Expatica's resident tax accountant Martin Brune comes to the rescue of Expatica readers bewildered by the German tax system.

RM writes:

Hello Martin

I am a freelance writer & filmmaker.  I also taught part time at a University in the UK until February 2005.  I moved to Berlin in April 2005.  At present I am still in the English tax system and have just filed my tax return (stating my mix of University payroll (taxed at source via PAYE) & freelance income) for April 2004-April 2005.  I will pay this tax in December 2005.
 
I am not earning very much money at present, what I do earn comes from writing commissions in the UK.  However, I've been offered a little bit of teaching work at Potsdam University (little is the word, only about EUR 700 worth all together).  They have asked for my tax code in order to put me on the payroll.  Can I give them my UK tax code or is now the time to enter the German tax system?
 
I gather the German system runs from December to December.  If I do enter the system can I avoid being taxed until April 2005 since I will already have paid UK tax on any earnings up to that point?
 
Ah, questions, questions.  If you have the time to answer them I would be very much obliged! Thank you in advance.

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Dear RM,
 
Thanks for your email.
 
Your tax situation in Germany is kind of complicated.

The German tax year is the calendar year. The income you received before moving to Germany in April will not be taxable in Germany, as you haven't been resident in Germany from January to April.
 
Your current income needs to be divided into income from teaching and income from writing commission.
 

Bewildered by the German tax system? Martin is here to help

The income from teaching might be tax free in Germany according to Art. XIII double tax treaty UK/Germany. This article states that income for teaching that is received during a temporary stay in Germany that doesn't exceed 2 years is not taxable in Germany but in the UK. I would recommend asking the payroll department if you are covered by Art. XIII double tax treaty UK/Germany.
 
Please note that you might be liable for German social security.
 
Income from writing commissions in the UK are taxable in Germany according to Art. XI double tax treaty UK/Germany if no permanent establishment in Germany exists.
 
Therefore, on first sight I would say that your teaching income will be tax exempt in Germany, your commission income will be taxable in Germany. However, to finally determine your tax status more background information would be necessary.
 
Best regards
 
Martin
 
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RH writes:

Dear Martin Brune,

I work in Germany as an expat and I get salary, daily allowance and my rental fee of apartment here is paid. I am liable to pay tax in Germany on my world-wide income because of the 183-day-rule.

I know the salary is taxable. The rental fee is not because this is my second household but what about the daily allowance? Is the whole amount taxable or is there a tax free limit (e.g.: EUR 30/day) and only the amount above this limit is taxable?

Could you please help me out with this problem.

Thank you very much in advance.

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Dear RH,
 
Thank you for your email.
 
According to German tax law, daily allowances are tax free up to certain amounts.
 
The amount is determined by the duration of absence from your workplace and if this time is spent inside or outside of Germany. If you are on a business trip inside of Germany, the maximum amounts that can be paid tax free are:
 
Absence from workplace

• more than 8 hours: 6 Euro/day
• more than 14 hours but less than 24 hours: 12 Euro/day
• more than 24 hours: 24 Euro/day
   

For business trips outside of Germany the maximum allowances are fixed according to the cost of living in the foreign country and the duration of absence, too.
 
Some examples (more than 8/14/24 hours):

• Amsterdam: 13/26/39 Euro
• London: 20/40/60 Euro
• New York: 16/32/48 Euro
   

As you maintain a double household, a special regulation applies to you, too: For the first 3 months in Germany the daily allowance can be paid tax free even if you are working at your workplace.
 
Best regards
 
Martin Brune

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RD writes:
 
I've recently moved to Germany with my wife, and we're confused by the German tax system. At registration, I was given the married tax code for me, being the only person working. Now, my wife has recently started working freelance and we're a little confused as to what to do for tax codes. What would be the recommendation?

Thanks.

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Dear RD,
 
Thanks for your question.
 
Before answering your question I would like to give an overview of the tax classes and wage tax deductions.
 
As you might be aware from reading my other articles or answers, the German tax system allows several deductions from the taxable income: business expenses, special expenses limited deductible, special expenses unlimited deductible and extraordinary expenses.

For business expenses and special expenses (limited/unlimited deductible) lump sums are deducted if the actual expenses do not exceed these amounts.
 
In addition, different tax tables are used for married people filing jointly and for singles.
 
The above lump sums and tax tables are considered when your employer withholds German wage tax, as the employer calculates your wage tax based on the details mentioned in your wage tax card (Lohnsteuerkarte). This document, issued by the municipal authorities, shows your personal details and your tax class (Steuerklasse).
 
The meaning of the tax classes is as follows:

• Tax class I: Single: Single tax table, lump sum deductions for business expenses and special expenses
• Tax class II: Single with dependent child/children: Single tax table, lump sum deductions for business expenses, special expenses and children's extra allowance
• Tax class III: Married: Married tax table, lump sum deduction for business expenses, doubled lump sum for special expenses (one for employee, one for spouse)
• Tax class IV: Married: Treated like tax class I
• Tax class V: Married: Married tax table, lump sum deduction for business expenses, no deduction for special expenses
• Tax class VI: For second wage tax card: Single tax table, no deductions.

As lump sums for married couples are granted twice, married taxpayers have the following options to choose their tax classes:

• III and V
• IV and IV

A general recommendation is that employed spouses earning a similar amount of income should chose IV and IV, spouses earning different amounts of income (only one spouse working, or monthly income of one spouse exceeds monthly income of other spouse by more than EUR 1,000) should choose III and V (III for the only or better earner, as most of the lump sum deductions are allocated to the higher income).
 
A change of tax classes can be applied for at the municipal authorities or at the responsible tax authorities.
 
If III and V was chosen, an obligation for filing a German income tax return exists. If due to this or other regulations a filing of a German income tax return is necessary or if you file your tax return on a voluntary basis, the wage tax withholding is only an instalment payment on the annual income tax. Therefore, choosing different tax classes will not lower your German tax burden but will only increase your cash flow during the year.
 
However, it makes sense to think about the right tax class in advance, as i.e. unemployment payments from the Bundesagentur fuer Arbeit are calculated based on the last net income - and this is determined by the tax class. A tax adviser can help you to determine your best option.
 
To give a simple answer for RD's case: as wage tax cards and different tax classes determine the wage tax withholdings, they are only important for employees. If one of the spouses is self-employed, I would recommend that the employed spouse chooses tax class III. This gives a higher cash flow during the year. However, please be aware that if the spouse has a significant profit from self employment, the final payment when filing the annual German income tax return will be significant, too.
 
Hope this helps.
 
Best regards
 
Martin

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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.

November 2005

Copyright Expatica 2005

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