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The following is a list of tax-saving possibilities some of which are applicable to almost everybody.
1. Office in the home
At present, all costs attributable to such an office, including depreciation if the home is self-owned, can be deducted for an office consisting of a separate room (preferably not one though which one must pass to reach another room). The office must contain only work-related furniture and objects (e.g. no beds, private books, etc.). The tax authorities are entitled to inspect the room. The 1996 Tax Act (see our articles on this subject) places tight restrictions on deductions for home offices, however.
2. Business travel using your car
Travel costs are deductible at DM 0.52 per driven kilometre without proof of actual cost. Actual cost may also be calculated and proven. For leased cars, an up-front payment in the first year may be included in full in calculating total first year cost. Proof of actual cost requires a vehicle logbook.
3. Second households
"Reasonable" rent can be deducted for a second household maintained at one's place of work in addition to the family home. A ruling by the Duesseldorf Central Tax Office holds approx. 60 m2 living space to be a "reasonably" sized second household. If your apartment is larger, perhaps part of it can be used as a home office. Deductions for second households are limited to two years under the 1996 Tax Act. The time prior to 1996 counts towards this limit.
4. Parking fees
Parking fees at your regular place of work are included in the standard deduction of DM 0.70 per kilometre of one-way distance between your place of work. Parking fees for business trips or for persons with changing places of work are in addition to the standard deduction of DM 0.52 per driven kilometre.
5. Life insurance
If an employer takes out a qualifying life insurance policy on the life of an employee, premiums paid by the employer can be taxed at a flat rate of 15 %, to rise to 20 % in 1996. The maximum premium amount is currently DM 3,000, rising to DM 3,408 in 1996. An existing employee insurance policy can be converted into an employer policy. Salary payments can in principle also be converted into insurance premium payments. The tax savings can amount to roughly as much as half of the amount converted into insurance premiums.
6. Moving costs
Moving costs are tax deductible if work-related, e.g. cost of occupying a second household near the place of work, cost of abandoning this household when the work terminates, and cost of moving the primary household to the place of work. There are a variety of standard moving deductions, but higher actual costs can always be itemised. Costs of moving to a location closer to work also qualify if commuting time is reduced by one hour or more or if working or driving conditions are materially improved by the move.
7. Employer loans
Interest-free or low-interest loans lead to no taxable benefit up to DM 5,000 per employee. For other loans, irrespective of amount, an interest rate of at least 6 % is necessary (and sufficient) to avoid a taxable benefit.
8. Tax-free employer payments
The following are examples of payments which can be made tax-free to employees:
-- Payments for attendance of pre-school children of employees in kindergartens or day-care centres, if paid in addition to regular salary.
-- Bonuses for marriage or birth of children of up to DM 700 within three months before or after the marriage or birth, if paid in addition to regular salary.
-- Bonuses for long-term service of DM 600, DM 1,200 and DM 2,400 depending on length of employment, subject to certain conditions (sec. 3 LStDV). The payment must again be in addition to regular loan. If the limits are exceeded, the excess is a payment for multiple year work and is taxed at a reduced rate.
9. Settlement payments
Settlement payments up to DM 24,000 are tax free on termination of an employment relationship if the termination is either initiated by the employer or pursuant to court judgement. The exemption limit rises depending on age and duration of employment (to DM 30,000 at age 50 after 15 years of service and to DM 36,000 at age 55 after 20 years of service). Amounts in excess of the limits are taxed at half of the average tax rate.
10. Employee-funded pension schemes
The tax authorities now permit conversion of salary into pension rights with deferred taxation, provided a number of conditions are met. The tax deferral advantages can be quite significant.
11. Home ownership benefits despite income exceeding prescribed limit
The current tax incentives under sec. 10e EStG (and in some cases still under sec. 34f EStG) are denied to taxpayers with income before personal deductions exceeding DM 240,000 for joint filers and DM 120,000 for single filers. Since, however, each spouse is entitled to benefits (though not with respect to the same house), it may be possible by electing to file separate returns for the spouse with the lower income (if under DM 120,000) to claim the benefits which would not be available at all on a joint return basis. Disadvantages from loss of marital splitting must be carefully calculated, however. The same technique may be of use under the new home ownership subsidies taking effect in 1996.
12. Home tax subsidies and home offices
Since the subsidies are calculated based on the cost of the residential parts of the home, costs attributable to home offices are not counted. If this leads to lower benefits, this can be avoided in the first year by not setting up the home office until e.g. one month after first occupancy, since use of the future home office for residential purposes during part of the year is sufficient to obtain its inclusion in the calculation base for the whole year. Be sure to document the residential use (e.g. photographs).
13. Pre-occupancy costs and repair costs in connection with personal home ownership
Deduction in full is possible for certain costs (e.g. interest) incurred in the period between purchase (end of construction for self-built homes) and first occupancy (pre-occupancy costs). Repair costs in the pre-occupancy period can also be deducted (but not improvement costs). Deductible repair cost is limited to DM 22,500 or 15 % of acquisition cost, whichever is lower.
14. Cable connection costs in home qualifying for sec. 10e subsidies
These costs can be deducted as pre-occupancy costs.
15. Improvement vs. repair/maintenance
Recent decisions of the Federal Tax Court treat work in different stories of a building to be improvement in full (cost must be depreciated), not repair (entire cost deductible year incurred) if the work includes improvements and is interrelated, even if, taken in isolation, some of it would otherwise have been repair work. Another decision holds any enlargement of usable space, no matter how slight, to constitute an improvement.
16. Church tax ceiling agreements
Taxpayers will receive upon request (but not otherwise) a limitation of their church tax to 3 % - 4 % of taxable income from the Catholic and Evangelical Churches in most States (but not in Bavaria and Mecklenburg-Vorpommern). The request should be addressed to the diocese (Catholic) or State church organisation (Evangelical) after receipt of the income tax assessment notice, a copy of which should be included.
17. Spouses employing each other
Interspousal employment relationships for reasonable compensation will be recognised if the subject of a clear and unequivocal advance written agreement as long as they involve services relating to the other spouse's income-earning activities. Aid which can be expected from family members without remuneration (washing clothes, answering telephone, etc.) does not qualify. Typing manuscript or proofreading for an author-spouse are examples of qualifying services. For joint filers, such employment yields an additional standard deduction for the employee-spouse (DM 2,000).
18. Transfer of deduction for dependent children of divorced parents
The spouse paying all of the support payments to a child having reached the age of majority can obtain the full deduction for the child and the associated education cost deduction even if the child lives with the other spouse provided this spouse has no income of his or her own and pays no support to the child. The child must also have a legal right of support against both spouses, which is generally the case for children still completing their education.
19. Damage to cars from storm and flood
Such damage is deductible as an extraordinary personal expense if the loss is high enough in relation to income to constitute an objective hardship.
20. Outside activities
Outside activities (e.g. painting, renting oldtimer cars) can lead to tax deductible losses if the intent to earn a profit can be established.
21. Amendment to non-appealable assessment notices
Assessment notices which have become final can be changed if "new circumstances" are discovered not known at the time the assessment was issued. If these new circumstances favour the taxpayer, they can lead to issuance of a revised assessment provided the taxpayer was not grossly negligent in failing to disclose the matter in the first place. A possibility thus exists to claim a benefit which one forgot in filing the return even after the assessment notice is no longer appealable.
Disclaimer and Copyright
This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.