Tax Issues for Expatriates

Find out about the difficulties expatriates can face with German taxation, including DTT problems and issues affecting people from the USA residing in Germany…

Expatriates are exposed to multiple tax problems. Not only do they have to comply with tax rules of their home country but they are also liable to tax in Germany. In many cases double taxation will occur. In order to prevent double taxation, the taxation rights of both countries have to be identified.

Double Taxation

Double taxation is a problem to most expatriates and not commonly advised on by tax advisors, because it is complicated and susceptible to professional liability. Many countries, like the U.S., force their citizens to file tax returns (Steuererklärungen), even if they do not have an income in the U.S. Also, as long as residency in Germany is established, taxes are due.

One major problem is to prevent double taxation and to file all necessary reports and returns to all tax authorities involved.

Tax planning in order to reduce the world-wide tax burden can only take place once their tax status has been identified.

The most important streams of income which are subject to double taxation are: rental income, wages/salary (including from a former employment, e.g. stock options and pensions/pension schemes) and capital gains. Not disclosing any of these incomes in both countries could lead to tax fraud.

In most cases, double taxation can be effectively excluded. Most countries have concluded double tax treaties and many have domestic legal instruments to exclude double taxation. Before coming to Germany, a tax advisor should be addressed with identifying the tax risks and problems and all necessary steps should be taken in order to prevent double payment of taxes. The later these steps are taken, the more complicated they are – it is harder to reclaim the tax in arrears than not to pay in the first place!

Tax for Americans in Germany

American citizens have a special status when it comes to expatriate taxation. They have to file annual tax returns even if no taxes are owed, once income is above the filing requirement, regardless of where the income was earned or whether a tax return was filed in Germany. Form 1040 (or similar), at the very least, has to be filed.

Since Germany is a preferential destination for U.S. citizens, the U.S. Internal Revenue Service (IRS) has established an office in the U.S. Consulate in Frankfurt a.M.

Tax liability in the U.S. arises when individuals do not qualify for the foreign earned income exclusion. Under this rule non U.S.-source income of 99,200 USD (year 2014) remains untaxed in the U.S. It is important to note that the IRS determines its very own currency exchange rate. Further requirements have to be fulfilled: either a 330 day presence in Germany within a 12 month period, or residency in Germany for a full calendar year. If both conditions are met, form 2555 has to be filed separately.

For those earning more than 99,200 USD a foreign tax credit can be claimed by completing form 1116. Thus, double taxation can be avoided.

Other sources of income are subject to specific tax rules and double tax treaties. They must be reported in both tax returns – the U.S. will normally tax the foreign income and provide a tax credit.

Expatriates are granted a two month extension for filing their tax returns (note: another form has to be added), the extension is not granted for the tax payment – therefore, if a tax is due, interest will be charged from 15th of April of the relevant year.

Not filing tax returns and paying taxes in the U.S. is tax fraud. As a result, upon returning to the U.S., taxpayers are normally charged with tax fraud. Taxpayers have sidestepped the allegation by proving that they did not know about their obligations (note: burden of proof). However, it remains necessary for them to catch up with their tax obligations and file all outstanding tax returns (late filing), pay all taxes, pay interest on all taxes and penalties for each year. Under these conditions criminal charges will be abandoned; however, the financial burden could be high.

If a taxpayer cannot fulfil the ‘burden of proof’ test and the IRS acts on the assumption of tax fraud, fines, seizure of property or wages and even imprisonment are possible.

The German and U.S. tax authorities have a sophisticated system of information sharing. Also, every time U.S. citizens make use of consular services (such as applying for a new passport) this information is provided to the IRS.

Further Obligations for American Expatriates

Note that once a US national opens a bank account in Germany and the accounts exceed more than 10,000 USD at any time during the year, they will have to file a Report of Foreign Bank and Financial Accounts (FBAR) to the IRS by 30 June of the following year electronically.

Also, taxpayers with specific foreign financial assets that exceed certain thresholds (200,000 USD) have to report those assets to the IRS (form 8938 – Statement of Specific Foreign Financial Assets).

Again, keep in mind that the IRS determines its own currency exchange rate.

Disclaimer: Tax law is a complex matter. Any information provided on this website is intended as a summary and not to be more than a general overview. A specific client-advisor relationship does not arise from any information shown herein. Neither the author nor the publisher are responsible for any liability, especially for actions taken on the basis of information contained in this summary, nor for any errors, omissions etc. This text is not intended to render legal, accounting or tax advice.

Due to the complexity of tax law in any country and especially the interaction of multiple tax systems it is always recommended and encouraged to seek professional advice concerning specific matters before making any decision.

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