Foreign Tax Relief and Tax Treaties in Germany

Whether you’re a German citizen or not, you need to pay taxes by law, if you earn money while living or working in Germany.

Taxes are levied by the federal government (Bundesregierung), federal states (Bundesländer), and municipalities (Gemeinden). Tax administration is shared between two taxation authorities: the Federal Central Tax Office (Bundeszentralamt für Steuern) and the approximately 650 regional tax offices (Finanzämter).

Tax revenue, derived from income tax, VAT, corporation tax, and various other streams, is distributed between the federal government, states, and municipalities.

Are you aware of foreign income and how it is being taxed in Germany?

If you wonder, who can pay tax in Germany? Then, the answer is, every person who may be a resident or non-resident of Germany is subject to its income tax purposes.

If a person is staying in Germany for less than 6 months and deriving income from German sources, then the person is considered to be a non-resident, as mentioned in Section 9 of the Fiscal Code. For example, some business travelers, who travel from country to country for business purposes may reside less than 6 months.

A resident is someone who’s residing permanently or has been residing for more than 6 months in Germany. Unlike a non-resident, a resident has to pay taxes on his worldwide income unless there is an exemption under the provisions of the tax treaty.

There are different types of taxes in Germany, such as income tax, also known as “Einkommensteuer” in German, Trade tax (“Gewerbesteuer”) and Value added tax (VAT) (“Umsatzsteuer”). The tax system in Germany is mainly based on the capability of a person to pay, maintaining transparency, and fairness while following the procedure of paying taxes. 

So, if you’re visiting Germany to perform any kind of services, then you should be aware of how foreign income is taxed and the types of tax relief you can get in Germany.

Bundeszentralamt für Steuern/Federal Central Tax Office

What is Foreign income?

Before you proceed with the further part of the article, let’s have an idea about the meaning of Foreign income.

In general words, Foreign income is the income you earn or receive for performing any services in a foreign country. 

For example, if you are a citizen of the United States but you have been residing in Germany for more than 6 months consecutively for offering personal services and get paid for your work, then your income must be taxed in Germany and that particular income is known as foreign income.

However, the definition of foreign income is not limited to foreigners only, it can be applied to German nationals who are having a source of income from different countries.


Tax system based on residence

The tax system of Germany is based on the residence of a person.


Unlimited Tax liability

It means the calculation of income tax must include both worldwide income or foreign income and German income. According to Section 1(1) of the Income Tax Act (“Einkommensteuergesetz”), the person whose residence or habitual abode is in Germany will be subjected to Unlimited tax liability unless an exemption under the tax treaty.

Please note that the Unlimited Tax liability can also be applied to German nationals who are residing abroad.


Limited Tax Liability

 This includes the Non-residents or the persons who work as public servants and are paid wages from German funds, as mentioned in Section 1(2) of the Income Tax Act. For example, German income earned by a foreign artist is subject to limited tax liability.


What is Double Taxation?

As we read about the tax system in Germany based on residence, how it works, and foreign income. The next question that arises is, if a person is residing in Germany and is subject to pay tax, then, does the person need to pay tax for the same income in his home country? 

Yes, it may happen which is called “Double Taxation”.

The meaning is the same as it sounds like, being taxed twice for the same source of income. To elaborate, We can say that the Income may be earned and taxed in a foreign country but then, that income can be taxed for the second time in the home country. Sometimes the tax rate becomes so high that businesses cannot handle the expenses. 

Double Taxation has been a very important issue for people who want to work in foreign countries. The Corporations who wanted to grow internationally often faced the issues of Double Taxation.


How can Double Taxation be prevented?

The best way to prevent the issue of Double Taxation is to make a bi-lateral (two-party) agreement or tax treaties between the two countries. These treaties help in developing a mutual understanding of the jurisdictions of the two countries and also, help in exchanging relevant information that can reduce double taxation practices or any other illegal tax practices, bring efficiency in trade practice, and reduce any kind of uncertainty. 

For example, According to Article 20 of the Germany-UK treaty, if a person visits Germany and resides for more than 2 years and works for a Public research facility can pay taxes in his home country. 

Like many other countries, Germany has also signed with many foreign countries and ensured that the income must not be taxed in more than one country.


Tax Treaty

The Tax Treaty is also known as the Double Tax Treaty (DTT) signed between two countries to minimize or eliminate Double taxation on the same income. As mentioned earlier, the German National Income Tax Law has signed tax treaties with various countries. To be precise, Germany has signed DTTs with nearly 90 countries worldwide, most of the countries are highly industrialized and developed, but it doesn’t have DTT with Brazil, Hong Kong, and some other countries.

