In early 2011, the German government finally agreed to increase the lump sum business expense deduction for employees in 2011 from EUR 920 per year to EUR 1,000 per year. This was a result of long-winded negotiations between the governing parties.  The increase of lump sum business expense deduction results in a tax saving of maximum EUR 3 per month for employees.

Expatica’s tax advisor in Germany, Martin Brune, gives an overview of three lucrative tax saving possibilities for employees that can result in a higher tax saving.

 Tax advantage for married couples, even if spouse lives abroad

Married couples that are both resident in Germany can apply for the married tax table.

Normally, this is done within the German wage tax card system when the high earner opts for tax class 3 and the low earner opts for tax class 5.

However, even if the married status is not considered during the year, a taxpayer can apply for the married tax table when filing a German tax return.

The married tax table is in general beneficial if the two partners have a different level of taxable earnings, as this table reduces the impact of German progressive tax rates.

A simplified example shows the impact of the married tax table, using an annual taxable income of EUR 60,000 for spouse A and EUR 20,000 for spouse B:

• Annual German income tax for spouse A based on single tax table: EUR 17,028
• Annual German income tax for spouse B based on single tax table: EUR 2,701
• Overall annual German income tax for both: EUR 19,729
• Annual German income tax based on joint tax table: EUR 18,014
• Tax saving because of joint tax table: EUR 1,715 per year

Even if only one spouse is working in Germany and the other spouse is living outside of Germany the spouse working in Germany can apply for the German married tax table if:

• The spouse living outside of Germany has EU citizenship and residency and
• At least 90 percent of the overall annual income of both spouses is taxable in Germany or the amount that is taxable outside of Germany is less than EUR 16,008 per year.

According to latest German case law, the 90 percent / EUR 16,008 regulation doesn’t apply if one spouse is registered as a German resident.

Therefore, if for instance, the husband is on assignment in Germany and has a German residence permit and his wife (with EU citizenship) remains in the home country, the husband can apply for the German married tax table regardless of the amount of income that the wife earns abroad.

However, outside income of both spouses that isn’t taxed in Germany is used to determine the tax rate.

As the married tax table is beneficial in most – but not in all – cases, it is recommendable to contact a German tax advisor and ask for tax comparisons before filing a tax return.

Salary split

If an employee is working for his employer regularly in different countries and this employer has branches or affiliated companies in these countries, a salary split situation is worth reviewing.

With this salary split, the taxable income is sourced to more than one country in order to benefit from lower tax rates and from free amounts.

This salary split is based on the double tax treaties that Germany has signed with other countries. In general, these double tax treaties include one clause, stating that if an employee is working in one country and his/her salary is paid from an employer of this country, the salary will be taxable in this country too.

Here is a simplified example:

An employee is regularly working for 180 days per year in Germany for his German employer and 50 days per year in the UK for the UK filial of the German employer. His salary will be taxable in Germany completely if it is paid and borne by the German company only.

However, if the part of remuneration that relates to UK workdays is paid and borne by the UK filial, 50 out of 230 workdays will be taxable in the UK and exempted from tax (with progression clause) in Germany.

In this scenario, the employee will benefit from both the German and the UK tax free amounts and might also benefit from a lower progressive tax rate on the UK taxable income.

As the contractual set-up of a salary split is complex and the tax savings need to be compared with additional administrative expenses (such as filing of tax returns in two countries), it is advisable to discuss this with a qualified tax advisor in advance.

Deferred compensation/pension plans

Employees that are assigned to Germany on a long-term basis or that intend to stay in Germany can use a deferred compensation or private pension plan to reduce the German tax burden.

According to German tax law several options exist to pay into a pension plan and lower your tax payments.

One option is that an employee can ask the employer to pay parts of the gross salary into a pension plan.

For instance, if a salary increase of EUR 100 per month is added to a gross salary of an employee that is in the highest tax bracket, this will result in an additional net payment of EUR 55.69 only – before deduction of German social security contributions.

If these EUR 100 are paid from the employer into a pension plan instead, the payment might be tax free so that EUR 100 will reach the pension plan account and yield interest.
The pension that results from the pension plan will be taxed once it is paid out and gives the opportunity to benefit from a lower tax rate. This is because, normally, the income after retirement is lower than before and therefore a lower progressive tax rate applies.

Other options are private pension plans that an employee can contribute into out of his net salary. These payments can be considered in the annual tax return and might lower the German tax burden.

Typical private pension plans on the German market are so called Riester-Rente or Rürup-Rente plans.

It is recommendable to ask a qualified insurance broker for a pension or deferred compensation plan that meets the requirements of German tax law and either allows contributing into this plan tax free or qualifies for a deduction in the German tax return.

Martin Brune works as a tax advisor in Duisburg. For more information email: brune@stb-brune.de (PH +49 (0) 203 713 6878 0, Fax +49 (0)203 713 6878 9.

You can also ask Martin Brune your tax-related question via Expatica's Ask-the-expert section for Germany.

This article contains information of a general nature and should not be considered as legal advice.
Although the greatest care has been taken in drafting this article, it is possible that certain information may have become outdated or inaccurate since its publication. Martin Brune cannot be held liable for the consequences of actions or omissions based on the content of this article.