In the United States, citizens and lawful permanent residents are normally required to file an annual income tax return.
This return must include any income earned throughout the world. That is to say, even if an American lives in a foreign country, he or she must still report any income earned there to the United States.
This can lead to a double-taxation scenario if the foreign country where the person lives also imposes an income tax.
To help minimize double taxation, the United States government has negotiated reciprocal tax treaties with a number of foreign nations, such as Germany.
The German-American tax treaty has been in effect since 1990. The treaty has two main goals.
- First, to avoid double taxation of income earned by a citizen or resident of one country in the other country.
- And second, the treaty helps to promote residents of either country from avoiding taxes.
In fact, under a 2006 amendment to the U.S.-Germany income tax treaty, the governments of both countries are allowed to share tax information with one another. This makes it possible, for instance, for the IRS to see what income taxes a U.S. citizen living in Germany is paying in that country.
How the German-American Tax Treaty Works in Practice
The treaty itself covers a number of income scenarios (including but not limited to the following):
Profits earned by a U.S. or German business is normally taxable in the country where the business is registered. But if the business in one country creates a “permanent establishment” in the other country, then the profits attributed to that establishment are taxable in the other country.
For example, if a German company establishes a branch office in Florida, the profits attributed to that branch are taxable in the United States because the German company has created a “permanent establishment” in the United States.
The tax treaty provides that corporate dividends are taxable in the country where the shareholder resides.
But dividends may also be taxed in the corporation’s country of residence as well. To minimize double taxation, the treaty limits each country’s dividends tax to 5 percent of the gross amount for foreign companies who own at least 10 percent of the corporation’s voting shares; otherwise, the tax is capped at 15 percent. Under certain circumstances each country’s dividends withholding tax can even be reduced to zero.
Individual Employees and Personal Services
If a resident of Germany temporarily works in the United States, the treaty states that income is not taxable in the U.S., and vice versa. There are several caveats here.
The German resident must not remain in the U.S. for more than 183 days during the applicable calendar year, their income must be paid by a German employer, and that income must not come from a permanent establishment of the German employer in the U.S.
Special Rules for Educational Professionals
A professor, teacher, or other scholar who is a resident of one country may work for, or research in, the other county for up to 2 years without having to pay taxes on their income from such activities to the host country.
Note this exception only applies to individuals affiliated with an accredited educational institutional or other organization that conducts “public benefit” research.
Need to Know More About the USA-Germany Tax Treaty?
This is only a brief overview of some of the subjects covered by the tax treaty between the U.S. and Germany. If you have additional questions or concerns, contact my law office to schedule a consultation.