Peter Scheller
Berater für Wirtschaftsprüfer, Rechtsanwälte, Steuer- und Unternehmensberater

„Wenn es knifflig wird.“

Expatriates: 10 tax issues to be considered in Germany

von Peter Scheller

Expatriates: 10 tax issues to be considered in Germany

Tax systems are different in every country. Therefore expatriates working abroad face special challenges. German tax regulations are different to regulations in other countries. Individuals who are working and living in or considering re-locating to Germany should pay attention to 10 important topics.

No. 1: Tax rates

Germany has the reputation of being a high tax jurisdiction. This is the case for individuals with high income.  The maximum income tax rate is 45% plus solidarity surplus charge of 5.5% on income tax. Therefore the combined maximum rate is 47.5%.

The tax burden on lower or average income is endurable. In addition German tax law is less strict concerning the deduction of income related expenses compared to most neighbouring countries. And it provides a wide range of personal allowances and a relatively liberal acceptance of private expenses. Foreign individuals are often surprised by the relatively low tax burden on average income.

The real problem is social security liability if applicable. The social security contributions are one of the highest in Europe. Individuals coming to Germany should always seek advice on whether or not they can avoid German social security contributions.

 No. 2: Tax assessment

The majority of Anglo-American countries adopted a self-assessment regime for income taxation. US- or British citizens for instance have to file their income tax return and to calculate their tax burden. On this basis the income tax has to payed.

In Germany the system is different. The taxpayer also has to file income tax returns. These tax returns are basis for the tax assessment by the fiscal authorities. The final tax amount is calculated by the tax office. Consequently every taxpayer receives a tax assessment note. Please be aware that this ugly looking printout on recycling paper is the most important document you receive from your tax office. If there is a mistake in the tax calculation or your legal opinion varies from the one of the tax office your can file a legal protest within a month. If you miss the deadline you lose your legal position. Then the tax office can reject the correction even if they have made the mistake. Therefore it is important to check the tax assessment note within the one month time frame. If you have a German tax adviser you should send the note to him as soon as you receive it.

 No. 3: Work related expenses

Employees are entitled to a lump-sum deduction for work related expenses not exceed Euro 1.000 p.a. If expenses exceed this amount the proven expenses are deductible. There is a standardized deduction for commuting between home and work by car of Euro 0.30 per kilometre (one way). Germany’s tax law allows the deduction of most other work-related costs such as travelling costs, contributions to professional associations and unions, necessary expenses for two households, depreciations on IT and other assets used for working purposes etc. A special limitation exists for the expenses for the taxpayer’s home office.

More about issues to be considered if working in Germany see here.

No. 4: Relocation expenses

Very interesting for expatriates moving to Germany or back to their home countries is the possibility of  deducting relocation expenses. Deductible are all removal/transport and travelling costs for the employee and his or her family. Deductible are also expenses for flights to search for a home in Germany. Additional expenses such as compensations for rental contracts, broker fees for procuring flat or home or in connection with childcare can be deducted.

The employer may reimburse those expenses free of tax. However, if the employer does not reimburse all relocation expenses, the employee is entitled to deduct additional costs in his or her German income tax return. In addition there are special lump-sum deductions for international relocations. These deductions are significant.

No. 5: Personal deductions and allowances

Under certain conditions contributions to statutory or private pension schemes, mandatory contributions to health, accidental and liability insurances and to insurances for disability and old age are deductible. This also applies for contributions to foreign insurance companies if their products fulfil certain criteria set by German tax law. Very dangerous in this respect are fund-based pension plans (see next number).

Donations to German and foreign charities and non-profit organisations are also deductible if they fulfil certain obligations. Alimony payments up to Euro 13,805 for a divorced or separated resident spouse is deductible if the spouse agrees to be subject to German income tax with these payments. There are a varity of other allowances and deductions.

No. 6: Fund-based pension plans and trusts

Most expatriates from English speaking countries have pension plans which are fund-based. Tax implications of these plans are often ignored and can lead to disaster. In general contributions to these plans cannot be deducted because the foreign plan do not fulfil certain German legal requirements. If the German employer pays a proportion of the contributions these payments are taxable income. Beside this a far more serious danger lurks around the corner. If the investment funds are non-transparent (which in general they are) a penalising tax regime comes into force. The taxable income will be increased by at least 6% of the last published market price of the calendar year. A higher amount might be applicable under certain circumstances. This taxation of investment funds take place regardless of the fact whether profits or capital are distributed or not. It is also irrelevant whether the fund is profitable or not. This tax regime is designed for Germans who try to avoid German taxation by investing in tax havens and by „accident“ it also hits expatriates with fund-based pension plans.

