The taxation of individuals in Germany is based on the principle
of the taxpayer’s ability to pay taxes. The German constitution
(Grundgesetz – GG) only permits the state to tax the income of
individuals if, after taxation, that individual has adequate eco-
nomic means to maintain a minimum livelihood.
An individual’s income is subject to income tax (Einkommen-
steuer) plus a solidarity surcharge (Solidaritätszuschlag) (see
chapter 8.6). Church tax (Kirchensteuer) is collected if the
individual belongs to one of the “recognized” churches (see
chapter 8.7). Income generated by an individual from commercial
business activity is also subject to trade tax (Gewerbesteuer).
Increases in wealth from inheritance or gifts are not classifed as
“income”; proceeds from these sources are, however, subject to
inheritance tax (Erbschaftsteuer) and gift tax (Schenkungsteuer).
While several other European countries still have taxes on
capital, Germany’s net worth tax (Vermögensteuer) has not been
levied since January 1 1997. The Federal Constitutional Court
(Bundesverfassungsgericht – BVerfG) ruled in 1995 that certain
aspects of the net worth tax were unconstitutional and that
collection of the tax must cease at the end of 1996 if the defects
were not remedied. The legislature has, however, intentionally
failed to act. Accordingly, there is at present no legal basis to
levy net worth tax in Germany.
Municipalities continue to levy a tax on real estate (real estate
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Value added tax (Umsatzsteuer) regulations apply if individuals
operate a business. Individuals are also affect-
ed by real estate transfer tax (Grunderwerbsteuer), which arises
whenever real property is transferred for consideration