Germany is a high-tax country with a comprehensive US income tax treaty and a social security totalization agreement. German income tax is high enough that the Foreign Tax Credit usually covers the US tax on the same income, but the credit is figured separately for each income category under IRC §904 and is capped at the US tax on that category, so it is not a blanket answer and a US return is still required.
The primary complexities for US expats involve navigating the US tax treatment of German pensions (like Riester-Rente), investments in German funds (which are often PFICs), and reporting for German business structures like the GmbH.
US filing basics every American abroad must know
US citizens and green-card holders are taxed on worldwide income wherever they live, and usually must file Form 1040 once gross income exceeds the IRS threshold ($15,750 for single filers, $31,500 for married filing jointly, and $23,625 for head of household for 2025), even when no tax is ultimately due. The tools that reduce double taxation are the Foreign Earned Income Exclusion (FEIE, up to $130,000 for 2025 under IRC §911) and the Foreign Tax Credit. Neither is automatic. The FEIE requires a tax home in a foreign country plus either the bona fide residence test or 330 full days abroad in a 12-month period, and it reaches earned income only. The Foreign Tax Credit is figured separately for each income category under IRC §904 and is capped at the US tax on the foreign income in that category, so it reduces double taxation without guaranteeing that none remains.
Two reporting rules catch most filers in Germany: the FBAR (FinCEN Form 114), required when foreign financial accounts exceed $10,000 in aggregate at any point in the year, and Form 8938 (FATCA) for specified foreign assets above the applicable threshold. Both can carry penalties even when no tax is owed. If you are behind, the Streamlined Filing Compliance Procedures are the usual path back for non-willful taxpayers. They run on two tracks: the foreign track carries no offshore penalty but requires meeting the program's non-residency test, and the domestic track carries a 5% offshore penalty but works through amended returns, so it does not fit someone who never filed at all. Tax and interest on the catch-up years are owed whichever route applies.
US tax treaty with Germany
The United States and the Federal Republic of Germany have a comprehensive income tax treaty in force. The treaty aims to prevent double taxation and fiscal evasion. However, for US citizens living in Germany, its direct benefits are often limited by the treaty's "saving clause."
This clause, found in Article 1, paragraph 4, allows the US to tax its citizens and residents as if the treaty did not exist. In practice, this means US citizens cannot use most treaty articles to exempt income from US tax. The treaty's main functions for individuals are to reduce German withholding tax on payments flowing to the US, provide rules to determine residency (the "tie-breaker" rules), and facilitate the exchange of information between tax authorities.
Article 1(4) (Saving Clause).
This is the most critical article for US citizens abroad. It reserves the right of the United States to tax its citizens on their worldwide income, regardless of other treaty provisions. There are specific exceptions, but for most income types, the saving clause means a US citizen in Germany must still file a full US tax return and cannot simply claim treaty exemption on their German salary.
Article 10 (Dividends).
This article limits the withholding tax that the source country can impose on dividends. For an individual US citizen receiving dividends from a German company, Germany's withholding tax is capped at 15% only if the citizen is a US tax resident. For US expats residing in Germany, Germany applies its full domestic tax rate.
Article 11 (Interest).
This article generally eliminates withholding tax on interest payments arising in one country and paid to a resident of the other. For example, Germany will not withhold tax on interest paid from a German bank to a US resident. However, as a US citizen, you must still report and pay US tax on that interest income.
Article 12 (Royalties).
Similar to the interest article, this provision generally eliminates source-country withholding tax on royalties. This is beneficial for artists, authors, and inventors receiving cross-border royalty payments.
