Reply to: german tax officials asking for back taxes for previous contract in germany

[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).

[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]

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]

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]

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]

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.

[BlightyBoy]

The lap of the Gods

There is the back tax, lets assume say EUR 20000, then the fine would be 20-40000. If they're lenient it would be about 20,000, if not they might impose a higher fine.

Total to pay EUR 40,000, assuming a fine of EUR 20000, if your tax liability was 20000.

Generally you can calculate the tax as approx 35% on your earnings.

Given the sums involved you should contact an accountant.

I would contact SJD, at least they do seem to have knowledge of contracting in Germany and could get you in touch with a German accountant.

You also want the tax back from HMRC, which would have to be handled by a UK accountant.

Maybe they can help you on both counts, dealing with the German authorities via a German tax consultant and handling the tax refund in the UK.

Hmmm....

Various conflicting stories posted here and various anecdotal evidence. I'm not sure that there is any hard and fast rule.

When I was investigated by the tax office (the initial "friendly" letters enquiring as to where and when I had been contracting) I quickly engaged a solicitor and filed a Selbstanzeige soon as. The result was that the outstanding tax was calculated "mutually" (they came up with a ridiculous number and we came up with a more realistic number supported by paperwork - contracts and bank statements). They then arrived at a number (which was actually below the number we calculated!) and that was agreed. Including the interest a sum of a little over €100,000 was due which was subsequently paid (within the alloted time). No prosecution, no criminal conviction. There may have been a fine in there somewhere but it would only have been a relatively small amount (this was over 2 years ago and my memory of it may not be *entirely* accurate).

An ex-colleague of mine was also investigated - and had been operating over a much longer period of time and the amount of tax (including interest) calculated was somewhere in the region of €250,000. A fine was also payable but this is "only" €36,000 so I am not sure where the 1 or 2 times the outstanding tax comes from...

There are so many factors that can affect the outcome that it really is hard to say; like all things beauraucratic in Germany there is no "rule of thumb". One of the factors that benefited me was the "five year rule" (it has since been extended to 10 years). That is the rule whereby any tax evaded more than five years ago will not be prosecuted (as long as it is all repaid with interest). In my situation I had been evading tax on my income up until about 4 years before I was investigated and so the "damage" was limited to only the last "false" tax return; the previous tax returns were not taken into account (is my information). The amount of evaded tax in that (last) return was around the €20,000 amount. The other limiting factor is the amount; anything below a total of €50,000 in unpaid taxes (and that being during the period that can be prosecuted, i.e. the last 10 years) also does not get prosecuted.

So, for unpaid/undeclared taxes for the last 10 years that amount to a sum above €50,000 you will be in trouble; anything below €50,000 you will most likely be OK - as long as the tax is repaid pronto.

Further factors however are "flight" of course; anyone being investigated for tax evasion who skips the country will likely be in more trouble (and probably independent of the €50k/10 year guidelines). My colleague has a colleague who left Germany and returned to the UK. A total sum in unpaid tax (over a time period that I do not know) of €75,000 has resulted in this individual being arrested and jailed in the United Kingdom. Had that person remained in Germany and "faced" the music then they most likely would have had the same "slap on the wrist" that I got and no more need be said. Naturally there are reasons why we Brits return home that has nothing to do with evading prosecution; if these can be demonstrated to the court/tax office then you will unlikely be considered to have fled.

The final and possibly most influential factors (as in all matters German) is the nature of the person that is investigating you. In that respect I was fortunate to get someone that my own solicitor considered to be a "decent chap". This fellow is, apparently, somewhere in his 50's and working towards his retirement. The fact that I conceded to having evaded tax made his life (and job) easier. However, according to my solicitor, things can have gone quite differently had the officer investigating my case been some ambitious "young gun".

So it is all pretty much in "the lap of the Gods". Sooner or later most people will get caught up with - it's only a matter of time. How individuals get treated and the consequences are pretty much open so all that one can really do is face the music, pay up the money + interest + fine and hope for the best.

Good luck!

BTW if anyone is currently under investigation and in Munich then consider using this guy: Kompetente Beratung bei Selbstanzeige, Strafrecht München, Fachanwalt für Steuerrecht und Wirtschaftsrecht: Rechtsanwälte Höchstetter & Kollegen He speaks fluent english, is a little on the expensive side but very good and worth it IMO)

[BlasterBates]

There is the back tax, lets assume say EUR 20000, then the fine would be 20-40000. If they're lenient it would be about 20,000, if not they might impose a higher fine.

Total to pay EUR 40,000, assuming a fine of EUR 20000, if your tax liability was 20000.

Generally you can calculate the tax as approx 35% on your earnings.

Given the sums involved you should contact an accountant.

I would contact SJD, at least they do seem to have knowledge of contracting in Germany and could get you in touch with a German accountant.

You also want the tax back from HMRC, which would have to be handled by a UK accountant.

Maybe they can help you on both counts, dealing with the German authorities via a German tax consultant and handling the tax refund in the UK.

[jonnyd]

christ!
Does the fine include the tax owed or is that separate?

[BlasterBates]

Calculate the tax you should have paid on 9 months of income (approx 35%), add interest and then the fine will be between 1 and 2 times the value of the tax evaded, so there is a motivation for being co-operative, as "silly plonkers" will have a lower fine than "hardened criminals".

You also now need to contact a UK accountant and try to get UK tax refunded.

This is not automatic if your tax return has been closed.

Unfortunately there are many UK contractors like yourself who think they can work for 6 months without paying tax.

This unfortunately is not the case as non-residents (in the UK as well) are always liable for tax on income earned in the country.

Some contractors argue that if the contract is with their UK company is not German income, but the German authorities may or may not agree (usually not), which is why you need the assistance of an accountant who would argue your case with the German authorities. A contract that goes longer than 6 months is almost certainly German income and should be taxed as such, i.e. from day 1. Contractors have been on the forum who were facing criminal charges of tax evasion for contracts of 5 months.

Anyway good luck.

[SueEllen]

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?

HMRC will happily co-operate with them.

There is no 6 month cut of if you work there for 9 months.

Read the previous posts and follow the advice already given.

[jonnyd]

Get a German accountant to help you out (I would recommend Claudia Kuffer at expat tax).

If you paid tax in UK then there will be the dual taxation stuff to consider.

If you worked in DE and didn't register at all there could be problems (i.e. a fine).

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?

[stek]

Hi all,

Ive just been given a summons to the Munich tax office about outstanding back taxes.

I was a guest contractor working for 9 months in Germany, and was paying my taxes in the UK.

I thought there was a 6 month period before you had to declare residency. I only stayed another 3 months before the contract finished so the extra taxes didn't seem to matter much.

Now I'm really worried about what to do!

Anyone any advice on these kind of matters?

Thanks for anything.

john

Read the similar threads on this on the site - be very afraid, German taxman takes no prisoners and rolls people up in piano wire...

[cheakyp]

Get a German accountant to help you out (I would recommend Claudia Kuffer at expat tax).

If you paid tax in UK then there will be the dual taxation stuff to consider.

If you worked in DE and didn't register at all there could be problems (i.e. a fine).

[eek]

Yep Read http://forums.contractoruk.com/accou...an-cometh.html and be ensure you have the cash to pay....