Expatica's resident accountant Martin Brune explains the arcane mysteries of double tax treaties to three readers who each have ties to two countries.

Sorry for disturbing your time with this question. I am from the UK, employed by a company here in Germany paying tax here in Germany, and would like to know what can be reclaimed in tax.

I started work here in April 2005. I have a mortgaged house back in UK, and I travel quite a bit back to the UK (once or twice a month). I also rent an apartment here in Frankfurt. I know that self employed people can claim back travel and expenses, but i don't know if i can make any tax rebate claim for travel and or housing etc.

Thanks.

____________________

Dear Reader,
 
Thank you for your question.
 
The German tax system allows taxpayers to deduct expenses if the expenses relate to income that is taxable in Germany.
 
Therefore, in a first instance it needs to be checked if your income is taxable in Germany.
 
The income from employment is taxable in Germany as you are paid from a German company. Therefore, you can deduct any expenses that are related to this income, i.e. travel expenses that occur when you are on a business trip will be deductible if they are not refunded by the employer. Housing is deductible if a double household exists (see previous columns for the definition of a double household).
 
However, the deductions for certain expenses is limited. If you use your own car for a business trip, you can deduct a lump sum of EUR 0.30 per kilometre driven. This lump sum covers all costs for petrol, insurance etc. For meals on a business trip you can deduct per diems lump sums up to certain amounts, depending on the duration and location of your business trip.
 
The rental income that you receive in the UK is taxable in the UK according to the double tax treaty Germany/UK. However, Germany will use this income as so called progression income to determine the tax rate.

Expenses that relate to this rental income (i.e. travel expenses, phone expenses) will be deductible from the progression income. This will lower your German tax burden slightly.
 
Hope this helps.
 
Best regards,
 
Martin 
____________________

VB writes:

Dear Mr. Brune,

I was a resident of the United States for the past years and a citizen of France. I started a new job in Germany in September 2005 where I moved with my family.

I am aware that I have to file a tax return in the US as a resident since I was living there for more than 6 months, and that this will cover my world wide income.

However, am I considered a resident of Germany for 2005? I am not sure one can be considered a resident of two states for the same year. And shall I file a tax return in Germany?

In such a case, shall I include my world wide income for 2005, even for the period I was not in Germany yet? This may have a significant impact for me as my US salary was quite larger than my German salary.

Thank you.

____________________

Dear Reader,
 
Thank you for this interesting question.
 
According to the German tax law a taxpayer is considered to be a German resident if he/she stays in Germany for at least 6 months or has the intention to stay in Germany for at least 6 months.
 
Assuming that you will stay in Germany for 6 months you are considered to be a German resident starting in September 2005.
 
Therefore, in 2005 you will indeed be considered as a resident of two countries.
 
But this doesn't mean that your income is taxed twice: Double tax treaties avoid income you received from one source being double taxed. They allocate the right of taxation to only one of the involved countries. The other country will then leave this income either tax free or gives a foreign tax credit.
 
Both methods are used in your case:
 
You will need to file a German income tax return for 2005 as your income that is not taxable in Germany exceeds an amount of EUR 410. However, Germany has only the right to tax your income that you received during your German residency as it is paid by a German employer. The US income will be tax free in Germany but will be used to determine your tax rate.
 
In your US tax return, your whole 2005 income will be taxed. However, for the income that will be taxed in Germany you will receive a foreign tax credit.
 
As a result, your income is only taxed once although you had two residencies in 2005.
 
Best regards
 
Martin

____________________

M writes:

Dear Martin -

I have read with great interest your responses to the many diverse questions presented and now I have my own.

Background: I am a US citizen, retired from US government and am married to a German citizen. I have my permanent residency permit, including work permit. Two questions:

1.  Am I required to pay taxes in Germany for interest and dividends earned in investments outside Germany?

2.  If we own an Eigentumswohnung (flat) which we rent (for costs only) to my wife's mother, is the rent taxable? If so, is there a limit over which it is taxable? Any information you can provide will be greatly appreciated!

____________________

Dear Reader,
 
I hope my previous responses helped you a little bit and I am happy to answer a question of a staunch reader.
 
Assuming that your only residency is in Germany, your income from interest in dividends will be taxable in Germany. This is determined by the double tax treaty that Germany has concluded with the country the investment is located in, i.e., if your investment is in the US, due to Articles 10 and 11 of the double tax treaty Germany/USA the country a taxpayer is resident of has the right to tax the income from interest and dividends.
 
When filing a tax return in Germany, you will benefit from the savers free amount (EUR 2,740 for married in 2005 and 2006). Your dividend income is due to the so called "half income procedure" only subject to tax with 50 % of the dividend income.
 
Your second question relates to rental income. In this case, a fundamental German tax rule needs to be considered in advance: Income is only taxable if the taxpayer has the intention to receive a profit on a long term basis.
 
If you are renting out your flat for costs only, meaning that your mother-in-law only refunds the costs that occur with regard to the flat, this will not be taxable in Germany as you have no intention to receive a profit. However, I would recommend to keep all receipts for this flat for 10 years as it might be necessary one day to prove to the tax authorities that you haven't made a profit but only got a refund of costs.
 
Best regards
 
Martin

____________________

To read more about Martin Brune you can click on Ask our accountant  or Financial - Advisors under Expatica's business directory.

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.

January 2006

Copyright Expatica 2006

Subject: Life in Germany, tax advice, ask our accountant, tax advisor Martin Brune