What is a double taxation agreement (DTA)?
A double taxation agreement (DTA) is an international treaty between two countries or jurisdictions. The main aim of a DTA is to prevent the double taxation of income that could be taxable in both countries if no agreement existed. Double taxation occurs when a taxpayer has to pay tax on their income in two different countries, which can lead to an unfair burden.
A DTA typically specifies:
- Which country has the right to tax certain types of income: The agreement determines which country has the sole right to tax certain income such as dividends, interest, royalties, salaries, etc.
- Methods to avoid double taxation: The DTA establishes mechanisms for how taxes paid abroad can be credited or deducted from the tax owed domestically.
- Rules for information exchange: DTAs may include provisions for the exchange of tax-relevant information between the contracting states to combat tax evasion.
- Definitions and dispute resolution procedures: They clarify terms and establish procedures for resolving tax disputes between the contracting states.
The exact provisions in a DTA vary from agreement to agreement and depend on the interests of the countries involved. DTAs are important for easing the tax burden on individuals and companies earning cross-border income, and they help promote international business activities and investments.
You can find information on the DTAs concluded by Germany here: Double taxation agreements and other agreements in the tax sector
What is a double taxation agreement (DTA)?
Should I declare my foreign income gross or net?
In Germany, tax-free foreign income is only considered in the calculation of the tax rate applied to your taxable German income (progression clause).
The amount of income to be declared must be determined according to German tax law. To calculate foreign income, deduct the actual foreign income-related expenses in full from the foreign income.
Example: Pavel moves from Poland to Berlin
Pavel worked in Poland from January to April. Since then, he has lived and worked permanently in Berlin. He has been fully liable to tax in Germany since moving in May.
His gross income in Poland was 10,000 Euro. He incurred income-related expenses of 350 Euro (travel expenses) and 60 Euro (work materials). As the actual income-related expenses are below the current income-related expenses allowance of 1,000 Euro, his foreign income in this case is 9,000 Euro.
The foreign income of 9,000 Euro is subject to the progression clause in the year of moving and must be declared in Annex WA-ESt.
To calculate foreign income, the actual foreign income-related expenses must be deducted in full from the foreign income (here: the foreign gross income).
According to § 34d EStG, the sum of foreign income consists of:
- Income from agriculture and forestry conducted in a foreign country,
- Income from business operations abroad,
- Income from self-employment carried out abroad,
- Income from the sale of assets abroad,
- Income from employment carried out abroad,
- Income from capital assets if the debtor has a residence, management, or registered office abroad, or if the capital assets are secured by foreign property,
- Income from renting and leasing abroad, and
- Other income earned abroad.
Should I declare my foreign income gross or net?
Do I need to declare my income from abroad?
You must declare all income - domestic and foreign - in the German tax return for the assessment period.
For foreign income, the following cases must be distinguished:
- The foreign income is tax-free in Germany, for example, due to a double taxation agreement or another tax agreement. In this case, the tax-free income must be declared in Annex AUS or, for income from employment, in Annex N-AUS. This tax-free income is subject to the progression clause, meaning it is included in the calculation of the tax rate applied to the income taxable in Germany.
- The foreign income is fully taxable in Germany. In this case, the foreign income must be declared in the tax return in the same way as domestic income in the relevant annexes. If taxes have been paid on the foreign income abroad, these can be credited against the German income tax. The creditable foreign taxes can then be recorded in Annex AUS.
- Foreign wages are tax-free due to the Foreign Employment Decree (ATE) or an Intergovernmental Agreement (ZÜ). In this case, the income must also be declared in Annex N-AUS and is subject to the progression clause.
You can find information on the double taxation agreements concluded by Germany here: Double taxation agreements and other tax agreements
Do I need to declare my income from abroad?
