german tax officials asking for back taxes for previous contract in germany

[BlightyBoy]

I did register but after 6 months. i thought there was some kind of tax cut-off after 6 months. I was in and out of de for the remainder 3 months and didnt declare any tax. Im not sure about the 187 day rule and if I fall under it or not. Im in the UK at present. I dont want to go to jail! Can they come and get me?

The 187 rule is to do with tax residency. If you are considered tax resident in one country, say the UK - and take a contract somewhere else within the EU, say Germany, then you can maintain your UK tax status for up to 186 days. As long as you return to the UK "permanently" before the 186/187 days runs out you will only be liable for income tax within the UK. However, as of day 187 you will be considered tax resident in Germany (in that example) with your German tax-residency status applying from day #1 (not from day 187).

During the 186 day period you can voluntarily elect to be tax resident in your host country (you don't actually need to wait). Even if you end up staying for less than 186 days, you will still be considered tax resident (in the host country) for the time you were there. This is probably how some contractors were only in Germany for 5 months but are still being pursued for unpaid taxes in Germany.

Another thing to consider is that federal taxation in Germany is not based on money earned in Germany alone but - (and not unlike the U.S.) - money earned from all over the world. This differs in the UK where HMRC only require you to declare monies earned within the UK.

[jamesbrown]

The 187 rule is to do with tax residency. If you are considered tax resident in one country, say the UK - and take a contract somewhere else within the EU, say Germany, then you can maintain your UK tax status for up to 186 days. As long as you return to the UK "permanently" before the 186/187 days runs out you will only be liable for income tax within the UK. However, as of day 187 you will be considered tax resident in Germany (in that example) with your German tax-residency status applying from day #1 (not from day 187).

During the 186 day period you can voluntarily elect to be tax resident in your host country (you don't actually need to wait). Even if you end up staying for less than 186 days, you will still be considered tax resident (in the host country) for the time you were there. This is probably how some contractors were only in Germany for 5 months but are still being pursued for unpaid taxes in Germany.

Another thing to consider is that federal taxation in Germany is not based on money earned in Germany alone but - (and not unlike the U.S.) - money earned from all over the world. This differs in the UK where HMRC only require you to declare monies earned within the UK.

Your second paragraph contradicts your first and, in reality, there is no automatic rule. On the contrary, you are generally liable for taxation of money earned locally from day 1.

You're also confused about tax on worldwide income. Most countries tax the worldwide income of their residents, including the UK, Germany and the US. However, the US also taxes the worldwide income of non-residents, with some allowances. Thus, whether you're resident in the UK or in Germany, your worldwide income will be taxed (if your are resident), and there are no differences between the UK and Germany in that respect (in contrast to the US, where non-residents are taxed on their worldwide income, with potential allowances, such as the Foreign Earned Income Exclusion).

[BlightyBoy]

TAXi!

Your second paragraph contradicts your first and, in reality, there is no automatic rule. On the contrary, you are generally liable for taxation of money earned locally from day 1.

You're also confused about tax on worldwide income. Most countries tax the worldwide income of their residents, including the UK, Germany and the US. However, the US also taxes the worldwide income of non-residents, with some allowances. Thus, whether you're resident in the UK or in Germany, your worldwide income will be taxed (if your are resident), and there are no differences between the UK and Germany in that respect (in contrast to the US, where non-residents are taxed on their worldwide income, with potential allowances, such as the Foreign Earned Income Exclusion).

Perhaps your understanding or the nuances of it all are broader then mine; however is it not the case that with the dual-tax treaties between the UK and Germany (in fact, most if not all EU/EEA countries) that one is not automatically liable, per-se, for taxes in a country where one is domestically resident when tax-residency in another country is still valid? (even if income is generated in the country where tax-residency does not apply)?

I do not see how my two paragraphs are contradictory - I suggested that it is possible to either maintain foreign tax residency (e.g. in the UK) for the ~186 days or elect to be tax resident in for example, Germany, from day 1. What I failed to include (an oversight on my part) is that once becoming tax-resident in Germany then yes, I am liable for earnings since "day 1" however my, albeit limited, understanding of dual-taxation means that the option exists to either recover the paid taxes from HMRC and then pay to the Finanzamt or at least demonstrate that the earnings have been subject to taxation (within the EU/EEA).

