All countries have unique tax laws and rules. If an individual has income or capital gains from one country and resides in another country, that individual may be responsible for paying taxes in both countries pursuant to the respective tax laws. In order to alleviate the burden of “double taxation” on individuals who may be affected, countries such as Germany, the United Kingdom, and the United States have negotiated and entered into so called double taxation agreements with other countries. Double taxations agreements, or tax treaties, are simply a type of agreement between countries to determine how affected individuals and entities will be taxed in both countries.
Examples of such double taxation agreements are:
- Convention Between the United States and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and Capital and to Certain Other Taxes
- Convention Between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains
- Convention Between the United Kingdom of Great Britain and Northern Ireland and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital
Double taxation involving Americans generally occurs in two ways: an individual is a resident of the U.S. and has income or gains in another country, or the individual is not a resident of the U.S. and has income or gains in the U.S. In either case, the individual may have to pay taxes not only in his/her country of residence, but also in the other country. Double taxation agreements operate to limit, reduce or eliminate the individual’s tax liability in one country or the other. The agreements are generally reciprocal, meaning that the agreements work in the same way for residents of both countries involved. The specifics of the tax implications depend on the details of the actual agreements between the countries, including what taxes are paid where and what types of income and gains are subject to the agreement.
Double taxation agreements largely work in one of three ways:
- An individual pays tax in his or her country of residence and gets an exemption or relief from tax in the foreign country where the individual earned income or gains.
- An individual pays tax in in the country where the individual earned income or gains and gets an exemption or relief in the country where he or she resides.
- Taxes are automatically deducted from the income or gains in the country where the individual earned those income or gains. The individual then declares these amounts as taxes already paid on the individual’s tax return in the country where he or she resides.
Tax relief may be available for various types of income, depending on the individual and the rules as determined by any double taxation agreements between the countries where the individual resides versus where he or she earned such income, including, but not limited to, earnings from employment or professional services, pensions and annuities, interest, royalties, and dividends. The rules for tax relief on each of these types of income vary and can be complicated.
Most double taxation agreements also contain what is known as a “saving clause” which prevents a citizen or resident of a country from using the provisions of the agreement in order to avoid taxation of foreign income entirely. In cases where no double taxation agreement exists between the country where an individual resides and where the individual earned income, or where the type of income is not covered by an existing agreement, the individual may be responsible for paying taxes on the income according to the rules of each country as to that income.
Individuals who earn income or gains in one country while residing in another should seek the advice of an experienced tax professional and an international attorney regarding the implications of international taxation. Urban Thier & Federer, P.A. is an international law firm concentrating on United States, German, European Union, and UK law. With offices in New York, Orlando (FL), Palm Beach (FL), Munich, and London, we are positioned to assist clients to resolve legal issues and manage litigation throughout the United States and European Union countries (particularly Germany and the United Kingdom).
We encourage you to explore our websites – www.urbanthier.com (United States firm) and www.urbanthier.de (German firm) to learn more about Urban Thier & Federer, P.A., Urban Thier & Federer, Rechtsanwälte, and their respective attorneys and practice areas. We encourage you to become informed of your rights and options. You should also ensure that any law firm you consult or retain to represent you has the experience, resources and ability to take your case through trial and appellate courts, if necessary.
Please note that Urban Thier & Federer, P.A. does not represent you and cannot take any action on your behalf unless and until you enter into a formal written Legal Representation Agreement.
Christian T. Fahrig Carl-Christian Thier