Many Americans living in Germany draw income from the US – as a pension, dividends, retirement plan distributions or VA benefits – and can live comfortably on just those or they are working low-paying jobs, that do not come with tax consequences. Others move to Germany late in the year and their income for 2-3 months is under the relevant tax threshold. Some American are internationally fairly mobile and spend only so much time in Germany out of the year.
Almost every single of the above-mentioned Americans is convinced that he does not have to file a German tax return because the “German income is not high enough”, the other income is not “from Germany”, “paid to a US bank account” or “in US dollars”. Some also think that because they spend less than 183 days in Germany all is good.
Actually all of the above examples highlight common misperceptions as to who needs to file a German tax return and which country (Germany or the US) actually gets to tax certain sources of income. First of all, the question as to who needs to file hinges on somebody’s residency in a country. In Germany the national tax law has two concepts which address this aspect and they are very different from the 183 days rule, which is a term that can only be found in international tax treaties. Second, international tax treaties assign taxation rights sometimes without considering the situs of the income source. For example, under the current tax treaty between Germany and the US the distributions from US retirement plans can be subject to taxation in Germany. Third, those international tax treaties sometimes mandate that foreign income be considered for tax bracket purposes in the other country. While the other country cannot tax this particular income, it needs to know about it in order to determine the local tax rate.
Because of all those intricacies regarding the interfaces between national, international and treaty tax law it is fairly easy to leave foreign income off of a German tax return or just not file at all. In both cases a German tax office might suspect not an honest mistake but bad-intent, which can trigger a tax evasion investigation.
For this reason we always advise that somebody who has non-German income always files a tax return. IT is the only way to be fully transparent and present your opinion to the tax office. A lot of times they can be reasoned with. However, in order to do this you need to be ahead of the game and not at the mercy of the tax office.
Please reach out to us if you think this affects you, if you have questions or specific consulting advice on this issue.
