Germany specific
Kirsten Simmons avatar
Written by Kirsten Simmons
Updated over a week ago

TFX specializes in top-tier U.S. tax services for individuals, partnerships, corporations, trusts, and estates worldwide. If you need assistance with your German tax return, we have got you covered. We maintain strong partnerships with trusted local tax experts in 193 countries. These professionals are well-equipped to handle your non-U.S. tax needs. Reach out to us via phone, chat, or email, and we will connect you with an experienced local firm. Your global tax compliance just got simpler with TFX.

Table of contents:

German businesses and investments

Opening a local business in Germany as a U.S. citizen

Before opening a local business in Germany, you will likely need to obtain a visa or work permit to reside and work in Germany legally. Moreover, you must decide on your business structure and register your business with the appropriate German agency. There are several German agencies where you may need to register your business, such as the local offices of Business and Standards, the local Labour Office, the trade office (Gewerbeamt), the tax office (Finanzamt), etc. You can find out more details on the appropriate office for your region provided on Germany’s Federal Ministry for Economic Affairs and Energy website.

Types of local business structures in Germany and the U.S. filing requirement

  • Sole Trader

    As a Sole Trader, you are self-employed. You must report your self-employment to the IRS via form Schedule C (included in our PREMIUM package).

  • Limited liability company (GmbH)

    A limited liability company (Gesellschaft mit beschränkter Haftung or GmbH) means the business is considered a separate entity from the individuals who form it. You must report your Limited Liability Company to the IRS via Form 5471.

  • Corporation (AG)

    A corporation (Aktiengesellschaft or AG) also has limited liability, but (in Germany) requires at least five people to form and requires a high initial investment amount. You will need to report your corporation to the IRS via Form 5471.

  • Partnership (OHG or KG)

    In Germany, the partnership model can be an Offene Handelsgesellschaft (OHG) in which the partners are responsible for all the liabilities of the company, or a Limited Partnership (Kommanditgesellschaft, KG) comprised of general partners with unlimited liability and limited partners whose liability is limited to the number of their contributions. You will need to report your partnership to the IRS via Form 8865.

Social Security and pensions

The German Social Security system comprises three pillars:

  • Pillar I: Mandatory state pension insurance (Gesetzliche Retenversicherung): All employees and employers contribute a percentage of their salaries to this system. This scheme is based on the pay-as-you-go or redistributive model. The scheme operates on a pay-as-you-go or redistributive model.

  • Pillar II: Voluntary occupational pension insurance: Voluntary occupational pension schemes are offered by employers to their employees. These schemes can include:
    a) Defined benefits (Leistungzusage).
    b) Defined contribution (Beitragasorientierte Leistungzusage).
    c) Contribution with minimum benefit.

  • Pillar III: Private insurance: Private pension schemes in Germany are funded through private contributions.

U.S. - Germany Social Security Totalization Agreement

An agreement between the United States and the Federal Republic of Germany improves Social Security protection for people who work or have worked in both countries. It helps people who, without the agreement, would not be eligible for retirement, disability, or survivor benefits under the Social Security system of one or both countries. It also helps many people who would otherwise have to pay Social Security taxes to both countries on the same earnings.

The agreement's provisions eliminate double Social Security taxation and permit dual residents to use their work in both countries to qualify for benefits.

  • If you are self-employed, contributions to the German Public Retirement System exempt you from contributions to the U.S. Social Security system that otherwise would be required in the U.S. on self-employment income.

  • If you have Social Security credits in both the United States and Germany, you may be eligible for benefits from one or both countries. If you meet all the basic requirements under one country's system, you will get a regular benefit from that country. If you do not have enough work credits under the U.S. system to qualify for standard benefits, you may be able to qualify for a partial benefit from the United States based on both U.S. and German credits.

    • To be eligible to have your German credits counted, you must have earned at least six credits under the U.S. system.

    • To be eligible to have your U.S. credits counted towards German benefits, you must have a minimum period of coverage in Germany totaling 18 months.

    Note: although the agreement allows the Social Security Administration to qualify for U.S. retirement, disability, or survivor benefits, the agreement doesn’t cover Medicare benefits.

Taxation of Social Security benefits

  • U.S. Social Security benefits received by U.S. citizens and Green Card holders residing in Germany are exempt from tax in the U.S. They are only taxable in Germany.

  • German public retirement system contributions withheld from your paycheck or made on self-employment income are not deductible from your U.S. taxable income. They also do not qualify for the foreign earned income credit. You can access your German Public Retirement System account records online.

