US Citizen foreign investment income

13 posts in this topic

[American citizen employed and resident in Germany, looking to invest relatively minimal capital]

 

Dear all,

 

First time posting here, although I have read quite thoroughly through the forum on the topic. I understand lots of the restrictions on Americans living in Germany (PFIC, "double taxation", difficulties investing in Germany, etc.).

 

From everything I have read, the recommended non-immobile investment is returning funds to the USA and investing there in ETFs or what have you.

 

I thought I understood it and it was quite bleak, with the requirement to file the American investment income on American tax return and then additionally file it on my german tax returns (approx. 26% minus paid American tax burden).

 

As I am a relatively new investor (10,000 capital) all my potential gains would be eaten up by currency transfer and tax filing requirements in germany (hiring steuerberater).

 

However, I spoke Friday with my boss together  with a steuerberater who said very clearly, several times (there was no miscommunication, confirmed by my boss) said that due to the German American tax treaty, I do not need to include on my German tax return or pay taxes in Germany on American investments (ETFs, etc.).

According to him, I can simply transfer my earned money to the USA and invest that money in US investments while only paying worldwide (investment) income taxes in the USA. German taxes wouldn't be paid on this income, only on employer income or other German-based incomes (real estate, etc.).

 

Based on all my research and my limited understanding, this goes entirely against what I thought, which was that I had to file worldwide investment income in both countries and pay additional taxes in Germany. 

 

I have even read through the tax treaty, but all the "however" and such statements have really decreased my confidence in my correct understanding. A lot of the help I have found online through "tax advisors" tend to mix information specific for American citizens together with general "depends on the tax treaty" statements.

 

Can anyone please verify this or put me on the right direction?  all text I've read (although sometimes obscure) seems to disagree with what I heard today from the Steuerberater?

 

Thank you, and apologies for the long-winded message.

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On 16.6.2019, 19:27:13, Idyllic Blues said:

However, I spoke Friday with my boss together  with a steuerberater who said very clearly, several times (there was no miscommunication, confirmed by my boss) said that due to the German American tax treaty, I do not need to include on my German tax return or pay taxes in Germany on American investments (ETFs, etc.).

According to him, I can simply transfer my earned money to the USA and invest that money in US investments while only paying worldwide (investment) income taxes in the USA. German taxes wouldn't be paid on this income, only on employer income or other German-based incomes (real estate, etc.).

 

Ask the Steuerberater to put this in writing and sign his name to it.  Tell him you intend to share his written opinion with the local Finanzamt and Steuerberaterkammer.

 

His advice - assuming you have accurately reported it - is at best wrong and at worst might very well be interpreted as aiding and abetting tax evasion (Steuerhinterziehung).

 

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Okay, let's be kind and see if we can find a way to interpret @Idyllic Blues's Steuerberater's advice in a way that does not having the local Steuerfahndung howling for his blood.

 

But first:  Idyllic Blues appears to have a correct understanding of the taxability of his investment income from US sources.  All of it is subject to tax in both Germany and the United States. (Subject to tax does not mean "actually taxed".  It is the difference between having a loaded gun pointed at you as opposed to someone actually shooting you.)

 

The treaty gives Germany the exclusive right to tax US-source interest and capital gain from the sale of intangibles (e.g. stock or bonds).  The US is allowed to impose a maximum 15% tax on US-source dividends for which Germany will give a tax credit against the German taxes that the treaty allows Germany to impose on this US-source dividend income.

 

To avoid double taxation, US-source interest will be "resourced foreign" under the treaty (Art 26) so that the US citizen can claim a foreign tax credit on his US tax return for whatever tax Germany actually imposes on that US-source interest.

 

Capital gains - if Germany's tax is at least 10% - will be deemed foreign sourced if Idyllic Blues is resident in Germany and he can claim a foreign tax credit for any German taxes imposed on this item of investment income.

 

So, in light of all this how to give the Steuerberater the benefit of the doubt?

 

Well, Idyllic Blues statement of facts to the StB said that the amount he proposed to invest would be small.  If so, then perhaps the Steueberater assumed (ah, that word) that the US investment income - together with all other taxable income would fall below the annual €801 Freibetrag (€1,602 if Idyllic Blues is married) and hence would not need to be reported to much less taxed - by Germany.

 

So . . . until all of Idyllic Blues investment income exceeds the German Freibetrag, he may follow the StB's advice to not bother reporting it on Anlage KAP.  In the meantime, of course, he will be reporting it and paying whatever tax is owed on it to the IRS. Depending on the nature, source and amount of all his other income it may very well be that he'll end up owing no tax to either country.

 

 

 

 

 

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Sorry, but no.

If you had even have 1 cent of capital income from outside Germany, i.e. any capital income that was not subjected to Abgeltungsteuer (only capital income from German banks being subjected to it), you have to fill in Anlage KAP, i.e. do a tax return, even if your total worldwide capital income is below 801€, see:


And any Steuerberater knows that full well.

