US-Germany tax treaty: property, rent and gains

The documents behind the answer

The IRS publishes the convention signed at Bonn on 29 August 1989, whose general effective date is 1 January 1990, and a protocol signed at Berlin on 1 June 2006 that replaced several articles. This guide reads both together. The 2006 protocol rewrote Article 1 (scope, including the “saving clause”) and Article 23 (relief from double taxation), and left Article 6 and Article 13(1), (2) and (5) as they were in 1989 (it replaced only Article 13(6), on individuals who change residence). The IRS page lists the protocol and a technical explanation; the dates of entry into force are on that page and not repeated here.

Article 2 lists the taxes covered. For Germany they are income tax (Einkommensteuer), corporation tax, trade tax and the capital tax (Vermögensteuer); for the US, the federal income taxes. State income taxes, the German transfer tax (Grunderwerbsteuer) and the annual property tax are not on the list.

The saving clause: why US citizens are different

Article 1(4) of the convention, as replaced in 2006, says the convention does not affect the taxation by the United States of its residents and its citizens, except for specific benefits listed in paragraph 5. Those benefits include Article 23 (relief from double taxation) and Article 24 (non-discrimination). Paragraph 4 also lets the US tax a former citizen or long-term resident for ten years after the loss of that status.

In practice, a US citizen who owns property in Germany cannot use the treaty to stop reporting German rent or a German gain to the US. The treaty instead guarantees that the US gives credit for German tax on the same income. Which German taxes qualify is set by Article 23(1): the income taxes named in Article 2, other than the capital tax, count as income taxes.

Rent from a German property

Article 6(1) lets a state tax income from immovable property in its territory, whoever owns it. Article 6(3) states that this applies to income from direct use, letting, or use in any other form. So Germany may tax the rent of a US owner, and § 49 of the German income tax act (EStG) makes rent from German land German-source income for a non-resident.

The relief comes from Article 23(1). In accordance with the provisions and subject to the limitations of US law, the US allows its residents and citizens a credit against US income tax for the income tax paid or accrued to Germany. Article 23(2) deems an item of income that Germany may tax under the treaty to be German-source income for that purpose. The credit is therefore tied to US foreign-tax-credit rules, whose limits are not discussed here; the protocol notes that future changes in US law must preserve a credit for German tax on income Germany may tax under the treaty.

Selling the property

Article 13(1) lets Germany tax gains from selling German immovable property. Article 13(2) widens “immovable property” to include shares in a company resident in that country whose assets consist wholly or principally of such property, and interests in a partnership, trust or estate to the extent their assets are such property. Gains from other assets, such as shares in a company that is not property-rich, are taxed only in the seller’s state of residence (Article 13(5)).

On the German side, the private sales rule in § 23 EStG applies to German land if no more than ten years pass between purchase and sale; property used exclusively for your own residential purposes from purchase to sale, or in the year of sale and the previous two years, is outside it. The guide on the ten-year rule explains the rule, and the guide on selling as a non-resident covers the steps. Because the US also taxes its citizen on the gain, the credit under Article 23(1) is what prevents the gain from being taxed twice at full rate.

If you move to Germany

A person who is resident in Germany, even a US citizen, falls under § 1 EStG, which taxes people with a home or habitual abode in Germany on worldwide income. Article 4 sets the tie-breaker when both states treat a person as resident: permanent home, then centre of vital interests, then habitual abode, then nationality, and failing that the competent authorities agree. Article 23(3) then applies to a German resident with US income: income that the US may tax is, in principle, left out of the German tax base, though Germany may take it into account to set the rate on the rest. Certain items, such as some gains taxable in the US by reason of Article 13(2)(b), are instead relieved by a credit.

Non-discrimination

Article 24(1) bars either state from taxing nationals of the other more burdensomely than its own nationals in the same circumstances, and applies even to persons who are not residents of either state. A protocol note adds that this does not oblige the US to treat a German national who does not live in the US like a US citizen who does not live in the US.

Which professional to consult

Two filings are involved, so two advisers: a tax adviser (Steuerberater) in Germany and a US tax preparer who knows foreign tax credit relief. A notary (see the notary profession page) handles the contract only. Payotte reports published rules and does not give personal tax advice.