Relocating to Germany from Israel

Relocating from Israel to Germany poses various obstacles and challenges. In addition to setting up a new life in a new surrounding, the German tax system poses certain obstacles that can be challenging and if addressed wrongly very expensive. We are happy to assist individuals with their needs and answer their questions, when relocating to Germany from Israel.

Based on our experience in the field of international taxation, we have summarized the key issues, to provide you with guidance.

General German income tax system

According to the German Income Tax Act, a person with a permanent or habitual residence in Germany is subject to unlimited income tax liability in Germany. Based on the so-called world income principle, in case of unlimited income tax liability in Germany, all income derived from sources anywhere in the world is subject to German income tax, if this income is income specified in the German Income Tax Act. This includes e.g. employment income.

A person without a permanent or habitual residence in Germany is subject to limited income tax liability in Germany if certain German income is derived. The individual tax rates (for 2021) increase progressively to a marginal rate of 42% with a top tax rate of 45% applying to income above 270 kEUR.

Germany and Israel have concluded a Double Taxation Treaty (“DTT Israel”) which has priority over the German national law, and which allocates the right to tax certain income between the two jurisdictions.

Employment income

If you are permanently living in Germany and therefore do have a permanent residency in Germany, you are considered a tax resident and accordingly you are subject to unlimited income tax liability in Germany. The world income principle, as mentioned above, applies and generally all your worldwide income is subject to German income tax.

If you are in addition to permanently living in Germany also working in Germany, the DTT Israel allocates the right of taxation for this income to Germany, since you are resident in Germany and the employment is exercised in Germany. This generally applies irrespective of the residence of your employer. A German resident working in Germany remotely for an Israeli employer generally must subject his income from wages to German taxation.

Income from real estate

If you own real estate, in general, the according income is subject to tax in the jurisdiction, where the property is physically located. This applies to ongoing income derived from the real estate property as well as when you sell your property.

E.g., if you live in Germany and you own real estate in Israel, the respective income derived from this property would be taxable in Israel even tough you are subject to unlimited tax liability in Germany. It is however important to know, that this income might be considered when determining your specific German income tax rate.

Note: If you own real estate in Germany, you can potentially sell it tax free! Certain restrictions and owning periods apply in order to qualify for this exemption. Feel free to get in touch with us if you want to receive more details in this respect.

Income from capital

If you are a tax resident of Germany, any interest paid from a source in Israel is subject to tax in Germany. However, Israel has the right to deduct withholding taxes on these payments.  The DTT Israel limits these withholding taxes to 5%.

The same applies for dividend income from a company in Israel. The applicable withholding tax limitation in this case as per the DTT Israel is 5%, if the recipient of the dividends is a company (but not a partnership) with at least 10% of the shares in the Israeli company or 10% in all other cases.

The withholding tax deducted at the source of the interest or dividend payment in Israel can be credited against the German tax on this income. A proof of taxation (withholding tax certificate) needs to be provided to the German tax authorities.

Any capital gains derived by a tax resident of Germany are subject to tax in Germany, if the person is the beneficial owner of such capital gains.

German social security obligations

Generally, any employed person in Germany is subject to the German social security system. This is in general also true for anyone employed by a foreign employer, but physically working in Germany.

Exemptions apply e.g., in the following cases:

• (Temporary) secondment from a foreign country to Germany or
• An arrangement between the German social insurance and the foreign social insurance is concluded for a specific case.

Therefore, if you are working permanently in Germany, you are subject to the German social security system.

What to consider when leaving Germany: Exit Taxation

If you ever consider leaving Germany again and relocate to another country, in certain instances you might be subject to German exit taxation.

The German exit tax (“Wegzugsbesteuerung”) applies, if you were subject to unlimited income tax liability for at least 7 out of the past 12 years in Germany and you end this unlimited income tax liability (e.g. by relocating to another country). If you further owned at least a 1% share in any corporation (in Germany or any other country) anytime within the past 5 years, the German exit tax might apply.

If the exit tax applies, a notional capital gain in respect of the shares in this corporation is subject to German income tax.