Tax on Foreign Income In Germany

Key takeaways

• Everyone who is a resident of Germany must declare foreign income in their tax declaration in Germany.
• You can offset taxes paid abroad against the taxes in Germany.

This is how you do it

• Declare the foreign income as you do the domestic income in the tax form.
• Also, complete Appendix AUS to declare foreign income and taxes paid abroad. The tax office will consider the taxes paid abroad only if you mention them in Appendix AUS.
• Declaring foreign income correctly can be tricky and prone to mistakes. Hence, we recommend using tax software or hiring a tax advisor. We find SteuerGo*, Wundertax*, and Smartsteuer* to be among the best tax software for expats in Germany.

Table of Contents

Do you have to declare foreign income in Germany?

Yes, you must declare foreign income in your tax return in Germany. It doesn’t matter if the income is tax-free in Germany or not.

The following applies to foreign income.

• Suppose the foreign income is tax-free in Germany. However, you must still declare the income in Annex AUS for tax purposes. This is because tax-free foreign income is subject to the progression reservation (Progressionsvorbehalt). This means the tax office includes the tax-free foreign income when determining your tax rate. Hence, foreign income can move you to an upper tax bracket. You must declare the tax-free foreign income from employment in Annex N-AUS.
• Suppose the foreign income is fully taxable in Germany. In this case, you must declare the foreign income as you do for income earned in Germany. 
• You paid taxes abroad on your income. You can offset the taxes paid abroad against income tax in Germany. You must mention the offsettable foreign taxes in Appendix AUS. 

What is considered a foreign income in Germany?

Section 34d of the Income Tax Act (EstG) regulates what counts as foreign income in Germany. The German tax authorities consider the following types of income as foreign income.

• Income from agriculture and forestry carried out in a foreign country,
• Income from business operations abroad,
• Income from self-employment carried out abroad,
• Income from the sale of assets abroad,
• Income from employment carried out abroad,
• Income from capital assets held in a bank outside Germany,
• Income from rental and leasing abroad, and
• Other income earned abroad.

In short, any form of income you earn outside Germany must be declared in the income tax return.

For example, you have a savings account in your home country. The interest earned in that account must be declared in tax returns in Germany.

Another example is the rent you receive from a property in your home country. The German tax office considers this rent to be foreign income. And you must declare it in your tax returns.

How do you declare income from foreign sources in Germany?

You declare foreign income as you do domestic income. This means adding the foreign income to the relevant appendices of the tax form as you would for domestic income. 

Additionally, you must fill out Appendix AUS in the following cases.

• Foreign income is subject to tax in Germany. And you want to offset the taxes paid abroad against German income tax. 
• Foreign income is tax-free in Germany. This could be because of a double taxation agreement (Doppelbesteuerungsabkommen). However, you must declare this income in Appendix AUS as it’s subject to the progression reservation.
• You must declare foreign income from employment in Appendix N and N-AUS.  In addition, you complete Appendix AUS to offset the taxes paid abroad against income tax in Germany. You must declare foreign income from employment and the tax paid abroad in Appendix AUS.

NOTE: Suppose you earn foreign income from different countries. You must specify the foreign income from each country separately. It’s because different countries have different tax treaties with Germany.

Declaring income from abroad correctly is usually complex. Thus, you should either use tax software or hire a tax advisor (Steuerberator).

We recommend SteuerGo*, Wundertax*, and Smartsteuer* tax software for expats in Germany.

How much tax do you pay on foreign income in Germany?

Whether you pay tax on your income from abroad in Germany depends on the tax treaty between the country in which you earned it and Germany.

There are two scenarios: you pay tax, or you don’t. If you do pay tax on your foreign income in Germany, the German tax authorities treat the foreign income as they treat the domestic income.

This means the same tax rate and regulations apply. You can deduct business expenses from your foreign income. What type of tax the tax office (Finanzamt) will apply depends on how you earn the foreign income.

For example, the tax rate will be 25% flat plus a 5.5% solidarity surcharge if the foreign income is from capital gains. Similarly, you pay tax on your foreign income from employment based on your personal tax rate.

Learn about the expenses you can deduct to save tax in our guide. You can also download the free cheatsheet summarizing all the expenses you can deduct from the taxes in Germany.

What is the Double Taxation Treaty?

A double taxation agreement (Doppelbesteuerungsabkommen (DBA)) is an international treaty between two countries or jurisdictions. It’s also known as a double tax treaty.

The main objective of a DBA is to avoid double taxation on income that is taxable in both countries. Double taxation occurs when a taxpayer must pay taxes on their income in two different countries.

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 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.

The Double Tax Treaty varies from country to country. The terms and conditions depend on the relationship between the two countries.

The Double Tax Treaty is critical in promoting international business and investments by easing the tax burden on individuals and companies.

References

• https://support.taxfix.de/hc/de/articles/11145982704797-Ausl%C3%A4ndische-Kapitalertr%C3%A4ge-in-der-Steuererkl%C3%A4rung-mit-Taxfix
• https://www.lohnsteuer-kompakt.de/texte/2023/177/auslaendische_einkuenfte