Many Americans living in Germany ask:
“If I receive income from the U.S. how should that income be reported for German tax purposes?”
Both countries operate under the worldwide income principle. Therefore, there is a risk of double taxation. To avoid double taxation, it is essential to understand how income is allocated under the Germany–U.S. Double Taxation Agreement (tax treaty, DTA).
In this article we have summarized some of the most important scenarios from our clients. Before we look at specific income types, we first need to clarify a critical preliminary question:
Where Is Your Primary Residence Under the Double Taxation Agreement?
For tax purposes, the tax treaty uses “tie-breaker” rules under Article 4 to determine your treaty residence when both Germany and the U.S. consider you a tax resident based on national tax law. These tie-breaker rules apply if you are a dual tax resident, for example, if you maintain a home in Germany, and you are considered a tax resident of the U.S. (e.g. based on citizenship).
To resolve this, the treaty looks at:
- Permanent home: where you have a dwelling your family primarily uses.
- Centre of vital interests: where your personal and economic ties are strongest.
- Habitual abode: where you spend the most time.
- Nationality: if the above do not resolve the issue, nationality often will.
If the tie-breaker still doesn’t decide residency, the treaty grants residency to one country’s tax authorities for treaty purposes.
Practical implication: Please note that the primary residence is a theoretical concept developed to apply certain rules under the tax treaty. It does not supersede the domestic tax law residence and most of our clients often still need to file their tax returns in both the U.S. and Germany.
Please note: The following section is written based on the assumption that your treaty residence (primary tax residence) is in Germany. If your treaty residence is in the U.S., the outcome may differ.
Working Remotely for a U.S. Employer from Germany
How Employment Income from a U.S. Company is Reported in Germany
If you live in Germany and work remotely for a U.S. employer:
- Your employment income is generally taxable in Germany under § 19 EStG because you perform the work in Germany.
- Even if the salary is paid by a U.S. company, Germany taxes it under its domestic tax law (worldwide income principle).
- This is the case even if your U.S. based employer is withholding federal taxes on your employment income.
- Additionally, social security and health insurance need to be handled.
Application of the Tax Treaty for Employment Income from a U.S. Company
Under Article 15 of the tax treaty:
- Your income will be taxed by Germany as the state of residence because the work is physically performed in Germany.
- An exemption may apply under Article 15 (2) DTA, if your presence in Germany does not exceed 183 days in the relevant tax year, your salary is paid directly by your U.S. based employer, and your employer has no permanent establishment in Germany.
- The U.S. generally retains the right to tax U.S. source income, and your employer may withhold taxes. Your ultimate U.S. tax burden depends on the application of the FEIE or FTC.
Practical note: Some expats believe that the U.S. tax withholding on their paycheck generally satisfies their tax obligations. In fact, Germany will generally subject your gross income to taxation regardless of whether and how much U.S. taxes were withheld by your U.S. based employer.
Working as a Freelancer with Clients in the U.S.
German Tax Reporting for Freelancers working for U.S. based Clients
If you work as a freelancer in Germany with U.S. clients:
- Germany generally taxes your freelance income because the work is performed in Germany.
- Usually, German income tax is due regardless of whether the income is earned with clients in Germany, other EU countries or the U.S.
- You should report this income on your German income tax return. Depending on the type of work you are doing it may be classified as self-employment income (Einkünfte aus freiberuflicher Tätigkeit, § 18 (1) Nr. 1 EStG) or income from business operations (Einkünfte aus Gewerbebetrieb, § 15 EStG).
- Additional tax rules apply, such as Sales Tax (Umsatzsteuer) and Trade Tax (Gewerbesteuer) and possibly the requirement to present financial statements (Buchführungspflicht).
Treaty Considerations for Freelancers with U.S. Clients
The tax treaty uses the term “permanent establishment” in Article 5, to allocate income earned from self-employment. As a result, if you have a fixed base or office in Germany, Germany has the primary taxing right. If you work entirely from Germany and don’t have a permanent establishment in the U.S., the U.S. typically cannot tax that business income.
Rental Income and Gains on Sale from Property Located in the U.S.
German Tax Reporting of Rental Income under § 21 EStG
As a German tax resident, you must report worldwide rental income (Einkünfte aus Vermietung und Verpachtung), including from properties located in the U.S. Your taxable income needs to be determined using German tax rules, especially in relation to accrual of income and expenses and calculation of amortization of physical assets (buildings).
