UK rental income on German tax returns (post-Brexit)

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I am employed in Germany and live , work and pay taxes here.

Since 2012, I have also been receiving rental income from my UK flat.

I have declared this income in the UK on my HMRC tax return, and do not need to pay tax on it as it falls under the UK tax personal allowance threshold.

 

What i am absolutely 100% clear about is that as long as the UK is still in the EU, I do not even need mention my British rental income at all in my tax return:

"§ 32b Abs. 1 S. 2 Nr. 3 i.V.m. § 32b Abs. 1 S.1 Nr. 3 EStG

Nicht unter Progressionsvorbehalt aufgeführt werden müssen Einkünfte aus der Vermietung oder der Verpachtung von unbeweglichem Vermögen, wenn diese in einem anderen Staat als einem Drittstaat (ergo: EU/ EWR-Ausland) belegen sind.

Das Besteuerungsrecht für Großbritannien für die Einkünfte aus Vermietung und Verpachtung aus in UK gelegenen Objekten ergibt sich aus dem Doppelbesteuerungsabkommen zwischen Deutschland und UK, nach dem UK aufgrund des Belegenheitsprinzips das alleinige Besteuerungsrecht zusteht.

Aus diesem Grund (DBA + § 32b EStG) haben wir die Vermietungseinkünfte in der Vergangenheit nie deklariert, sondern das Finanzamt lediglich mit einem Satz darauf hingewiesen."

 

 

So here comes the crunch - 

'Post Brexit / i.e. after the UK leaves the EU', I understand that it will not be taxed again in Germany on the UK income,  but it will raise my German tax rate on my other income (e.g. on my German salary) -

this is called Progressionsvorbehalt.

"Es ist aber nicht unwahrscheinlich, das die Vermietungseinkünfte dann zumindest in den Progressionsvorbehalt einfliessen.

Etwas anderes, z.B. eine Besteuerung unter Anrechnung der UK Steuern erlaubt das derzeitige Doppelbesteuerungsabkommen  nicht.

Und die Abkommen bleiben ja bestehen unabhängig davon ob UK Teil der EU ist oder nicht."

 

 

My question relates specifically to WHICH DATE is actually most important for the changing of the rules.

It is likely that Brexit will happen on 31st January 2020.

An official withdrawal agreement should soon be in place between the UK and the EU, which means that a formal  'transition period' runs from 31st January 2020 until 31st December 2020.

During this 'transition period', the EU will still continue to treat the UK exactly like a member state, and all EU rules will still apply:

 

https://www.gtai.de/gtai-de/trade/recht/rechtsbericht/vereinigtes-koenigreich/brexit-die-uebergangsphase-im-deutschen-und-britischen-recht-210062

 

https://www.gtai.de/gtai-de/trade/recht/rechtsbericht/vereinigtes-koenigreich/brexit-rechtliche-aspekte-der-uebergangsphase-209796

 

https://de.m.wikipedia.org/wiki/Brexit-Steuerbegleitgesetz

 

www.ertragsteuerrecht.de/media/RegE_Brexit-StBG.pdf

 

https://www.bundesfinanzministerium.de/Monatsberichte/2019/04/Inhalte/Kapitel-3-Analysen/3-3-brexit-steuerbegleitgesetz_pdf.pdf;jsessionid=B87FA0D85091738336A6A4AFE8E1B49B.delivery2-master?__blob=publicationFile&v=3

 

https://www.haufe.de/steuern/gesetzgebung-politik/brexit-steuerbegleitgesetz_168_473764.html

 

https://www.bundesregierung.de/breg-de/themen/brexit/nach-britischen-wahlen-geordneter-brexit-wahrscheinlich-1570622

 

 

"Ein zwischen der EU und UK verhandeltes Austrittsabkommens mit einer Übergangszeit liegt auf dem Tisch. Nach dem Austrittsabkommen würde UK für die Übergangszeit bezüglich wichtiger EU-Rechte noch wie ein EU-Mitglied behandelt werden.

