Can I pay taxes in two countries?

Income tax

Double taxation agreement (DTA)
Double taxation agreements are intended to avoid natural persons or companies who earn income in two different countries from being taxed twice in both countries. Germany has currently concluded such agreements with over 70 countries.
If there is no double taxation agreement between the states concerned, the respective domestic law applies. Within the European Union, the double taxation agreements are overlaid by the overriding EU law.

Residence in Germany
Anyone who has their place of residence or habitual abode in Germany is subject to unlimited taxation under German income tax law. This means that the country of residence principle and the world income principle apply in principle. This means that all income earned around the world is subject to unlimited income tax in Germany.

Residence abroad
Anyone who has neither a domicile nor their habitual abode in Germany is subject to the principle of source country and the principle of territoriality under German income tax law. Accordingly, income from foreign sources is subject to tax in Germany, e.g. the interest from an investment abroad. However, if the foreign state also taxes this interest, double taxation should be avoided or reduced.
Two standard methods are used for this:

  • Exemption method: In this case, the foreign income is excluded from taxation in Germany. However, the income is used to calculate the tax rate (progression proviso).
  • Credit method: In this case, the income is taxed in both countries. However, the country of residence offsets the tax levied abroad and thus reduces its tax burden by this amount.

With the exemption method, the tax level of the other contracting state applies, with the credit method, the German tax level applies.

How is the pension taxed abroad?
Anyone who only spends the winter months in the warm south and does not relocate abroad remains subject to tax in Germany as normal. Retirees who completely move their place of residence abroad and receive a German pension there must submit a tax return to the tax office in Neubrandenburg. Here, taking into account the double taxation agreement, it is determined whether and how much tax the emigrated pensioner has to pay in Germany. A special double taxation agreement was agreed with Spain, Switzerland and the USA: Germany has no right to tax German pension income.

Limited tax liability
Otherwise, the so-called limited tax liability applies: Retirement benefits must be taxed from the first euro onwards, the basic tax-free allowance customary in Germany and the splitting of spouses for married or partnered persons do not apply.
One way out: pensioners with a foreign residence who receive at least 90 percent of their income from Germany can apply for unlimited tax liability. Then tax exemptions, spouse splitting and other benefits continue to apply. This is also the responsibility of the tax office in Neubrandenburg.

Downstream taxation
German pensions have been taxed downstream since 2005. This means that the pension expenses in the savings phase are made tax-free step by step and the pension income is taxed in return. The tax rate was 50 percent in 2005 and has grown by two percentage points every year since then.

Taxable pensioners are in any case well advised to seek expert advice at an early stage
to look for a tax advisor or an income tax aid association.