Will Expats Pay Less Taxes Than Germans?

Key Takeaways

Germany plans to attract skilled expats with tax incentives to fill 1.72 million job vacancies.
A €100,000 income example shows how expats might see reduced effective tax rates under the new plan.
With a 30% tax rebate, expats earning €100,000 could pay just 19% in taxes, significantly lowering costs.
Gross salary and taxable income differ; expats’ tax rebates are based on gross salary, not taxable income.
In the second year, the expat tax rebate drops to 20%, resulting in a 23.5% effective tax rate.
By the third year, a 10% tax rebate reduces expats’ average tax rate to approximately 28%, still beneficial.
Expats save nearly €30,000 in taxes over three years compared to Germans with the same income.

Introduction: The Potential for Lower Taxes for Expats in Germany

Right now, everybody is paying a lot of taxes here in Germany. However, soon enough, expats could pay less in taxes than Germans. This is part of the so-called Growth Initiative planned by the German government for 2025.

This initiative is likely to be welcomed by many because it could reduce expat tax liabilities by up to 30%, potentially saving tens of thousands of euros. Let’s delve into what this Growth Initiative from the government entails and what it could mean for your personal tax rate. All this will be explained in this comprehensive article.

Germany’s Job Market and the Growth Initiative

As of December last year, Germany had 1.73 million job vacancies—a staggering figure for a country with a population of just 83 million. Each open vacancy represents a loss in potential productivity for German companies, meaning that Germany is likely losing billions in GDP annually due to unfilled positions.

If you were part of the German government, responsible for addressing this issue, what would you do? It’s clear that the current workforce cannot fill these gaps, so attracting talent from abroad becomes crucial. This is the goal of the new Growth Initiative for 2025: to bolster the German economy by reducing tax burdens for expats, thereby encouraging skilled workers from outside Germany to fill these roles.

Understanding the Tax Proposal: A High-Income Example

Let’s examine the proposed tax plan using a high-income example. Consider a single person with a taxable income of €100,000 per year. Although this might seem high, it effectively illustrates the proposed changes. Normally, an individual earning €100,000 would have a maximum tax rate of 42%.

However, it’s crucial to understand that this is the maximum tax rate, not the actual amount paid. The real tax rate, which averages out the taxes paid on every euro earned, is about 33%. For instance, income up to €12,000 is taxed at 0%, and each euro over that is taxed progressively up to 42%. This brings the real tax rate to 33% for someone earning €100,000. By making tax-deductible investments like pensions or real estate, one can reduce their taxable income and, subsequently, their taxes.

The Impact of the Growth Initiative on Expats’ Taxes

Now that we understand the difference between maximum and average tax rates in Germany, let’s explore the potential impact of the government’s plan. In the first year of working in Germany, expats would receive a 30% tax rebate. For a German earning €100,000, the tax liability would be just under €33,000.

However, an expat with the same gross salary would effectively earn €70,000 after the rebate, placing them in a lower tax bracket. This reduces their overall tax rate to about 19%, resulting in significantly lower taxes—less than €19,000 on €100,000 earnings.

Understanding Gross Salary vs. Taxable Income

It’s essential to distinguish between gross salary and taxable income, especially when discussing the proposed tax rebate. Gross salary is the amount agreed upon in your employment contract, while net salary is what you receive after taxes.

Your payslip might initially seem shocking due to the deductions, but it doesn’t reflect your real net pay at the end of the year. This discrepancy occurs because we are taxed on our taxable income, not our gross salary.

Filing an annual tax declaration can reveal that your taxable income is lower than your gross salary, allowing for adjustments. Therefore, while the proposed tax rebate applies to gross salary, the actual tax benefits will be calculated based on your taxable income.

Year Two: A Decreasing Rebate for expats

In the second year, the special expat tax rebate decreases from 30% to 20%. This means that instead of €100,000, the effective income for tax purposes is €80,000. While the maximum tax rate remains 42%, the average tax rate increases to just over 29%, translating to around €23,500 in taxes.

Though this is a notable increase from the first year’s effective tax rate of 19%, it’s still a substantial saving compared to the standard rates. The real tax rate for expats in the second year, considering the rebate, stands at approximately 23.5%.

Year Three: Final Phase of the Rebate

In the third year, the tax rebate further reduces to 10%. Using the same calculations, a German with €100,000 taxable income would pay close to €33,000 in taxes. For expats, the rebate reduces the effective taxable income, bringing the average tax rate down to 28%.

This gradual increase in tax liability over the three years is still beneficial for expats compared to their German counterparts, due to the structured rebates which lower the overall tax burden progressively.

Summarizing the Growth Initiative’s Impact

To summarize, the new Growth Initiative could be highly valuable for expats. If an expat earns €100,000 annually over the first three years, they could save almost €30,000 in taxes compared to a German with the same income. The German would pay nearly €100,000 in taxes over this period, reflecting a 33% average tax rate.

In contrast, the expat’s overall tax rate would be almost 9.4% lower, significantly reducing their tax liability. However, it’s important to remember that this plan is not yet finalized and faces potential constitutional challenges. Critics argue that it may violate Germany’s Grundgesetz by discriminating against Germans in favor of expats.

Conclusion: What We’ve Learned and Next Steps

In conclusion, the proposed Growth Initiative from the German government could mean substantial tax savings for expats, potentially reducing their tax bills by thousands of euros compared to German citizens. However, this proposal is still under review and has sparked debate about its fairness and constitutionality.

Despite the controversy, the initiative aims to address Germany’s workforce shortages and stimulate economic growth by attracting skilled workers from abroad. If you’re looking to optimize your tax situation, making smart tax-deductible investments could be beneficial. For personalized advice, consider booking a free meeting with us at perfinex.de/meeting. Thank you for reading, and we hope to see you in the next article.