 

ab dem UK nicht mehr Mitgliedstaat der EU ist und auch nicht wie ein solcher zu behandeln ist,"

 

 

Question 1:

Therefore am i right in thinking that for my 2020 German tax return, the current tax rules still apply for my rental income and that there will be no changes?

i.e. i dont even need to declare my UK rental income on my 2020 German tax return?

i.e. any changes will only be valid from 1st January 2021 onwards? 

 

 

Second smaller question 2 - 

my german tax consultant (with UK expat experience) is sadly  retiring very soon.

does anyone know of a good quality affordable german tax consultant (with UK expat experience)  for people like me, that they could recommend to me please?

 

 

Any help is greatly appreciated.

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Due to the transition agreement, then although the UK formally leaves the EU on 31st January nothing will change until at least 1st January 2021.

This means that the German tax year 2020 will stay the same.

 

Taxation agreements between countries are normally negotiated individually and have nothing to do with EU membership.  So I would expect that the taxation agreement between Germany and the UK remains the same and would not be part of the negotiations (at least initially).

Such agreements do get amended overtime, so it might change in the future, but this would not necessarily have to do with EU membership.  Germany wants to make sure that you do pay tax but that the agreements are fair.  If the UK changes the tax rules significantly, then I expect Germany to react.  But these agreements take a long time to negotiate and require agreement from both sides.

 

 

As for tax advisor, then @PandaMunich is very well regarded on here, and she knows not just a lot about German taxation but also about the taxation agreements between Germany and other countries such as the UK and how things are applied in detail.

 

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Thank you very much dj_jay_smith.

I hope PandaMunich also replies if she gets time!

2 minutes ago, dj_jay_smith said:

Due to the transition agreement, then although the UK formally leaves the EU on 31st January nothing will change until at least 1st January 2021.

This means that the German tax year 2020 will stay the same.

 

Taxation agreements between countries are normally negotiated individually and have nothing to do with EU membership or not.  So I would expect that the taxation agreement between Germany and the UK remains the same and would not be part of the negotiations.

Such agreements do get amended overtime, so it might change in the future, but this would not necessarily have to do with EU membership.  Germany wants to make sure that you do pay tax but that the agreements are pay.  If the UK changes the tax rules significantly, then I expect Germany to react.  But these agreements take a long time to negotiate and require agreement from both sides.

 

 

As for tax advisor, then @PandaMunich is very well regarded on here, and she knows not just a lot about German taxation but also about the taxation agreements between Germany and other countries such as the UK and how things are applied in detail.

 

 

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1 hour ago, DannyThru said:

Therefore am i right in thinking that for my 2020 German tax return, the current tax rules still apply for my rental income and that there will be no changes?

i.e. i dont even need to declare my UK rental income on my 2020 German tax return?

i.e. any changes will only be valid from 1st January 2021 onwards? 

 

Let's wait and see what happens end of January.

After all, at the end of next week we will (hopefully) know for sure.

 

1 hour ago, DannyThru said:

my german tax consultant (with UK expat experience) is sadly  retiring very soon.

 

Don't worry, your Steuerberater will have found someone to take over his clients and you will probably also like the successor, since you liked your present Steuerberater.

Otherwise, just ask for quotes from several Steuerberater and then decide.

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4 minutes ago, PandaMunich said:

 

Let's wait and see what happens end of January.

After all, at the end of next week we will (hopefully) know for sure.

 

 

Don't worry, your Steuerberater will have found someone to take over his clients and you will probably also like the successor, since you liked your present Steuerberater.

Otherwise, just ask for quotes from several Steuerberater and then decide.

i)
Agreed, lets watch this space for the end of January - its only a week away.

Well said.

