If foreign citizens move to Germany in order to work and live there, they become resident in Germany. As German residents, they become liable to income tax concerning their world wide income. This principle can result in double taxation scenarios. But Germany’s wide-spread network of double taxation treaties avoids (in general) double taxation.
Expatriates from the Anglo-Saxon world or the USA must realize that Germany’s double taxation policy is different to the one of their respective home country. These countries avoid taxation generally by crediting foreign income taxes against their own income tax. Germany, in contrast, avoids double taxation generally by excluding foreign source income. For example, the following incomes are tax exempt in Germany if a double taxation treaty is in place:
- Salaries, compensations, benefits in connection with work carried out abroad
- Foreign income from business and trade
- Foreign income from independent professional services
- Foreign rental income
- Capital gains regarding foreign real estate and business property
But although this income is tax exempt, one has to declare this foreign source income in German income tax returns. This is due to the fact that this foreign source income increases the German income tax rate.
Other foreign income is taxable in Germany such as
- Income from capital investment (dividends and capital gains)
- Other income (gains from private transactions, alimony, annuities etc.)
- Dividends and other income from corporations with significant capital interest
might be subject to special tax treatments.
Here are some practical tips for expatriates who assign a German tax adviser (Steuerberater) with filing his or her tax return:
- If an expatriate moves to Germany or leaves from there during the calendar year, he or she has to declare his or her foreign source income. This also applies to income earned before moving to Germany or after leaving it.
- Example: Mr. A moves to Germany on July 1st in order to work there. His foreign source income includes a salary earned in his home country for the period January 1st to June 30th. He also earns a rental income for a property in his home country for the full calendar year. From July 1st on, he earns a salary in Germany. Only the German salary is taxable in Germany. But for purposes of calculating the German income tax rate, the foreign income has to be declared.
- In general, German tax advisers should analyze foreign income tax returns in order to identify foreign income, private expenses and allowances. This is no problem in the USA since all US-citizens and green card holders have to file income tax returns even if they are not resident in the USA. Also, the tax year in the USA is the calendar year.
- For citizens from the UK or other countries of the Anglo-Saxon world, the situation is different. First of all, a lot of them have tax years different from the calendar year. For example, the tax year in UK starts on April 6th and ends on April 5th of the following year. Consequently, a German tax adviser cannot use figures from British income tax returns since they do not represent calendar year figures. Therefore, expatriates have to provide their tax advisers with calendar year figures in regard to their foreign source income. Nevertheless, foreign tax returns give a good indication which figures might be declarable in Germany.
- Another problem occurs for tax years where an expatriate is not resident in his or her home country anymore. If he or she has no or minimal income in his or her home country, he or she will not file income tax returns at home. This is no problem in regard to foreign source income since there isn’t any. But there is no indication concerning private expenses paid abroad which might be deductible in Germany (e.g. private health insurance premiums paid to a foreign health insurance company). Therefore, expatriates have to provide their German tax advisers with respective information and documentation. And as well, expatriates should always be aware of the fact that German tax law allows more allowances and deductions of private motivated expenses than most other countries.
- If foreign source income is taxable in Germany (e.g. foreign dividends), a foreign withholding or income tax can be credited against German income tax. But the tax adviser needs proof that foreign taxes have been withdrawn (bank statements etc.).
- And there is another speciality of German income tax law. Spouses living together are assessed jointly, unless they elect to be assessed separately. Consequently, they are allowed to file one joint income tax return in Germany. This is especially very favorable if one spouse has a high income and the other one has a low or no income at all.
When an expatriate meets with his or her German tax adviser, he or she should always keep a complete dossier regarding his or her German and foreign income, his or her foreign income tax returns and private motivated expenses paid in Germany and abroad.
More information can be found on our website:
- German taxation of expats (https://www.scheller-partner.de/2011/06/german-taxation-of-expats/)
- Deductible property service fees (https://www.scheller-partner.de/2011/10/haushaltsnahe-dienstleistungen-deductible-property-service-fees/)
- Tax assessment and income tax (https://www.scheller-partner.de/2012/01/tax-assessment-and-income-tax/)
- Local German business tax (https://www.scheller-partner.de/2012/02/local-german-business-tax/)