U.S. citizen working in Germany for a U.S. company

Tax implications, which country to pay taxes

Pages: 1 2

colibriUSA
Hello everyone!

My wife (German/US dual citizen) and I (US citizen) are planning a move to Germany to be near her family. We are unclear for how long we would move to Germany, since it depends to some degree on my adjustment to the language and weather, as well as the continuing health of my own parents back in the US. Initally I see it as at least a two or three year venture.

I'm looking for some general advice on taxes and employment for me. We certainly will eventually consult a tax lawyer in Germany, but before committing to any particular decision, I would like to get a general idea regarding the tax implications for me, if I continue working for my US employer while living in Germany. I work in IT and can do much of my work across the internet or phone. I would expect to be working in the US for 20% or less of my working days.

My US employer is a relatively small company, and I cannot see them ever agreeing to pay me in Euros or working with the German tax authorities. If they continue to pay me in US dollars, what would be the best way to structure a contract agreement with regard to the items below. And what would be my obligations in Germany?

Income Tax in Germany/US
US Social Security and Medicare Taxes vs. German Rentenvesicherung
Health Insurance

Most likely my wife will be able to get a full-time job employed in Germany by a German firm, so you can add that to your assumptions. She was employed in Germany for about five years before coming to the US (and marrying me).

Thank you in advance for your advice!
ColibriUSA
Expaticus
My US employer is a relatively small company, and I cannot see them ever agreeing to pay me in Euros or working with the German tax authorities. If they continue to pay me in US dollars, what would be the best way to structure a contract agreement with regard to the items below. And what would be my obligations in Germany?

Income Tax in Germany/US
US Social Security and Medicare Taxes vs. German Rentenvesicherung
Health Insurance

Most likely my wife will be able to get a full-time job employed in Germany by a German firm, so you can add that to your assumptions. She was employed in Germany for about five years before coming to the US (and marrying me).
If it's really for two to three years, then you and your company need to discuss the possibility of them entering into a expatirate employment agreement, wherein they would continue to withhold local, state and federal taxes, as well as Social Securitiy and Medicare. Be aware that your last state of residence is where you'll be taxed. However, I don't think this would be treated as freelance income; I'm 99% sure your company would have to top you up at least the German income taxes, if not the social system payments. Think about it, otherwise everybody in Germany would find an employer in Hong Kong or Dubai. Worst case, you'll have to top it up out-of-pocket, but still be an expatriate employee.

Beware, after two or three years you may find yourself staying here longer than you thought ... after which your employer and/or the local tax authorities will likely run out of patience as expat contracts are supposed to be temporary. When I had an expat contract with the US firm with which I originally transferred to Germany, it was a fat bull market version, with full tax equalization, tax prep paid, and private US health insurance attached. When I went on the local economy, it was a rude awakening to say the least.

If your company is really that small, then the foregoing probably won't fly. Then they'll have to pay you on a freelance basis your gross salary in dollars, withhold nothing, and you file locally and contribute into the social system stuff yourself. As long as you're "vested" in your US Social Security benefits, you won't lose them even if you go on the local economy and start paying into their system; and even if you do, you can claim it back upon return to the US up until a certain number of years. If you make more than $84,000 per year, you'll also still be on the hoook for US taxes not covered under the tax treaty ... if you make under it will simply show "taxes paid to other jurisdictions" and zeros for SS and Medicare. Regardless, you'll still have to file a US return.

The possibility of your wife working for a German firm complicates the health insurance issue a bit, but I would think you'd be interested in obtaining local private insurance. One weird twist here is that most companies pick up 1/2 of your monthly premia, regardless of how much it is. Watch it ... her pension plan coverage could mess up IRA maximum contribution limits for you. Plus, throw out any ideas you may have about doing your own taxes to save money.

Good luck with your planning. Your wife appears to be getting the same 5-year-itch to return home that mine had. Let's just say that Germany's a nice place to visit, but you really need to think through the potential financial consequences of moving here. I've penciled out that the difference versus staying in States for me has been the difference of having at least one more kid in private boarding school
LesEdelman
Income tax: You will undoubtedly become a tax resident of Germany subject to full German income tax.
You MUST find a German tax professional to advise you on your (and possibly your US employer's) tax obligations, both substantive and procedural.
To the extent you work in the US (while resident of Germany), US will have a treaty right to tax the related income under US/German treaty Article 15(2)(b), and Germany must exempt such income under Article 23(2)(a) (so-called "exemption by progression", i.e., the US earnings are factored into the determination of the German tax rate applicable to other taxable income, but the US earnings themselves are not subject to tax).
http://www.irs.gov/pub/irs-trty/germany.pdf

Social security: See http://www.ssa.gov/international/Agreement...y.html#coverage
There is a 5-year rule for staying in the US social security system.