  • German State Pension and other similar payments received under the German Public Retirement System legislation by U.S. citizens and Green Card holders residing in Germany are taxable in both countries. However, you can eliminate the burden of double taxation. Taxes paid in Germany on pension income are applied as a foreign tax credit against tax owed on the same income in the U.S.

  • Contributions to the German employer pension scheme:

    • Contributions paid by or on behalf of a U.S. citizen/Green Card holder to the pension scheme may be excludable in computing his U.S. taxable income, and

    • Any benefits accrued under the pension scheme or contributions made to the pension scheme by or on behalf of a U.S. citizen/Green Card holder’s employer are not treated as part of the employee’s taxable income.

    Note: the exclusion of contributions to the pension scheme is not mandatory. You may add those contributions to your annual taxable income. Considering the high tax rate paid in Germany on earned income, added employer contributions may still leave you tax-free in the U.S. Your benefit: the added amount will be considered previously taxed, which will reduce the taxable portion of pension payments in the future.

Tie-breaker rule to apply for treaty benefits

U.S. Green Card holders residing in Germany may elect to apply what is known as the tie-breaker rule of the U.S.-Germany Tax Treaty and be deemed a resident only of the State (i.e., country) with which their personal and economic relations are closer (Germany).

Under such an election, the individual would file Form 1040NR and report only income derived from U.S. sources. The requirement to provide full disclosure of foreign bank accounts remains, and tax on income from U.S. sources will be higher than a tax on the same income when applied to U.S. residents filing Form 1040.

German income reporting

Bruttoarbeitslohn - Gross wages/salary

The primary source of information is Anlage N. If you had employee income from sources outside of Germany, you would also need Anlage N-AUS to add numbers from the respective fields.

To report the total amount of the annual gross salary from line 6 (Bruttoarbeitslohn):

  1. Open your Tax Questionnaire and click the Configure Life & Income button on the left side.

  2. Click Yes next to I receive payments from an employer.

  3. Click Next Step and Submit.

  4. Navigate to Income > Wages and click Yes to the question Did you receive payments during the tax year from a non-U.S. Employer?

  5. Enter the gross salary amount to the question Gross wages/salary earned with this employer during the tax year? Use the income calculator to convert to a calendar year.

Einkünfte aus selbständiger Arbeit - Income from self-employment

Income from self-employment is a turnover of your unincorporated business. You will need German forms Anlage S or Anlage G. To report the gross income from the self-employment or business income, navigate to Income > Self-employment tab and enter the amount under the question Gross Income from the Self-employment.

Each type of income is reported as a gross amount before any deductions are allowed in Germany, for example, before contributions to the German public retirement system (those are reported separately).

Abfindung - Severance pay

If you received severance pay as compensation for termination of employment, add the gross amount as additional wages.

Lohnsteuer & Solidaritätszuschlag - Income tax & surcharge on income and corporation tax

Similarly to income, the tax must be reported separately for each type of income on which tax was paid. To report tax imposed on the particular income type:

  1. Open your Tax Questionnaire and navigate to Taxes And Deductions > Taxes Paid.

  2. Click Yes under the question Did you pay any tax to any non-U.S. country on any of your income this year?

  3. Add the amounts printed on line 7 (Lohnsteuer) and line 8 (Solidaritätszuschlag) and enter the results as wages tax.

If there was an additional tax payment during the calendar year (i.e., Bundeszentralamt für Steuern issued a tax bill for tax underpaid in the prior year), add that amount to the amount of tax withheld during the filing year.

Taxes on unearned income may be withheld by the payor (e.g., bank-withheld income from dividends), or you may owe tax upon completing the tax assessment form. Report each type of tax paid during the filing year in the respective section, even if it applied to income received in prior years.

How to report your deductions

We will take specific deductions allowed for German residents by the U.S.-German Tax Treaty, for example, we can deduct contributions made to the employer pension scheme. You will report contributions to the employer pension separately from the gross income. We will take this deduction if this improves your tax position (in some cases, you may benefit from not taking this deduction now).

Further, the Taxes And Deductions > Deductions section of TQ offers you questions related to various additional deductions. Such deductions include mortgage interest, alimony payments, and investment advisor fees. Similarly to personal allowances in Germany, the U.S. tax system also applies a “Standard deduction” concept: $12,950 per single person and $25,900 for the married couple for the 2022 tax year. For most German residents filing a U.S. tax return standard deduction option is more tax efficient than “itemized deductions” - grossing up individual deductions. Refer to Standard vs. Itemized deduction on the U.S. tax return for more information.

