Are pension contributions paid into a UK scheme from German income tax-deductible in Germany? What happens if you work outside Germany for three months a year? And what is the best time to move to Germany anyway? The Expatica tax accountant answers your questions.

WR writes:

Just read your article The New Tax Year on Expatica.com and it was really helpful.

I noted your comments for pension regulations for 2005 onwards. But specifically for tax years 2001 - present day, would pension contributions paid into a UK pension scheme, but taken from net income in Germany, be due for tax re-imbursement here in Germany? What about National Insurance contributions which are paid through the same route? Of course both these items come from gross income if living and working in the UK.

I would be grateful for your opinion.

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Dear WR,
 
Thanks for this interesting question.
 
According to the German income tax law that was valid until 2004, contributions to a governmental pension scheme and to health insurance companies are deductible from gross income up to certain limits. These contributions are known as 'special expenses'.

As the income tax law did not say 'German governmental pension scheme', the above in general also applied to contributions paid into foreign governmental pension schemes. The same applies to health insurance contributions.
 
However, in addition to the German income tax law the German income tax directives (Einkommensteuerrichtlinien) state that a deduction of special expenses is not possible if the special expenses directly relate to tax-free income.
 
So, are your contributions deductible or not? A brief example can be used for clarification:
 
Employee X has been on assignment from the UK to Germany since 1 July 2004. His income from January to June 2004 was taxable in the UK due to the double tax treaty.

As his assignment fulfils certain criteria, he can remain in the UK social security scheme while on assignment to Germany according to EU regulation 1408/71. Therefore, he contributed to the UK governmental pension scheme and to National Insurance during the whole year 2004.
 
Result: in his German income tax return 2004 the salary received from January to June is tax free due to the double tax treaty. Although Germany will use this income for progression purposes (to determine the tax rate), it is considered as tax-free income in the meaning of the German income tax directives. Therefore, he can't deduct the pension and health insurance contributions paid from January to June.
 
From July onwards, he goes on contributing to the UK governmental pension scheme and to National Insurance due to EU regulation 1408/71. He is not obliged to pay into the German social security scheme. However, from July onwards his salary is taxable in Germany due to the tax treaty.

Therefore, he can deduct the contributions for July to December 2004 as special expenses (up to certain limits mentioned in the German income tax law).
 
Hope this helps.
 
Kind regards,
 
Martin Brune
 
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DP writes:

I am arriving in Germany in May and will be in a hotel for up to three months before I find my own apartment. Do I still pay German tax for these three months? How do I deduct rent and language courses from my tax, if this is possible? Due to my job, I will be out of the country for approx. three months of any year--does this make any difference?

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Dear DP,
 
Thanks for your question. May is the best time to arrive in Germany. The weather is getting warmer, and people are getting friendlier.
 
Despite this, the tax situation remains as confusing as in the previous months.
 
Your questions can be split up into two parts:

1) What is taxable in Germany?
2) What is tax deductible in Germany?
 
I will try to answer point 1) first.
 
If you do not maintain another residency during your stay in Germany, the answer is quite simple: everything is taxable in Germany.
 
If you maintain another residency in another country during your stay in Germany, it becomes a little bit more difficult. It depends on the country where your first residency is. (Unfortunately, you didn't mention this in your question.)

Has Germany concluded a double tax treaty with this country? If not, Germany will tax your income from May onwards, but might give a foreign tax credit for salaries that are also taxed in other countries.
 
However, as Germany has concluded double tax treaties with most countries, most likely there is also a double tax treaty with your country.
 
A double tax treaty always determines the right of taxation if the place of residency differs from the place of work.
 
In a first instance, it needs to be checked which place of residency is your 'center of vital interests' (i.e. the place which your personal and economic relations are closer to) and therefore your place of residency in the meaning of the double tax treaty.
 
Most likely, the residency maintained in your home country will be your center of vital interests.
 
Assuming that this is correct, from May onwards your place of residency (home country) differs from your place of work (Germany).
 
In this case, most of the double tax treaties allocate the right of taxation to the country where the work is provided (Germany) if

• the taxpayer spends more than 183 days in this country (Germany) or
• the remuneration is borne by a company or permanent establishment that is resident in this country.

Therefore, if you exceed the 183 days in 2004 (although being out of Germany for a certain time of the year) or if the remuneration for German workdays is borne by a German company, your salary for German workdays will be taxable in Germany.
 
As you mentioned in your question, you will spend approximately three months a year outside of Germany. With regard to the taxation of the salary related to these workdays, the above has to be checked again. Does your place of residency differ from the place of work? If so, is there a double tax treaty your home country has concluded with this country?
 
Assuming that you will remain on the German payroll during these 3 months, most likely your home country will have the right to tax the income that relates to the three months outside of Germany.

This is because with the three months you will not exceed the 183 days in the other country and the remuneration is not borne by a company that is resident of this country (because it is borne by the German company).
 
To summarize this with a brief example: Let's assume that

• you maintain another residency in the UK while on assignment in Germany,
• you spend three months on business trips in France, and
• your salary is paid by a German company.

In this example, Germany will have the right to tax the salary that relates to German workdays. The UK has the right to tax the salary that relates to French workdays, as you did not exceed the limit of 183 days in France in 2005 and the salary is not borne by a French company.
 
Part 2) of your question can be answered in a simpler way:
 
With regard to the double household expenses (rental costs) I can refer to my former column (Deduction dilemmas). The rental costs are deductible if a second household exists and if the costs are reasonable.
 
The costs for a language course will be tax deductible if the costs relate to income that is taxable in Germany. Most likely, you will attend this course because you need some German language knowledge when working in Germany. Therefore, the costs will be tax deductible.
 
Both costs can be included and specified in your annual German tax return. If the German tax authorities will accept the cost, the deduction will be shown on the assessment notice that is issued.
 
After typing all these sentences to answer your questions, I am warm. May is coming...
 
Kind regards,
 
Martin Brune

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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.

April 2005

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

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