Foreign Income Tax in Germany: Double Taxation

A job partly paid from abroad. An inherited flat in Italy that you rent out. A brokerage account in the US. The moment you live in Germany and earn money anywhere, the same worry appears: do I have to declare this here — and will I end up paying twice? This guide explains the system behind foreign income: worldwide income, double-taxation treaties, and the often underestimated progression clause. (Germany’s tax year runs January to December, and returns are filed through ELSTER, the official online tax portal.)

In short: If you live in Germany, you have unlimited tax liability and must declare your entire worldwide income (§ 1 EStG) — including foreign income. Double taxation is prevented by the relevant double-taxation treaty (DBA): either by exempting the income in Germany (which triggers the progression clause, § 32b EStG, raising your tax rate) or by crediting the foreign tax (§ 34c EStG). It is all declared in Anlage AUS (the foreign-income form).

Worldwide income: Germany wants to see everything first

The starting point is strict but simple. If you have a residence (Wohnsitz) or your habitual abode (gewöhnlicher Aufenthalt) in Germany, you have unlimited tax liability here (§ 1 (1) EStG). And unlimited liability covers not just your German income but your worldwide income — every euro, from any country.

At this stage it only means: you must declare everything. Whether German tax actually arises is a second question, answered by the double-taxation treaty. Many people believe foreign income “is none of the Finanzamt’s business” — the most expensive mistake in this area, because through international data exchange (such as the automatic exchange of financial-account information) the tax office finds out anyway.

If you only live in Germany for part of the year or move away, that is a special situation — see leaving Germany. For residents, the normal rule is: worldwide income.

The double-taxation treaty (DBA): who may tax?

So that the same income is not fully taxed in two countries, Germany signs double-taxation treaties — currently with around 100 countries. A DBA allocates the right to tax: for each type of income it decides which country may tax it.

Broadly, most treaties provide:

• Salary: taxed in principle by the country where the work is performed (the activity state) — with exceptions such as the 183-day rule.
• Rental income: taxed by the country where the property is located (the situs state).
• Dividends and interest: usually taxed in the country of residence, often with a limited withholding tax in the source country.

If a country has no DBA with Germany, the credit method under national law applies automatically (§ 34c EStG). To find the treaty that applies to you, use the official overview from the Federal Ministry of Finance (link below).

Exemption or credit: the two methods

The DBA states not only who may tax but also how Germany avoids the double taxation. There are two routes.

Exemption method (with the progression clause)

Germany exempts the foreign income from German tax — it stays tax-free here. This is the common route for foreign salary and foreign rent. But tax-free does not mean without consequence. Through the progression clause (§ 32b EStG), the exempted income raises your tax rate on your remaining, German-taxable income (see below).

Credit method (§ 34c EStG)

Germany taxes the foreign income normally but credits the tax actually paid abroad against the German tax. The credit is capped at the German tax that would fall on that income (the maximum credit amount). This method is typical for foreign capital income and for countries without a DBA. If you paid less tax abroad than in Germany, you top up the difference here; if you paid more, the excess is usually lost.

The progression clause: tax-free, but not for nothing

The progression clause surprises most people. The exempted foreign income is not taxed, but it is counted when your tax rate is calculated. The Finanzamt works in three steps:

1. It adds the exempted foreign income notionally to your taxable income.
2. From that higher sum it derives the tax rate.
3. It applies that higher rate only to your taxable German income.

Example: You have €40,000 of taxable German income plus €15,000 of foreign salary exempted by a treaty. Without the progression clause your average rate might be around 20%. Adding the foreign income lifts the rate to, say, around 24% — and that higher rate is applied to the €40,000. Result: a few hundred euros more German tax, even though the €15,000 itself stays tax-free.

For how the mechanism works in detail — including on wage-replacement benefits such as Elterngeld (parental allowance) — see the progression clause post.

Three practical examples

Foreign salary

You live in Berlin and work on site for a while for an employer in Austria. Under the treaty the activity state (Austria) usually taxes, and Germany exempts — with the progression clause. You declare the salary in Anlage N and Anlage AUS. Check the 183-day rule: if you stay under 183 days in the activity state and a German employer pays you, the right to tax may still sit with Germany. For an overview of employee topics, see our for employees page, and the Restio homepage shows how it helps.

Foreign rental income

You own a rented flat in Spain. Under the treaty Spain (the situs state) taxes, and Germany exempts — again with the progression clause. The rent goes in Anlage AUS (and the income is calculated by German rules, including depreciation and expenses, for the progression clause).

Foreign dividends

You hold US shares in a brokerage account and receive dividends. The US withholds a withholding tax (reduced by the treaty, often 15%). In Germany the dividends fall under the flat capital tax; the 15% US withholding is credited (§ 34c or § 32d EStG). Declared in Anlage KAP and Anlage AUS. For German and foreign capital income, see the Anlage KAP post.

Anlage AUS: where it all comes together

Anlage AUS is the central form for foreign income. There you record:

• the foreign income by type and country of origin,
• the foreign tax paid that should be credited,
• the income subject to the progression clause.

Depending on the type, a matching form is added: Anlage N (salary), Anlage V (rental), Anlage KAP (capital income). Good proof matters: foreign tax assessments, payslips, dividend statements showing the withholding tax. Without evidence, the Finanzamt often refuses the credit.

If you are filing in Germany for the first time, the first tax return for expats post walks you through the general procedure.

Common mistakes

1. Not declaring foreign income at all. Even exempted income belongs in the return — precisely because of the progression clause.
2. Forgetting the progression clause. “Tax-free” does not mean “no effect”. Budget for the slightly higher German tax.
3. No proof of foreign tax. No foreign assessment, no credit.
4. Mixing up the methods. Exemption and credit give very different results — check what your specific treaty prescribes.
5. Overlooking the 183-day rule. On short assignments abroad, Germany may keep the right to tax after all.

How Restio helps

Foreign income is not a standard situation — even the question “exemption or credit?” depends on the specific treaty. Restio sorts that out for you:

• Guided tax topics — Restio takes you through the right order: capture worldwide income, determine the method, fill in Anlage AUS and the matching extra form.
• Scan receipts — photograph foreign tax assessments, payslips, and dividend statements; Restio picks out the relevant amounts and the withholding tax shown.
• Deadline watcher — filing dates stay on your radar, even while you wait for documents from abroad.
• Tax questions with the paragraph and the number — “Is my Spanish rent taxed in Germany?”, “How much US withholding tax can I credit?” — a clear answer with the relevant § and the current threshold, in English or German.

Get Restio

Further reading

• § 34c EStG – credit for foreign taxes
• § 32b EStG – progression clause
• Federal Ministry of Finance – double-taxation treaties (country list)

Foreign income looks complicated but follows a clear logic: first declare everything (worldwide income), then apply the treaty (exemption or credit), then factor in the progression clause. Keep those three layers apart cleanly and you tax correctly — and you are guaranteed not to pay twice.