Double Taxation in Germany

Key takeaways

• A Double Taxation Agreement (Doppelbesteuerungsabkommen (DBA)) was created to prevent the same income from being taxed twice in different countries.
• Double Tax Treaty varies from country to country.
• DBA specifies which country has the right to tax which income.
• Every form of income abroad is taxable in Germany. Hence. you must declare foreign income in Germany.

This is how you do it

• Learn about the double taxation treaty between the source country and Germany once you have an income source abroad.
• Not declaring foreign income can lead to heavy fines and imprisonment.
• You must fill out Appendix AUS to declare foreign income and the taxes paid abroad.
• International tax laws can become complicated quickly. Hence, we recommend consulting a tax advisor.

Table of Contents

What is the Double Taxation Agreement in Germany?

A double taxation scenario arises when you live in one country and receive income from another. In this case, both countries can levy tax on your income.

This is where the Double Tax Treaty comes into play. It allows you to avoid being taxed twice—once in the country where you live and another where you earn.

Moreover, the Double Tax Treaty allows tax authorities to prevent tax evasion.

A Double Taxation Agreement (Doppelbesteuerungsabkommen (DBA)) is an international treaty between two countries. The DBA regulates which income Germany or the other country has the exclusive or concurrent right to tax.

The DBA terms and conditions vary from country to country. So, you should check what double taxation conditions apply in your case. 

International tax laws can become complicated quickly. Hence, we recommend consulting a tax advisor.

A tax advisor will ensure you are not taxed twice and file the tax return correctly.

What does a Double Tax Treaty specify?

A DBA specifies:

• Which country has the right to tax certain types of income: The agreement determines which country has the sole right to tax certain types of income, such as dividends, interest, royalties, salaries, etc.
• How to avoid double taxation: In DBA, the countries establish procedures for crediting or offsetting taxes paid abroad against taxes owed domestically.
• Rules for exchanging tax information: The double taxation treaty specifies how the two nations will exchange tax-relevant information to combat tax evasion.
• Definitions and procedures for tax dispute settlement: The double taxation treaty defines the process for settling tax disputes between the two countries.

Why do countries have a Double Tax Treaty?

Let’s understand it with an example.

Suppose you live in Berlin. So, according to German tax law, you are subject to unlimited income tax liability. 

Unlimited tax liability means you are liable to pay tax in Germany on all of your income. It doesn’t matter which country you receive this income from.

This is also known as the worldwide income principle (Welteinkommensprinzip), and it applies to everyone living in Germany.

Let’s assume you earn from the following sources.

• Salary from employment in Germany
• Rent from a rental property in Italy
• Interest from an account in India
• Dividends or capital gains from the stocks you hold in a bank in Singapore.

Since the worldwide income principle applies to you, you must declare all income from different sources in your German tax return. The problem is other countries also want their share of taxes.

So that the taxpayers don’t pay full tax on the same income in several countries, the countries form double tax treaties. The DBA dictates which country is entitled to how much tax.

NOTE: The double taxation agreement regulations apply to both individuals and companies.

Benefits of Double Taxation Agreements in Germany

• Prevent deducting full tax on the same income twice – once where you live and another where the income came from.
• Prevent tax evasion.
• Guidelines to exchange tax-relevant information make tax control easier for both countries.
• Clear guidelines on which country can levy tax on a particular income and when.

When must you pay attention to the Double Tax Treaty in Germany?

As soon as you have an income source outside Germany, you should learn about Double Taxation Agreements between Germany and that country.

Here are some examples where DBA comes into play.

• Employees who work temporarily abroad
• Retirees who receive pensions from other countries (pensioners who live abroad and receive a German pension may also have to pay tax on this in Germany)
• Income from rented properties abroad
• Capital gains, dividends, and interests from banks in foreign countries.

NOTE: In DBA, the country of the company whose shares you own doesn’t matter. It’s the location of the bank or broker that holds your shares. If the bank is outside Germany, the capital gains are considered foreign income. 

How can you avoid double taxation in Germany?

To avoid double taxation in Germany, you must declare all foreign income and taxes paid abroad in your annual income tax return. To do so, you must fill out Appendix AUS and declare 

• foreign income,
• taxes paid abroad, and
• foreign income-related expenses

If you earn income from different countries, you must specify the foreign income for each country separately. It’s because the DBA rules vary from country to country.

The German tax office only considers the taxes you declared in Appendix AUS. You also need to attach proof of the taxes paid abroad.

You can attach the foreign country’s income tax return statement as proof. You can also deduct income-related expenses to reduce your taxable foreign income, as you do with domestic income.

We know it’s a lot of bureaucracy and that too in German. Hence, we recommend hiring an English speaking tax advisor to handle it for you.

We have also created a cheatsheet summarizing all the expenses you can deduct from your taxes in Germany. You can download the cheatsheet and use it when filing your tax return.

Read our guide on how to declare foreign income in Germany to learn more.

Principles of a Double Taxation in Germany

The Double Tax Treaty varies from country to country. However, some principles are common to most double-taxation agreements.

Exemption method (Freistellungsmethode)

In the exemption method, income is taxed in the source country and not in the country of residence. In other words, taxes on foreign income are exempt in the country of residence.

Credit method (Anrechnungsmethode)

In the credit method, you pay tax in both the source country and the country of residence. But you can offset the tax paid in the country where you work against the tax in the residence country.

Treaty override

Suppose the country where you earn doesn’t levy any tax on your income. In this case, the German tax office has the right to levy full tax as per the German tax law.

This clause is added to prevent tax evasion.

183 days rule

Suppose you went abroad temporarily for work. In this case, Germany has the right to levy full tax on your income if you live less than 183 days abroad.

On the other hand, the source country has the right to levy full tax on your income if you live more than 183 days in the source country.

Public sector employees

German public sector employees, such as soldiers, ambassadors, etc., are always subject to taxation in Germany. It doesn’t matter how many days they work abroad.

FAQ

How does a double taxation agreement work with inheritance and gift tax?

Suppose you received an inheritance from abroad. In this case, you are liable to pay tax in Germany.

German inheritance and gift tax applies in this situation. You can offset the tax paid abroad against the tax due in Germany.

This way, you prevent double taxation.

How high is the tax rate in a Double Tax Treaty in Germany?

The German tax authorities treat foreign income the same way they treat domestic income. So, the tax rates are the same for the foreign income.

References

• https://www.buhl.de/steuer/ratgeber/doppelbesteuerungsabkommen/