| Income type | Treaty rate | Statutory rate | Notes |
|---|---|---|---|
| Dividends | 15% | 26.375% | 5% where the beneficial owner is a company owning directly at least 10% of the voting stock of the payer (Article 10(2)(a)). Article 10(3) removes the tax entirely in two cases: a company that has owned directly 80% or more of the voting power for the 12-month period ending on the date entitlement to the dividend is determined and that meets the limitation-on-benefits conditions in Article 28, and a pension fund resident in the other state where the dividends do not come from carrying on a business. Article 10(4) denies the 5% and the 80% zero rate to dividends paid by a RIC, a REIT, or a German Investmentvermögen. |
| Interest | 0% | 26.375% | Article 11 leaves interest taxable only in the recipient's state of residence. The 26.375% is Germany's domestic rate on investment income (25% plus the 5.5% solidarity surcharge on it), and it does not reach every payment to a nonresident: ordinary German bank deposit interest generally falls outside Germany's limited tax liability under §49(1) no. 5 EStG, while interest on registered bonds and similar instruments issued by a German obligor falls inside it. |
| Royalties | 0% | 15.825% | Article 12 leaves royalties taxable only in the recipient's state of residence; the 15.825% is the §50a EStG withholding plus the solidarity surcharge. Treaty relief is not automatic at source. Under §50c EStG the payer withholds unless the recipient first obtains an exemption certificate from the Bundeszentralamt für Steuern, and otherwise the route is a refund claim, subject to the statutory filing window. |
Because of the saving clause, a US citizen living in Germany generally cannot use the treaty to exempt their German salary or business income from US tax. The main mechanism for avoiding double taxation on this income is the US Foreign Tax Credit, not the treaty itself. The treaty is primarily useful for reducing German withholding on investment income and providing a framework for resolving residency disputes.
German Pensions and US Tax
The US tax treatment of German pension plans is a significant area of complexity for American expats. Germany's system includes state, company, and private pensions, with the private plans posing the biggest challenge.
Two common types of private, tax-subsidized plans are the Riester-Rente and the Rürup-Rente (also known as Basisrente). For US tax purposes neither is a qualified plan under IRC §401(a). What they are instead is unsettled. Both are normally sold as insurance or annuity contracts, and no IRS ruling holds that a Riester or Rürup contract is a foreign trust, so competent advisers take different positions on the same product. The consequences depend on which position applies:
- Foreign Trust Reporting: If treated as a foreign grantor trust, you may need to file Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) and Form 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner), unless the plan is an applicable tax-favored foreign trust under Rev. Proc. 2020-17. That relief is not automatic and it is narrower than it is often described. The plan must meet every condition in section 5.03, including that only contributions from income earned for personal services are permitted and that contributions are limited by a percentage of earned income, or to $50,000 a year, or to $1,000,000 over a lifetime. You must also be an eligible individual under section 5.02, which means current on your US income tax returns and having reported contributions, earnings, and distributions as US law requires. Whether a Rürup contract clears the personal-services condition is genuinely contested, because German law does not restrict who may fund one. The relief covers Forms 3520 and 3520-A only. It does not change how the plan is taxed and it does nothing for Form 8621, the FBAR, or Form 8938. These forms are complex and carry substantial penalties for non-compliance.
- PFIC Reporting: These pension plans almost always invest in German or EU-based mutual funds and ETFs. From a US perspective, these are Passive Foreign Investment Companies (PFICs). Ownership of PFICs requires filing Form 8621 for each fund, often resulting in a higher US tax liability on the investment growth than a comparable US fund.
- No automatic deferral: A US 401(k) defers growth by statute. A German private plan does not. If the arrangement is treated as a foreign grantor trust, you are treated as owning the underlying fund shares, so dividends the funds pay inside the plan are your income in the year they are paid. Under the default PFIC rules of IRC §1291 the growth itself is not taxed year by year, but an excess distribution or a sale of fund shares is taxed at the highest ordinary rates for the years it accrued, plus an interest charge. A mark-to-market or QEF election trades that for current annual inclusions. Which of these applies changes the answer, so the honest statement is that the deferral you would get in a US plan is absent, not that every year produces a tax bill.
Occupational pensions are the exception worth checking. Article 18A(5) of the treaty, added by the 2006 protocol, lets a US citizen who is a resident of Germany and exercises an employment there deduct or exclude contributions to a German pension plan in computing US taxable income, and keeps employer contributions and accruals out of US income, capped at the relief the US would give for a corresponding US plan. This survives the saving clause: Article 1(5)(a) lists paragraphs 1 and 5 of Article 18A among the benefits the saving clause does not reach. Paragraph 16 of the Protocol defines the qualifying German arrangements as those under §1 of the Betriebsrentengesetz and records that the US recognizes them as generally corresponding to US plans, so the relief covers occupational (betriebliche) pensions rather than private Riester or Rürup contracts. Note the limits: Article 18A(5) is written for employment, not self-employment, and it applies only to the extent the contributions or benefits get German tax relief.
Furthermore, the balances in all German pension accounts (company and private) must be considered when determining your filing requirements for the FBAR (Report of Foreign Bank and Financial Accounts) and Form 8938 (Statement of Specified Foreign Financial Assets).
