tax calculations are done by the tax office. This system requires a different attitude from taxpayers:

• It happens that the tax office makes a mistake when calculating the income tax and solidarity surplus charge. Then taxpayer has one month to file an appeal against the tax assessment note. If taxpayer misses the deadline he looses his right to protest against the tax assessment in most cases. Therefore it is important to check tax assessment notes within the one month period.
• There is another issue to be considered. If a tax payer has losses which can be carried forward he has to declare these losses in the tax return. In this case the tax office will sent out two tax assessment notes, an income tax assessment note and a notice to assess losses to be carried forward  Therefore tax payer has to check both tax assessment notes.
• Tax payers should not forget to declare losses even if they cannot be deducted from regular income in respective periods (e.g. capital losses). This kind of losses can be credited against capital gains in following years. But if the income tax assessment note cannot be changed anymore and there is no notice to assess losses to be carried forward these losses are lost for tax crediting.
• It is advisable to forward every assessment note to a German tax adviser in order to be checked.
• Another issue has to be considered. In general an income tax return has to be sent to the tax office by 31 May of the following year. If a German tax adviser is preparing the tax return the deadline is extended to 31 December. It happens that the tax office needs several months to file tax assessment notes. In general this is very unfavourable if tax payer has to settle outstanding taxes. This is due to the fact that every taxpayer has to pay 0.5% per month on any outstanding taxes. This matches a yearly interest rate of 6%. But this is only the case from the sixteen’s month after tax year’s ending.

Example: A German tax advisers files the income tax return 2010 for his client in December 2011. The client sends the tax return to the tax office on 30 December 2011. The tax adviser calculates an outstanding amount for income tax and solidarity surplus charge of € 100,000. Because of various questions by the tax officer the tax assessment is delayed to 15 December 2012. The tax assessment note shows taxes of € 100,000 and interests of € 4,500 (€ 100,000 times 0.5% for 9 months). If taxpayer wants to avoid interests he should pay € 100,000 by 31 March 2012 on voluntary basis.

Before mentioned topics apply for expatriates living in Germany as well as non-residents who are taxable in Germany with German source income.

Author: Peter Scheller, German Tax Adviser – Master of International Taxation

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