This article looks at taxes in Germany for non-residents. We will look at how to become tax non-resident in Germany and what the benefits are.
We also look at some of the broader implications of German tax, including how the country levies its exit tax.
European tax can be confusing, and often-times, quite expensive so getting the right advice is crucial. At Nomad Capitalist we help entrepreneurs and investors to get the most out of their situation, wherever they’re located, while working to legally reduce their tax bill. Talk to us today to learn how.
We receive a lot of questions about tax obligations in Germany. They include the following:
- Do non-residents pay taxes in Germany?
- How much tax do foreigners pay in Germany?
- How long can I stay in Germany without paying tax?
- How much tax will I pay in Germany?
- Who has to pay income tax in Germany?
Before we answer these specific queries, let us address the more general question of what a tax non‐resident is. The easiest way to do this is to define tax residency status.
Essentially, a tax resident is someone who is legally bound to file taxes in a specific jurisdiction.
Acquiring tax residency status comes about as a combination of push and pull factors. Our founder Andrew Henderson interprets this as the tax‐free quadrant.
So, a tax non‐resident is someone who is not legally obligated to make tax payments in a specific jurisdiction. We can advise you on how to stay in the good books of the tax authorities.
Ultimately though, we want to reduce your overall tax bills.
The German government wants your tax. It is a high-tax country. So, the benefits are tax deductions on your worldwide income.
The income tax rates for single and married residents in Germany are excessive. Although it is worth bearing in mind that Germany doesn’t levy any local or state income taxes.
In Germany, income tax is called Einkommensteuer. Income taxes are paid at the end of the tax year, as in the calendar year in Germany, in the form of a wage tax (Lohnsteuer).
If employed in Germany, employers deduct income tax from your gross wage and duly transfer it to the tax office for you. They also deduct your pension, health, nursing care, and unemployment insurance from your gross salary and transfer it too.
Suppose you reside in Germany for more than six months. In that case, the onus is on you as an independent contractor to file a tax declaration (Steuererklärung) with your local tax office (Finanzamt).
The Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt) oversees income tax rates and sets them depending on which tax class you belong to.
However, German income tax exemptions exist. We can help you find these income tax deductions.
Becoming a tax non-resident in Germany reduces your taxable income, aka employment income. You can say auf wiedersehen to paying income tax in Germany.
You will no longer be liable to pay the Solidaritätszuschlag; the solidarity surcharge applied on capital investment income subject to lump sum taxation and on employment income taxed at lump sump rates.
This solidarity surcharge funds the costs related to German unification and forms 5.5% of your income tax. Why a solidarity surcharge still exists when East and West Germany are long gone is a question we have yet to find an answer for.
You are also freed from paying the church tax (Kirchensteuer) if you are a member of a religious community. This church tax can amount to 8 or 9% of your income tax, depending on where you reside in Germany.
German taxation laws are complex. They are established by the German Income Tax Act of 1934 and subsequent amendments.
Income tax in Germany is based on earnings from employment, rental income, and investment gains.
There are several requirements to becoming a tax non-resident of Germany. We outline them below.
Demonstrate that you have no ties to the country regarding property (no “personal” room at your parent’s house; no house or apartment that is not rented out).
Pledge to spend no more than six months per year in Germany.
Promise to cut German source income from your worldwide income to avoid paying income tax in Germany.
Before beginning the liquidation process, it’s necessary to prepare a balance sheet (which must contain the name and address of the person in charge of the liquidation (liquidator).
The first step of the liquidation is sending a notification to the German Trade Register containing the liquidator’s declaration that there are no reasons not to liquidate the company.
The decision of liquidation must be published in the “German Electronic Federal Gazette,” and the creditors must be notified regarding the decision of liquidation and the procedure for submitting the claims.
The cancellation from the German Trade Register can only be made a year from the first notification sent to the creditors. The request for canceling must contain the liquidation decision and proof that the creditors were announced regarding the liquidation.
When transferring the company ownership, it is necessary to notarize the German shares to transfer them, as it is part of the official process.
If you want to transfer your shares and own 50%, it is taxable at a 28% rate. However, if you own more than 50%, then it is not taxable.
The process of transferring can take from one to two months.
If you are a visiting professor, student, or researcher, you are generally subject to the same commitments to pay taxes as all German residents are.
However, you may qualify for relief from German tax under the double tax treaty between Germany and your country of residence.
If your research visit is based on a fellowship, you may be exempt from German income tax liability.
