Foreign income of Germans: Duty of disclosure in the income tax return
If you are looking for specialists in international tax law, you have come to the right place. This is because there are special features to consider when preparing income tax returns for income from abroad.
Foreign income arises for persons who have a place of residence or habitual abode in Germany and earn income from abroad. They are subject to unlimited tax liability in Germany and must disclose all income earned worldwide to the tax office. Whether this income is taxable in Germany or not is initially irrelevant and depends, for example, on the relevant double taxation agreement.
Even if the income has already been taxed abroad or has been subject to withholding tax there, the income must be declared in Germany. Even if the foreign income is not taxable in Germany, it generally affects the tax rate on German income. This is referred to as the so-called progression proviso. Please remember to declare all foreign income in your German income tax return. If you have forgotten to do this in the past, we can support you in making a voluntary disclosure to avert greater damage.
Particularly problematic are investments in funds, trusts and foundations as well as LLCs, which under German law can be both partnerships and corporations, because the shareholders are often unaware that a tax liability may exist even without a distribution or sale of shares. Determining whether and to what extent withholding tax paid abroad can be offset against German income tax is complex and should not be attempted without the advice of a specialist. As a rule, this is only worthwhile if the withholding tax was at least four or five figures.
Income from bank accounts and custody accounts abroad
It is not prohibited to hold accounts and custody accounts abroad, e.g. to achieve a broader diversification and risk reduction for larger assets, to benefit from the lower withholding tax or to achieve an interest gain. It is only important that income from foreign accounts and custody accounts is declared in the German tax return. Failure to do so may result in criminal tax proceedings in which you will not only have to pay all evaded taxes with interest and any penalties; you may even be sentenced to prison (see Hoeneß case). Anyone who has not yet declared income from abroad should check whether it is really worth it.
Playing with open cards - and driving best in the long run
In an age of international networking of tax authorities, very extensive reporting obligations for banks and the purchase of tax CDs from former bank employees by tax authorities and searches by customs, the risk of discovery is very high. In our experience, it was not worth it in most cases. The tax savings effect is often negated by the high administrative and travel costs, especially for investments of less than €1 million. In addition, many countries have gradually introduced a withholding tax, which is sometimes even higher than the final withholding tax in Germany. This currently amounts to 26.38% (25% income tax and 5.5% solidarity surcharge). Switzerland, for example, levies a withholding or transfer tax of 35% on dividends from Swiss stock corporations. If this income is not declared in the German tax return, no partial refund of the withholding tax can be claimed. Taxation in Germany would therefore have been cheaper and would have cost less “nerves”.
Further information on the preparation of income tax returns and how we can also support you can be found here.