Investments, property, and capital gains in Germany
Investing in Germany as a US person requires careful planning to avoid US tax traps. The most significant issue is the Passive Foreign Investment Company (PFIC) regime.
Any German or other non-US domiciled mutual fund, index fund, or ETF is almost certainly a PFIC. Owning shares in a PFIC requires filing Form 8621 for each investment. The default tax treatment under the PFIC rules is punitive, applying high tax rates and interest charges to distributions and gains. While elections (like a QEF or Mark-to-Market election) can mitigate this, they add complexity and may not be available for all funds.
For business owners, forming a German limited liability company (Gesellschaft mit beschränkter Haftung, or GmbH) has US tax implications. A GmbH is not a per se corporation under US tax law, meaning its classification can be chosen (as a corporation or a disregarded/partnership entity) via a check-the-box election. If it is treated as a foreign corporation, the next question is whether it is a Controlled Foreign Corporation (CFC), and that test is not about your stake alone. A foreign corporation is a CFC when US shareholders owning 10% or more each, counted together, hold more than 50% of the vote or of the value. One American holding exactly 50% of a GmbH alongside a German partner does not create a CFC; two Americans holding 30% each do. CFC status brings an annual Form 5471 (Information Return of U.S. Persons With Respect To Certain Foreign Corporations) and can lead to current US taxation of the company's profits under rules like GILTI (Global Intangible Low-Taxed Income) or Subpart F, even if no profits are distributed to you.
Self-employment and companies in Germany
For self-employed US citizens in Germany (known as Selbstständige or Freiberufler), the key is the US-Germany Social Security Agreement, often called a totalization agreement. This agreement prevents double taxation of social security contributions.
Under the agreement, your work is typically covered by only one country's system. If you are self-employed and reside in Germany, you will generally pay into the German social security system (including pension, health, and long-term care insurance). To avoid also paying US self-employment tax (Social Security and Medicare), you obtain a Certificate of Coverage from Germany. SSA directs a self-employed person to write to the local German sickness fund (Krankenkasse) that collects the German contributions. You attach a photocopy of the certificate to the US return each year. For 2025, following the IRS correction to the Schedule SE instructions, you check box 3 on Schedule 2 (Form 1040) and enter EAS on line 4 instead of filing Schedule SE. Where the German side will not issue a certificate, Rev. Rul. 92-9 sets out an alternate procedure using a statement from SSA. Without one or the other, US self-employment tax applies.
It is a common misconception that the Foreign Earned Income Exclusion (FEIE) can reduce or eliminate US self-employment tax. It cannot. The FEIE is an exclusion from income tax only, and the Foreign Tax Credit cannot be applied against self-employment tax either. What relieves a self-employed person in Germany of US self-employment tax is the totalization agreement, evidenced by a Certificate of Coverage. Where no totalization relief is available the tax is 15.3% on 92.35% of net earnings, with the 12.4% Social Security portion stopping at the annual wage base ($176,100 for 2025, $184,500 for 2026) and the 2.9% Medicare portion uncapped, plus a further 0.9% Additional Medicare Tax on combined Medicare-taxed wages and self-employment income above $200,000 for a single, head-of-household or qualifying-surviving-spouse filer, $250,000 for a joint return, and $125,000 for married filing separately, and it is owed once net earnings from self-employment reach $400 or more.
Worked examples
Salaried software developer in Berlin (2025)
Anna is a US citizen working for a German tech company in Berlin. Her annual salary is €110,000, which we assume converts to roughly $120,000. The German figures below are a rough illustration, not a computation of her return: German taxable income is materially lower than gross salary once deductible contributions and allowances come out, so treat the tax below as an upper bound.
Taxing the full €110,000 as if it were taxable income gives German income tax of roughly €35,000, plus the solidarity surcharge. The surcharge is not automatic. For 2025 it is charged only where assessed income tax exceeds €19,950 for a single filer, phasing in until the full 5.5% applies above about €33,760, so Anna is over the line and a colleague earning half as much would not be. Her German income tax and surcharge together are the creditable taxes. Her German social insurance contributions are not income taxes and cannot be credited.
