An increasing number of employees occasionally work in foreign countries. If you are one of them, where do you have to file your tax declaration? Where do you have to pay income tax? Here is a summary of the most important regulations affecting your tax status:
German tax law, tax law of the foreign country, and double taxation agreements between those states – all these need to be considered. wages are normally taxable in the state, where the work is carried out. An employee who works in Britain is only taxed there. But there are exceptions to this general principle. We explain these in more detail:
1. An employee has lived and worked in Germany. On January 1st, he moves to the UK and starts working there. As he has no further income or residence in Germany, he will not be taxed there for that fiscal year. His annual income is instead taxed in the UK.
2. The employee starts living and working in the UK on July 1st. He has to file 2 tax returns for that year, one in Germany and one in the UK. The wages earned in Germany are taxed there. UK wages must be declared in the German tax return. While these remain untaxed, they are still subject to the German ‘progression clause’, which is why the German income tax rate will be higher than usually.
3. On January 1st, the employee moves to the UK and starts working there. In addition to his UK income, he receives rental income from a property in Germany.
That rental income is taxed only in Germany. The employee has limited tax liability in Germany and needs to submit an annual German income tax declaration.
4. The employee works in the UK, but he keeps his German residence for his wife and children.
UK wages are taxed only in the UK. All other proceeds, e.g., German income of his wife, capital gains, rental income etc., are taxed only in Germany. The employee is subject to unlimited tax liability in Germany. UK wages are subject to German ‘progression clause’, so the German income tax rate will be higher than usual.
5. The employee’s primary place of residence is Germany. As he works for an international corporation in the UK, he is employed in different countries throughout the year.
• In the UK: 120 days
• In Germany: 80 days
• In other countries: 20 days
His total annual earnings are 110.000 €.
The employee is subject to unlimited tax liability in Germany. Wages are split by work time:
• In the UK: 120 days / 220 days x 110.000 € = 60.000 €. This amount will only be taxed in the UK, but is subject to the German progression clause.
• In Germany: 80 days / 220 days x 110.000 € = 40.000 €. This amount will be taxed in Germany.
• In other countries: 20 days / 220 days x 110.000 € = 10.000 € This amount will be taxed in Germany.
All other income is taxed in Germany.
6. The employee lives in Germany and works for a German business. He is sent to the USA for 3 month, introducing new software to a client. He stays at a hotel.
In this case – and despite his activities overseas – his wages are taxed in Germany. This applies, whenever the employee is abroad for no longer than 183 days.
7. The employee lives in Germany, and his primary place of residence is there. He has worked in Iran for nearly a year. He has no tax documents relating to his time in Iran. It is not clear whether he paid any taxes there.
Normally, wages earned in Iran would not be taxed in Germany. However, as he cannot proof that he paid taxes in Iran, his wages are taxed in Germany.
There are plenty of exceptions to these general principles, for example:
• For cross-border commuters
• For managing directors and board members
• For certain salary components like royalties, compensations, pensions, etc.
• For countries without double taxation agreement
Double taxation agreements regulate the rights of taxation between two nations. Their central features are often similar, but the details may differ.
If your problem is complicated, we would recommend a consultation. We will tell you exactly what considerations are of importance to keep your tax liabilities for overseas work as low as possible.