Obviously this tax implication was not designed to tax fund-based pension plans of expatriates. It is very questionable whether these tax regulation is in line with European freedom rights. Along with a team of experts I am working on a defence strategy. We will forward this issue to German fiscal courts and if necessary to the European Court of Justice.

Even more dangerous is the German tax regime of trusts. This applies for expatriates moving to Germany if they are beneficiary or settlor of a trust. For more information see an article on the website of the IAPA International Association of Professional Advisers.

No. 7: Property service fees

Germany has a very special tax regime for private motivated expenses. Normally they are not tax deductible but expenses connected to private homes are deductible up to certain limits. This applies for services such as housekeeping, chimney sweeping, housemaids, gardening, snow clearing etc. It also applies for certain maintenance and repair work at your residential home. You can deduct these costs even if you are a tenant of a flat. Your landlord or property manager should provide you with a special property expenses statement.

These regulations apply for all properties used for residential purposes regardless of where the property is situated in the European Union (EU) or the European Economic Area (EEA). Therefore expenses connected to holiday homes can be deducted, One can deduct these expenses for a holiday home on the Costa del Sol if he provides the tax authorities with proper invoices and bank statements associated with the same.

No. 8: Foreign source income

Most expatriates moving to Germany think that their foreign source income is not subject to German income taxation. This is a grave misjudgement. Foreign source income is either taxable in Germany or it effects the progressive German income tax rate. In both cases the income has to be declared in the German income tax return.

The calculation of foreign source income has to follow German legal requirements. This may require a recalculation of foreign source income. This is especially the case for business and rental income (for example recalculations of depreciations or capital allowances).  Foreign income taxes including withholding taxes can often be offset against German income tax if foreign source income is taxed in Germany.

No. 9: Stock options

A special problem arises from employment income related to stock options. Respective benefits will be taxed in Germany under certain conditions. Taxed will be the difference between the value at the time of purchasing the stocks and the value at the time when the options have been granted. For the allocation of taxation rights the time between granting the options and the vesting time (vesting period) is applicable. This means that if somebody worked for an employer in the vesting period in different countries he may have to pay taxes in two or more countries.

Example: The vesting period was 2 years. For one year employee worked in the USA and for the other year he worked in Germany. Half of the benefit will be taxed in the USA and the other half in Germany.

If your employer withheld German income tax on the full benefit you have to declare the tax-free part in your German income tax return in order to reclaim the unjustified tax. In general it is easier if you or your employer apply for an exemption form from the Federal Central Office for Taxes. In this case your employer is not obliged to withhold taxes on the exempt amount.

No. 10: Paperwork

German income tax law requires a lot of information when filing out the income tax return. It also grants various deductions and allowances. In return German tax authorities ask for extensive proof and documentation. It is therefore advisable to keep all documents regardless whether they are of a German or foreign source. Lack of documentation might result in significantly higher taxes and lack of knowledge can prove expensive.

See also: Expatriates – 10 issues to be considered if working in Germany

Glossary

Income Tax Einkommensteuer
Solidarity Surplus Charge Solidaritätszuschlag
Social Security Sozialversicherung
Income Tax Return Einkommensteuererklärung
Tax Assessment Note Steuerbescheid
Property Service Fees Haushaltsnahe Dienstleistungen
Property Expense Statement Hausgeldabrechnung
Relocation Expenses Umzugskosten
Tax Adviser Steuerberater
Federal Central Office for Taxes Bundeszentralamt für Steuern

Author: Peter Scheller – Master of International Taxation – Steuerberater

Bildquelle: www.fotalia.com

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Einen Kommentar schreiben

Kommentar von G. P. Alvord |

We lived in Germany from 2014-May of 2017. From Jan 2- 2017 until May 12, 2017 our date of permanent departure from Germany, we were out of the country for 34 days, leaving 98 calendar days that we were physically in Germany. Fj

We filed and paid Germany income tax each year.

