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 ("Finanzgericht Baden-Württemberg" case number 9 K 2651/21) showing VA disability compensation is not taxable nor should be considered under the "Progressionsvorbehalt! This decision, however, is not final as the local "Finanzamt" has submitted a "Revision" (an appeal) to the "Bundesfinanzhof" in Munich (file number: 1 R 22/22), which is the highest tax court in Germany who makes final decisons on tax issues stemming from the State's lower Tax Courts. If your local "Finanzamt" is calculating your VA disability compensation towards the "Progressionsvorbehalt," then you should file an appeal against them within one month of your "Steuerbescheid." Otherwise, the "Steuerbescheid" becomes final and cannot be changed. To determine whether or not your local "Finanzamt" is calculating 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) from two different veterans showing how your local "Finanzamt" may word it therein. Also below I have included an "Einspruch" (appeal) to file with your local "Finanzamt" in the event they are calculating your VA disability compensation towards the "Progressionsvorbehalt." Simply type in your information where indicated. What this will do is it will force your local "Finanzamt" to wait until the current pending "Revision" is decided by the "Bundesfinanzhof." If the upcoming decision from the "Bundesfinanzhof" upholds the lower tax court's decision, then your "Finanzamt" will be legally bound by that decision and will be forced to exclude VA disability compensation from the "Progressionsvorbehalt." Any previoulsy paid taxes paid because VA disability compensation was considered towards the "progressionsvorbehalt" for that tax year will then be refunded as long as an "einspruch" was filed within 30 days of the "steuerbescheid."
Below is the tax treaty 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 articles are based on as well.
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 professional 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. 4 (since VA compensation does not come from "öffentliche mittel" from a EU-EWR country) and is 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! However, having said this, since the type of foreign income must be determined under Austrian tax law, VA benefits (disability compensation, DIC, and "death pension' for surviving spouses) falls under § 3 Nr. 1 (1) and would be tax free anyways regardless of one's citizenship.
The Swiss tax system is complicated in that the Federal Goverment and the "Kantonen" can levy their own taxes as well! According to the DBA between the U.S. and Switzerland VA disability compensation would fall under §19(1)a (with an eye on §19(4)!) 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.").
According to Federal Swiss tax law, VA compensation would fall under "Artikel" 25(j) and would be tax free in Swizterland from their "direct' tax"; however, based on the different "Kantonen," which have their own tax laws as well, VA compensation may -or may not- fall under a tax free article therein. In addition, based on this link from a local Swiss tax office, which explains in German, the way foreign income derived under §19 of the DBA is used towards their (Kanton) progressive tax; https://www.taxinfo.sv.fin.be.ch/taxinfo/display/taxinfo/Vorsorgeleistungen+aus+dem+Ausland Please note at the bottom under "Spezialfälle," according to another tax treaty (German-Swiss), payments similar to VA compensation that are paid by the German Government are still considered under their "Progressive" tax rate.
Also here is a court case -in German- in which a U.S. Airforce retiree failed, inadvertently, to claim her DoD retirment (and possibly VA compensation) to the Swiss tax authorities. She faced criminal charges for tax evasion! This outlines how serious the Swiss take foreign income into consideration when one files their tax return there!
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.
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.
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.
Based on the tax treaty between the U.S. and Portugal, VA compensation falls under §21(1) and is tax free for an American citizen living in Portugal. However, pursuant to §25(3)(c) VA compensation is considered as income to establish one's total tax rate. This means that Portugal does not tax, directly, VA disability compensation like they would do to normal wages etc..., but would use the yearly sum of the VA disability compensation to set one's total tax bracket. Thus, indirectly taxing it by raising the tax burden of the individual.
Below is a copy of the U.S/Portugese tax treaty for reference.
According to the U.S./Danish tax treaty of 2001, VA disability compensation falls under §19(2) and is tax free in Denmark. However, according to §23(3)(c) the yearly sum of the VA disability compensation is calculated towards one's total tax "base." As with the vast majority of Eurpoean countries, VA compensation isn't directly taxable in Denmark like other types of income, but it does raise one's tax bracket causing a higher tax burden for the individual.
Here is a copy of the U.S./Danish tax treaty for reference.
According to the U.S. tax treaty with the Netherlands (1992) and subsequent Amendments in 2004, VA disability compensation would fall under §20(2)(a) and is tax free if one is a U.S. citizen and a legal resident living in the country. However, under §25(2) any VA disabilty compensation is considered as income for establishing one's overall tax bracket. Thus, raising one's overall tax burden every year by raising their tax rate.
Below is a copy of the tax treatry and amendments between the U.S. and The Netherlands for reference.
According to the U.S./Greek tax treaty, which appears to be unchanged since the 1950's, -more specifically Article XI(3)- Goverment "pensions" i.e. VA disability compensation payments are not taxed in Greece. There also isn't any provisions in this tax treaty regarding any progressive taxes as is the case with other Eurpoean countries. Below is a copy of the tax treaty between the U.S. and Greece for reference.
According to the U.S/Norwegian tax treaty, VA disability compensation would fall under §17 and would be tax free (directly) for a legal residents of Norway. However, under §23(2)(a) income derived under other article of the tax treaty -such as §17- is used to determine the legal resident's tax bracket (progressive tax). As with the vast majority of other European countries, Norway will 'in-directly' tax VA compensation by making one pay a higher tax rate on their taxable income based on the amount of their VA disability compensation.
Here is a link to the Norwegian tax authories stating that foreign pensions and disability payments must be reported on one's tax return (except for Denmark and Sweden, as they are reported to the Norwegian tax authories directly), and will be taxed accordingly to the pertinent tax treaty; https://www.skatteetaten.no/en/person/taxes/get-the-taxes-right/employment-benefits-and-pensions/pension-and-disability-benefit/pension-and-disability-benefits-from-abroad/
Below is a copy of the U.S/Norwegian tax treaty for reference;