Why leads me to suspect that the guy @Idyllic Blues talked to isn't a Steuerberater.

So I suggest Idyllic Blues looks up his name in the official register of Steuerberater, to be sure: https://steuerberaterverzeichnis.berufs-org.de/

 

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Thank you both for the advice. Somehow I didnt have this post set up to be followed, and i have just now realised you provided answers. I guess I need to log in more often as I browse.

 

Unfortunately, I had correctly understood and am required to file in both countries. I had this confirmed by another (internationally-focused) Steuerberater within a few days of my previous post.

 

In regards to whether he is a licensed Steuerberater, unfortunately he is on the Steuerberaterverzeichnis list and is the steuerberater for the firm I work for. He was extremely clear in that my worldwide income (investments) are only steuerpflichtig in the USA (due to the treaty), and nie in Deutschland. This was repeated several times in several different ways in German (and additionally confirmed in English by my boss). 

 

A few quotes:

 

SteuerberaterEinfach gesagt alles außer nichtständige Arbeit ist in der USA zu erklaren.

 

me: [My problems are the taxation of] Investments:

Steuerberater: Alles USA

boss: Alles USA, aber auch Deutschland?

Steuerberater: Ne, alles USA.

 

[referring to investment income]

Boss: Aber der Steuerpflichtige Einkommen, ist die Frage, wo entsteht die das Steuerpflichtige Einkommen? 

Steuerberater: In Meine Sicht, immer USA. Amerikaner bleiben immer im Welteinkommen in der USA steuerpflichtig.

Me: But my problem is that in Germany the worldwide income is taxed at 25% whereas its 15% in the USA. I need to pay my taxes in Germany.

Steuerberater: Nur für die Einkommen durch nichtständige Arbeit.

 

 

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On 9/21/2019, 1:33:30, Idyllic Blues said:

Thank you both for the advice. Somehow I didnt have this post set up to be followed, and i have just now realised you provided answers. I guess I need to log in more often as I browse.

 

Unfortunately, I had correctly understood and am required to file in both countries. I had this confirmed by another (internationally-focused) Steuerberater within a few days of my previous post.

 

In regards to whether he is a licensed Steuerberater, unfortunately he is on the Steuerberaterverzeichnis list and is the steuerberater for the firm I work for. He was extremely clear in that my worldwide income (investments) are only steuerpflichtig in the USA (due to the treaty), and nie in Deutschland. This was repeated several times in several different ways in German (and additionally confirmed in English by my boss). 

 

A few quotes:

 

SteuerberaterEinfach gesagt alles außer nichtständige Arbeit ist in der USA zu erklaren.

 

me: [My problems are the taxation of] Investments:

Steuerberater: Alles USA

boss: Alles USA, aber auch Deutschland?

Steuerberater: Ne, alles USA.

 

[referring to investment income]

Boss: Aber der Steuerpflichtige Einkommen, ist die Frage, wo entsteht die das Steuerpflichtige Einkommen? 

Steuerberater: In Meine Sicht, immer USA. Amerikaner bleiben immer im Welteinkommen in der USA steuerpflichtig.

Me: But my problem is that in Germany the worldwide income is taxed at 25% whereas its 15% in the USA. I need to pay my taxes in Germany.

Steuerberater: Nur für die Einkommen durch nichtständige Arbeit.

 

 

 

The quotes you indicate above are... just incorrect. You should really get someone who is both a Steuerberater and a CPA.

 

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13 hours ago, Storamin said:

 

The quotes you indicate above are... just incorrect. You should really get someone who is both a Steuerberater and a CPA.

 

I concur.

 

Cheerio

 

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On 9/21/2019, 1:33:30, Idyllic Blues said:

Thank you both for the advice. Somehow I didnt have this post set up to be followed, and i have just now realised you provided answers. I guess I need to log in more often as I browse.

 

Unfortunately, I had correctly understood and am required to file in both countries. I had this confirmed by another (internationally-focused) Steuerberater within a few days of my previous post.

 

In regards to whether he is a licensed Steuerberater, unfortunately he is on the Steuerberaterverzeichnis list and is the steuerberater for the firm I work for. He was extremely clear in that my worldwide income (investments) are only steuerpflichtig in the USA (due to the treaty), and nie in Deutschland. This was repeated several times in several different ways in German (and additionally confirmed in English by my boss). 

 

On 9/21/2019, 1:33:30, Idyllic Blues said:

 

@Idyllic Blues

 

Your firm's Steuerberater is clueless.

 

Like many StB of my acquaintance he may be perfectly competent in the area of domestic German tax law but completely out to lunch when it comes to anything involving foreign aspects.

 

Worse, rather than admit his inexperience and/or ignorance, he chooses to wing it rather than do something simple like get a copy of the treaty and actually read it. 

 

Article 23, Para. 5 is the provision that applies directly to you. It describes the methodology for relieving a US citizen resident in Germany of the burden of double taxation caused by US insistence on taxing its citizens regardless of their residence.

