Expatriates: 10 tax issues to be considered if working in Germany
von Peter Scheller
Germany’s growing economy requires a skilled workforce. For years now Germany’s industries have been struggling to find enough qualified staff in Germany. Therefore qualified employees will be recruited from abroad. The number of employees from other countries exceeds 15% of the overall workforce in certain German regions, for example in Berlin or the southwest of the country. Most foreign employees are EU-citizens. However there is a growing number of expatriates from countries such as the USA, Canada, Russia, Ukraine and other non-EU member states. Expatriates are confronted with German tax and social security law as well as other legal issues.
Foreign employees and their employers have to understand some special issues in order to avoid unnecessary risks.
1. Taxes and social security contributions
In a lot of states social security contributions will be raised as an additional tax and have to be paid to the tax authorities. In Germany this is different. Income tax at a progressive tax rate will be withheld from the salary by the employer and be paid to the tax authorities on behalf of the employee (withholding wage tax). The same applies for the solidarity surplus charge.
The German social security system by contrast is totally separated from the tax system. It is administered by social security agencies. Salaries and other benefits have to be declared by the employer to these agencies. The employer has to pay the employer’s and the employee’s part of the contributions to the respective agency.
The German social security system includes:
- Health insurance
- Nursing care insurance
- Pension insurance
- Unemployment insurance
- Accident insurance
For more information see: https://scheller-international.com/blog-beitraege/german-social-security-rates-2017.html
2. Working for a foreign employer in Germany
Certain practical problems may occur when employees working for their foreign employers in Germany. If the employer is not tax resident in Germany (seat or permanent establishment), he is does not classify as a “German Employer” in the sense of the income tax law. There is only an exception in cases of personnel leasing. A foreign employer cannot register with the German tax authorities and therefore cannot withhold income taxes on behalf of the employee. In cases like this the employee has to file income tax returns and pay income tax plus solidarity surplus charge in instalments.
The situation in regard to social security contributions is different. Every employer regardless where he is situated has to fulfill above mentioned obligations. This includes obligations like declaration and payment of contributions to the social security agencies, payroll bookkeeping, storage of documents and preparing for social security audits.
This separation of tax and social security law results in an unpleasant situation that the employer has to fulfill all obligations concerning the social security system while the employee has to fulfill all obligations regarding income taxation. Often foreign employers try to avoid this artificial split-up of formal requirements by using a postbox or the private address of an employee as registration address. However, employers following this route should be aware of the fact that they might constitute an (unwanted) permanent establishment in Germany.
For more information see: https://scheller-international.com/blog-beitraege/the-unwanted-permanent-establishment-in-germany.html
3. German socials security system and assignment
Often foreign citizens want to remain in their home country’s pension and health care systems. Therefore it seems preferable to stay out of the German social security system in order to avoid contribution. However, this is only possible under certain circumstances.
Every employee who works in Germany becomes in general liable to the German social security system. Whether the employer is situated in Germany or abroad or the employee is insured in a foreign social security system is irrelevant. The only exceptions are short term stays in Germany or an assignment.
An assignment by a foreign employer requires the following:
- The employment in Germany is of temporary nature and
- is based on an assignment.
An assignment is defined as follows:
- The employee must start his work in Germany because of a direct directive of his or her employer.
- The employee must continue to work for his or her foreign employer. This means that the authority to issues directives must remain with the management of the foreign employer. The employee shall not be integrated into the organization of a German company.
- The labor contract between foreign employer and the assigned employee must be obtained.
- The labor relation abroad shall be continued after the assignment period.
- The period of assignment must be determined before the employee starts to work in Germany.
It is advisable to enter into a separate assignment agreement showing that before mentioned criteria are fulfilled.
For more information see: https://scheller-international.com/blog-beitraege/assignment-and-social-security.html
4. German social pension and health care
There are situations where the individual cannot avoid to pay into the German social security system. This is always the case if a foreign employee works for a German employer.
In regard to social pension schemes it is less harmful if contributions will be paid in two countries. If the foreign employee leaves Germany and has not fulfilled the five year minimum contribution period he or she is entitled to a refund of the employee’s part of the contribution. The employer’s part is not refundable. If he or she has fulfilled the five year period, no refund is possible. However, the foreign employee is entitled to a pension when reaching retirement age.
More daunting is the health insurance if the person wants to stay in its domestic health system or has a private health insurance. In this case payments into the German system would result in payments into two systems without any additional cover. This can be avoided if the following pre-conditions are fulfilled. In general every person who is living in Germany is obliged to have a basic health insurance cover. If this person works as an employee in Germany he or she is subject to the German social security system (if not be assigned to Germany). However, employees are not obliged to be within the German social health insurance system if their salaries exceeds certain maximum amounts. For 2018 these amounts were 4,950 per month or 59,400 Euro per year.
Employees with salaries exceeding this amounts are not obliged to be part of the German social health system. They can chose between a private insurance or to be insured in the socials security system on a non-obligatory basis. A foreign health insurance or a foreign social health system is sufficient if it provides the same cover as the basic German social health insurance. Whether a social security system or a foreign private health insurance provides a sufficient cover has to be analyzed.
5. Requirement to file a German income tax return
There is no obligation for an employees to file an income tax return if they only received salaries or fringe benefits in Germany which have been subject to Germany’s withholding wage tax.