Albania Iran, the Islamic Republic of Philippines
Algeria Ireland, Republic of Poland
Argentina Israel Portugal
Armenia Italy Romania
Australia Jamaica Russia
Austria Japan Serbia
Azerbaijan Jersey Singapore
Bangladesh Kazakhstan Slovak Republic
Belarus Kenya Slovenia
Belgium Korea, Republic of South Africa
Bolivia Kosovo Spain
Bosnia and Herzegovina Kuwait Sri Lanka
Bulgaria Kyrgyzstan Sweden
Canada Latvia Switzerland
China, People’s Republic of * Liberia Syria
Costa Rica Liechtenstein Taiwan
Cote d’lvoire Lithuania Tajikistan
Croatia Luxembourg Thailand
Cyprus Macedonia Trinidad and Tobago
Czech Republic Malaysia Tunisia
Denmark Malta Turkey
Ecuador Mauritius Turkmenistan
Egypt Mexico Ukraine
Estonia Moldova United Arab Emirates
Finland Mongolia United Kingdom
France Montenegro United States
Georgia Morocco Uruguay
Ghana Namibia Uzbekistan
Greece Netherlands Venezuela
Hungary New Zealand Vietnam
Iceland Norway Zambia
India Pakistan Zimbabwe
Indonesia Philippines  

Source: PWC Germany


What kind of Double Taxation relief can be granted?

The DTT’s foremost goal is to improve the trade and economy of the two countries. It ensures that the income that has been earned by a person would not get compromised due to the tax rules and regulations of two countries, and also, maintains smooth conduct of process while encouraging cross-border trade and investment between the countries.

A Double Taxation Agreement can require two things to maintain a mutual understanding between two countries and to avoid or minimize Double Taxation as a person may be charged for tax in the host country where the income is generated and gets an exemption from the home country or he may be levied from the country he earned and receives a foreign tax credit from his home country. Therefore, there are two methods to minimize Double taxation through DTT’s, they are, exemption method and crediting method. 

  1. Exemption method

The exemption method helps to improve the cross-border investments as a result of which trade and the globalization of business see steady growth. According to the exemption method, a taxpayer is exempted from paying tax in his home country irrespective of the country where he has earned the income. However, he has to pay the tax in the country where he generated his income. For example, a person residing in Germany has to pay only the German taxes and not the domestic tax. 

The exemption method is more common in countries that don’t have large differences in their tax rates such as the western countries.

  1. Crediting method

The foreign tax crediting method requires the home country to allow for providing credits in case of domestic tax liability against the foreign country where the taxpayer earns his income. The crediting method helps in balancing the tax paid in one country (abroad) and the tax liability in another country (domestic). In this case, the taxpayers have to pay taxes in Germany for their worldwide income but also get credit from their home country. 

The foreign tax credit method is more common in the countries where the tax rate is lower than in Germany, for example, middle eastern and Asian countries.


What is Withholding Tax Relief in Germany?

As earlier mentioned, According to Section 49 of the Income Tax Act, German income earned by foreign artists or are getting paid from German Public funds are subject to the limited income tax liability in the country where they have a registered address. This type of income is taxed in accordance with the tax withholding procedure

When a DTT completely or slightly exempts the income earned in Germany from tax withholding, the taxpayers who are liable for limited income tax liability can claim for tax relief in Germany as per Section 50a of the Income Tax Act.


Tax relief through refund or exemption

The foreign taxpayers may request a refund, in accordance with Section 50d(1) of the Act, in case they want a refund for the withholding tax that has already been paid or withheld. 

The taxpayers can apply for a certificate of exemption if they want to protect any future earnings from getting exempted from withholding tax to remove the tax that the taxpayer has to withhold. 

Tax relief through exemption or refund can only be accepted if they abide by the procedural requirements that are mentioned in Section 50d of the Income Tax Act.


Who is eligible to receive the Tax Relief?

Generally, the taxpayers who have their habitual abode outside Germany and earn a domestic income or German income can claim for tax relief.


Common Questions on Quora

  1. What are the taxes in Germany?

Ans: In general, Income tax and Value added tax (VAT) are the most common taxes in Germany. VAT is 19% (7% reduced for groceries), but the income tax is solely based on how you’re making a living there. For example, if you’re buying a property or a car, you may have to pay extra income tax.

  1. Can a non-european citizen pay taxes in Germany?

German income tax is imposed based on residence and not on citizenship. If you’re a resident in Germany, then regardless of citizenship, you will be paying the income taxes. 

  1. If you have German citizenship and live in another country, do you have to pay German taxes?

If the country you currently reside in has a tax treaty with Germany, then, the German taxes can be deducted from the country you reside in.  

  1. If an expat person lives in Germany, buys property in their home country, is that taxable?

It depends, if the home country and Germany had a tax treaty signed then income from the property from the home country is only taxable in the home country and Germany will not have any right. But If the income is a foreign income then it might increase the German tax rate.

If there’s no treaty, then you have to pay the German tax in full.

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