Gains on Sale of Real Estate under German Tax Law (§ 23 (1) Nr. 1 EStG)
Gains on sale of real estate property are generally taxable as other income at your individual tax rate. If a rental property is sold after a minimum 10 year holding period, a gain on sale is tax exempt. Gains on sale of a family home that has been used by the taxpayer in the three years preceding the sale, are likewise tax exempt under German tax rules.
Treaty Allocation of Income from Property Located in the U.S.
Under the Article 6 of the tax treaty rental income from U.S. property is taxable in the U.S.
Likewise, gains on sale from property located in the U.S. are taxable in the U.S. under Article 13 of the tax treaty.
Due to the treaty allocation of income to the U.S. Germany does not tax this income directly. For German tax purposes, the income progression rule of § 32b (1) Nr. 3 EStG will apply. In case the gain on sale is tax exempt under German tax law, gain on sale from a U.S. property does not need to be reported.
Practical tip from our experience with U.S. expats: If you own a house in your home country and expect a gain on sale, adequate tax planning and timing can avoid income tax progression in Germany, if the tax exemption rules of German tax law are applicable.
Investment Income from U.S. Accounts (Dividends, Interest, Capital Gains)
German Taxation of Worldwide Investment Income
As a German tax resident, you must report all investment income worldwide, including U.S. dividends, interest, and capital gains. In Germany, these are generally taxed as Kapitalerträge (capital income). Under § 32d EStG of German tax law, a flat tax of 25% (plus a solidarity surcharge of 5.5%, in essence 26.375%) will be applied to investment income exceeding 1.000 EUR per year (for spouses filing jointly: 2.000 EUR). There is no distinction between short-term and long-term investments. Please also note, that German tax rules usually do not permit transaction costs, funding costs and other expenses associated with investment income to reduce your taxable income. Another restriction is that losses incurred from stock investments can only be offset against gains from stock investments.
Treaty and Tax Withholding
Under Articles 10, 11 and 13 of the Double Taxation Agreement between Germany and the U.S. the following applies:
- Dividends are taxable in Germany. The U.S. can withhold 5% or 15%, depending on the total shareholding.
- Interests are generally taxable in Germany, with no U.S. tax withholdings.
- Likewise, realized capital gains should only be taxed in Germany.
- For certain financial instruments and specific situations, some exemptions from these general rules may apply.
Practical tip: Withholding tax paid in the U.S. can be used as a foreign tax credit against German taxes on investment income, if properly reported and adequately documented.
Crypto Investments and Income from Crypto Currency
How Income from Crypto Assets Is Taxed in Germany
If you are a German tax resident, you must report crypto transactions in your German tax return if they generate taxable income, including selling cryptocurrency for a profit, exchanging one cryptocurrency for another, or using crypto to purchase goods or services. Under § 23 EStG, income from crypto assets is not reported as investment income but rather falls into the “other income” category. As such, gains are taxable as private disposal income (private Veräußerungsgeschäfte) if sold within one year. If the holding period exceeds one year, gains are generally tax exempt. Other rules set out by the German Ministry of Finance (BMF) apply if active trading, staking, lending, or mining is involved.
Treaty Considerations for Crypto Investments
The double taxation agreement between Germany and the U.S. does not contain specific crypto provisions. Therefore, as a fallback rule, Article 21 should be applied.
This means, the primary right of taxation lies with the country of residence, which is Germany in our case.
Income from Active Military Service under SOFA (Active U.S. Military Members)
Special Rules under the SOFA
The SOFA (Status of Forces Agreement) between the U.S. and Germany specifically affects U.S. military personnel and their dependents. If a service member lives in Germany temporarily, his income is usually entirely exempt from German taxation if it falls under this special agreement. A spouse or family member not earning income from German sources is usually also covered by SOFA. However, you need to be careful with income from German sources, such as other non-military income, rental income, or investment income.
SOFA creates an additional rule set superseding certain national and tax treaty rules but only to the extent that the income is covered by SOFA.
Military Disability Benefits in Your German Tax Return
- U.S. military disability benefits may be tax-free in the U.S.
- German tax law (§ 3 Nr. 6 EStG) exempts disability benefits related to military service only if it is paid by the German government or by other EU countries.
