Germany’s taxation system can be complex, especially for inpats (foreigners moving to Germany) and expats (Germans living abroad). Understanding the rules, laws, and double taxation agreements (DTAs) is crucial for ensuring compliance and optimizing tax liabilities.
Tax Residency
In Germany, tax residency is determined by several criteria. An individual is considered a tax resident if:
- They have a permanent home in Germany.
- They spend more than 183 days in Germany within a calendar year.
Tax residents are subject to unlimited tax liability, meaning they must pay tax on their worldwide income. Non-residents are subject to limited tax liability, only paying tax on income sourced from Germany.
Key Tax Laws
1. Income Tax Act (Einkommensteuergesetz – EStG):
- Governs the taxation of income for residents and non-residents.
- Sections §1 and §49 outline the conditions for unlimited and limited tax liability.
2. Foreign Tax Act (Außensteuergesetz – AStG):
- Addresses issues of international taxation, such as transfer pricing and controlled foreign corporations (CFC) rules.
- Important for expats with foreign income and investments.
Double Taxation Agreements (DTAs)
Germany has signed DTAs with numerous countries to prevent double taxation of income. These agreements allocate taxing rights between Germany and the other contracting state, typically stipulating which country has the right to tax specific types of income and providing methods for eliminating double taxation.
Key provisions commonly found in DTAs include:
- Article 4: Resident – Defines residency for tax purposes.
- Article 6-21: Income Types – Allocates taxing rights for different income types (e.g., employment, business profits, dividends, interest).
- Article 23: Elimination of Double Taxation – Methods such as tax credits or exemptions to avoid double taxation.
Inpats in Germany
For foreign nationals moving to Germany, several tax considerations are essential:
1. Employment Income:
- Generally taxable in Germany if the work is performed in Germany.
- DTA provisions may allow exemption or tax credits in the home country.
2. Rental Income:
- Income from renting property in Germany is taxable in Germany.
- Expenses related to the rental can be deducted.
3. Investment Income:
- Dividends, interest, and capital gains are typically taxable in Germany.
- DTAs may provide relief through reduced withholding tax rates.
4. Social Security Contributions:
- Inpats may be subject to German social security unless exempt under a social security agreement between Germany and their home country.
Expats from Germany
For German nationals or residents moving abroad, several tax issues must be considered:
1. Retaining German Tax Residency:
- If maintaining a permanent home or significant ties in Germany, one may still be considered a tax resident.
- Can lead to continued taxation on worldwide income.
2. Foreign Employment:
- Income from foreign employment is generally taxable in the host country.
- Germany may provide tax credits or exemptions under the relevant DTA.
3. Foreign Property and Investments:
- Income from foreign property and investments is taxable in Germany if the individual retains tax residency.
- DTA provisions and the AStG may influence the tax treatment.
4. Exit Tax (Wegzugsbesteuerung):
- Applies to unrealized capital gains on substantial shareholdings when leaving Germany.
- Deferral or relief may be available under specific conditions.
Practical Tips
- Professional Advice: Consult with a tax professional familiar with international tax laws and DTAs.
- Regular Review: Periodically review your tax situation, especially if your residency status or income sources change.
- Documentation: Keep thorough records of all income sources, tax payments, and relevant documents to ensure compliance and facilitate tax filings.
Understanding and navigating the complexities of German tax laws and DTAs is essential for inpats and expats. For personalized advice or more detailed information, please contact WW+KN, a Baker Tilly Company, at info@payrollgermany.de.