How do I tax my foreign income?

If you have your residence or usual place of abode in Germany, you are subject to unlimited income tax liability here. This means you must pay tax in Germany on your domestic and foreign income. On the other hand, the foreign country also levies taxes; this is known as the source principle.

To avoid double taxation, Germany has concluded double taxation agreements with all major countries.

If the foreign country has the right to tax, double taxation is avoided as follows:

Exemption method:

• Foreign income is tax-free in Germany but is included in the calculation of the tax rate (progression clause).

Credit method:

• Foreign income is included in Germany, and the tax paid abroad is credited against the tax liability or deducted from income as business expenses.

For wages, the exemption method is generally applied.

(2022): How do I tax my foreign income?

What are examples of foreign income?

The amount of foreign income is determined by German tax law. Any deductions for income-related expenses are therefore handled according to the Income Tax Act. Foreign income includes:

• Wages from employment abroad.
• Income from savings and deposits with foreign financial institutions.
• Dividends from shares in foreign companies.
• Distributions or income from foreign investment funds or bonds.
• Income from self-employment if the work is carried out abroad.
• Income from agriculture and forestry if the land is located abroad.

(2022): What are examples of foreign income?

What is considered foreign income?

You can earn foreign income from various types of income. The type and amount must be determined according to German tax law in accordance with § 34d EStG. The deduction of income-related expenses and business expenses is therefore based on the Income Tax Act.

• For income from employment, the work must be performed abroad. It can also be utilised abroad without being carried out in Germany.
• For income from self-employment, the work must be performed or utilised abroad (e.g. authors' rights).
• For income from business operations, the income must be generated through a business establishment located abroad.
• For income from agriculture and forestry, the land cultivated must be located abroad.
• For income from capital assets, the capital assets must be secured by foreign property, for example.
• For income from renting and leasing, the property must be located abroad or the rights (e.g. authors' rights) must be granted for use abroad.

(2022): What is considered foreign income?

What is the double taxation agreement (DTA)?

A double taxation agreement (DTA) determines where and how income is taxed when work is carried out in a foreign country. To avoid double taxation, Germany has concluded such agreements with over 70 countries.

If you are taxable in the neighbouring country, you will be exempt from tax in Germany. If you pay taxes on your cross-border employment in Germany, you do not have to pay tax on the income again in the neighbouring country. However, the income taxed abroad is included in the progression clause in Germany. This means that a total income is calculated from the income as a cross-border commuter and other income in Germany. This total income results in a higher tax rate, but only the income received in Germany is taxed at this rate.

Exceptions: For France, Austria and Switzerland, a special cross-border commuter regulation applies under the respective double taxation agreement. If you work in France or Austria, you do not have to pay taxes there, but must declare the wages in your German tax return and pay tax on them normally. Civil servants or public sector employees, however, pay tax on their income in the country where they work, as the principle of the paying state applies.

If you work as a cross-border commuter in Switzerland, your employer may deduct a wage tax of 4.5 percent, which is credited against the tax in Germany. If you are a civil servant or public sector employee, you must pay tax on your income entirely in Germany.

Please note that there are special regulations for cross-border commuters during the coronavirus period, as many employees are or were working from home and do not or did not commute daily (see also: Double taxation agreements and other agreements in the tax sector).

(2022): What is the double taxation agreement (DTA)?