- Article 19 (3) of the tax treaty provides a special exemption for military disability benefits paid by the U.S. government to their prior service members living in Germany.
In essence, military disability benefits are usually tax exempt in both jurisdictions.
Military Pension or Government Pension
German Tax Reporting under § 22 EStG
German tax residents must report worldwide pensions, including U.S. military and government pensions. A portion of the pension may be tax exempt under German tax law, depending on the age at the time of retirement.
Treaty Allocation under Article 19
The general rule under the tax treaty is that a pension related to public service by a U.S. citizen performed in the U.S. military or in the U.S. federal or state civil administration should only be taxed in the U.S. and not in Germany.
As a result, Germany will apply the income tax progression rule under § 32b (1) Nr. 3 EStG.
Social Security Pension from the United States Social Security Administration
German Tax Reporting under § 22 EStG
Social security pensions must be reported in your German tax return and will be subject to taxation in Germany. Depending on the age of the retiree and the date when the retirement benefit was first received, a small percentage will be considered tax exempt.
Treaty Rules: Article 18 (1)
Social security retirement income is taxed according to the treaty article for social security benefits. Under Article 18 (1) the taxing right remains with Germany, if this is the resident state under the tax treaty.
Effectively, Germany will require taxes for the entire retirement payment, except a small tax-free portion.
Private Pensions and Retirement Accounts (IRA, 401(k), and similar U.S. pension funds)
How Distributions from Retirement Funds Are Taxed in Germany
Private retirement accounts such as 401(k) plans, IRAs, Roth IRAs, and similar U.S. pension vehicles require special attention because they need to be assessed from a German tax law perspective. If a retirement plan is funded pre-tax, it will benefit from a tax shelter unless a withdrawal is made. Usually, withdrawals from U.S. retirement accounts fall into the other income category (Sonstige Einkünfte, § 22 Nr. 1 or Nr. 5 EStG) and the entire receipt is taxable.
Roth IRAs and similar structures, which are funded with after-tax income, are not considered tax beneficial retirement accounts under German tax law. Accordingly, such funds are usually treated as regular investment funds.
Deductibility of Contributions to U.S. Retirement Funds Under German Tax Law
German tax law recognizes the deductibility of certain contributions to pension plans under § 10 EStG. Unfortunately, contributions to U.S. retirement schemes do not qualify. Only contributions to recognized German and certain EU pension schemes can be deducted from taxable income in Germany.
Treaty Principle for Retirement Income
Under Article 18 (1) of the Germany – U.S. double taxation agreement, retirement income is taxed in the country of residence at the time of distribution, not in the country where the pension was accumulated. In our example this is Germany.
In our experience, U.S. expats living in Germany face three main challenges related to their U.S. retirement accounts:
- Distributions from Roth IRAs are taxable and the tax-exemption under IRC §408A cannot be used under German tax law.
- Pension funds that are not considered a “pension scheme” under Article 18 (3) are not tax sheltered during the accumulation phase in Germany.
- Contributions to U.S. pension schemes do not qualify as a deduction under German tax law (§ 10 EStG).
Key Takeaways for U.S. Expats with a Primary Residence in Germany and Income from U.S. Sources
- Your primary residence under the tax treaty determines which country has initial taxing rights. In this article, we are assuming that your primary residence is in Germany.
- Remote salary and freelance income earned from U.S. sources while living and working in Germany are taxable in Germany. Tax withholdings or prepayments in the U.S. provide no tax relief in Germany.
- Rental income from property located in the U.S. is generally tax exempt in Germany. Gains on sale from property located in the U.S. are likewise generally tax exempt in Germany. However, due to income tax progression, such income has an indirect impact on your taxes in Germany. Some exemptions may apply to gains on sale.
- Investment income from U.S. sources is taxable in Germany. Under German tax law, a flat tax is usually applied to investment income. The U.S. may have the right to tax withholdings. Withholding taxes can be credited against German taxes.
- Income from crypto assets is taxed in Germany with your individual tax rate. In some circumstances it may be tax exempt.
- Income from active military service, government pensions, and military pensions paid by the U.S. government are taxable in the U.S. and not in Germany. However, due to income tax progression, such income has an indirect impact on your taxes in Germany.
- Social security pensions are taxable in Germany. A small portion may be tax exempt depending on the year of retirement.
