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/)
family member is looking for a Female Divorce
Attorney to help her any clues on how to find some need spanish speaking.
We have discovered another practical problem:
Some US-citizens send all relevant documents to their US-CPA. And in some case the CPA does not send it back. Eventually they have to file tax returns in Germany. And suddenly they realise that they are missing relevant documents to file German income tax returns.
Expatriates should be aware of the fact that most of tax relevant documents will be required twice (in USA and in Germany).
Do you have to pay your taxes in Germany first and then in the United States second or vice versa? This is our first year in Germany and your above scenario helps out greatly. We moved at the end of July so does that mean that we pay taxes to the USA on all that we earned from January to July and then pay Germany what we earned from July to December? If correct, then who do we file with first?
Also – I have had an online company for 2 years that is an American company where I create online products for teachers to buy online (therefore no actual tangible products, expenses etc – they just pay $3 or $5 and download a file from their computer) – does that count as foreign earned income while I am living in Germany for the following 2 years – that is how long we will be here before returning to live in the states – do I pay taxes to Germany on that income or just declare it on my German taxes as foreign earned income (I get paid to my US bank account) and pay the taxes on the earnings in the United States?
Finally – our house in the states was up for sale during the summer and the sale was finalized in August (we moved here at end of July) – do we pay taxes on house sale in the United States or in Germany?
I am *such* the creative free spirit type of person – so the thought of all of this tax stuff makes me anxious as I want to do the right thing – we will hire a tax accountant to make sure it is right but for peace of mind now, these are the questions that are floating around in my head and while searching online I saw this article so thought I would see if anyone could answer the questions to help alleviate my worry since tax season is a few months off
Great article guys! Paying taxes is crucial here in Germany, but very often you can get some of them back :). Therefore I wrote a short post about: How to make your tax declaration in Germany step-by-step – check it out: http://blog.getdoido.com/2015/01/get-your-tax-money-back-a-step-by-step-guide/
@Alison, I’m nearly in the same exact boat. I sold a house last summer, and I’m looking into doing online business in the US for this year. I currently work in Germany as a UX designer for a german-based firm.
I’m looking for a new tax preparer.
I have lived with my fiance for the past 2 years but we will get married in 2015. She has not been working. Is it possible to claim retroactive marital status of a „joint return“ for the last year and get a tax refund as a married couple if we have been living in and registered at the same address but only married in 2015? If not, why not if Germany allowed this for gay couples? Any advice would be appreciated Thanks!
Hallo Mike,
It is not possible to get the status of married couples before marriage.
However, there is a possibility to deduct maintenance or support payments to partners under certain circumstances.
If you need any further information do not hesitate to contact us.
Peter Scheller
Thanks Peter,
Another thing I learned is that if we get married in 2015, even by Dec 31, 2015, the tax benefits of this marriage will not take place until the following year (2015).
ie. the tax benefits take place only in the calendar year AFTER the marriage yeaer. Is this true?
sorry the „following year“ should be (2016)
please excuse the typo
By German tax law, if you get married on Sept 30, 2015, you can only claim married tax benefits for 25% of 2015. Your salary will be taxed as 75% „single“ filing status and 25% as „married“ instead of qualifying as „married“ for all of 2015.
Is this correct? Thanks!
You can claim the marriage status (Splitting Tarif) for the full year.
To claim the full refund of wage taxes (Lohnsteuer) you have to file a joint income tax return with you wife.
Respected Sir,
Guten Tag!
Myself Raju Arkachari from Mold-Tek Technologies Ltd. Had worked in Germany during the calendar year 2012.
I would like to file my Income Tax returns for that period.
Please let me know if you would take up my case and the charges for your services.
Thanks & Regards
Raju. K. Arkachari
Mobile No : +91 – 8762802472
Hi!
I have a question that is perhaps so obvious that I can’t find the answer to it anywhere. I have a 2014 income considerably LESS than 8,000, so I understand that I am exempt from paying income tax… However, do I still have to file something to the Finanzamt? Do I just not do anything?
Hi Raju,
I have seen your comment today. Sorry for the late reply.
We will come back to you.
Best regards
Marta, you have to file an income tax return if your are leagally obliged. The obligations are set in § 46 EStG (German income tax law code). In general you do not have to file income tax returns if your total income including all tax free benefits are under € 410 per month. However, there are exceptions from this rule. You should ask your tax adviser.
Hello Peter
Thank you for your article. I am a little confused about one point though. You state that, „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.“
Does this mean that an already taxed foreign source of income,(in my case interest earned on savings), could be used to push one into a higher tax bracket here in Germany? If so, wouldn’t that run counter to the idea of avoiding double taxation?
Also, would the capital in the savings account itself have any bearing on the above?
I’d be very grateful for any light you could shed on this matter.
With many thanks in advance,
Thomas Krarup
Hi Thomas,
Just to give you an explanation:
• This quote only applies to you if you are resident in Germany.
• If so, foreign source income which is not taxed in Germany (especially because of a double taxation provision) will increase the German tax rate on German source income (higher tax bracket).
• Interests will not be subject to this treatment. If you are resident in Germany all kind of capital income (dividends, interests etc.) is taxable in Germany. It does not matter whether this income is German or foreign source income.
Please note that there are special rules for crediting foreign withholding taxes against German income tax.
• The increase of tax rate in general applies only on foreign business or rental income.
Thomas, I tried to send this message directly to you but the E-Mail came back with an error message.
Best regards
Peter
Hello Peter,
I have been living in Germany for a few years now and have been trying to find out if indeed my Military retirement pay is indirectly taxable(higher tax rate). Seeings as I have to pay more in back-taxes due to my retirement.
From a previous comment you stated“• The increase of tax rate in general applies only on foreign business or rental income.“ Since my retirement is neither how can I get this through to my Steuerberatern.
One addition to this is that I am also employed full-time since the retirement isn’t so much to be able to live off of.
Any German legal paragraph that I could forward would be extremely helpful.
Thanks in advance,
James
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Hi Peter,
I am hoping for more information based on the response you made to Thomas above about rental income boosting the tax rate you may be charged at in Germany, and also about taxable savings interest/dividend payments. My husband moved to Germany a year ago. I have to decide whether to join him full time or part time. I earn no money. I might choose not to be resident here as I have freedom to move around and could spend the bulk of my time in UK instead. How do I decide on the best tax option for us as a couple? We have a small rental income in UK but may sell the let property, and small savings policies such as ISAs, not all jointly owned. Of course, my decision will not only be based on tax, but I am trying to decide what is my best course of action by informing myself of all the facts. I look forward to hearing from you,and feel some urgency about it(!)
Thank you
Frances
Hi Frances,
We will come back to this point.
Peter
Hello Peter
Similar problem as James (29 Sep 2015)
I am married to a German filing a joint German tax return. How does my American Military retirement check effect our taxes?
Hello Peter
Similar problem as James (29 Sep 2015)
I am married to a German filing a joint German tax return. How does my American Military retirement check effect our German taxes?
Added the word German taxes