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12/10/2005German tax exemption rules on foreign source employment income clarified

German tax residents will have to pay tax twice on foreign source employment income unless they keep within the guidelines of a recent German administrative ruling on providing proof of taxation.

Having a clear idea of what the tax authorities need is half the battle

Following a ruling passed on 1 January 2004, the German tax authorities exempt tax residents in Germany from paying German taxes on foreign source employment income only if the taxpayer proves that this income—if higher than EUR 10,000—has been taxed in the country where the work was performed.

Alternatively, if the resident taxpayer can prove that the foreign country has renounced its right to tax that income, exemption from German tax will also be granted.

An administrative ruling, passed on 21 July 2005, stipulates which types of proof of taxation or documents have to be provided to avoid a double taxation of foreign source employment income in Germany.

The procedure in more detail

The Federal Ministry of Finance (BMF) issued the administrative ruling because it was not clear which proof of taxation had to be provided to the German tax authorities based on the national subject to tax clause for foreign source employment income (Sec. 50d cl. 8 of the German income tax law). The ruling contains some guidance with respect to the procedure to exempt this income from taxation in Germany.

Beginning with the assessment period 2004, a tax-exemption claimed under a double tax treaty for foreign source employment income will only be granted by the German tax authorities if the taxpayer is able to prove that this income was taxed in the foreign country where the work was carried out or that the foreign country has renounced its taxation right.

The requirement to document the foreign taxation or the renouncement of the taxation right only applies to income tax returns and tax assessment notices and does not have any impact on the German wage tax withholding procedure.

Taxpayers must provide documents

Generally speaking, a taxpayer with unrestricted tax liability in Germany must demonstrate that the foreign source employment income was declared by presenting either:

  • the foreign income tax assessment notice and  proof of tax payment, or
  • a copy of the foreign income tax return in self-assessment jurisdictions and proof of tax payment, or
  • documentation stating that the foreign country has renounced its taxation right.

A special rule applies to employees covered by net salary agreements who are required to provide a certificate issued by the employer. This certificate, however, must fulfil certain requirements.

For practical reasons and for the time being, tax exemption will be granted by the German tax authorities without any proof if the foreign source employment income earned within an assessment period does not exceed EUR 10,000.

German authorities get benefit of doubt

The German tax authorities rule that if the taxpayer cannot provide the necessary proof, the foreign source employment income will be subject to German taxation. If any doubt regarding the foreign taxation of this income arises, the income will be taxed in Germany and the German tax authorities will request the information from the foreign tax authorities without hearing the taxpayer.

However, if the taxpayer is able to prove the foreign taxation at a later date, the German assessment notice will be amended. The period for the possible amendment of the assessment notice starts in the year in which the proof is provided to the German tax authorities.

October 2005

Katrin Köhler is the Senior Manager, International Assignment Services at Deloitte Tax, Düsseldorf. She can be contacted at kkoehler@deloitte.de or +49 211 8772 2641 .

Subject: Tax in Germany, tax issues for expats


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