Taxation of 'foreign shares' in options, proof required by the German tax office.
December 8, 2009 | 50,00 EUR | answered by Dipl.BW/SB Ulrich Stiller
Facts:
In 2002, I received stock options from my employer, which I exercised in 2007. From 2003 to 2006, I was employed by the same employer in a European country. According to tax law in that country, these options are not subject to taxation there, and therefore the employer made them tax-free in Germany for that period upon payout.
The German tax office now demands proof of taxation of the options in that country in 2007 in the form of a tax assessment notice for the 2007 tax return. Otherwise, the German tax office threatens to tax the foreign portions in Germany. Since I returned to and worked in Germany from autumn 2006 onwards, I did not file a tax return in that country for 2007, even though my family lived there until April 2007. This was acceptable to the local tax authorities.
In this context, two questions arise:
1. Can the German tax office insist on a tax assessment notice from that country for 2007 as the sole proof, or is it sufficient according to German law/jurisprudence to provide evidence that according to tax legislation in that country, no income tax is due, or what other form of proof can I provide?
2. In the event that, due to the above situation, I must retroactively file a tax return in that country for 2007, can I invoke, according to German law, that my center of life was abroad until April 2007, as my family lived there and I regularly commuted on weekends? If so, could I then tax my German income in that country until April 2007, or extend my time abroad for the calculation of foreign activity in relation to the options until April 2007? In this case, I would "gain" 6 months and at the same time reduce the taxation in Germany accordingly.
Dear inquirer,
Thank you for your inquiry, which I would like to answer based on the information provided and in the context of your situation within the scope of an initial consultation as follows:
In your case, income from non-self-employment in the sense of § 19 EStG would be present. Section 50d paragraph 8 EStG is relevant for you:
"If income of an unlimited tax resident from non-self-employment (§ 19) is to be excluded from the assessment base of German tax by a double taxation agreement, the exemption is only granted in the assessment, regardless of the agreement, to the extent that the taxpayer proves that the state to which the right to tax is assigned under the agreement has waived this right to tax or that the taxes imposed on the income in that state have been paid. If such proof is provided only after the income has been included in an income tax assessment, the tax assessment is to be amended accordingly. Section 175 paragraph 1 sentence 2 of the Tax Code shall apply mutatis mutandis."
There is a fact sheet from the BMF dated 21.07.2005 (IV B 1-S 2411-205) on the aforementioned provision. The details are regulated there.
In principle, you are obligated to provide proof of tax liability or exemption. However, there is a de minimis threshold: If the earnings determined under German law do not exceed 10,000 euros in a calendar year.
If the foreign state has waived its right to tax assigned to it, you must provide documents showing the waiver. You should present a certificate from the relevant tax authority, which you then translate into German and submit to the tax office.
In the absence of proof, the German tax office will tax the income and adjust the assessment in your favor within the statute of limitations if the evidence is provided.
However, proof is not required if the relevant double taxation agreement assigns Germany the right to tax because the foreign state does not exercise its right to tax, as in Art. 13 para. 2 DTAA France, Art. 15 para. 4 DTAA Austria, Art. 15 para. 3 and 4 DTAA Switzerland. The same applies if taxation is made dependent on the transfer of income to the state of activity (Art. II para. 2 DTAA UK, Art. II para. 2 DTAA Ireland).
As you can see, things are not quite simple and need to be clarified through individual consultation.
I hope that my explanations have been helpful to you.
Best regards,
Ulrich Stiller
Tax advisor
