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Merkel calls taxing bankers’ bonuses a ‘charming’ idea

German Chancellor Angela Merkel said on Thursday that plans to tax the bonuses of London bankers was a "very charming idea" but did not say whether Berlin was prepared to heed a Franco-British call to adopt the policy.

Published: 10 December 2009 16:39 CET

Merkel calls taxing bankers' bonuses a 'charming' idea

Coming soon to Frankfurt? Photo: DPA

“I find that the idea in particular of introducing, if I have correctly understood, a one-off tax in the City of London, is a very charming idea that could provide a lesson or two,” she told reporters with a smile on the sidelines of a meeting of the centre-right European People’s Party.

She added that it should not be taxpayers who shoulder the burden of the financial crisis but “banks and their employees.”

In a joint opinion piece in Thursday’s Wall Street Journal, British Prime Minister Gordon Brown and French President Nicolas Sarkozy urged other leaders to impose a tax on bonuses.

“We agree that a one-off tax in relation to bonuses should be considered a priority due to the fact that bonuses for 2009 have arisen partly because of government support for the banking system,” wrote the leaders.

Britain announced Wednesday it was slapping a one-off 50-percent tax rate on bonuses above £25,000 ($40,700) to recoup cash spent saving the financial sector during the crisis.

According to reports in the French press, Paris is also poised to impose a 50-percent tax on bonuses above €27,000 ($39,800), although officials stressed that the exact format has not yet been decided.

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EXPLAINED: Do I have to declare income from foreign sources on my German tax return?

If you’re filling in a German tax return, you are generally legally required to declare and pay tax on all income you earn – wherever in the world you earn it. This is true even if you keep the money abroad.

In most cases, your worldwide income is subject to what’s called “unlimited tax liability” – which means that there’s no exemptions or discounts on your taxes for money earned abroad – whether its from work or capital gains like the sale of stocks. This is generally even true if Germany doesn’t have a Double Taxation Agreement (DTA) with the other country in question.

If, however, Germany does have a DTA – some of your tax might end up getting limited in Germany. This is generally providing that you’ve paid it in the other country.

For example, the US may apply a withholding tax to payments made to you for freelance services you provide in the US, for example. In this case, the DTA between Germany and the US would allow you to submit documentation proving that you’ve already paid tax on this payment in the US. That’ll prevent you from having to pay tax again in Germany on the amount that actually gets wired to your account.

READER QUESTION: How can I find a German tax advisor?

Who has a double taxation treaty with Germany?

Germany has concluded double taxation agreements with numerous – but not all – countries and territories. You can check out the German government’s dropdown menu here to see which countries are on the list.

German residents earning money in other EU countries should still check this list, as certain tax provisions may be unique to the two countries in question.

READ ALSO: Everything you need to know about paying taxes in Germany

What about rental income?

As a general rule, rental income is taxed in the country where the property is located, meaning you don’t have to declare or pay it in Germany. There are some notable exceptions – for example if the property is located in Spain. In this case, you would report this income in Germany.

What about inheritance?

Some double taxation agreements have clauses that specifically govern what tax rules there are around inheritance that a German resident might get from abroad.

In general, the inheritor will still have to pay inheritance tax in Germany, but could see their tax liability reduced if tax already has to be paid abroad.

There are also other exceptions possible, such as if a child receives a property in their parent’s will and then proceeds to live in it for at least 10 years after they acquire it. In this case, they may not need to pay any tax on it.

In certain complicated cases – or if you have any doubt – it may be a good idea to seek out the services of a professional tax advisor who can make sure you don’t get in trouble with the Finanzamt (tax office).

READ ALSO: Do foreigners owe tax in Germany on money that is inherited from overseas?

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