Taxable income is divided into the following types of income: earned income and capital income. Capital income is the income generated through the possession of wealth. All other income is earned income.
Examples of earned income are wages or salary, other similar compensation based on working for someone, and pensions. Similarly, it is regarded as earned income if the recipient receives fixed income, paid instead of wages, such as social benefits, compensation, unemployment relief or per diem payments from an accident insurance contract.
A certain part of the income derived from business activities or farming is usually regarded as earned income.
The procedure is first to separate the part regarded as capital income, then to assess the rest of the income as earned income. The separation between capital income and earned income concerns business income, farming income, the income of a shareholder in a consortium, and the receipts of dividend from a nonlisted company. If you have taxable income of this type, one part will be earned income, the other part capital income.
The tax assessment for earned income involves first subtracting the tax-deductible amounts from the gross income, then assessing the remaining amount according to the progressive scale of state taxation. In addition, there are two flat rates of tax applicable to earned income, namely municipal tax (usually 18% to 19%) and church tax (1% to 2%).