On her US return she reports the $120,000 salary. Instead of the FEIE she claims the Foreign Tax Credit on Form 1116. US income tax on $120,000 for a single filer taking the standard deduction is roughly $18,000. Her German income tax on the same wages is larger, and because the wages are general-category foreign income, the §904 limitation for that category admits enough credit to bring the US tax on her salary to zero. The excess does not vanish and does not shelter anything else: it carries back one year and forward ten, and only within the general category, so it cannot offset US tax on passive income such as dividends. She still files the return to claim the credit and still reports her German accounts on the FBAR.
Self-employed graphic designer (2025)
Ben is a US citizen working as a freelance graphic designer in Munich. His net profit from self-employment is €80,000 (approx. $87,000). Ben is properly registered in Germany and pays into the German social security system (pension and health insurance).
Ben obtains a Certificate of Coverage from the local German sickness fund (Krankenkasse) that collects his German contributions. When filing his US return he reports the $87,000 of profit on Schedule C. He does not file Schedule SE. He checks box 3 on Schedule 2 (Form 1040) and enters 'EAS' on line 4, which is what the IRS correction to the 2025 Schedule SE instructions calls for in place of the older 'Exempt, see attached statement', and attaches a photocopy of the certificate. Without the certificate the 15.3% self-employment tax would apply, and neither the FEIE nor the Foreign Tax Credit would reduce it. He still computes US income tax on the $87,000, which the Foreign Tax Credit for his German income taxes will usually cover, subject to the §904 limitation for the general category.
Retiree with a German private pension (2025)
Carla, a US citizen, retired in Germany. She has a Riester-Rente private pension plan with a balance of €150,000. The plan is invested in three German mutual funds. This year, she did not take any distributions.
Despite receiving no income from the plan, Carla has real US reporting to do. The first question is whether the contract is a foreign trust for US purposes at all, which is unsettled. If it is, Forms 3520 and 3520-A are in play unless the plan meets every condition in Rev. Proc. 2020-17 and Carla is an eligible individual under it, in which case that relief covers those two forms and nothing else. Separately, because the three funds are PFICs, she files three Forms 8621. Under the default §1291 rules a year with no distribution and no sale does not by itself produce a US tax bill; the charge lands on an excess distribution or a disposition, with an interest charge for the deferral, unless she elects mark-to-market or QEF and picks up income annually instead. She also reports the €150,000 on her FBAR and Form 8938. The complexity and cost of compliance are high, illustrating the challenges of holding German investment products as a US person.
Common mistakes for Americans in Germany
- Assuming German mutual funds or ETFs are treated like US funds, and failing to file Form 8621 for these PFICs.
- Ignoring the US classification question for German private pensions (Riester, Rürup): if the contract is a foreign trust, Forms 3520 and 3520-A follow unless the plan meets every condition of Rev. Proc. 2020-17 and you are an eligible individual under it.
- Missing Article 18A(5), which can make contributions to a German occupational (Betriebsrentengesetz) pension deductible or excludable on the US return for an employee, and which the saving clause does not override.
- Forgetting to include the value of non-state German pension plans on the FBAR and Form 8938.
- For self-employed individuals, paying US self-employment tax because they failed to obtain a Certificate of Coverage under the US-Germany Totalization Agreement.
- Believing the Foreign Earned Income Exclusion (FEIE) is always the best option, when the Foreign Tax Credit is often more beneficial in a high-tax country like Germany.
- Thinking that because the US-Germany treaty allows for 0% withholding on interest, the interest income is not taxable on a US return. It is fully taxable.
- Testing a German GmbH for CFC status on one owner's stake instead of the aggregate: the company is a CFC when US shareholders holding 10% or more each own together more than 50% by vote or value, and Form 5471 can be required even where that line is not crossed.
- Using the tax treaty to claim an exemption from US tax on German salary, which is not allowed for US citizens due to the saving clause.
Germany tax FAQ
Do I have to report my German pension on my US tax return?
Yes. At a minimum, the account balance of private and company pensions must be considered for FBAR and Form 8938 reporting (a German state pension entitlement is generally not a financial account you hold, which is a separate question from how it is taxed; confirm the reporting treatment of any specific arrangement). Furthermore, German private pensions like the Riester-Rente or Rürup-Rente are complex. Whether they are foreign trusts for US purposes is unsettled; if they are, Forms 3520 and 3520-A follow unless the plan meets every condition of Rev. Proc. 2020-17 and you qualify as an eligible individual under it. They also almost certainly hold PFICs, so Form 8621 applies, and a sale or an excess distribution is taxed under the punitive §1291 rules with an interest charge even though the plan itself made no payment to you. Separately, Article 18A(5) of the treaty can make contributions to a German occupational pension under the Betriebsrentengesetz deductible or excludable on your US return where you are employed in Germany, and the saving clause does not take that benefit away.