Question: as we were only in Germany 98 days in 2017, do we have to file and pay income tax for 2017. We are getting different answers from different Steurberaters.

Antwort von Peter Scheller

As long as you have a  residence in Germany, you remain in the system: https://scheller-international.com/blog-beitraege/german-tax-residence.html

Germany does not have the 183-days rule like many other countries.

You have to file an income tax return for 2017. Whether you have to pay taxes, is another questions.

Kommentar von Regina M |

I am permanent resident living in Hamburg with a permanent work contract in a company and want to buy shares in a company up to 3% of total. Do I need to do something special with my tax declaration even if I don’t have any earnings on the first year?

Kommentar von Anuj Gupta |

Hello All,
I am an Indian citizen living in Germany since Jan 2011, during all these years i have been actively investing my income (earned and taxed in Germany) in various assets like real estate, life insurances and mutual funds in India.
Now I am considering making Germany as my permanent base, hence would like to bring all my assets like money from various investments like real estate etc from India to Germany.
To do so which all taxes or documentation should i keep in my mind.
Your help will be really appreciated.
Thanks,
Anuj

Kommentar von Prathyusha chatta |

Hello ,
I am a dependent (on family reunion visa).I am not yet working.My husband pays for my German language learning course and also the travel expenses for it.Are these expenses are claimable on tax ?

Antwort von Peter Scheller

Yes, but if you do not have any income and therefore do not pay taxes it is irrelevant.

Kommentar von Kay |

I receive a wage-loss replacement in Canada, but am a permanent resident of Germany, where I don't receive any income, but my husband does.
I paid taxes on this income in Canada for the last 4 years, but I am now considered a non resident.
Do I have to pay taxes on this income in Germany and if so, do I have to pay it back to the year I came to Germany?

Kommentar von Özi |

Residing and Working in Germany and salary taxable in Germany by the employer. Vorsorgewohnung in Austria generates rent income. How to calculate the rent tax and where to pay it?

Antwort von Peter Scheller

Without getting into detail:

Rental income to be taxed in Austria.

In Germany tax excempt. However, it has to be declared in the German income tax return since it has an effect on the German income tax rate.

Kommentar von Igor |

My family was in Germany during one month as a turists. When we were going back home we had a law to return taxes. But it is not organized in Dusseldorf airport and i can provide you with all details.

1. To check items for the tax free refund we have to register to the flight at first. It took 20-30 minutes to stay in line to register. We were before chekin started. So we had 2 hours for all.
2. We have to go for checking goods we bought to the officer. We staid in line 30-40 minutes. There were just 2 officers with no time limitation as passagers.
3. We have goods for more then 1500 euro with the price for children 20-40 euro and few items 130-300 euro. So checking every item is about 20 minutes.
4. For the Handy bagagge tax refund i had to go to check in other place with a new line.
5. I needed the time for airport control and for the passport control.

If you use arifmetick which is before university education you can easily understand that it is impossible to return taxes in Dusseldorf airport.

This time i was in tax control when i had just 1 hour to go to the flight so i made a decision not to return taxes just to be on time to flight. I was right because my family run to be on time to the flight. And it was without checking handy bagagge so i am sure this process is not orginized.

You can use airport video to check this process from registration untill boarding and i will give you permission to check it.

I often travel and i know how it has to work. It is not orginized in Dusseldorf airport. We dont steel money we return it by the law.

Please provide me organisation name which is responsible for this process i would like other people are not so sad about their money.

Antwort von Peter Scheller

To use professional advisers is in general quiet expensive. The refund must be substential in order allow an employment of such a person.

Kommentar von emmanuel |

hello i am living in France and i have a job offer in Bremen. my wife and 2 kids will stay in France and she will keep working and tax imposed in France. what will be my tax class in Germany to calculate my net revenue if interesting or not to accept this position. moreover as we pay also taxes in France i wonder what will happen about our both revenues in each country ? in germany will i have to declare my wife french revenue ? in France i know i will have to declare, not taxable but included in calculation of % on my wife tax level. thks

Antwort von Peter Scheller

You really need proper tax advice in Germany in order to avoid a double taxation secnario.

