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Tax Treaty Considerations for Expats in Germany

Submitted: January 2014

Tax treaties exist to protect taxpayers from being taxed twice on certain money flows between two countries. Treaties are particularly important if you have investments outside Germany, and intend bring money earned from them into Germany during your stay. They also apply if you build up some investments in Germany during your stay, and intend to leave them there after you have left Germany. Germany has a network of tax treaties in force with over 90 countries worldwide.

Most tax treaties will conform to the OECD Model Treaty and typically will state how the various forms of income are taxed. It will state whether the specific income is only taxed in Germany; only taxed in your home country, or taxed in both countries. It may also state what rate of tax is applicable in different cases. The treaty will also contain a definition of residence only for the purposes of the treaty; this is not the same as the definition of tax-residence in tax law. The types of income covered by a treaty may include:

It is important to recognise that a tax treaty operates on money flows both into and out of the treaty countries.

The withholding tax rate in Germany on dividends sent to a country without a tax treaty is 26.375% (including the solidarity surcharge), if sent to a country with a tax treaty the rate is generally reduced to 15%.

The withholding tax rate in Germany on interest sent to a country without a tax treaty is 26.375% (including the solidarity surcharge), if sent to a country with a tax treaty the rate is reduced to 0%.

The withholding tax rate in Germany on royalties sent to a country without a tax treaty is 15.825% (including the solidarity surcharge), if sent to a country with a tax treaty they are generally reduced to 10%.

Germany’s tax treaties with other countries generally restrict the amount of withholding tax those countries can charge German residents to 15% on dividends and 10% on interest. Royalties are only taxable in the country in which they arise.

In addition many of Germany’s tax treaties with developing countries include a special section. This means that Germany agrees to treat the tax that has been spared (or saved) by the treaty in those countries as if it was paid, and this amount can be used as a tax credit against income in Germany. The countries include Argentina, Cyprus, Greece, Hungary, India, Indonesia, Iran, Israel, Ivory Coast, Jamaica, Kenya, Korea, Liberia, Malaysia, Malta, Mauritius, Morocco, Pakistan, Portugal, Singapore, Sri Lanka, Trinidad and Tobago, Tunisia and Uruguay.

Rental income from tax treaty countries is taxable in the country where the property is located, and if tax has been paid, it does not need to be included in the calculation of German taxable profit. If there is no tax treaty, or the treaty that exists give Germany the right to tax, any tax already paid is treated as an expense, and only the net amount is taxable in Germany.

For the complete rules and rates it is necessary to read the treaty itself. A link to each German treaty in force (in German) can be found here. The sections dealing with dividends, interest and royalties can usually be found half way through the treaty document.

Prior to arriving in Germany you may be able to arrange your existing investments so that the maximum advantage is gained from the terms of any treaty. This may involve moving investments from one non-German country to one with a more favourable tax treaty, or even to Germany itself, to reduce the tax rate paid.

If your home country has a generally higher rate of tax than Germany, you may benefit by becoming tax-resident in Germany as early as possible. At the end of your stay in Germany you can also rearrange your affairs to ensure that any ongoing income from German employment or investments is also taxed at the lowest rate possible in the future.

 

 



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