As for the global aspects, I am a little confused; we own(ed) property both in the UK and in Germany that was/is being rented out. We were obliged to declare the rental income on the property in the UK (even though tax-resident in Germany) but not the income in Germany (property rent and earnings). However, we were/are required to declare UK based income on our German tax returns. Perhaps the situation has changed recently; we no longer have the property in the UK so it has ceased to be an issue.

Based on this personal experience, no additional tax was paid on UK-based (rental) earnings in Germany even though a) the taxation rate is higher than in the UK and b) that the UK-based income would have increased my total income to a point whereby I would've crossed some income threshold (and paid an even higher rate of tax). The advice we received from a German tax accountant (when we bought the property in the UK) was to subject the rental earnings to taxation in the UK and to provide the Finanzamt with a copy of our UK based tax-returns (because we would be able exploit our tax-allowances in the UK).

[jamesbrown]

is it not the case that with the dual-tax treaties between the UK and Germany (in fact, most if not all EU/EEA countries) that one is not automatically liable, per-se, for taxes in a country where one is domestically resident when tax-residency in another country is still valid?

Dual tax treaties don't speak to tax residency, they provide the rules for relief (or partial relief) of double taxation. The general principle is that you don't pay tax twice on the same income, although the actual relief varies depending on a great many factors. Typically - and this applies to Germany - residents pay tax on their worldwide income and non-residents only pay tax on that portion of their income generated locally (from day 1). It's worth noting that this is self-evident from the position in which you found yourself. For a resident paying tax on their worldwide income, some foreign income may be taxed at source, for which double taxation may be partially or fully offset by a tax treaty. You'll note that the US is very unusual insofar as they demand non-resident citizens to pay tax on their worldwide income. This is why US citizens living abroad must file a tax return every year, regardless of their residency status.

we own(ed) property both in the UK and in Germany that was/is being rented out. We were obliged to declare the rental income on the property in the UK

HM Revenue & Customs: The Non-resident Landlord Scheme

[BlightyBoy]

Dual tax treaties don't speak to tax residency, they provide the rules for relief (or partial relief) of double taxation. The general principle is that you don't pay tax twice on the same income, although the actual relief varies depending on a great many factors. Typically - and this applies to Germany - residents pay tax on their worldwide income and non-residents only pay tax on that portion of their income generated locally (from day 1). It's worth noting that this is self-evident from the position in which you found yourself. For a resident paying tax on their worldwide income, some foreign income may be taxed at source, for which double taxation may be partially or fully offset by a tax treaty. You'll note that the US is very unusual insofar as they demand non-resident citizens to pay tax on their worldwide income. This is why US citizens living abroad must file a tax return every year, regardless of their residency status.



HM Revenue & Customs: The Non-resident Landlord Scheme

The "position in which I found myself" had little or nothing to do with a lack of understanding of German or international tax laws; like many others I was presented with a mechanism by which my tax liabilities in Germany could be reduced; the legalities or otherwise of the scheme were, at that time, completely irrelevant to me (as they were undoubtedly to others) and as such I (as with many others) have paid the price.

[jamesbrown]

The "position in which I found myself" had little or nothing to do with a lack of understanding of German or international tax laws; like many others I was presented with a mechanism by which my tax liabilities in Germany could be reduced; the legalities or otherwise of the scheme were, at that time, completely irrelevant to me (as they were undoubtedly to others) and as such I (as with many others) have paid the price.

Fair enough - I wasn't taking a dig, just noting that the general rule is to pay tax on locally earned income from day 1 and that the taxation of worldwide income then depends on residency (unless you're a US citizen), for which tax treaties generally allow you to offset any double taxation of earned income (unearned income is another story, as some countries simply don't recognize the country-specific structures in place for legal avoidance, such as SIPPs, ISAs etc. in the UK).