 

 

 

ii)

Unfortunately this was the email i got              : - (

 

ich wünsche Dir ein frohes neues Jahr ! Das neue Jahr fängt für mich mit einer großen Veränderung an…Ich werde mein Büro zum 31.1.2020 schließen. Ich möchte mich auf diesem Wege für die tolle Zusammenarbeit der letzten Jahre bedanken. Es hat immer viel Spaß gemacht mit Dir zu arbeiten. Ich hätte Dir gerne einen Kollegen empfohlen der die Steuererklärung 2019 übernehmen kann, aber leider nimmt der einzige Kollege, den ich so gut kenne, das ich ihn guten Gewissens weiter empfehlen kann, aus Kapazitätsgründen derzeit keine neue Mandanten mehr an.  

Ich wünsche Dir alles Gute für die Zukunft !

 

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i)
i have found this which i still think could be potentially be very relevant here, but unfortunately i am not a qualifed tax advisor:
 
 

Das Steuerbegleitgesetz:

Das Brexit-Steuerbegleitgesetz (Brexit-StBG; abrufbar im Bundesgesetzblatt Teil I 2019 Nr. 9 28.03.2019 S. 357) hat hauptsächlich den Zweck, zu verhindern, dass allein der Brexit unerwartete steuerliche Belastungen auslöst.

Solche Belastungen sind denkbar, denn viele Geschäfte, die innerhalb der EU abgeschlossen werden, sind steuergünstiger als solche, die mit Drittstaaten abgewickelt werden.

Solche Vergünstigungen würden durch das Ende der Mitgliedschaft wegfallen.

Das Gesetz enthält Vorkehrungen für beide Brexit-Varianten – für einen Austritt ohne Abkommen ebenso wie für einen Austritt mit Abkommen und Übergangsphase.

Letzteres erkennt man an dieser Formulierung:

… ab dem Zeitpunkt, ab dem das Vereinigte Königreich von Großbritannien und Nordirland nicht mehr Mitgliedsstaat der Europäischen Union ist und auch nicht wie ein solcher zu behandeln ist.

 
 
 
ii)
in all seriousness, just to make it really simple for me going forward - my question is: are you taking on new clients please?
This would be of considerable interest to me at the moment, for my Einkommensteuererklärung 2019.
 
If you would be willing to take me on as a new client, approximately how much might it cost please?
 
Just as background -
i have interest from the UK, income from my job in Germany, and rental income from the UK.
 
i am currently extremely interested in potentally becoming a client of yours.
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@rickyjalapeno  

 

yes, as I understand it, the transition period until the end of 2020 means that for 2020 everything stays the same. However it means that rental income from the U.K. needs to be declared from 2021 onwards in a German tax return and will be considered as Progressionsvorbehalt, which means that although it is technically tax free, it actually raises your tax rate.  (Previously it didn't need to be declared as it wasn't relevant to the German tax authorities). 

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2 minutes ago, DannyThru said:

@rickyjalapeno  

 

yes, as I understand it, the transition period until the end of 2020 means that for 2020 everything stays the same. However it means that rental income from the U.K. needs to be declared from 2021 onwards in a German tax return and will be considered as Progressionsvorbehalt, which means that although it is technically tax free, it actually raises your tax rate.  (Previously it didn't need to be declared as it wasn't relevant to the German tax authorities). 

When you say technically tax free, that of course means from a German perspective as it remains fully taxable in the UK.

 

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@GaryC yes correct, i am talking about it from a German perspective. I.e. It remains fully taxable in the UK. However, it is theoretically  possible that if you earn e.g. £6k net of expenses per year as UK rental  income, and have no other major uk income, (and importantly if you are eligible for the uk personal allowance of £12.5k), then essentially it could overall  be tax free in the UK, as you would earn less than the personal allowance threshold. 