You will have to continue filing a US return, and avail yourself of the foreign earned income exclusion and/or the foreign tax credit. You will continue to have some US tax liability on earnings for days worked in the US, and on other US income on which you are not subject to (or just choose not to pay) German tax. Beware electing the foreign earned income exclusion unless you are 100% sure it produces an improvement over using exclusively the foreign tax credit.
rhody
You could apply for self-employment under the Handelsvertreter premise. This is a trade representative for a company that does not have offices in Germany. You would be able to bill them for your salary but you would only pay income taxes in Germany. You can be exempt from paying Social Security in Germany too and also deduct costs such as a car as a self-employed person. Depending on how much you earn, you could be exempt from health care premiums but I would not recommend that. You could get an expat insurance from a company like BUPA/IHI or similar and be privately insured but search the forums here on the advantages/disadvantages of that.

You have to check on the details of doing this with your tax adviser. I had to give a business plan to the chamber of commerce here (IHK) and then I was granted this status. It wasn't a bad setup considering social security pays for the retired people today anyway. I was able to decide where I wanted to put my retirement money myself.
colibriUSA
Thank you all for your interest and advice.

Well, I suspected it was going to be a bit complex from things I had already read on this site and elsewhere. There are certainly enough caveats in your messages to keep me awake at night. Allow me to summarize my understanding of the main items and ask a couple of follow-up questions.

It is doubtful I could get an expatriate contract, by which I assume you (Expaticus) mean a contract paid in dollars. However, I don't understand how I could be taxed on the income in the US for state and federal, if it was an "expat" contract. Wouldn't they have to organize an agreement with the German tax authorities to make payments to them? Or would they simply withhold US taxes as usual, meanwhile I would also pay German taxes out of my remaining pay with dollars converted to Euros, and finally at the end of the tax year get a huge refund for the US income tax?

A side question perhaps related to the above: We have a German friend (German resident) who works in Switzerland and Germany (for a Swiss company), and he was required to pay his entire German tax liability up front for the whole year. He had to take out a loan to pay the taxes! Then he paid the loan off over the course of the year. Surely this isn't something I can expect?!!

In any case, although I will pursue it, I don't see them going too far to keep me employed offshore. Assuming I instead receive freelance ("contractor") payments from my company, in Germany I expect to be liable for German income tax. (No question.)

Assuming freelance contract work, would I also be liable for German Social Insurance taxes, which would be deducted from pay and only refunded to me (to be paid into the US SS/Medicare program?) on my return to the US within five years? Or could I opt out, except to pay SS taxes directly to the US SS/Medicare with my annual US income tax return?

What happens if at some point you realize you will be staying longer than five years, after earlier assuming you would be returning to the US in less than five years. Do you just begin German social insurance payments at that time, or is there a reconciliation or penalty imposed?

The $84K limit, is that by individual or married filing jointly in the US? Our combined income might surpass that, but not mine alone.

It sounds like there is less of a decision to be made regarding Health Insurance. Do I understand correctly that if I am freelance then we must get Private Insurance regardless of my wife's employer?

Thank you again for your comments,

ColibriUSA
Starshollow
I can only answer two of your questions and leave the others to the real experts in the relevant areas touched by them.

Assuming freelance contract work, would I also be liable for German Social Insurance taxes, which would be deducted from pay and only refunded to me (to be paid into the US SS/Medicare program?) on my return to the US within five years? Or could I opt out, except to pay SS taxes directly to the US SS/Medicare with my annual US income tax return?
as a freelancer (unless you are a teacher) you do not have to contribute from your income to the typical social insurances such as unemployment insurance, public pension etc. You are outside of this system. You "only" have to pay taxes and have to have a health insurance, rest is up to you, i.e. how much you put away for pension and all.

It sounds like there is less of a decision to be made regarding Health Insurance. Do I understand correctly that if I am freelance then we must get Private Insurance regardless of my wife's employer?
Regardsless if you are working here based on an expatriate employment contract or as self-employed, you will always have to sign up with private health insurance as under these circumstances and with no prior contributions to any EU memberstate's public health insurance for at least 24 month out of the last 5 years your are not eligible for voluntary membership. If you are employed under German employment contract, you might still be able to opt out from public health insurance if you decide that this is what you want. All you need to have is a German gross salary in excess of around 49.000 EUR and to show proof that you did also have gross salaries of about equal amounts for the preceding three years outside of Germany. If it is only you and your wife coming to Germany (i.e. not a bunch of children with you) and if your wife will also be employed/earning income, that you would definetly be better from the monetary side to go with private health insurance. A good independent broker can work this our for you in details so that you get a better understanding of the situation. If you don't know where to find one... well, one is just a click away ;-)

Cheerio
Expaticus
1. I really never figured out the mechanics of the way that my employer did it ... they seemed to withhold everything on the US side and then squared up with Germany later. I could be wrong becasue other stuff was going on behind the scenes of which I was not aware.

A side question perhaps related to the above: We have a German friend (German resident) who works in Switzerland and Germany (for a Swiss company), and he was required to pay his entire German tax liability up front for the whole year. He had to take out a loan to pay the taxes! Then he paid the loan off over the course of the year. Surely this isn't something I can expect?!!

