Taxation of foreign rental income in germany

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In a Nutshell: Taxation of Income derived from Foreign Real Estate owned by German Residents (Individuals)

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Taxation of foreign rental income in germany

  1. 1. In a Nutshell: Taxation of Income derived from Foreign Real Estate owned by German Residents (Individuals) Questions and Answers 29 January 2012 www.stburbahns.de Status since 2008: Application of Section 2a & 32b German Income Tax Code. For prior periods especially re discrimination of EU treaty compare Federal Tax Office Note of 30 July 2008, Federal Gazette 2008 I 810 incl. negative progression.
  2. 2. 1. You own real estate in a foreign country and use it yourself?  Lacking rental or lease income there is since 1987 no taxable income under German domestic tax law which needs to be declared in the German income tax return (compare OFD Frankfurt v. 18.10.2011,Tz. 2).  Germany has currently no wealth tax. www.stburbahns.de
  3. 3. 2. You own real estate in a foreign country from which you receive rental income as landlord?  Under German domestic tax law you as a resident of Germany are liable to tax with your worldwide income (full tax liability).  Double taxation, i.e. the situation that your income is taxed in the state where your property is situated and in the state of your (main) residency, shall be avoided by tax treaties. Tax treaties usually determine which state shall be entitled to taxation and how double taxation shall be prevented. The methods applied to avoid double taxation are either the so called ‘exemption method’ or ‘credit method’ and usually apply to certain type of income.  The answer to this question depends therefore if Germany has concluded a tax treaty with the state where your property is situated and if the relevant tax treaty applies the exemption method or credit method. www.stburbahns.de
  4. 4. 3. You own real estate in a country with which Germany has no tax treaty concluded from which you receive rental income as landlord, e.g. Brazil?  Under German domestic tax law you as a resident are fully liable to tax with your worldwide income.  In lack of an applicable tax treaty German domestic law applies to your rental income despite the possible taxation in Brazil.  You need to calculate and declare your rental income under German tax rules in Euro on a cash basis (rental income received less related expenses paid in the relevant calendar year). Special rules apply for certain cost items, e.g. acquisition cost for the building will be depreciated usually with 2% per annum. Interest expense incurred for financing the acquisition cost is usually fully tax deductible. The income needs to be declared in your German tax return. You may be entitled for a credit of the foreign income tax paid against your German income tax www.stburbahns.de charge but subject to limitations.
  5. 5. 4. You own real estate in a country with which Germany has no tax treaty concluded from which you receive rental income as landlord, e.g. Brazil, but your expenses are exceeding your income (loss situation)?  In case your calculations shows a loss because your expense exceeds your rental income these losses are not deductible from your remaining German income.  Instead the loss will be assessed separately and be carried forward. The losses may reduce profits in later years from real estate in the same country (per country limitation; per source limitation).  This rule applies to all non EU/EFTA states (=Other States).  The loss will not reduce the progressive income tax rate in the year the loss was incurred (no negative progression) - compare Federal Tax Court decision of 12.01.2011, I R 35/10. www.stburbahns.de
  6. 6. 5. You own real estate in a country with which Germany has concluded a tax treaty (exemption method) from which you receive rental income as landlord, e.g. Poland?  This rule is predominantly applied to rental income from real estate in tax treaties.  Under this rule Poland will tax your rental income under Polish domestic tax rules. Germany as resident State in turn is usually required to exempt this income from taxation.  However, Germany usually applies the exemption method together with the progression rule.  Under the progression rule the exempted income will be taken into account to calculate the income tax rate which will be applied on your remaining taxable income (without exempted rental income). The progression rule requires that you calculate (under German rules) your rental income and declare it in your German tax return (as exempted income).  Exemption from the progression rule: The progression rule applies since 2008 not to EU/EFTA sourced rental income. In these cases a separate calculation is dispensable.  Lacking taxable income in Germany no credit for the Polish income tax will be granted in Germany. www.stburbahns.de
  7. 7. 6. You own real estate in a country with which Germany has concluded a tax treaty (exemption method) from which you receive rental income as landlord, e.g. Poland, but your expenses are exceeding your income (loss situation) ?  In case your calculation shows a loss because your expense exceeds your rental income (calculated under German rules) these losses are not deductible in Germany because the income is also exempted.  The loss will not reduce the progressive income tax rate (no negative progression) - compare Federal Tax Court decision of 12.01.2011, I R 35/10. www.stburbahns.de
