Taxation while living overseas!

Germany:

The German tax system can be complex at times, especially regarding foreign income because Germany taxes their residents based on their "world-wide" income.

 

Based on the DBA (the tax treaty) between the U.S. and Germany, more specifically §19(3), VA disability compensation is tax free in Germany. However, under §23(3)a, Germany "retains the right" to use any income that is excluded from direct taxation noted in the treaty towards their 'rate of tax' (in German, the "Progressionsvorbehalt") to determine one's overall tax bracket. In other other words, 'in-diect' taxing of income by raising one's taxable income level!

 

However, before the German "Finanzamt" can do this, they must -under German tax law- determine the type of income they are dealing with because there are only certain, limited types of income that can be applied toward the "Progressionsvorbehalt." Under German tax law VA disability compensation is characterized as income falling under §3 Nr. 6 EStG. This type of income is not specifically listed under §32b EStG (which is the tax law pertaining to the "Progressionsvorbehalt'), and therefore cannot also be applied to it! VA disability compensation is tax free in Germany and cannot be applied to their progressive tax law either!

 

Below is a recent State tax court decision showing that VA disability compensation is not taxable nor should be considered under the "Progressionsvorbehalt! This decision, however, is not final as the "Finanzamt" has submitted a "Revision" (an appeal) to the "Bundesfinanzhof" in Munich, which is the highest tax court in Germany for final decisons on tax issues (file number: 1 R 22/22). If your "Finanzamt" is calculating your VA disability compensation under the "Progressionsvorbehalt," then you should file an appeal with them within one month of your "Steuerbescheid." Otherwise, the "Steuerbescheid" becomes final and cannot be changed. To determine whether or not your "Finanzamt" is using your VA disability compensation towards the "Progressionsvorbehalt," you'll need to look at your "Steuerbescheid" carefully. It isn't out in the open, but rather on the back pages somewhere with all of the other text. Below I have attached two "Steuerbescheide" (the relevant page) showing how your "Finanzamt" may word it therein. Also below I have included an "Einspruch" to use to file with your "Finanzamt" in the event they are using your VA disability compensation towards the "Progressionsvorbehalt." Simply type in your information where indicated. What this will do is force the "Finanzamt" to wait until the current pending decision is decided by the "Bundesfinanzhof."  If this decision from the "Budensfinanzhof" upholds the lower tax courts decision, then the "Finanzamt" will be legally bound by that decision and will be forced to exclude VA disability compensation from the "Progressionsvorbehalt."

Highlighted "Steuerbescheid"
Highlighted steuerbescheid.pdf
PDF-Dokument [2.2 MB]
Appeal to the "Finanzamt"
Einspruch mit aussetzung.docx
Microsoft Word-Dokument [14.4 KB]
Finanzgericht Urteil
Finanzgericht Urteil -redacted- 9-05-202[...]
PDF-Dokument [5.8 MB]

Below is the DBA bewteen the U.S. and Germany. Also below are the supporting documents used in the above appeal for reference; an article written -in German- by a tax expert specializing in foreign income under German tax law; an excerpt from a legal newsletter from 2018 from a German Lawyer who works for EUCOM and states VA compensation is not taxable in Germany, and doesn't fall under their progressive tax rate either, and; the Court case from the "Bundesfinanzhof" from which these other article are based on as well.

 

When communicating with German Goverment officials, called "Behörde" in German, do not refer to VA disability as a "Rente," "Erwerbsunfähigkeitsrente" or something similar; this means that these types of re-occuring payments have a "Versorgungsfunktion."! VA disability compensation is an "Entschädigung" or an "Indvaliditätsentschädigung."

U.S.-German Tax treaty
DBA USA-Deutschland.pdf
PDF-Dokument [239.4 KB]
German article on VA compensation and taxation
10.9785_isr-2021-100705-highlighted-.pdf
PDF-Dokument [177.5 KB]
News letter 2018
NewsletterWinter2018-pg2.pdf
PDF-Dokument [480.1 KB]
BFH Urteil 1997
BFH-Entscheidung.pdf
PDF-Dokument [101.4 KB]

Austria:

Based on the DBA (tax treaty) bewteen the U.S. and Austria, more specifically §19(1) VA compensation is tax free in Austria. However, under §22(3)b, it appears Austria may 'retain the right' be able to use any tax free income in Austria toward their Progressive tax (the "Progressionsvorbehalt") as well.