The $84K limit, is that by individual or married filing jointly in the US? Our combined income might surpass that, but not mine alone.
2. This happened to a British colleague of mine who works here in Germany but resides in the UK. Our company advanced him the amount ... otherwise it would have been the same situation.

3. I'm slightly out of date ... this year it's risen to $91,400. As far as I know it's individual. I'm not an accountant, but if your wife gets a German job, it might make more sense to file jointly (better German Tax Class), but I don't think a joint US filing would necessarily allow you to claim her German taxes as well. I really, really don't know .. my limited knowledge on the topic is now completely exhausted.
sarahTT
How much should one be willing to pay someone to prepare their US return in Germany for:
-US citizens
-living the whole year in Germany (not the first year abroad)
-no US income
-working for German company
-a fairly complicated tax situation
-and are above the $91,400 mark?

Just a ballpark. I previously worked for a US company and the tax preparation was included. I no longer work for that company, but still thought of using the same service. The estimate the company gave me is absurd - so does anyone have some ballpark figures to share?
LesEdelman
-a fairly complicated tax situation

Complexity is in the eye of the beholder. Maybe you should make a list of the IRS forms and schedules comprising your 2007 tax return and it will give a better idea of what is involved. Without knowing more, I'd suggest a range of US$750-1,250.
Expaticus
If by "complicated" you mean your financial situation involves passive income from multiple sources, private partnerships, gifting/trusts, petitions to local authorities on estimated taxes and other filing complexities that require the use of both a German and US specialist at the same firm, I'd triple the high end of the previously given range.

Worth it, in my opinion, but the payback isn't until when you sail through audits unscathed and/or have all your stuff pass muster with the Finanzamt every single year.

I know two people who tried to wing it who got nabbed and ending up paying in arrears ... the interest and penalties on which dwarfed what they thought they were "saving" by being cheapskates.
rhody
Check out the Handelsvertraeter route like I explained above. You work for a small company that is not going to foot the bill for expatriation. So you are on your own to come to Germany. Germany and the US have a tax treaty so there is no double taxation. Even with the limit of foreign earned income (Form 2555), for any excess you claim a Foreign Tax Credit (Form 1116) and state the tax treaty by checking off checkbox d on 1116. But again, see a tax adviser - I am not one - but got my advice from my buddy who is a CPA.

In the end, you can negotiate a decent salary, apply for Handelsvertraeter/Self Employment status (if your wife is German, this might be easier) so that you just pay income tax to Germany and pocket your social security and put it somewhere else other than in the hands of the government. As self-employed you can write off your car, gas, office space in your house etc. It's the most lucrative way in your situation IMHO.
sarahTT
Just wanted to say thanks for all your advice.

Looks like I am going to try out a local guy here in Hamburg and see how that goes.
Don Giovanni
I was here the first two years on an ex-pat agreement and here is how it was structured in my case.

What they do is make an arrangement keeping you in the US payroll system.
This included that about 70% of my salary was paid in EUR here into my bank account while about 35% was still paid in the US in dollars.

That means you will be contributing only into the US social security system, while having to pay income taxes on the German side. As for US taxes (Federal and State) you will be paying based on a hypothetical tax prepared by some accounting firm (Deloitte in my case) and at the end of the year they do the filing on both sides of the Atlantic.

At year end, they do a real calculation of the taxes on the US side and them compare them to the hypothetical taxes that were paid by the company and that could result in a balance owed to the company or some owed to you by the company.
Generally speaking since the 35% of salary was not too much I did not have a tax liability during the first year in US so ended up getting back all the paid amounts to federal and state which I had to give back to the company since they were paying on my behalf.

Hope this shed some light onto the matter for you! It is quite complicated and would be better if your company employs a firm that takes care of that for you.

Cheers!
bleater
Interesting! I am in a similar boat, being from New Zealand (i.e. non-EU) and about to arrive in Germany with my German wife for a fixed period. I had asked similar questions as the O.P., but the Handelsvetreter route is new to me. I'm interested to hear more of anyone else's experience with the exact procedures for that.. who to apply to, who grants it etc.
norcal_sf
It seems all the topics I am interested in are old. As the OP has not been on since 2009 (I've already PMed him though), I thought I would see if I could resurrect this thread.

Basically I'm a dual US/German citizen moving with my US husband to Germany for his job.

I'd like to continue to work for my California start-up. It looks like I could continue to pay US taxes/social security by having the employer file a US/D 101 form. Other than this, I am unclear as to what additional costs my employer would have to pay (Expaticus comment about expat costs). Am I just asking for issues trying to stay under the US tax code as my husband will be paying into the german system? I know we will have to file a US return as well.

The other option as I understand it is to go the Handelsvertreter route. Of course with this I would have to give up my stock options as I would no longer be an employee, but from the discussion above might be the more financially lucrative of the two options.

My family (husband, son and myself) would be covered by my husband's health insurance (private I assume due to his income being >50K).

Am I missing something in my analysis, other than needing to find a tax advisor to talk to?
Pages: 1 2
TT Logo
You are viewing a low fidelity version of this page. Click to view the full page.