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21 minutes ago, DannyThru said:

@GaryC yes correct, i am talking about it from a German perspective. I.e. It remains fully taxable in the UK. However, it is theoretically  possible that if you earn e.g. £6k net of expenses per year as UK rental  income, and have no other major uk income, (and importantly if you are eligible for the uk personal allowance of £12.5k), then essentially it could overall  be tax free in the UK, as you would earn less than the personal allowance threshold. 

 

Indeed.

 

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If the Germany-UK tax treaty is still in effect, then the following should be of interest:

 

Article 6
Income from immovable property
(1) Income derived by a resident of a Contracting State from
immovable property (including income from agriculture or
forestry) situated in the other Contracting State may be taxed in
that other State.

...

(3) The provisions of paragraph 1 shall apply to income
derived from the direct use, letting, or use in any other form of
immovable property.

 

Article 23 Elimination of double taxation

(1) Tax shall be determined in the case of a resident of Germany as follows:

a) There shall be exempted from the assessment basis of the German tax any item of income arising in the United Kingdom and any item of capital situated within the United King-dom which, according to this Convention, is effectively taxed in the United Kingdom and . . . . .

 

So the question is:  does "effectively taxed" in the UK mean some amount of tax was actually assessed and paid or does it mean "woulda coulda shoulda been" taxed in the UK were it not for the exemption allowances provided under UK tax law?

 

If exempted from German tax, progressionsvorbehalt will apply:

 

Article 23 (1d) provides:

 

d) Germany, however, retains the right to take into account in
the determination of its rate of tax the items of income and
capital which are under the provisions of this Convention
exempted from German tax.

 

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2 hours ago, Straightpoop said:

If the Germany-UK tax treaty is still in effect, then the following should be of interest:

 

My understanding (I think this came from PandaM) is that the DTA between Germany & Great Britain is independent of the Brexit saga.

However, it can of course be changed or even revoked at any time.

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The DTA is independent of Brexit but my understanding is that after the end of the transition period Germany becomes entitled to discriminate against UK rental income (treat it disfavorably as compared to German rental income), which they can't do right now.

I seem to recall from previous research that Germany taxes residents on their worldwide rental income (subject to DTAs rules) but allows German rental losses to be offset against other kinds of income, while only considering profits (but not losses) on foreign income. Thus:

 

If you earn 50,000 euros from employment in Germany and 20,000 from rental income also in Germany you get taxed on 70,000.

If you earn 50,000 euros from employment in Germany and have losses of 10,000 from rental income also in Germany you get taxed on 40,000

If you earn 50,000 euros from employment in Germany and 20,000 from rental income in Canada (as an example) Germany taxes the 50,000 as if you were earning 70,000 and Canada taxes 20,000.

If you earn 50,000 euros from employment in Germany and have losses of 10,000 from rental income in Canada you get taxed on 50,000 (your losses in Canada don't count; only profits do).

 

In the case of EU rental income, Germany has decided to ignore it. I am guessing that's because allowing offsetting losses from German rental income but not from EU rental income is incompatible with EU law: they must treat it the same or ignore it altogether.

 

Why do they do this? I am guessing it's because they want to stop well-heeled Germans from buying holiday homes in Spain, France and Italy, letting them at a loss for short holiday stays—while using them themselves and making them available to friends and family in the off-season—and using the rental losses to reduce their taxable income in Germany. I am just speculating but this seems plausible to me.

 

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Colleague of mine here in Germany receives UK rental income.

I believe he reports this to HMRC. But I know he's never reported this to the Finanzamt, no need before the Brexit transition period is over.

 

What to expected if, after the Brexit transition period is over, he continues NOT to report this income to the FA?

Will the FA know of it? Maybe they know already? My guess is the UK (maybe HMRC, maybe his UK bank, whatever...) informs the FA, tough no idea how well / fast / smooth this exchange of information works...

If they do find out, what are the likely consequences? Prison? Fine? Pay back with some added interest? A slap on the wrist?...

 

Greg,

 

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8 minutes ago, Bollins said:

Colleague of mine here in Germany receives UK rental income.