 

However, Austria is required by their tax law to determine the type of income that is derived from a foreign source. It appears that VA disability comepnsation would fall under §3 EStG (1988) Nr. 1(1). Since the "progressionsvorbehalt" in Austrian tax law is not explicitivily listed, it only appears to be used in certain cases of income under §3 EStG Nr. 2 and 3. Therefore it appears that VA disability compensation is not used under the "progressionsvorbehalt" either.

 

Having said that, if you reside in Austria, it would be imperitive that you seek out profession tax advice to determine whether if VA comepnsation would be seen as income under §3 Nr. 1(1) EStg (1988) and as such be exempt from the "progressionsvorbehalt," or as income under §3 Nr. 2 and 3 (or whether it is simply classified as "Ausländische einkünfte" regardless of the type of income it falls under) and subject to the "progressionsvorbehalt" of Austrian tax law. I have included a copy of the U.S.-Austrian tax treaty here for reference.

 

Note: If you're an Austrian citizen and are receiving VA compensation due to serving in the U.S. Armed forces or are a surviving spouse of a former service member and are receiving "survivor benefits' from VA, then it appears, based on the below court case, that any income dervived from VA would NOT be tax free in Austria due to the wording of §19(1) of the tax treaty!

DBA U.S.-Austria
DBA U.S.-Austria.pdf
PDF-Dokument [185.5 KB]
Urteil
2131.1.1.0.pdf
PDF-Dokument [20.6 KB]

Switzerland:

According to the DBA between the U.S. and Switzerland VA disability compensation would fall under §19(2)b and is tax free in Switzerland. However, under §23(1)a, Switzerland "may apply the rate of tax" of any payments deriving from §19 to one's yearly income tax bracket. In other words, they can use the yealy amount of VA compensation towards their progressive tax rate (or "progressionsvorbehalt.").

 

Here is a link to a local Swiss tax office that explains -in German- the way foreign income derived under §19 of the DBA is used towards their progressive tax; https://www.taxinfo.sv.fin.be.ch/taxinfo/display/taxinfo/Vorsorgeleistungen+aus+dem+Ausland

 

If you reside in Switzerland, it would be in your best interest to consult a tax advisor there to inform yourself on how VA disability compensation is claimed when filing your yearly income taxes. Below is a copy of the DBA between the U.S. and Switzerland for reference.

DBA U.S.-Switzerland
swiss(1).pdf
PDF-Dokument [117.8 KB]

Poland:

According to the tax treaty between the U.S. and Poland, VA disability compensation would fall under §19(2) and is tax free in Poland to U.S. citizens who are residents in Poland. However, under §23(1)c any income that is deemed tax free in Poland will still be used to calculate one's tax rate ("exemption with progression" rule). In essence they can in-directly tax VA compensation by considering the yearly sum to drive up one's total income for tax purposes.

 

Here is also a link to the Polish tax authories website showing disability "pensions" under Polish tax law are tax free; https://www.podatki.gov.pl/en/pensioners/specific-conditions-for-pensioners/ . Keep in mind that this simply states they are exempt from taxes, not the progressive tax rate. Also below is the U.S./Polish tax treaty for reference.

U.S.-Poland tax treaty
Treaty-Poland-2-13-2013.pdf
PDF-Dokument [93.1 KB]

France:

According to the U.S. tax treaty with France, VA disability compensation would fall under § 19(2)a and is tax free in France for U.S. citizens who are residents there. However, under § 24(2)a any Government payments stemming from the U.S. are to be reported to the French tax authorities in order to be applied to their rate of taxation (taux effectif method). In essence they can in-directly tax VA compensation by considering the yearly sum to drive up one's total income for tax purposes.

 

Here is a link to the French tax authorities, which explain how foreign income -in accordance with an individual tax treaty- is handled under the French tax code; https://www.impots.gouv.fr/internationalenindividual/taxation-foreign-source-income

 

Below is a copy of the U.S./French tax treaty for reference.

U.S.-France tax treaty
france.pdf
PDF-Dokument [107.5 KB]
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