Are my German mutual funds a problem for US taxes?
Yes, almost certainly. Any non-US domiciled fund is considered a Passive Foreign Investment Company (PFIC). This requires filing a separate Form 8621 for each fund, and the default tax rules are very unfavorable. It is a major compliance trap for US investors in Germany.
I'm self-employed in Germany. Do I have to pay US Social Security tax?
Generally, no. The US-Germany Totalization Agreement prevents double social security taxation. If you are covered by the German system, you request a Certificate of Coverage from the local German sickness fund that collects your contributions, attach a photocopy to the US return, and for 2025 check box 3 on Schedule 2 (Form 1040) and enter 'EAS' on line 4 in place of Schedule SE. The exemption runs on that certificate. If Germany will not issue one, Rev. Rul. 92-9 provides an alternate procedure using an SSA statement, and with neither of them US self-employment tax applies at 15.3% on 92.35% of net earnings.
Does the US-Germany tax treaty mean I don't have to file a US tax return?
No. Due to the treaty's "saving clause," the US reserves the right to tax its citizens on their worldwide income as if the treaty didn't exist. You must still file a US tax return and report all your income. The treaty's main benefit for avoiding double taxation on earned income comes indirectly, by allowing the Foreign Tax Credit to function.
How does the Foreign Tax Credit work with Germany's high taxes?
You compute the US tax on your foreign income and claim a credit for the German income taxes paid on that same income. German rates are generally higher than US rates, so the credit often reduces the US tax on your German income to zero. Three limits decide whether it does. The credit is figured separately for each income category under IRC §904, so high German tax on wages cannot shelter US tax on passive income. Within a category it is capped at the US tax on the foreign income in that category, and the excess carries back one year and forward ten rather than being refunded. And only income taxes count: German social insurance contributions are not creditable, and the credit cannot be applied against US self-employment tax.
What is a German GmbH for US tax purposes?
A German GmbH (limited liability company) is not a per se corporation for US tax purposes. Its US classification can be elected under the check-the-box rules. If it is treated as a corporation, it is a Controlled Foreign Corporation only where US shareholders who each own 10% or more hold, in aggregate, more than 50% of the vote or value. That is an aggregate test across all US owners, not a question of whether your own stake is large. Where it is met, Form 5471 is required and company profits can be taxed to you under Subpart F or GILTI without any distribution. Form 5471 can also be required in other situations, including on acquiring a stake that reaches 10%, on acquiring another 10% on top, on disposing of enough to drop below 10%, and on becoming a US person while already holding 10%.
Do I need to file an FBAR for my German bank accounts?
Yes, if the combined highest value of all your foreign financial accounts (including bank, brokerage, and non-state pension accounts) exceeds $10,000 at any point during the year. The threshold is aggregate and it is a high-balance test, so accounts you never think of can pull you over it. Penalties are real: the non-willful maximum is $16,536 per annual report for 2025, and the willful maximum is the greater of $165,353 or 50% of the balance in the account at the time of the violation.
The treaty says 0% withholding on interest. Is my German bank interest tax-free in the US?
No. This is a common point of confusion. The treaty provision prevents Germany from withholding tax on interest it pays to a US resident. It does not make the income exempt from tax in your country of residence. As a US citizen, you are taxed on your worldwide income, so you must report your German bank interest on your US tax return and pay US income tax on it.
Sources and last reviewed
- IRS - Germany Tax Treaty Documents (verified 2026-06-07)
- U.S. Treasury Department - Treaty Information (verified 2026-06-07)
- SSA - U.S.-German Social Security Agreement (verified 2026-06-07)
- Protocol of June 1, 2006 amending the US-Germany treaty (Articles 1, 10, 18A and Protocol paragraph 16) (verified 2026-08-12)
- IRS, Rev. Proc. 2020-17 (exemption from Forms 3520 and 3520-A for applicable tax-favored foreign trusts) (verified 2026-08-12)
- IRS, Correction to the 2025 Instructions for Schedule SE (Form 1040) (verified 2026-08-12)
Reviewed by Ilya Fayerman, Esq. (NY Bar) on
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