Income Tax Act (EStG)

Historical development and significance

The Income Tax Act was originally enacted on March 29, 1920 and underwent its last major revision in 1934. The current version is based on the promulgation of October 8, 2009 with continuous amendments to date. The EStG forms the central legal basis for the taxation of the income of natural persons in Germany. Wage tax is the most important form of income tax. The law comprehensively regulates the tax treatment of all types of income. The regulations apply to all natural persons who are resident or ordinarily resident in Germany. The international dimension is covered by regulations on limited tax liability. The importance of the law is reflected in the annual tax revenue of several hundred billion euros. The complexity reflects the various economic circumstances. The regulations are constantly adapted to new developments. Case law continuously clarifies the interpretation.

System and structure

The EStG is divided into twelve sections with a clear systematic structure. Tax liability is fundamentally defined in the first section. The second section regulates the determination of taxable income. Assessment and the tax rate follow in the subsequent sections. Tax reductions and tax collection are regulated in detail. The taxation of persons with limited tax liability is dealt with in a separate section. Child benefit is also anchored in the EStG. The pension allowance is another important area of regulation. The subsidy amount for company pension schemes concludes the law. The system provides clear orientation. The individual provisions are coordinated with each other.

Types of income and determination

The EStG distinguishes between seven types of income, each with its own calculation rules. Income from agriculture and forestry is regulated in §§ 13-14a. Commercial income is governed by §§ 15-17. Self-employment is dealt with in § 18. Income from employment is governed by § 19 and investment income is covered in § 20. Renting and leasing is dealt with in § 21, while other income completes the system in § 22. The calculation regulations are sometimes very complex. Different methods are used to determine profits. The surplus calculation applies to certain types of income. It is often difficult to differentiate between types of income.

Tax-free income and allowances

The law defines extensive catalogs of tax-exempt income in § 3 EStG. Social benefits such as child benefit and BAföG are generally tax-free. Certain allowances for Sunday, public holiday and night work remain untaxed. The EStG has various allowances for different life situations. The basic allowance ensures the minimum subsistence level. Child allowances take family expenses into account. Allowances for the elderly and disabled provide further relief. The allowances are regularly adjusted. The tax exemption of certain income serves social purposes. The system of tax-free allowances is complex. The amount is determined politically.

Assessment and collection

Tax is levied primarily through wage tax as withholding tax. The assessment serves to finally determine the annual tax. Advance payments ensure a continuous tax flow. The tax declaration obligations are regulated in detail. Electronic transmission is now standard. The limitation period for assessment is generally four years. The possibilities for amendments are defined by law. Appeals are governed by the German Fiscal Code. Enforcement is based on general rules. Interest is regulated by law. The procedural rules are complex.

Special procedures and discounts

The EStG provides various tax reductions for special situations. Some craftsmen’s services can be claimed for tax purposes. Extraordinary expenses are taken into account. Retirement income is subject to special regulations. Losses can generally be carried forward. The trade tax credit reduces income tax. Foreign taxes are credited. The tax reductions often have an incentive effect. The conditions are strict. Proof must be provided. The structuring options are limited.

Current developments and outlook

The EStG is continuously adapted to new economic developments. Digitalization requires new regulations for modern business models. The international dimension is becoming increasingly important. The complexity of the law is being critically discussed. Simplifications are regularly called for. Case law is developing the law dynamically. European harmonization is influencing developments. Climate protection aspects are gaining in importance. The social component remains important. The future brings new challenges. Reform remains an ongoing task.