 

You will declare and pay taxes on your US dividends to both Germany and the US.

 

Germany has the PRIMARY treaty right to tax those dividends at its applicable domestic rate.  The treaty, however, requires Germany to give you a credit for up to 15% for US taxes actually paid on those same dividends. (The "actually paid" part is what you have to demonstrate to the FA - not always easy.)

 

The US tax on qualified dividends is currently a maximum 15% in most cases (20% for the filthy rich) and, depending on your personal situation, quite possibly zero.

 

If you follow the treaty methodology you should never pay a combination of taxes on any item of income that is greater than the highest rate imposed by either country individually on that same item.

 

 

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9 minutes ago, Straightpoop said:

The US tax on qualified dividends is currently a maximum 15% in most cases (20% for the filthy rich) and, depending on your personal situation, quite possibly zero.

 

So in the case of the "filty rich", the US override the double taxation agreement between Germany and the US, to be exact article 10 no. 2 b.) which limits the US tax to 15%?

  • Article 10
    Dividends

         1. Dividends paid by a company that is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.

         2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the dividends are derived and beneficially owned by a resident of the other Contracting State, the tax so charged shall not exceed:

    a.) 5 percent of the gross amount of the dividends if the beneficial owner is a company that owns directly at least 10 percent of the voting stock of the company paying the dividends;

    b.) 15 percent of the gross amount of the dividends in all other cases. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.

Nice to know that Germany isn't the only country that likes to do treaty overrides if they're not satisfied by the amount of tax the treaty allows them to charge :D

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@PandaMunich

 

Panda,

 

The provision you quote restricts the US right to tax German residents on their US-source dividends. (It would be 30% were it not for the treaty.)

 

In its so-called "savings clause" the treaty specifically reserves to the US the right to tax its citizens - including those resident in Germany - as if the treaty did not exist; hence:  15% or 20% or any other rate as provided by US domestic law.

 

Article 1, para. 4:

 

a) Except to the extent provided in paragraph 5, this
Convention shall not affect the taxation by the United States
of its residents (as determined under Article 4 (Residence))
and its citizens.

 

Hence, no treaty override.

 

US citizens may claim the benefits of only certain specifically enumerated parts of the treaty (Art. 4 para. 5). One of these, of course, is Article 23:

 

 

5. The provisions of paragraph 4 shall not affect the benefits
conferred by the United States:
a) under paragraph 2 of Article 9 (Associated Enterprises),
paragraph 6 of Article 13 (Gains), paragraphs 3, 4 and 5 of
Article 18 (Pensions, Annuities, Alimony, Child Support, and
Social Security), paragraph 1 and 5 of Article 18A (Pension
Plans), paragraph 3 of Article 19 (Government Service), and
under Articles 23 (Relief from Double Taxation), 24
(Non-discrimination), and 25 (Mutual Agreement Procedure);
 

 

 

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4 hours ago, Straightpoop said:

In its so-called "savings clause" the treaty specifically reserves to the US the right to tax its citizens - including those resident in Germany - as if the treaty did not exist;

 

Well, that's a nifty clause, no need for a treaty override since the treaty itself allows the US to do whatever they please.

So they negotiated a treaty that in large parts doesn't apply to all US citizens who are resident in Germany?

Which means that this treaty basically only binds Germany - am not too impressed with Germany's negotiation prowess here...

 

Well, at least it sounds a bit more formally correct than the treaty overrides Germany does (which they put into national law after negotiating the treaties and by which they ignore §2 AO, which gives international treaties precedence over national law) but in my opinion that still goes against the spirit of the law: the law should apply to everybody the same way.

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16 hours ago, PandaMunich said:

 

Well, that's a nifty clause, no need for a treaty override since the treaty itself allows the US to do whatever they please.

So they negotiated a treaty that in large parts doesn't apply to all US citizens who are resident in Germany?

Which means that this treaty basically only binds Germany - am not too impressed with Germany's negotiation prowess here...

 

Well, at least it sounds a bit more formally correct than the treaty overrides Germany does (which they put into national law after negotiating the treaties and by which they ignore §2 AO, which gives international treaties precedence over national law) but in my opinion that still goes against the spirit of the law: the law should apply to everybody the same way.

hear-hear !

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16 hours ago, PandaMunich said:

So they negotiated a treaty that in large parts doesn't apply to all US citizens who are resident in Germany?

Which means that this treaty basically only binds Germany - am not too impressed with Germany's negotiation prowess here...

 

Don't feel bad for Germany.

 

Every country with a bilateral tax treaty with the US must agree to the same "savings clause" or there will be no treaty.

 

Since the US is the only country with citizenship based taxation (pace Eritrea), it is the only country whose tax treaties contain this language.

 

Enduring the (relatively small) hit to its national economy by the fact that a few of its US expat residents have the extra economic burden of placating the demands of their native country, is a relatively small price to pay for easing access to the US domestic market.

 

Same reason they endure humiliations like FATCA . . .

 

or Donald Trump

 

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