German income tax is a minefield that takes in employment income. We want to reduce your need to pay tax in Germany and elsewhere.
Double taxation is something that we specialize in. We want to half your need to make a tax declaration at the very least.
So, if an income tax rate is too great, consider using us as a consultant. The tax year is an annual headache. Lower your tax return by having us assign you to a different tax class.
Tax purposes constitute a significant consideration as to your direction. If you are looking for a tax-free existence, let us guide you to go where you are treated best.
A wealth tax of 4.5% is applicable on an income of more than €500,000. However, if you leave Germany, you are granted 10-12 years to decide whether to return.
If you come back and reside in Germany, you can avoid paying this tax in Germany. This is a great way to defer taxable income.
When a shareholder relocates abroad, Germany subjects the value increase of a shareholding of at least 1% (in individual cases even less than 1%) of a corporation’s capital to income tax, considering a sale of such shares (section 6 Foreign Tax Act, Außensteuergesetz – AStG and section 17 Income Tax Act, Einkommensteuergesetz – EStG).
As a result, Germany obtains the right to tax the hidden reserves in privately held shares generated in corporations until the taxpayers move from Germany from the instant they relocate abroad.
As with most double taxation treaties (DTT), the state of residence has the right of taxation on the capital gain from the sale of privately held shares in a corporation (Article 13 paragraph 5 OECD model tax convention). Germany loses the taxation right on the relocation of German taxpayers.
The present law stipulates that the taxpayer must have been subject to unlimited tax liabilities in Germany for at least ten years to be subject to the exit tax.
The new law lowers the period of unlimited tax liability required before the exit from ten to seven years. This means taxpayers moving to Germany will be liable for exit tax three years prior.
However, in the future, in the case of relocation, the duration of the unlimited tax liability will no longer be determined on the basis of the entire lifetime but only on the basis of the previous 12 years.
Under the present law, the exit tax ceases with retroactive effect if the taxpayer is only temporarily absent (with a well-documented intention to return at the time of relocation) and re-establishes unlimited tax liabilities in Germany within five years after the exit.
This period can be extended to 10 years if the taxpayer reasonably illustrates that their absence is due to professional reasons and that they still intend to return. Relating to the movement of EU/EEA citizens within the EU/EEA area, the possibility of return has, up to now, been unlimited in time.
Rules concerning taxpayers’ return to Germany will, in principle, still apply, but the regular period will be upped from five to seven years. An extension of an additional five years up to a total of twelve years will also become an option.
Upon application of the returnee, annual installments will not be levied. On the other hand, the previously unlimited return regulation for relocating EU/EEA citizens is to be abolished.
You can apply for a deferral under the use of the returnee provisions. This means you will only have to pay installments for part of the deferral period once you return to Germany. So, this combination is recommended.
German lawmakers intend this way in the future to be the only possibility for a shareholder of a corporation of more than 1% to terminate the tax liability in Germany without triggering an immediate exit tax burden.
In the future, any transfer that is not made upon death will negatively affect the deferment, irrespective of whether the recipient resides in Germany or abroad.
A further scheduled tightening is a regulation that has a knock-on effect on future profit distributions or deposit repayments from the corporation with a volume of at least 25% of the value of the taxpayer’s shares. This will result in an immediate due date of the tax.
This can lead to a partial lock-up of assets in the company.
The law requires collateral security to pay the deferred exit tax to the tax office if you relocate to a country outside the EU/EEA.
German lawmakers have put EU/EEA cases on an equal footing with third-country cases. Therefore, they will no more distinguish between relocations to third countries and EU/EEA countries – to the detriment of taxpayers who wish to move within the EU/EEA.
In the future, in general, collateral security for the exit tax has to be provided for all relocations. This will be an impossible obstacle for many taxpayers even if applying for the seven-year installment payment.
This is because, as interpreted by the tax authorities of a few federal states, the corporation’s shares subject to the exit tax cannot be counted as collateral security. Suppose you possess few German properties, federal treasury bonds, or similar assets with sufficient value. In that case, the exit tax could become due immediately, even in the case of relocations of EU/EEA citizens within the EU/EEA.
Yet, it is highly likely that tax authorities will have to be discreet in demanding collateral security in relation to the freedom of capital movement and freedom of establishment in a way that no such security can be demanded within the EU/EEA.
As the EU Recovery Directive applies in this respect, no risk exists for the German tax revenue. Nevertheless, in most future cases, this may only be enforceable with assistance from the Tax Courts.