Cross-border taxation is a complex but relevant topic for non-residents or foreign taxpayers when planning investments outside their home country. Non-residents who, for example, wish to invest abroad, such as in Germany, but are not resident there, have to find their way through a tangle of tax laws. This article will discuss some of the issues related to cross-border taxation, tax consequences in the home country, and ways to mitigate the tax impact of transactions.
Rules for Properties & Taxes
In the area of cross-border taxation, there are a number of rules and regulations that apply to individuals or legal entities in international transactions. The main aim is to ensure that income earned across borders is taxed properly, but not twice, and that the respective responsibilities of two participating countries are clear.
German tax law states that all income earned by non-residents from renting out homes in Germany must also be taxed there. This can be regular rental income, capital gains or other income from real estate investments. At the same time, the country of residence can also claim tax on income.
To avoid double taxation, many countries, including Germany, have entered into double taxation agreements with other countries. These agreements prevent double taxation by determining which country has the right to tax certain types of income.
The tax landscape is constantly changing, so even non-resident taxpayers should stay up to date in order to optimize their own tax strategy in the long term. Professional advice, for example from a specialist in international situations, can help to ensure that you are making the right decisions. Consulting with tax advisorswho are familiar with both German and the buyer's home country regulations is essential to optimize one's tax situation.
Taxes: Double Taxation Agreements And Tax Reliefs
Double taxation agreements (DTAs) are important treaties between different countries that serve to avoid double taxation for citizens of the respective countries. Germany has concluded DTAs with many countries worldwide to determine how taxation should be applied to citizens of both signatory states who earn income in the other country.
A double taxation agreement determines which country has the right to tax various types of income, such as rental income, interest income, dividends and capital gains. For example, it could be defined that rental income from German homes belonging to non-residents is only taxable in Germany, and the home country then exempts the income from its own taxation.
Claiming tax relief under a DTA usually involves a formal process in which the taxpayer must provide the tax authorities in their home country with evidence of the taxes paid in Germany. This may require extensive documentation.
Obligations of buyers not resident in Germany
Property purchasers who are not resident in Germany are subject to certain tax obligations, as are other property owners. In particular, this includes the obligation to pay tax on all income related to real estate ownership in Germany. For example, rental income must be declared on tax returns and, depending on the structure of the property ownership, rental income may be taxed at the personal income tax rate and thus progressively.
In addition to the taxation of current rental income, property owners may also be subject to capital gains tax if they sell their property within a holding period after purchase. Only after a speculation period has expired, often 10 years after purchase in Germany, can the property be sold tax-free. The tax is levied on the profit realized at the time of sale, which is the difference between the purchase price and the selling price of the home.
Furthermore, filing taxes in Germany can also be more complex for a non-resident. Non-resident taxpayers must report all relevant income and expenses earned in the country so that the taxable income can be calculated correctly and the tax return must be submitted to the German tax authorities every year by a certain deadline.
Therefore, for buyers who are not resident in Germany, it is recommended to consider a local tax advisor and/or lawyer who specializes in cross-border situations for a mandate. Hiring experts who are familiar with German, but also foreign tax law, can be helpful for one's own tax planning. This proactive approach can minimize tax liabilities and ensure that the taxpayer adheres to the requirements of the complex German tax system.
Tax implications in the buyer's home country
In addition to the requirements in Germany, buyers who are not resident in Germany must also deal with cross-border taxation in their home country. Some countries require their citizens to report their worldwide income, so any income from German homes must also be declared in the domestic tax return.
The procedure for reporting foreign income varies from country to country, but usually requires detailed documentation of the income and taxes paid abroad. This information is needed to calculate cross-border taxation according to the tax law of the home country and to recognize taxes already paid when a double taxation agreement is applied.
In summary, non-resident taxpayers are best served to optimize their cross-border situation through strategic planning and professional advice in both Germany and their home country.
Further information and expert advice can be found on our pages about International Mortgages including Swiss Mortgages, Italian Mortgages, German Mortgages und der Spanish Mortgages.
For more information on cross-border situations, please refer to our thematic sections on different residence topics, such as Blue Card Holders, Personen mit befristeter Aufenthaltserlaubnis, Internationale Investoren and Military Professionals.