There are various exceptions to this rule (§ 46 Income Tax Code):
- Additional income in the exceed of 410 Euro, which have not been subject to the withholding wage tax
- Payments or benefits from two different employers
- Claim of certain allowances in the withholding tax declaration (deductible job or private related expenses)
- Tax classes V or VI, if both spouses have been working in Germany
- One spouse is not tax resident in Germany and the other spouse claims for joint assessment
- Claim of German tax residency for individuals, who do not have a home or habitual abode in Germany
- Other special issues
In all situations mentioned below, individuals have to file a German income tax return:
- Relocation to or out of Germany within a calendar year
- Salaries and benefits deriving from German and foreign sources
- In Germany tax exempt income which has an effect on the individual German income tax rate
For more information see: https://scheller-international.com/blog-beitraege/foreign-source-income-and-german-income-tax.html
6. Tax assessment
A lot of countries adopted a self-assessment system for income taxation. A person has to file its income tax return and to calculate its individual tax burden. On this basis the income tax has to payed.
The German system is different. A taxpayer also has to file income tax returns. These tax returns are basis for the tax assessment by the tax authorities. The final tax amount is calculated by the tax office and afterwards every taxpayer receives a tax assessment note. He or she has to be aware of the fact that the ugly looking printout on recycling paper in general is the most important document to be received from the tax office. If there is a mistake in the tax calculation or the taxpayer’s legal opinion varies from the one of the tax office he or she can file a legal protest within a month. If the taxpayer miss the deadline in general he or she loses the right to protest. After the deadline, the tax office can reject a correction of the tax assessment even if it made a mistake. Therefore it is important to check the tax assessment note within the one month time frame. If the expatriate has a German tax adviser he or she should send the note to him as soon as possible.
For more information see: https://scheller-international.com/blog-beitraege/income-tax-assessment-in-germany.html
7. Work related expenses
Employees are entitled to a lump-sum deduction for work related expenses not exceeding Euro 1.000 p.a. If expenses exceed this amount they are deductible. There is a standardized deduction for commuting between home and work by car of Euro 0.30 per kilometer (one way). Other job related expenses can be deducted for income tax purposes if they are not refunded by the employer tax-free.
Job related expenses can be
- IT (hard- and software if mainly used for professional purposes)
- Working equipment and materials
- Professional literature
- Professional training
- Application for a job in Germany
- Language training
- Study in your private flat (restricted)
- Professional clothing (restricted)
- Tax adviser (if service is related to work performed in Germany)
- Bank fees (16 €)
- Relocation expenses
- Double household
- Other work related expenses
For expatriates moving to or out of Germany the following topics are of special interest:
- Relocation expenses (for more information see https://scheller-international.com/blog-beitraege/deductible-relocation-expenses-in-germany.html)
- Double household (https://scheller-international.com/blog-beitraege/deductible-expenses-for-work-related-second-household.html and https://scheller-international.com/blog-beitraege/double-household-in-germany.html).
8. Personal deductions and allowances
Like in most countries certain private expenses are tax deductible. Deductible are contributions to obligatory or private pension schemes, mandatory or private contributions to health, accidental and liability insurances and to insurances for disability and old age up to certain maximum amounts. This also applies for contributions to foreign authorities, organizations and insurance companies if their schemes and plans fulfil certain criteria set by German tax law.
Whether contributions are deductible does not only depend on the provisions of German income tax law but also on Double Taxation Conventions. There are two Double Taxation Conventions which have special provisions regarding the deductibility of contributions. These countries are the USA and Canada. Expatriates of other countries have to rely on German tax law only since there are no special provisions in Double Taxation Treaties with these countries.
9. Working in two or more states
An employee living and working in Germany is liable to German income tax. If he or she works in more countries different scenarios may occur:
- If the employee has home in Germany only and works nowhere else for more than 183 days in a calendar year or within a twelve month period (depending on respective Double Taxation Treaty) he will only be taxed in Germany.
- If the employee works for more than 183 days of the relevant period in another country he or she will be taxed in this country. In general this part of the income will be tax exempt in Germany. However, it has to be declared in the German income tax since it influences the progressive German income tax rate. In addition to that, it is necessary to prove that the foreign income tax have been payed or the other state has waived its right to tax this part of the income.
- The employee still keeps his or her main home in another country, this is often the case if one spouse works in Germany but the family remains in the home country. If the employee works physically in his home country, the part of the salaries connected to these times will be taxed in the other country and is in general tax exempt in Germany. This applies even if the working time abroad is short-term.
- For US citizens or persons with a status as a lawful permanent residents (Green card holder) special provisions apply. They will stay in the US system regardless of the fact whether they have a residence or work in the USA. They have to file US federal income tax returns regardless of a residence or workplace abroad. Whether they have to pay taxes in the USA is another question since they might qualify to the Foreign earned income exclusion or the Foreign tax credit.
10. Taxation of spouses
In general married couples apply for joint tax assessment in Germany. This is always advisable if one partner earns more than the other one. Joint assessment is in general only possible if both spouses are tax resident in Germany.
For more information see: https://scheller-international.com/blog-beitraege/taxation-of-spouses-in-germany.html.
Withholding income tax / Withholding wage tax
Solidarity surplus charge
Social security contributions
Income tax return
Social pension insurance
Social health insurance
Tax assessment note
Double taxation convention
Author: Peter Scheller, Steuerberater, Master of International Taxation,
Bildquelle: © charles taylor - Adobe Stock
- deductible expenses
- health insurance
- income tax
- income tax return
- pension insurance
- social security
- socials security contributions
- tax assessment
- withholding income tax
- withholding wage tax