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In our October 1995 issue, we reported on the improvements contained in the 1996 tax act for EU citizens (and citizens of Norway, Liechtenstein, and Iceland) whose income is primarily earned in Germany and subject to tax here, but whose families live in another EU country. The basic provisions apply whether the EU income earner is resident in Germany or not.

It is important for the persons affected by the new law to file the requests and applications necessary to take advantage of its full benefit.

Pursuant to the new sec. 1 par. 3 EStG, non-resident taxpayers must on request be treated in the same way as a resident taxpayer, irrespective of the type of earnings, if at least 90 % their total income during the calendar year is subject to German income tax or if the portion of the earnings not subject to German income tax does not exceed DM 12,000 (or DM 24,000 in the case of joint returns) during the calendar year. The amount of the earnings not subject to German tax must be confirmed in writing by the responsible foreign tax office.

Under the same conditions, resident and non-resident taxpayers with EU or EEA citizenship whose families live in another country in the European Union (EU or EEA) will also be entitled to claim all family-related tax relief, such as the splitting rates for married couples, the deduction of maintenance payments between spouses who are separated, the household allowance, and expenses for care of children (sec. 1 a EStG).

Such taxpayers are also entitled to government child support contributions (Kindergeld) if no equivalent payments are received in the country where their family resides. An application for Kindergeld should be filed with the local Labour Office (Arbeitsamt). Kindergeld amounts to DM 200 per child per month for the first two children, DM 300 per month for the third child, and DM 350 per month for each additional child.

In view of the decision of the European Court of Justice, instructions issued by the German Federal Ministry of Finance on 25 August 1995 state that the relevant provisions in the 1996 Tax Act, unless by their express terms not applicable until 1996, are to be applied immediately both to wage withholding and advance payments of income tax and to all assessment proceedings still pending.

All non-resident taxpayers affected should therefore immediately file a request with the tax office with jurisdiction for their place of employment for a certificate under new sec. 39c par. 4 EStG. Resident taxpayers affected should have their tax office make the necessary amendments to their wage tax card, so that wage tax can be deducted on the basis of the proper tax class and allowances. If excessive advance payments of income tax have been assessed, application for their abatement should be made to the responsible tax office.

Retroactive application of these rules should be requested where applicable for tax assessments which are still open for prior years.

Non-resident taxpayers with foreign earnings exceeding DM 12,000 (DM 24,000 for joint filers) or more than 10% of the total family earnings can at least file an annual tax return if they are resident citizens of an EU or EEA state. Up till now, tax withholding was final for dependent earned income. The assessment will be processed by the tax office responsible for the permanent establishment of the employer.

This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.