Kommentar von Nadine |

I am a German citizen, worked in Germany and moved to Mongolia (Abmeldung 6.7.2018, then had a holiday and have been a resident in Mongolia from August). Under a special agreement with the Mongolian government, my wages here are tax exempt. I do not pay tax here. How do I declare this in Germany? Do I even need to declare this tax exempt income in Germany. Can Germany tax my income although it has been declared as tax exempt here?

Antwort von Peter Scheller

If you are not tax resident in Germany any more you will not be taxed here. However, you have to declare this income in your German income tax return since t has an influence on your German income tax rate (see https://scheller-international.com/blog-beitraege/foreign-source-income-and-german-income-tax.html).

Kommentar von KT |

I am permanently employed outside of Germany (in Asia). I expect to work in Germany for approximately 35 days and to stay in Germany for 45 days (including the weekends) during 2019. Do I need to pay individual income tax in Germany for such a short period?

Antwort von Peter Scheller

It depends on a lot of things such as:

  • Where do you work abroad?
  • Do you have a residence in Germany?
  • Which nationality do you have?
  • What is the type of work you do in Germany?

and so on.

Kommentar von George Yiu |

My wife works in Germany now. I plan to reunion with her in July this year and stay in Germany as resident.
I am now working full time in Hong Kong and will work at home when I move to Germany.
Will my income earned in Hong Kong from Jan 1 to Jun 30 be subject to German tax?

Antwort von Peter Scheller

This needs a proper analysis and far more information. Please send an e-mail.

Kommentar von Anastasia Lavrenko |

Hi there,

I have lived and worked in Germany for 7 years and moved to New Zealand in June 2018 where I've been employed since. I'd like to submit my tax return in Germany for 2018 but I am getting extremely confused on whether I have to and if yes how to report my change of residency and employment status/earnings abroad. It seems that Anlage N-AUS is only for tax-exempt foreign income but what should I do if I payed taxes while working in NZ? Where do I specify that? Thanks in advance!

Antwort von Peter Scheller

See:

https://scheller-international.com/blog-beitraege/foreign-source-income-and-german-income-tax.html

Kommentar von Kiran |

I am permanently employed outside of Germany (in Asia). I expect to work in Germany for 30 days (including the weekends) during 2019. Do I need to pay individual income tax in Germany for such a short period?

My stay will be in dusseldorf,
I don't have residence in Germany
Indian
Technology Analyst in software engineer

Antwort von Peter Scheller

If you are not resident in Germany and work only for 30 days (business travel) there are no tax implications.

Kommentar von Adriano |

I am a German citizen but I never lived in Germany, only for vacation. Now I’m planning to move to Germany with the family and look for a job there. I have savings in bank abroad, that I will use to maintain family there till I find a job. Do I need to pay taxes over my savings abroad? Or only about the money “repatriate “ to Germany to cover my costs there?

Antwort von Peter Scheller

Please have a look at

https://scheller-international.com/blog-beitraege/foreign-source-income-and-german-income-tax.html

https://scheller-international.com/blog-beitraege/income-from-capital-investment.html

Kommentar von Rin |

I registered and worked as self-employed in Germany for 6 months during the tax year 2018. Then I moved to Japan for about a year (March 2018 - April 2019) where I worked and payed taxes (not as self-employed). I'm back in Germany, still registered as self-employed, and I don't know which forms I need to fill in. AUS, N-AUS?

Antwort von Peter Scheller

I suppose you need help of a professional tax adviser.

Kommentar von Nor B |

Hello, can i still claim as tax deductible for my overseas (australia) tax return items i already included here in my German tax return? For example “loss of income” from australian rental property?

Kommentar von Michelle |

I am a permanent resident here in Germany and just got recently employed by the Philippine government as an Administrative Assistant in their consulate. My contract states that they will give me my gross income monthly and I will be the one the pay and file for my taxes and social security. How do I go about this?

Antwort von Peter Scheller

We should not discuss this in this forum. Contact me via e-mail.

Kommentar von Ameera maged |

I work in Germany, and my kids lives with me, but my spouse is working outside Germany and do not hold any permit residence in Germany, is his income taxable in Germany?

Antwort von Peter Scheller

His income will only be taxable in Germany if the following applies:

He has a tax residence in Germany (https://scheller-international.com/blog-beitraege/german-tax-residence.html) and/or he works in Germany.

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