Double Taxation: When Do I Pay in Two Countries — and How Do I Avoid It?

Last updated: July 2026 · Giulia Uggias-Sproß, German Tax Advisor (Steuerberaterin, M.A. Taxation)

Two principles compete in international taxation: the residence principle and the source principle. When both states enforce their claim, genuine double taxation arises — and that is precisely what double taxation treaties protect against.

In brief

• Germany taxes on the worldwide income principle — anyone with unlimited tax liability here is taxed on their global income
• Germany has treaties with more than 90 states that allocate the taxing rights
• Two methods: exemption (with progression proviso) or credit for the foreign tax
• The credit is capped — a higher foreign tax rate does not lead to a refund
• Without a treaty, § 34c EStG applies — weaker protection, but credit or deduction remain possible
• The progression proviso is often overlooked: tax-exempt foreign income raises the rate applied to your German income

How does double taxation arise in the first place?

Germany taxes on the worldwide income principle: anyone with unlimited tax liability here is in principle taxed on their entire global income — regardless of where it was earned.

The source country, meaning the state in which the income arises, also has a taxing right of its own. If both states enforce this claim without a bilateral treaty or a national provision providing relief, genuine double taxation arises.

What is a double taxation treaty — and what does it achieve?

Germany has concluded double taxation treaties with more than 90 states — treaties under international law that allocate the taxing right for individual categories of income between the contracting states.

A treaty either assigns a category of income exclusively to one of the two states — or it permits both to tax, while prescribing how the double burden must be avoided.

Exemption or credit — which method applies?

• Exemption method: the foreign income is excluded from the German tax base. Important: the progression proviso nevertheless means this income raises the tax rate applied to the remaining German income.
• Credit method: both states tax the income, but the tax paid abroad is credited against the German tax liability. The credit is capped at the German tax on that income — a higher foreign tax rate does not lead to a refund.

Which method applies in a specific case depends on the relevant treaty and the type of income. Employment income, dividends, interest, royalties and business profits are generally treated differently.

What applies if there is no treaty?

Germany does not have a treaty with every state. In that case German domestic law applies, in particular § 34c EStG. This provision allows you to

• credit foreign taxes against German income tax, or
• deduct them as business expenses or income-related expenses.

The protection is therefore weaker than under a treaty — but it exists.

What is the progression proviso — and why is it overlooked?

Even where income is excluded from German tax under the exemption method, it has an indirect effect through the progression proviso (§ 32b EStG): the exempted income is not taxed, but it raises the tax rate applied to the remaining German income.

Practical consequence: someone with only modest domestic income in Germany but high tax-exempt foreign income can, through the progression proviso, end up with a considerably higher tax burden than the domestic income alone would justify.

Which situations typically affect expats?

• Employees on assignment: anyone posted abroad by a German employer often remains subject to unlimited tax liability in Germany, while the employment income is also taxed in the country of activity. The treaty determines which state holds the taxing right.
• Freelancers with international clients: income from self-employment can be taxable both in the country of residence and in the source country — particularly where a fixed base or permanent establishment exists there.
• Investors with foreign custody accounts: dividends and interest are frequently subject to withholding tax in the country of origin. This can be credited against German flat-rate capital gains tax — but only up to the amount of the German tax on that income.
• Leaving Germany: giving up a German residence ends unlimited tax liability, but not necessarily all German taxing rights immediately. For certain categories of income — such as income from German property — Germany remains entitled to tax as the source state.

Frequently asked questions

What is a double taxation treaty?

A bilateral treaty between two states setting out which state holds the taxing right for particular categories of income. Germany has concluded treaties with more than 90 countries.

Can I have to pay tax in two countries as an expat?

Yes, that is possible — particularly where no treaty exists, or where the treaty provides for the credit method and the foreign tax rate is below the German one. In most situations, however, the treaty prevents a full double burden.

What is the progression proviso?

The progression proviso (§ 32b EStG) means that tax-exempt foreign income is not taxed in Germany but raises the tax rate applied to the remaining income taxable in Germany.

What happens if there is no treaty with the source country?

§ 34c EStG allows the foreign tax to be credited or deducted. The protection is less comprehensive than under a treaty, but in many cases it prevents a full double burden.

Does the treaty apply automatically?

Treaty provisions apply by operation of law in principle, but must be claimed correctly in the tax return. For withholding tax relief abroad, a separate application procedure with the competent foreign tax authority is frequently required.

Your tax situation is individual

Whether assignment, relocation, a foreign portfolio or cross-border self-employment — classifying your income correctly requires an analysis of the specific treaty and of your personal tax liability. We advise in German, English, Russian and Italian.