Where do I need to pay taxes? How do I include pension plans in my return? Is dental work deductible? In his regular Expatica column, our tax accountant answers some of your questions.

A reader from New York wrote:

I have read that one is taxable in Germany if one is resident or has a customary place of abode there. So if I rent an apartment in Germany where I reside for less than six months every year, without having any employment in Germany, while I live in another country for the rest of the year, does that mean I am resident or have a customary place of abode in Germany, and am therefore liable to pay tax in Germany on my world-wide income?

I'd welcome enlightenment on this obscure issue.

______________________

Dear New York reader,
 
The problem you describe is an issue that many expats are worried about: Where do I need to pay taxes on my income?
 
The first answer I always give is: It depends...
 
It depends on your nationality and also on your place of residence.
 
Whereas some countries (like the US) have the principle of nationality (meaning every person that has the US citizenship is obliged to file a US tax return), Germany has the principle of residency.
 
From the German point of view, every person who has a place of residence or a customary place of abode in Germany is taxable in Germany.
 
A place of residence can be assumed if one maintains a house or apartment in Germany and has the intention to keep and use this house/apartment.

A customary place of abode can be assumed (with some exemptions) if a person is not only temporarily staying in Germany. In these terms, not only temporarily staying in Germany means that the stay will exceed a period of six months.
 
If one of the above mentioned criteria is met, a person will be taxable in Germany.
 
Next question will be: If one is in general taxable in Germany, what is included in the tax return?
 
Germany has concluded double tax treaties with most of the countries all over the world.

These double tax treaties allocate the right of taxation to only one of the involved countries to avoid double taxation.

Double tax treaties come into use every time two countries are involved, i.e. if a person

• has two places of residency,
• has a place of residency in one country but receives income from another country, etc.

The double tax treaties that Germany has concluded allocate - like the OECD model treaty does - the right of taxation depending on the type of income, the personal situation of an individual and other circumstances. That is according to most double tax treaties interest income and income from dividends is taxable in the country the receiving person is resident of; income from property (rental income) is taxable in the country where the property is located; income from employment is taxable in the country where the employee is resident (restrictions: 183-day-rule or costs are borne by the company in the other country).
 
If one maintains more than one places of residency, the double tax treaty also determines one place of residency as a place of residency within the meaning of the double tax treaty. This place of residency will then be used to allocate the right of taxation.

The determination of the place of residency in the meaning of a double tax treaty follows certain criteria. That is, it needs to be checked where a person has his centre of vital interests.
 
To give an example for a better understanding: A US national maintains a house in the US, where he lives together with his family and that is close to his or her workplace. In addition, he owns an apartment in Germany that he uses for business trips and for vacation.

According to the German tax law, he has a place of residency in Germany. However, according to the double tax treaty USA/Germany his main place of residency will be in the US. Therefore, the US will have the right to tax the worldwide income that is allocated due to a residency principle.
 
Germany will use this income only for progression purposes (to determine the personal tax rate). If the other income - that Germany has the right of taxation of -  will be 0.00, no tax will be due in Germany

______________________

Mrs. Vazquez wrote:

My company has offered me a private pension fund ('Private Pensionskasse'), and I would like to know how to enter this information in my 'Steuererklaerung' (income tax declaration). 

______________________

Dear Mrs. Vazquez,
 
Due to the new German income tax rules that were issued to promote private pension funds, contributions to a Pensionskasse can be treated as follows:
 
If the contributions do not exceed four percent of the annual income ceiling of the pension insurance (in 2005: four percent of 62,400), for contracts signed later than 31.12.2004 the amount mentioned before plus 1,800 Euro, the contributions can be paid

• free of tax and
• free of social security contributions (until 2008) to the Pensionskasse by the employer if certain criterias with regard to the contract are met.

(Normally, it is included in the contract that payments are benefited by the new German income tax rules).

However, employees can apply that the contributions are taxed as normal salary. In this case, and also in the case when the contributions exceed the above mentioned maximum amount,  employees can include the (exceeding) contributions in their income tax return.
 
The tax office will then check if it is more beneficial for the employee to get the governmental allowance (EUR 76 in 2005 plus additional children allowance) on the contributions or if the contributions are deducted as special expenses (and will lower your income tax burden).
 
To include the contributions in the income tax return, an enclosure called "Anlage AV" has to be attached. In addition, a certificate of paid contributions issued by the 'Pensionskasse' has to be added, too.

______________________

Isabelle wrote,

I have had some dental work to the amount of EUR 1500 (crown and so). Is this tax deductible?

Last year I tried to do my tax report alone and got approximately EUR eight back (juhu). Would you advise to get a tax advisor?

______________________

Dear Isabelle,
 
So called "extraordinary expenses" are tax deductible according to Art. 33 German income tax law ('Einkommensteuergesetz').

As explained in Art. 33 'Einkommensteuergesetz', extraordinary expenses are expenses that a taxpayer has and the majority of taxpayers do not have. This could, for example, be expenses due to sickness (medicine, costs for surgeries etc.), dental costs or funeral costs. These costs must not have been refunded by any authority, company or organization.
 
However, these costs are not tax deductible completely, in fact an own contribution is demanded.

As usual in German tax law, the own contribution can't be calculated in an easy way, but it is determined by the income, family status and if you have dependent children or not.

To calculate your own contribution, a percentage mentioned in Art 33. needs to be multiplied with your annual income (after deduction of business expenses).

Depending on the number of children, the percentages vary from four percent to seven per cent (no children) and 1 percent to four percent (additional distinction between: one or two children - more than two children).
 
Some examples for percentages:

• Single taxpayers without children and an annual income above EUR 51,130: seven percent
• Married taxpayers without children and an annual income above EUR 51,130: six percent
• Single or married taxpayers without children and an annual income between EUR 15,340 and EUR 51,130: three percent
• Single or married taxpayers with three or more children and an annual income between EUR 15,340 and EUR 51,130: one percent

Please note, that only the amount that exceeds the own contribution will be considered as tax deductible.
 
Following this, a single taxpayer without children and an annual gross salary of EUR 102,000, business expenses of EUR 2,000 and dental costs of EUR 7,500 can deduct EUR 500 in his/her income tax return.
 
A recommendation: If you insert the whole amount of extraordinary expenses into your income tax return, the German tax authorities will calculate your own contribution automatically and will consider the remaining amount.
 
As shown above, the German tax law isn't always easy. I would therefore recommend to contact a tax adviser at least when filing your first German tax return. In future years it can be recommendable if there other income than income from employment or if you have various kinds of business expenses.

______________________

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.

February 2005

Send a question to Martin Brune at germany@expatica.com

[Copyright Expatica 2005]

Subject: Life in Germany, tax advice, ask our accountant