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Foreign income: How is this taxed in Germany? (Ausländische Einkünfte)

Naturally, the question arises of how foreign income taxed in Germany.

What is foreign income (Ausländische Einkünfte)?

German tax law determines how much foreign income must be taxed. Thus, all expenses (Werbungskosten) are normally taken into account.

Foreign income includes

  • Salary for employment abroad
  • Dividends from shares of companies from abroad
  • Income from self-employment that took place abroad
  • Income from deposits / deposits with foreign financial institutions
  • Income from foreign investment funds or bonds
  • Income from agriculture and forestry, if cultivated land is located abroad

Types of income from foreign income (ausländische Einkünfte)

Everyone can earn foreign income from different types of income. § 34d Income Tax Act of the German tax law determines how these are taxed Any deductions are therefore determined by the Income Tax Act (Einkommensteuergesetz).

According to § 2 para. 1 Income Tax Act are subject to income tax:

  • Income from agriculture and forestry
  • Income from business activities
  • Income from self-employment
  • Income from employment
  • Income from capital assets
  • Income from renting and leasing
  • Other income

What should you keep in mind when it comes to foreign income (ausländische Einkünfte)?

  • The prerequisite for income from non-self-employment is that work was carried out abroad; this can be used abroad without ever having been carried out in Germany.
  • A condition for income from commercial enterprises (Gewerbebetriebe) is that income from operations were obtained from abroad
  • in the case of capital assets, it is essential that capital assets are secured by foreign real estate
  • self-employment must have been carried out abroad
  • managed land under agriculture and forestry, with which revenue was generated, must have been located abroad
  • in the case of rental and lease income, use of the property/item must have taken place abroad

Ausländische Einkünfte in der Steuererklärung

How is foreign income taxed (ausländische Einkünfte)?

Anyone who has registered their residence in Germany or resides in Germany is subject to unlimited income tax (unbeschränkt einkommensteuerpflichtig). As a result, all income, whether from home or abroad, must be taxed in Germany. In addition, taxes are levied by the respective state from abroad. This is not unusual and is called the Quellenprinzip.

In order to avoid double taxation (Doppelbesteuerung), there is an agreement between most countries to prevent this. Double taxation is avoided in two ways.

Exemption method (Freistellungsmethode)

  • revenue generated abroad is tax-exempt in Germany, but is subject to the proviso safeguarding progression (Progressionsvorbehalt)

Crediting method (Anrechnungsmethode)

  • foreign income is recorded in Germany and the tax paid abroad is credited against the tax liability (Steuerschuld)