The exemption method (Freistellungsmethode) is one of the ways to avoid double taxation in Germany.

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.

Example:

You work and earn in Belgium but have a permanent residence in Germany. Both countries have the right to levy tax on your income.

However, if the Double Tax Treaty between Germany and Belgium holds the exemption method, then you pay taxes in Belgium only.

In other words, you pay no taxes in Germany. But your foreign income is still included to determine your tax rate in Germany.

This is how you avoid paying tax twice on the same income.