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Explained: Do I have to pay Germany’s ‘solidarity tax’?

The Bundestag has agreed to get rid of the so-called 'solidarity tax' almost completely. What does it mean?

Explained: Do I have to pay Germany’s ‘solidarity tax’?
How much will you save? Photo: DPA

What’s happening?

The so-called 'Solidarity tax' or 'Soli' charge is set to be abolished for 90 percent of taxpayers from 2021.

The massive reduction is only possible because of the progress made after German reunification nearly three decades ago, Finance Minister Olaf Scholz said in Berlin on Thursday.

What is it anyway?

The 'Soli' was introduced as a special 'tax' in 1991 mainly for infrastructure and projects in eastern Germany after German reunification in 1990.

The charge currently levies an additional 5.5 percent income tax or corporation tax after a certain level of earnings, and last year brought the state a total of €18.9 billion.

The deduction appears on taxpayers' payslips under Solidaritätszuschlag (solidarity surcharge).

READ ALSO: Taxpayers in Germany to receive boost as 'solidarity tax' almost entirely abolished

Who will have to pay it in future (and who won't)?

Nine out of 10 taxpayers will no longer have to pay it – but only from 2021.

Under the new rules approved by the German government, 6.5 percent of taxpayers will pay a reduced rate while 3.5 percent of the wealthiest Germans will continue to pay it at its full rate.

According to the Finance Ministry, the state will lose out on about €10.9 billion in the first year after it is partially abolished.

Here are some examples of how it will affect certain groups of people in Germany:

SINGLE PEOPLE: Single employees subject to social insurance contributions will no longer pay the Soli from 2021 if they do not earn more than €73,000 gross per year.

Up to an income of €109,000, only a portion of their income will be lost to the solidarity surcharge. And those who earn more will continue to pay as before.

FAMILIES WITHOUT CHILDREN: Here it depends on whether both partners earn, or only one. A married couple without children – where only one partner earns – is fully relieved of the Soli up to a gross wage of around €136,000 and partly relieved up to around €206,000.

If both earn the same amount, no Soli has to be paid up to a joint gross wage of around €148,000. If the annual gross wage exceeds €219,000, the full charge has to be paid.

The solidarity tax appears on taxpayers' payslip. Photo: DPA

FAMILIES WITH CHILDREN: Here, too, it depends on whether both parents earn or not. For a family with a sole earner and two children, the lower limit is a gross annual wage of around €152,000.

Up to €221,000 only a partial charge is required. If both parents earn the same amount, they no longer pay the Soli up to a joint gross annual salary of around €164,000, and from €234,000, they would then have to pay the full charge again.

SELF-EMPLOYED: According to the Finance Ministry, 88 percent of business people assessed for income tax are exempt from the Soli – that’s about 370,000 people, and includes, for example, self-employed craftsmen. A further 27,000 people no longer have to pay the full amount.

READ ALSO: From climate action to 'Soli tax' reform: What you need to know about Germany's planned changes

COMPANIES: Anyone who runs a GmbH company and pays corporation tax for it is exempt from the reform and will have to continue to pay the Soli.

SAVERS: Some people will still face charges. For example, if you earn more than €801 per year in interest from money stored in a savings account then you'll have to contribute to the Soli. This would usually only apply to older agreements – because nowadays interest rates are significantly lower.

HOW MUCH WILL YOU SAVE?

According to calculations by the Munich-based ifo Institute, a family that no longer has to pay the Soli at all could save more than €1500 a year, depending on their income. Even those who still have to pay a partial charge can save several hundred euros. 

People who earn very little won’t make much savings because they currently do not pay a lot in Soli contributions, or they are already exempt.

WILL IT BE COMPLETELY ABOLISHED?

It’s not on the cards yet but some politicians are pushing for it. The conservative Christian Democrats (CDU/CSU) and the pro-business Free Democrats (FDP) want the Soli to be completely stamped out as early as January next year.

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For members

RETIREMENT

Reader question: Can I get a retirement visa for Germany?

Unlike in EU countries such as Portugal or Spain, Germany does not have a visa specifically for pensioners. Yet applying to live in the Bundesrepublik post-retirement is not difficult if you follow these steps.

Reader question: Can I get a retirement visa for Germany?
Two pensioners enjoying a quiet moment in Dresden in August 2020. Photo: picture alliance/dpa/dpa-Zentralbild | Sebastian Kahnert

Due to its quality of life, financial security and health care, Germany snagged the number 10 spot in the 2020 Global Retirement Index. So just how easy is it to plant roots in Deutschland after your retirement?

Applying for a residency permit

As with any non-EU or European Economic Area (EEA) national looking to stay in Germany for longer than a 90-day period, retirees will need to apply for a general resident’s permit (Aufenthaltserlaubnis) under which it will be possible to select retirement as a category. 

READ ALSO: How does Germany’s pension system measure up worldwide?

This is the same permit for those looking to work and study in Germany – but if you would like to do either after receiving a residency permit, you will need to explicitly change the category of the visa.

Applicants from certain third countries (such as the US, UK, Australia, South Africa, Japan, South Korea, Israel, Canada, and New Zealand) can first come to Germany on a normal tourist visa, and then apply for a residency permit when in the country. 

However, for anyone looking to spend their later years in Germany, it’s still advisable to apply at their home country’s consulate at least three months in advance to avoid any problems while in Germany.

Retirement visas still aren’t as common as employment visas, for example, so there could be a longer processing time. 

What do you need to retire in Germany?

To apply for a retirement visa, you’ll need proof of sufficient savings (through pensions, savings and investments) as well as a valid German health insurance. 

If you have previously worked in Germany for at least five years, you could qualify for Pensioner’s Health Insurance. Otherwise you’ll need to apply for one of the country’s many private health insurance plans. 

Take note, though, that not all are automatically accepted by the Ausländerbehörde (foreigners office), so this is something you’ll need to inquire about before purchasing a plan. 

READ ALSO: The perks of private health insurance for expats in Germany

The decision is still at the discretion of German authorities, and your case could be made stronger for various reasons, such as if you’re joining a family member or are married to a German. Initially retirement visas are usually given out for a year, with the possibility of renewal. 

Once you’ve lived in Germany for at least five full years, you can apply for a permanent residency permit, or a Niederlassungserlaubnis. To receive this, you will have to show at least a basic knowledge of the German language and culture.

READ ALSO: How to secure permanent residency in Germany

Taxation as a pensioner

In the Bundesrepublik, pensions are still listed as taxable income, meaning that you could be paying a hefty amount on the pension from your home country. But this is likely to less in the coming years.

Tax is owed when a pensioner’s total income exceeds the basic tax-free allowance of €9,186 per year, or €764 per month. From 2020 the annual taxable income for pensioners will increase by one percent until 2040 when a full 100 percent of pensions will be taxable.

American retirees in Germany will also still have to file US income taxes, even if they don’t owe any taxes back in the States. 

In the last few years there has been a push around Germany to raise the pension age to 69, up from 65-67, in light of rising lifespans.

READ ALSO: EXPLAINED: Could people in Germany still be working until the age of 68?

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