How Does Double Taxation Arise?
Two principles compete in international taxation: the residence principle and the source principle. Germany taxes on the basis of worldwide income: anyone who is fully tax-resident in Germany is, in principle, liable to tax here on all their global income — regardless of where it was earned.
The source country — the state in which the income originates — also has a right to tax it. When both states enforce this claim without a bilateral agreement or domestic rule providing relief, genuine double taxation occurs.
Tax Treaties: The Primary Instrument of Protection
Germany has concluded double tax treaties (DTTs) with more than 90 countries. These bilateral agreements allocate taxing rights over specific categories of income between the two contracting states. A treaty will either assign exclusive taxing rights to one state or permit both to tax — while prescribing how double taxation is to be eliminated.
The Two Relief Methods
Exemption method — Foreign income is excluded from the German tax base and not taxed in Germany. Important: the progression proviso means that exempt income still affects the tax rate applied to remaining German income.
Credit method — Both states tax the income, but tax paid abroad is credited against the German tax liability. The credit is capped at the German tax attributable to that income — a higher foreign rate does not generate a refund.
Which method applies depends on the specific treaty and the nature of the income. Employment income, dividends, interest, royalties and business profits are typically treated differently.
What Applies When There Is No Treaty?
Germany does not have a tax treaty with every country. In those cases, domestic law — specifically Section 34c of the Income Tax Act (EStG) — applies. This provision allows foreign taxes to be credited against German income tax, or alternatively deducted as a business or income-related expense. The protection is more limited than under a treaty, but it exists.
The Progression Proviso — Frequently Overlooked
Even where income is exempt from German tax under the exemption method, it has an indirect effect on the overall tax burden through the progression proviso (Section 32b EStG). The exempt income is not taxed, but it increases the rate applied to the remaining taxable German income.
An expat with modest German income but substantial tax-exempt foreign earnings may find themselves in a significantly higher effective tax bracket than their domestic income alone would justify.
Typical Situations for Expats
Employees on international assignments — Those seconded abroad by a German employer often remain fully tax-resident in Germany while also becoming taxable in the country of employment. The applicable treaty determines which state has primary taxing rights over the salary.
Freelancers with international clients — Income from independent work may be taxable in both the country of residence and the source country, particularly where a fixed place of business or permanent establishment is involved.
Investors with foreign portfolios — Dividends and interest from foreign sources are typically subject to withholding tax at source. This can generally be credited against German capital gains tax, but only up to the German tax attributable to those earnings.
Leaving Germany — Giving up a German residence ends unlimited tax liability, but not necessarily all German taxing rights immediately. For certain income categories — such as rental income from German property — Germany retains source-country taxing rights even after departure.
Frequently Asked Questions
What is a double tax treaty?A double tax treaty is a bilateral agreement between two countries that specifies which state has taxing rights over particular categories of income. Germany has concluded treaties with more than 90 countries.
Can I be required to pay tax in two countries as an expat?Yes — particularly where no treaty exists, or where the treaty uses the credit method and the foreign tax rate is lower than the German rate. In most cases, however, the applicable treaty prevents full double taxation.
What is the progression proviso?The progression proviso (Section 32b EStG) means that foreign income exempt from German tax is not itself taxed, but raises the rate applied to the remaining taxable German income.
What happens if Germany has no treaty with the source country?Section 34c EStG allows the credit or deduction of foreign tax. Protection is more limited than under a treaty, but in many cases full double taxation can still be avoided.
Does a treaty apply automatically?Treaty provisions apply by operation of law but must be correctly claimed in the tax return. For withholding tax relief abroad, a separate application to the relevant foreign tax authority is typically required.
Your tax situation is individual.
Whether it is a secondment, departure from Germany, a foreign portfolio or cross-border self-employment — the correct classification of your income requires careful analysis of the applicable treaty and your personal tax position. We advise in German, English, Russian and Italian.
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