Living and working in Germany: Personal income tax of individuals moving to Germany

Foreigners often have a misconception of their tax situation if moving to Germany and working there.

Here are typical issues often misunderstood:

  1. Very often foreign employees coming to Germany think that their foreign source income is not subject to German income taxation. This is a misjudgement. Foreign source income is either taxable in Germany or it effects the progressive German income tax rate. In both cases the income has to be declared in the German income tax return.
  2. The calculation of foreign source income has to follow German legal requirements. This may require a recalculation of foreign source income. This is especially the case for business and rental income (for example recalculations of depreciations or capital allowances).
  3. Foreign income taxes including withholding taxes can be deducted against German income tax if foreign source income is taxed in Germany.
  4. It is also not correct to believe that being tax resident in Germany is unfavourable compared to a situation where somebody receives German based salaries as non-resident. This is due to the fact that non-residents cannot claim various allowances and personal expenses. A careful tax planning is advisable.
  5. Germany has the reputation of being a high tax jurisdiction. This may be the case for individuals with high income. The tax burden on lower or average income is endurable. And German tax law is less strict concerning the deduction of income related expenses than most neighbouring countries. Additionally it provides a wide range of personal allowances and a liberal acceptance of private expenses. Foreign individuals are often surprised by the relatively low tax burden on average income. The real problem is social security liability if applicable. The social security contributions are one of the highest in Europe. Individuals coming to Germany should always seek advice on whether or not they can avoid German social security contributions.
  6. Foreigners often think that personal payments to foreign organisations or insurance companies cannot be deducted. That again is a wrong impression. Payments to foreign pension schemes, private health insurance, private accident insurance, personal liability insurance etc. may very well be deductible in Germany.
  7. A special problem arises from employment income related to stock options. Respective benefits will be taxed in Germany under certain conditions. Taxed will be the difference between the value at the time of purchasing the stocks and the value at the time when the options have been granted. For the allocation of taxation rights the time between granting the options and the vesting time (vesting period) is applicable. This means that if somebody worked for an employer in the vesting period in different countries he may have to pay taxes in these countries. Example: The vesting period was 2 years. For one year employee worked in the USA and for the other year he worked in Germany. Than half of the benefit will be taxed in the USA and the other half in Germany.

We have developed a checklist “Foreign citizens working in Germany – Required documents and information” to file a German income tax return. The checklist can be ordered free of charge at our German office (www.iapa-online.com/hamburg-germany).


Subsidies in the Netherlands

The Dutch government offers a number of incentive schemes in various sectors to support companies in their business operations. Foreign entrepreneurs who set up companies in the Netherlands and who register their companies with the Dutch Chamber of Commerce can also apply for a number of incentive schemes.

The most important subsidy agency in the Netherlands is AgentschapNL, which is based in The Hague. The latter organization is responsible for the execution of most of the schemes available in the Netherlands. In addition, there are also a number of important regional and provincial schemes available, as well as a number of international schemes offered by the Ministry of Foreign Affairs, the Ministry of Economic Affairs and Brussels.

This section will outline a number of the schemes that are currently available. Obviously this is not an exhaustive list, so we recommend that you contact your consultant for more detailed information.

Innovation subsidies

WBSO (Wet Bevordering Speur & Ontwikkeling)
WSBO stands for the Dutch Research and Development Act. Technological innovation is extremely important. The competitor never rests. The WSBO will help you if you wish to renew your technical processes or develop new technical products or software. The WBSO is a tax incentive scheme that forms part of the compensation of salary and wage expenditures for Research and Development work.

Subsidieregeling Internationaal Innoveren (Subsidy for International Innovation)
This regulation promotes cooperation between Dutch companies and foreign companies in emerging markets, Eureka countries and industrialised countries. By working together with local parties, Dutch companies can gain access to these markets. The maximum contribution per project amounts to € 500,000 for innovation projects in emerging markets and € 750,000 for innovation projects with Eureka or industrialised countries. The following countries are considered emerging markets: Brazil, China, Indonesia, Malaysia, Thailand, South Africa, India and South Korea.

Regional Subsidies

Depending on the location of your place of business, it is also possible to obtain subsidies from various provinces and regional authorities. For example, the Province of Brabant focuses mainly on technological innovation and projects an international profile in that field. The Province of Overijssel is extremely active in the reinforcement of agriculture through innovation, whereby its main concern is to keep the sector viable. Utrecht is oriented to creativity within the ICT sector. Furthermore, a lot of provinces offer subsidies in the area of sustainable development and sustainable energy.