I believe he reports this to HMRC. But I know he's never reported this to the Finanzamt, no need before the Brexit transition period is over.

 

What to expected if, after the Brexit transition period is over, he continues NOT to report this income to the FA?

Will the FA know of it? Maybe they know already? My guess is the UK (maybe HMRC, maybe his UK bank, whatever...) informs the FA, tough no idea how well / fast / smooth this exchange of information works...

If they do find out, what are the likely consequences? Prison? Fine? Pay back with some added interest? A slap on the wrist?...

 

Greg,

 

What an odd question.  Are you really suggesting your colleague is considering deliberately submitting an incorrect tax return to FA, with the potential consequences thereof, simply because he feels that HMRC may or may not share the relevant info with FA?  Shame on you and him!  

 

As I understand it, there is no requirement to declare rental income to FA from properties in other EU member states but there is a requirement to declare such income from other countries.  In terms of UK rental income, the double tax treaty assigns the taxing rights to the UK but post Brexit the UK rental income will feature in the Progressionsvorbehalt, thus affecting the rate at which German tax is payable. In that regard it is no different from other worldwide income over which Germany does not have the taxing rights.

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Interesting topic, I will be affected by this.

So what I understand is the tax return in Germany stays as is for 2020.

Tax return for Germany for the year 2021 should include my rental income in the UK. If this is the case, is it the income I receive or profit? I assume income but I am not sure.

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As I understand it, 2020 remains as-is for everything as EU rules continue to apply.  For 2021 onwards I think we all need to "watch this space".  In theory the UK will become just another third country, so rental income would be treated in that way but I guess there could be some difference rules if the talks lead to a deal - who knows.

 

As a general rules, taxation is on your gain or profit, not the gross income before allowable expenses. 

 

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So, the UK now has a trade agreement with the EU.

As at 11pm GMT  / midnight CET on 31st December 2020, the UK will now be classed as a ‘third country’ in the eyes of the EU (e.g. like Japan, Canada, Australia, China, etc) – i.e. completely outside of the EU / EEA.

 

i)

For the German tax year of 1st January 2020 to 31st December 2020, the previous rules still apply (due to the Transition period applying from 31st January 2020 to 31st December 2020):

i.e. any profit (or loss) you generate on rental property in the UK was completely ignored by the Finanzamt, and did not need to be considered at all in your personal annual German income tax return.

 

ii)

For the German tax year of 1st January 2021 to 31st December 2021, the rules are now quite different, now that the Transition period is over)

i.e. any profit (or loss) you generate on rental property in the UK will now need to be reported to the Finanzamt, and therefore need to be declared in your personal annual German income tax return.

It will not ‘directly’ be taxable, i.e. you will not pay 25% of any profit as tax, as such.

However, it will potentially still ‘indirectly’ be taxable, as it will now be considered as part of your ‘Progressionvorbehalt’, i.e. thus potentially raising your overall tax rate, from say 42% to 44% (just a fictive example).

 

So that’s my summary (PLEASE CORRECT ME ON ANY OF THE ABOVE IF NEEDED OF COURSE!!!!)

 

 

I do have 2 technical questions:

  1. is there a formal comprehensive list published anywhere online of what are classed as ‘allowable expenses’ relating to UK rental property (in either English or German)?

 

  1. in terms of any ‘income received’ and ‘expenses paid’, which date is actually most relevant?

The physical date I actually pay the invoice on………….or the period the invoice actually relates to?

Fictive example:  

– e.g. say, I have received an invoice from a supplier that relates to work they carried out for me on my UK rental property from 1st October 2020 to 31st December 2020 .

However,  I don’t manage to actually pay the invoice until 4th January 2021.

Which tax year is the invoice most relevant to?                

2020, or 2021?

 

(all advice is very welcome - they may sound like silly questions, but I am totally serious!)

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