FAQ on taxation
Fellowships are cash benefits, which are exempt from taxation under certain preconditions. Non-cash benefits do not fall into this category. If accommodation is provided free of charge, the value may play a role in assessing whether the fellowship is exempt from tax because the fellowship may not be worth more than is necessary to fulfil the research task or cover the necessary costs of living and training.
Journeys home may be claimed as additional expenditures for double households. A prerequisite for claiming a double household is that the employee maintains his/her own household in his/her home town. To be able to share the parental household does not suffice. The employee is not considered to run his/her own household if he/she forms part of the parental household or only has use of one room in the parental household.
I'm an American citizen and a professor at an American university. I am intending to move to Germany with my family this summer to embark on a research stay at a German research institute. The research stay will last 11 months. The research institution will transfer a certain sum from a research fellowship fund to my university at home. I myself will not receive a fellowship. Instead, I’ll continue being paid my usual US salary while I am working on research in Germany. At no stage will I be employed by a German employer. Am I liable for taxation in Germany? Is my tax status dependent on the number of days I spend in Germany? How long can we stay in Germany without being liable to taxation?
Art. 20, para. 1 of the German-American Double Taxation Agreement grants the right of taxation for the salary of an American university professor at a German research institution to the USA if the research stay does not exceed two years and is in the public interest, i.e., not first and foremost in the interest of private individuals or firms. To this extent salaries are exempt from taxation in Germany. Whether or not the German institution contributes to the costs of research work is irrelevant in terms of tax law. The two-year period begins on the day you enter the country in order to embark on research work.
I'm an American citizen and intending to come to Germany for a research stay that is scheduled to begin on 15 August and will last a total of 11 months. My wife’s employer has given her permission to accompany me, work for him online from Germany, and continue to draw her US salary. She is now worried that her salary might be subject to additional taxation in Germany, and therefore says she might not come with me. I do not wish to be separated from my wife for such a long time. Is there a way to avoid double taxation?
This question cannot be answered in general terms. It depends on the specific double taxation agreements between Germany and the employee's home country. For employees from the USA, it depends on whether the salary is paid by a private company or a public authority:
If the salary is paid by a federal, state, or local US authority, it is subject to US taxation according to Art. 19, para. 1, clause a of the German-American Double Taxation Agreement (DBA-D/USA), and thus tax-exempt in Germany.
If the salary is paid by a private American employer and the stay in Germany exceeds 183 days in any one calendar year, it is taxable in Germany according to Art. 15, para. 1 and 2 DBA-D/USA. In this case, the stay in Germany begins on 15 August, which means less than 183 days will be spent in Germany between then and the end of the year. In the current calendar year, the marital partner's private US salary would therefore be tax-exempt in Germany. The stay in Germany is expected to last another 6 ½ months in the following calendar year, which is longer than 183 days. Hence, a private US salary would be taxable in Germany in the following year. Income tax paid in Germany would be set against American tax according to Art. 23, para. 1, clause 1 a DBA-D/USA, thus avoiding double taxation. However, the marital partner can avoid having to pay tax in Germany on a private US salary by leaving the country before the period of 183 days has been completed in the next calendar year.
The 183-day rule then loses its validity retroactively. In the respective tax year, the foreigner has to pay tax on his indigenous earnings in that country from the first day of his stay, i.e. for the first 183 days, too. On proof of having paid tax in the one country, the foreigner will either be exempt from paying tax in his own country or it will be credited for this period.
Many, but not all double taxation agreements Germany has concluded with other states include special regulations exempting certain teaching and research activities that are carried out over a restricted period of time from taxation in the country in which they are carried out, or allocating the right of taxation to the country of domicile. In most agreements the special regulation only applies to a stay lasting no longer than 2 years. Incidentally, the various special regulations differ significantly so that it is not possible to make any across-the-board statements; each agreement has to be examined individually: in some cases, the taxpayer must be a teacher or higher education teacher, in others not.
There are differing criteria determining which teaching and research activities and which institutions are covered by the special regulation. In some cases, the special regulation only applies to emoluments not originating in the country in which the work is carried out. Whether teaching or research activities are covered by the special regulation should be discussed individually with the tax authorities responsible at the beginning of the stay abroad. They will examine whether the pre-conditions for applying the special regulation have been fulfilled. If they have, tax exemption will be confirmed and it will be determined to what extent income tax will be deducted in the country of domicile rather than in the country in which the work is carried out. Tax exemption notwithstanding, some countries require tax returns to be submitted. In the context of the income tax return the proportion of income covered by the special regulation must be specifically declared.
I am a researcher from Italy. From May to August I am being paid a monthly fellowship of 2,300 euros by a German university (the form of contract is a 'Honorarvertrag' - fee agreement). From September until April of the following year I will receive a monthly fellowship of 2,800 euros from the Max Planck Institute. Before my stay in Germany I was employed at a university in Denmark for 18 months and paid taxes on my income (until February of this year). In March and April I received a fellowship for a research stay in Poland (2,400 euros per month). Do I have to pay tax on the 'Honorarvertrag' / fellowships, and if so, in which country?
First of all, it is necessary to ascertain whether the respective payment is considered to be a fellowship, a fee for self-employed or free-lance work, or an employment salary according to the regulations in the respective country. Being designated a fellowship, fee or salary is not of itself decisive. It depends on the circumstances as a whole.
The next step is to examine the relevant double taxation agreement in order to determine which country has the right of taxation on the payment. According to the German-Italian double taxation agreement, for example, in the case of an Italian researcher in Germany it depends on whether the payments originate in Germany or not. If they do not originate in Germany, they may be exempt of taxation in Germany. If they do originate in Germany, the following differentiations obtain:
- A fellowship is exempt from taxation.
- In respect of fees for self-employed or free-lance work Italy as the country of domicile always has the right of taxation.
- A salary ensuing from employment is liable for taxation in the country of employment, i.e. Germany. The salary taxed in Germany must also be declared in the Italian income tax return. The tax paid in Germany is then credited to Italian tax liability.
In May, a German university intends to employ a researcher of Russian nationality, who is currently resident in Italy, for a period of 3-4 years. However, as she will be sent, or rather, delegated to a research centre in Switzerland for the duration of her contract she will not actually need to come to the German university. She will be resident in Switzerland. This raises some legal issues for us in respect of social security, tax and residence. In which state is she registered for tax and social security purposes? In which country does she acquire pension rights? How and where should she contribute towards her healthcare insurance? Does she actually need a German residence title?
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