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.
|Solidarity Surplus Charge||Solidaritätszuschlag|
|Income Tax Return||Einkommensteuererklärung|
|Tax Assessment Note||Steuerbescheid|
|Property Service Fees||Haushaltsnahe Dienstleistungen|
|Property Expense Statement||Hausgeldabrechnung|
|Federal Central Office for Taxes||Bundeszentralamt für Steuern|
Author: Peter Scheller – Master of International Taxation – Steuerberater