Running a home-based-business (HBB) is a popular way for Military spouses to start or continue their own career while following their husband’s career in the US Military.
As default mechanism NATO-SOFA stipulates that any time spent in the host nation “on orders” does not count as residency or establishment thereof as per the host country’s tax code. This precludes the requirement to report – and have taxed in accordance with applicable tax treaties – the worldwide income as would otherwise be due under German tax law. Regardless, a profitable enterprise as an HBB in the host country can be taxed in Germany. Your income is then taxed under the German “beschränkte Steuerpflicht” mechanism.
“Beschränkte Steuerpflicht” means that you can only deduct the expenses directly attributable to your HBB income without the possibility to consider additional expenses you might have such as German craftsmen for your private housing, certain child expenses or donations you make to a German charity. Also, you will not be eligible for the German general standard deduction.
However, without any or much other income it might be beneficial for you to “opt out” from “beschränkte Steuerpflicht” as under German § 1 sec. 3 German Income Tax Act, rendering you eligible for all of the other deductions as well. While this comes with an obligation to report and potentially have your other income tax-considered as well this will most likely always be the more beneficial approach if there is only little to no other income to be considered.
The biggest concern for SOFA spouses when opting out pertains usually to two areas:
- The involvement of their AD/GS spouse on the German side.
There is no reason to be concerned. The HBB spouse will be filed single and the AD/GS spouse is under no obligation to opt out or show on a German tax return at all.
- Loss of SOFA status.
At times people hear that they might lose their SOFA status when opting out. This is blatant and utter baloney! The use of the tax code as legally applicable has no bearing on the SOFA and there are no legal grounds in the actual SOFA to allow for a German tax office to take away your status.
Please reach out to the taxperts if you are looking at the most beneficial tax treatment of your HBB or if a tax office is threatening your SOFA status – the taxperts have corrected the tax office’s view on SOFA on more than one occasion and we are happy to lock horns again!
