US/Germany Double taxation

[Nixon]

Hello all,

We are having an issue regarding taxes that is not an everyday thing. At least to us.

My wife and I are US citizens residing in Germany.
She is working for a German company here, and she is paid in Germany.
I am working for a US company remotely from Munich, but I am paid by a daughter company from London/UK here in Germany. An accounting company in Berlin does my payslip every month with paying all social contributions here in Germany and sending the rest to my bank account as my pay. I am paying taxes yearly as soon as Finanzamt sends me the calculation for that year.
We are both filing taxes in the US yearly.

Here is the problem.
In 2023 her company asked her to go to the US for a 5 months long project.
Their normal procedure in this kind of situation is to organize a German accounting company to do a tax filing for the employee for that year. They use a tax equalization procedure in a case like this where they are trying to make sure that employee is not taxed twice.
My wife was there for 5 months and I was there for a few weeks in December. I was working as normally from there since my work is done remotely, and my paycheck was sent to my German account as any other month.

Process was like this. This accounting company would use two teams for calculations. One for US and another for German taxes.
The US team was quicker and finished first. Among other things, they told us that due to me being in the States and working from there during those few weeks I have to pay taxes in the US on the amount prorated for that time being in the US. I was paid in Germany, and they told me that we will not be taxed in Germany on that amount. OK, we paid.

However, now German team is telling me that this already taxed amount will be added to my income, reported to the Finanzamt, and that it will be considered under Progression Clause even though I was paid in Germany. Like income from rentals that you might have, etc. Even though Finanzamt doesn't call Progression Clause a tax, it will increase amount of taxes I have to pay if it is added like that. Hence, higher taxes, being taxed twice.

Any idea on how this should work? Now when I read all of this I am thinking that the American team made a mistake, but I am not sure.

TGIF,

Nixon.

[PandaMunich]

In summary:
They did it correctly.
The "US part of your salary" will be subject to Progressionsvorbehalt in your German tax return.

Since you have a US employer, article 15 (2) of the double taxation agreement (DTA) between Germany and the USA, which would have allowed you to stay for up to 183 days in the USA and still be taxed by your country of residence Germany, does not apply to you: http://www.pinkernell.de/dbausa.htm#Art15

--> we fall back to article 15 (1) of the DTA, which says that Germany has to give up the taxation rights on days worked in the USA, to the USA. That is why you had a "US part" of your salary that was taxed in the USA.

• ...renumeration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State, unless the employment is exercised in the other contracting State. If the employment is so exercised, such renumeration as is derived therefrom may be taxed in that other State.

The Progressionsvorbehalt on that "US part of your salary" (which is excluded from being taxed in Germany) is permitted by article 23 (3) a) of the DTA states: http://www.pinkernell.de/dbausa.htm#Art23

• 3. Where a resident of the Federal Republic of Germany derives income or owns capital which, in accordance with the provisions of this Convention, may be taxed in the United States or is exempt from United States tax under paragraph 3 of Article 10 (Dividends), tax shall be determined as follows:
  
  a) Except as provided in subparagraph b), the income or capital shall be excluded from the basis upon which German tax is imposed. The Federal Republic of Germany, however, retains the right to take into account in the determination of its rate of tax items of income and capital excluded under the provisions of this Convention.

[Nixon]

Thank you Panda.

We will do what we have to do.

[Nixon]

Hello Panda,

What would be different, taxwise, if I was working for a non-American company at that time? Or, if the company I am being paid by gets sold by the the parent company and I again go to the US for a short period of time and work remotely from there? Something like being a Digital Nomad.
Would I have to pay taxes to the US, or anything along those lines?

Thanks,

Nixon.

In summary:
They did it correctly.
The "US part of your salary" will be subject to Progressionsvorbehalt in your German tax return.

Since you have a US employer, article 15 (2) of the double taxation agreement (DTA) between Germany and the USA, which would have allowed you to stay for up to 183 days in the USA and still be taxed by your country of residence Germany, does not apply to you: http://www.pinkernell.de/dbausa.htm#Art15

--> we fall back to article 15 (1) of the DTA, which says that Germany has to give up the taxation rights on days worked in the USA, to the USA. That is why you had a "US part" of your salary that was taxed in the USA.

• ...renumeration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State, unless the employment is exercised in the other contracting State. If the employment is so exercised, such renumeration as is derived therefrom may be taxed in that other State.

The Progressionsvorbehalt on that "US part of your salary" (which is excluded from being taxed in Germany) is permitted by article 23 (3) a) of the DTA states: http://www.pinkernell.de/dbausa.htm#Art23

• 3. Where a resident of the Federal Republic of Germany derives income or owns capital which, in accordance with the provisions of this Convention, may be taxed in the United States or is exempt from United States tax under paragraph 3 of Article 10 (Dividends), tax shall be determined as follows:
  
  a) Except as provided in subparagraph b), the income or capital shall be excluded from the basis upon which German tax is imposed. The Federal Republic of Germany, however, retains the right to take into account in the determination of its rate of tax items of income and capital excluded under the provisions of this Convention.

[PandaMunich]

What would be different, taxwise, if I was working for a non-American company at that time? Or, if the company I am being paid by gets sold by the the parent company and I again go to the US for a short period of time and work remotely from there? Something like being a Digital Nomad.
Would I have to pay taxes to the US, or anything along those lines?

No, if you worked for up to 183 days in the USA and your employer were not a US company (nor your salary borne by a US company), then your country of residence Germany would have the taxation rights also on the days you worked in the USA, in accordance with article 15 (2) of the double taxation agreement (DTA) between Germany and the USA: http://www.pinkernell.de/dbausa.htm#Art15

[Nixon]

Thank you PAnda.