- Distributions from U.S. pension schemes are usually taxable in Germany. Some pitfalls exist for German tax residents in relation to distributions from Roth IRAs, accumulation of private pension plans, and contributions to U.S. pension schemes.
FAQ Section: Frequently Asked Questions From Our Clients Regarding U.S. Income for Expats Living in Germany
Q1: How does my primary residence under the Germany–U.S. tax treaty affect taxation?
A1: Your primary residence under the tax treaty determines which country has initial taxing rights. In this article, we assume your primary residence is in Germany. If you are a dual tax resident, Article 4 of the Germany–U.S. Double Taxation Agreement (DTA) applies tie-breaker rules (permanent home, center of vital interests, habitual abode, nationality).
Q2: Are remote salary and freelance income from U.S. sources taxable in Germany?
A2: Yes. Income from U.S. employers or clients is taxable in Germany if the work is performed in Germany. German domestic law applies (§19 EStG for employment, §18 or §15 EStG for self-employment/business). Tax withheld in the U.S. generally does not reduce your German tax liability. Article 15 DTA may provide an exemption if you meet the 183-day rule, your employer has no German permanent establishment, and your salary is paid directly by the U.S. employer.
Q3: How is rental income and gains from U.S. property taxed?
A3: Rental income and gains from U.S. property are primarily taxable in the U.S. under Articles 6 and 13 DTA. Germany generally exempts this income but applies the income progression rule (§32b (1) Nr. 3 EStG), which can indirectly affect your German tax rate. Some exemptions may apply if German tax law allows it (e.g., long-term holding of real estate or family home exemptions).
Q4: How is investment income from U.S. sources taxed in Germany?
A4: Dividends, interest, and capital gains from U.S. accounts are taxable in Germany (§32d EStG). A flat tax of 25% plus solidarity surcharge applies (26.375%). U.S. withholding taxes may be credited against German taxes. For specific financial instruments, exemptions may apply.
Q5: How is income from crypto assets taxed?
A5: Gains from cryptocurrency are taxed in Germany as “other income” under §23 EStG if sold within one year. If held longer than one year, gains are generally tax exempt. Special rules apply for trading, staking, lending, or mining. No specific rules exist in the Germany–U.S. DTA, so Germany, as your country of residence, generally has primary taxing rights.
Q6: How are U.S. military income, government pensions, and military pensions taxed?
A6: Active U.S. military pay is generally exempt from German taxation under SOFA. Military disability benefits may be exempt under Article 19 DTA. Government and military pensions are taxed in the U.S. only, with Germany applying the income progression rule (§32b (1) Nr. 3 EStG), which may indirectly affect German tax.
Q7: How is U.S. Social Security taxed in Germany?
A7: Social Security pensions are reportable in Germany (§22 EStG). A small portion may be tax-exempt depending on the retiree’s age and the start date of the benefit. Article 18 DTA generally grants Germany the primary taxing right, with exceptions for a limited tax-free portion.
Q8: How are distributions from U.S. pension schemes taxed?
A8: Distributions from 401(k)s, IRAs, Roth IRAs, and similar accounts are usually taxable in Germany (§22 EStG). Roth IRAs are treated as regular investment funds. Contributions to U.S. plans are not deductible under German law (§10 EStG). Article 18 DTA allocates taxation to the country of residence at distribution. Challenges include non-deductible contributions, non-tax-sheltered accumulation, and Roth IRA treatment under German law.
Why Professional Guidance from an Expat Tax Consultant Matters
As shown in this article, it can often be challenging to determine where income from U.S. sources should be taxed and where it needs to be reported in your tax returns. Inadequate reporting can cause double taxation and penalties due to incompliance with national tax regulations.
Expat tax services from Prinz.tax can help you:
- Determine your tax residence under the treaty (primary tax residence)
- Correctly determine the right of taxation for income from U.S. sources to Germany or the U.S.
- Accordingly, report all income in your German tax return in the right sections.
- Avoid double taxation by using the appropriate method of reporting foreign income in your German tax return, i.e. full exemption, exemption with income progression, or tax credit.
- Ensure tax compliance in Germany and avoid double taxation.
If you are a U.S. citizen living in Germany and need assistance with your tax return in Germany, request your free individual offer from Prinz.tax Steuerberatung GmbH today. To experience peace of mind of an integrated tax filing solution, also request an offer from our affiliate Prinz.tax International GmbH, for a U.S. tax return.
