What happened?

The plaintiff is a U.S. citizen living in the Netherlands, with income from acting on gigs in Germany. The employer withheld a lump sum wage tax of 25%, which was correct, but designed as a settlement without options to later recoup excess taxes withheld.

By filing a tax return, the taxpayer claimed back income-related expenses for his appearances in Germany.

As the plaintiff is a U.S. citizen and therefore not a citizen of an EU or EEA member state, the tax office sued over its rejection of the German tax return filed was of the opinion that the fact that he was domiciled in the Netherlands which is an EU member state didn't suffice in itself. Only if both conditions EU/EEA citizenship and domicile in the EU/EEA are met can the tax return be processed. In this respect, the law was clear.

But is the law prohibiting U.S. citizens perhaps unconstitutional?

Petition failed before the Tax Court

The State of Baden Württemberg's Tax Court upheld the decision of the tax office not to process the tax return filed by the U.S. citizen (docket number 6 K 1213/14), reasoning that the plaintiff indisputably had neither a domicile nor a habitual residence in Germany, and as a U.S. citizen, no EU/EEA citizenship.

Appeal to the German Supreme Financial Court unsuccessful

The judgment was appealed before the German Financial Supreme Court (Bundesfinanzhof, which confirmed the decision, docket number I R 80/16).

Supreme Court decision pending

The German Supreme Court is currently reviewing the German Financial Supreme Court's decision (2 BvR 148/21). U.S. citizens with German income sources that are subjected to German wage tax withholding finding themselves similarily situated with income related expenses should monitor the Constitutional action.

Until the German Supreme Court has decided this case, a tax return should also be filed by U.S. citizens, along with an objection letter to be returned to the tax office within 30 days upon receipt of the tax office's notice of rejection on processing the tax return filed.

Escape practice

While it’s true that U.S. citizens may not file a German tax return if they lack habitual residence or registered domicile in Germany, this has been challenged before the German Supreme Court, with a decision forthcoming.

The constraints of not being able to recoup excess wage tax withholding can be escaped by making the tax office force you to file a tax return in Germany. This will allow recouping excess wage taxes withheld by the employer. An escape is foreseen by law (§ 39a Section 4 German Income Tax Act): the employee may file an application with their local tax office and seek to be granted an income-related expense allowance (Lohnsteuerfreibetrag) in ELStAM, that is the eletronic wage tax withholding features used to compute the monthly wage tax withholding. The wage tax allowance applied for must be more than 1.000 EUR annually. Following the filing of the application, income-related expenses must be provable by presenting them to the tax office upon request.

U.S. citizens with German income sources that are subjected to wage tax withholding and evidently have more than 1.000 EUR of income related expenses annually should lodge an application for a wage tax allowance with their local tax office:

2022 German Wage Tax Allowance for U.S. Citizens

Once approved, the income-related expense allowance amount is saved along with the wage tax class and electronically fed back to the employer’s payroll system, which reduces the monthly tax withholding base.

As the wage tax was then potentially underpaid, without the employer being liable for such underpayment, the employee is legally required to file a German tax return for the fiscal year for which an allowance has been granted by the tax office.

The settlement effect (§ 50 Section 2 Sentence 2 No. 4 lit. a German Income Tax) is then overridden, and the required filing of a German tax return can result in excess wage tax being reimbursed to the U.S. citizen, who would otherwise not have this option of recouping excess wage taxes paid.

The obligation to file a tax return for the entire fiscal year is saved on the applicant's German Tax ID for which a tax allowance has been granted through wage tax withholding. But beware, failure to file the tax return by the filing deadline is considered tax evasion, which may lead to legal prosecution and punishment, including imprisonment.

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