  8. 8. 7. You own real estate in a country with which Germany has concluded a tax treaty (credit method) from which you receive rental income as landlord, e.g. Spain?  This rule is only exceptionally applied to rental income from real estate in tax treaties. Compare explicitly for Spain the note of OFD Frankfurt of 18 Oct 2011.  Under this rule Spain will tax your rental income under Spanish domestic tax rules. Germany in turn is also allowed to tax the rental income while crediting the Spanish tax against the German tax charge.  You need to calculate your rental income under German rules in Euro on a cash basis (income received less related expenses paid in the relevant calendar year). The income needs to be declared into your German tax return. To receive a tax credit you need to proof the foreign tax paid.  The credit method applies inter alia to income from real estate in the following countries:  EU/EFTA States: 2011), Finland  Other Spain (old and new treaty), States: Argentina, d’Ivoire, Bangladesh, Mauritius, Namibia, Switzerland www.stburbahns.de Cyprus (new DTC Cote
  9. 9. 8. You own real estate in a country with which Germany has concluded a tax treaty (credit method) from which you receive rental income as landlord, e.g. Spain, but your expenses are exceeding your income (loss situation) ?  EU/EFTA States: In case your calculation shows a loss because your expense exceeds your rental income these losses are usually tax deductible and subject to the usual tax loss utilization rules. These losses may therefore reduce your remaining taxable income in Germany.  Other States: In case your calculations shows a loss because your expense exceeds your rental income these losses are not deductible from your remaining German income. Instead the loss will be assessed separately and be carried forward. The losses may reduce profits in later years from real estate in the same country (per country limitation). No negative progression possible. www.stburbahns.de
  10. 10. 9. Do the same rules apply to holiday houses?  For holiday houses that are houses which are leased to different persons for short periods during a year in typical leisure resorts, basically the same rules apply.  However, under German domestic law certain special rules will be applied to holiday houses, especially in loss situations. Compare inter alia Federal Tax Note of 20 November 2003, Federal Gazett, 2003 I S. 640. www.stburbahns.de
  11. 11. Overview & Summary loss from (foreign) rental income tax treaty (credit method) no tax treaty tax treaty (exemption method) in Germany exempted income in Germany taxable income EU/EFTA States Other States All States loss fully deductible (reduction of other German income possible) loss carry forward (reduction of future rental income from same state) no loss deduction www.stburbahns.de EU/EWR States: no progression at all no negative progression
  12. 12. Impressum Der Kanzleiinhaber ist Mitglied in der Steuerberaterkammer Hamburg, Raboisen 32, 20095 Hamburg. Die gesetzliche Berufsbezeichnung »Steuerberater« wurde in der Bundesrepublik Deutschland verliehen. Kanzleianschrift: Steuerberater Rüdiger Urbahns – Rahlstedter Str. 163 b -22143 Hamburg-Rahlstedt - Telefon: 01578 845 77 80 -Fax: 040 301 87 429 E-Mail: rudiger.urbahns@stburbahns.de -USt-Id.-Nr: DE177626279 Der Berufstand des Steuerberaters unterliegt im Wesentlichen den nachstehenden berufsrechtlichen Regelungen: Steuerberatungsgesetz (StBerG) Durchführungsverordnung Berufsordnung (BOStB) Steuerberatergebührenverordnung (StBGebV) Die o. a. Regelungen können in ihrer aktuellen Fassung jederzeit unter der Rubrik »Downloads« auf der Internetseite der Bundessteuerberaterkammer unter www.bstbk.de eingesehen werden. Die wesentlichen Merkmale der Dienstleistungen ergeben sich aus den 32 und 33 des Steuerberatungsgesetzes. Die Preise für Steuerberatungsleistungen richten sich nach der Steuerberatergebührenverordnung. Auf Anfrage werden gerne nähere Auskünfte zu den Leistungen und den dafür anfallenden Gebühren erteilt. Im Übrigen sind die erforderlichen Angaben lt. DienstleistungsInformationspflichten-Verordnung (DL-InfoV) vom 12.03.2010 am Kanzlei-Standort zugänglich und einsehbar. Es besteht eine Vermögensschadenshaftpflichtversicherung im berufsrechtlich notwendigen Umfang bei der R+V Allgemeine Versicherung AG, Taunusstr. 1, 65193 Wiesbaden, vertreten durch die IAK GmbH, Horster Str. 26-28, 46236 Bottrop. Räumlicher Geltungsbereich: Europa einschließlich der Türkei und der Staaten auf dem Gebiet der ehemaligen Sowjetunion einschließlich Litauen, Lettland und Estland. Important Notice: The information provided in this publication is intended for general information purposes and cannot be considered as advice. An advisory relationship becomes binding only based on agreed and signed engagement letters. Note: Laws, regulations, administrative instructions, tax treaties and court decisions could deviate from each other and are subject to permanent changes. The judgement of a case depends on individual facts and circumstances so that it is strongly recommended to contact a tax advisor before making a decision that affects one's tax situation. Only applicable law is that of Germany. Status: Jan. 2012 www.stburbahns.de

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