As an example, you can report your property tax on a U.S. residence:

  1. Open your Tax Questionnaire and click the Configure Life & Income button on the left side.

  2. Click Yes next to I want to maximize deductions.

  3. Click Next Step and Submit.

  4. Navigate to Taxes And Deductions > Deductions and click Yes under the question Do you want to list various expenses that might improve your tax position?

  5. Click Yes under the question Did you own residential real estate during the tax year?

  6. Click Yes under the question Did you pay property taxes on the residence?

  7. Provide the amount and indicate the currency.

❗ Important note: foreign property taxes are not deductible for tax years 2018 through 2025.

Rentenbeiträge - Pension contributions

To report employer contributions and your contributions to the pension scheme:

  1. Open your Tax Questionnaire and navigate to Income > Wages.

  2. Click Yes under the question Did you receive payments during the tax year from a non-U.S. Employer?

  3. Click Yes under the question Were contributions made to a non-U.S. pension plan (whether yourself or by your employer)?

  4. Click Yes under the question Did your employer contribute to your pension plan?

  5. Provide the amount and indicate the currency.

Rentenzahlung - Pension payouts

To report payouts from foreign pensions of all types: Social Security, employer pension, and widow's pension:

  1. Open your Tax Questionnaire and click the Configure Life & Income button on the left side.

  2. Click Yes next to I have retirement accounts or receive retirement income.

  3. Click Next Step and Submit.

  4. Navigate to Income > Passive Income > Pension.

  5. Click Yes under the question Did you receive Foreign (i.e. non-U.S.) retirement distributions?

  6. Fill in the table Country & Pension Type.

Kindergeld - Child benefits

This does not need to be reported - it is not treated as income.

Q: My taxes are taken out of my German salary automatically. I also have a deduction taken out for the German Social Security system. Do I add these together for my income tax?

A: The Social Security payment is not deductible from your salary. Similarly, you do not “deduct” income tax. Instead, you need to report your gross salary, and then you can claim the foreign tax credit for income tax (not for the Social Security tax).

❗ Important note: there are other taxes that are also non-deductible, such as Church tax and VAT.

Germany - U.S. FATCA Treaty overview

In 2006, the United States of America and the Federal Republic of Germany signed a Protocol amending their Tax Treaty to avoid double taxation and prevent fiscal evasion concerning taxes, allowing the exchange of tax-related information. This amendment was implemented through the Foreign Account Tax Compliance Act (FATCA) in 2010.

Germany incorporated FATCA principles into its local law, obligating German financial institutions to provide information on U.S. accounts to the German tax authorities (Bundeszentralamt für Steuern). Further, it becomes subject to the Intergovernmental Automatic Exchange of Information that took effect on May 31, 2013. Subsequently, German banks reported account balances on June 30, 2014, with reviews based on account value. Accounts with balances over $1 million were reviewed by June 30, 2015, and those with lower values ($50,000 - $1 million for individuals and $250,000 - $1 million for entities) by June 30, 2016.

To comply with U.S. FATCA regulations, German financial institutions search their data for indications (indicia) that an account holder may be a U.S. person (U.S. Specified Persons or foreign entities in which U.S. taxpayers hold a substantial ownership interest). These indications include:

  • U.S. citizenship (evidenced by a U.S. passport or Green Card).

  • U.S. residential address.

  • Place of birth in the U.S.

  • U.S. telephone number.

  • Standing instructions to transfer funds to a U.S. bank account.

  • Power of attorney (PoA) or third-party authority in favor of a person with a U.S. address.

  • Use of a c/o or hold mail address.

German financial accounts reporting

Which types of German financial accounts must the U.S. individual report on FBAR / FATCA?

  • Individual bank accounts such as savings accounts, checking accounts, and time deposits.

  • Retirement accounts.

  • Brokerage accounts, commodity futures, or options accounts.

  • Insurance policies and annuity contracts with a cash value.

  • Business accounts where a U.S. person has a greater than 50 percent interest in the entity.

Which German financial accounts are not required to be reported on FBAR / FATCA?

Even though FATCA will provide relief in writing scope to many German retirement plans and pooled investment vehicles considered “deemed compliant", the FATCA rules applied to individuals were not relaxed. Form 8938 requires reporting by U.S. taxpayers participating in foreign pension plans.

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