Investments

MIA (Milieu Investerings Aftrek) (Environment Investment Deduction Scheme)
The purpose of the Environment Investment Deduction scheme (MIA) is to stimulate investment in environmentally friendly capital equipment. Companies that invest in the environment are entitled to additional tax deductions at a percentage of the investment cost. The environment investment deduction scheme is only available for capital equipment listed on the Environment List 2010 (Milieulijst 2010), which is updated on an annual basis.

EIA (Energie Investerings Aftrek) (Energy Investment Deduction Scheme)
The purpose of the Energy Investment Deduction scheme (EIA) is to stimulate investment in energy-saving technology and sustainable energy, i.e. so-called energy investments. Companies that invest in the energy industry are entitled to additional tax deductions at a percentage of the investment cost. The energy investment deduction is only available for capital equipment that complies with the specified energy performance requirements. The energy performance requirements and the capital equipment that are subject to the energy investment deduction are available in the Energy List 2010 (Energielijst 2010), which is updated on an annual basis.

BBMKB (Besluit Borgstelling MKB Kredieten) (Credit Guarantee Scheme for SMEs)
The purpose of the Credit Guarantee Scheme for SMEs (BBMKB) is to stimulate credit provision to small and medium-size enterprises (SME or MKB in Dutch). The scheme was designed for companies with a maximum of 100 employees and includes most professional entrepreneurs. If the entrepreneur is unable to provide the bank with sufficient security or collateral to secure a loan, the bank can appeal to the BBMKB for the necessary guarantees. The government will then, under certain conditions, provide the security for part of the credit amount. This reduces the level of the bank’s risk exposure and increases the creditworthiness of the entrepreneur.

KleinschaligheidsInvesteringsAftrek (Small-scale Investment Deduction)
The Small-scale Investment Deduction entitles the entrepreneur to deductions from investments in capital equipment between € 2,200 and € 300,000 in 2010. You invest in capital equipment in the year in which you buy it and therefore incur a payment obligation. The investment deduction can be applied in the year in question. If you do not intend to use the capital equipment in the year in which the investment is made, then part of the investment deduction is sometimes carried forward to the next year.

Environment and Energy

Energie Onderzoek Subsidie (EOS) (Energy Research Subsidy)
The purpose of the Energy Research Subsidy (EOS) is to increase the quality level of research and knowledge in the Netherlands by stimulating the development of new technology with the ultimate aim of realizing sustainable energy supply. The aim of the EOS programme is to broaden the knowledge base for energy efficiency and sustainable energy across the Netherlands. The knowledge forms the foundation for affordable, reliable and cleaner energy supply in the future. The EOS covers the full process from idea to market introduction.

Milieu & Technologie (Environment & Technology Subsidy)
Netherlands-based industrial small and medium-size enterprises (SME) qualify for subsidies for projects that contribute to the development and application of innovative environmentally oriented processes, products and services that are new to the Netherlands. The subsidy is known as the ‘Environment and Technology Subsidy’. The projects must focus on the analysis and exploration of market opportunities (TeMa component: ‘Technology in the Market’), or the project must be focused on the research, development, testing and first application of environmentally oriented innovations (ToeP component: Application in Practice’). Stimulering Duurzame Energieproductie (SDE) (Stimulation of Sustainable Energy production) The Dutch Ministry of Economic Affairs wants to support both companies and individuals who want to produce sustainable energy. Anyone who wants to produce energy in a way that does not adversely affect the environment, can make use of this regulation. The production of sustainable energy is not always cost-effective. The SDE compensates the difference between the cost price of regular energy and sustainable energy over a period of 12 or 15 years.

Foreign Markets

Private Sector Investeringsprogramma (PSI) (Private Sector Investment Programme)
The purpose of the Private Sector Investment Programme (PSI) is to contribute to the sustainable economic development of a number of developing countries with the use of the knowledge and capital available in Dutch companies and institutions. If you are planning to invest in a developing market, but the associated risks are excessively high, PSI might offer a suitable solution. The scheme could contribute to (partial) compensation of your investment costs. The programme applies to selected countries in Africa, Latin America, Asia and Eastern Europe. Foreign companies from a selected number of countries can also apply for the PSI.

Prepare2Start
The Prepare2Start programme helps Small and Medium-size enterprises (SME) in taking the first steps in exporting. The purpose of the scheme is to support SMEs with limited or no experience in export when entering new or practically new foreign markets. The support is available in the form of advice and supervision when setting up and implementing an internationalization plan, as well as a contribution towards the cost of a number of activities specified in the plan. The Prepare2Start is applicable to all countries in the world.

Author: Harry den Hond, Schagen Lensen & van Krieken Accountants, www.slk.nl