Withholding Tax (Foreign)

Withholding tax (foreign) refers to a tax that a country levies on income originating within its territory and paid to individuals or companies abroad-that is, it is withheld directly at the source. In the real estate sector, this primarily concerns rental income, capital gains, and lease payments from properties located abroad that accrue to German taxpayers, as well as, conversely, German income received by foreign owners. Withholding tax is often a central issue in international tax planning and can be reduced or credited through double taxation agreements (DTAs).

How Withholding Tax Works in International Real Estate Law

If an owner residing in Germany earns rental income from a Spanish vacation property, Spain, as the source country, is entitled to tax this income. Germany, as the owner’s country of residence, generally also claims the right to tax the income. The double taxation treaty (DTA) between Germany and the respective source country determines which country has the primary right of taxation and how double taxation is avoided-either through exemption (exemption method) or by crediting the foreign withholding tax against German income tax (credit method).

The exemption method is the standard approach for real estate income in many European DTAs: The country where the property is located taxes the income exclusively, while Germany exempts the income but takes it into account under the progression clause. The credit method, on the other hand, is more commonly used for dividends and interest, though it is occasionally applied to real estate income as well. It is therefore crucial for the taxpayer to know which method the specific DTA provides for real estate income-because the entire tax planning depends on this.

Taxation of Foreign Real Estate Owners in Germany

Conversely: If a foreign-resident owner generates rental income from a German property, Germany, as the source country, has the right to tax it. The foreign owner must file for limited tax liability in Germany and report income from the German property in a German income tax return. The tax deduction (withholding tax) may also be applied directly to the tenant if the tenant is a business and pays rent to a landlord with limited tax liability (Section 50a of the German Income Tax Act [EStG] applies primarily to certain types of income, not generally to rent).

Foreign owners with rental income from Germany can generally deduct the same business expenses as domestic landlords-i.e., depreciation (AfA), interest, maintenance costs, and administrative costs. However, limited tax liability applies only to German income; the foreign owner’s worldwide income is not taken into account in Germany.

Relevance for German Property Owners Abroad

German owners of foreign real estate-often vacation homes in Spain, Portugal, Austria, or other EU countries-must report their foreign rental income on their German tax return, even if it has already been taxed in the source country. Depending on the DTA, foreign income is either exempt in Germany (but taken into account for the progression clause) or the foreign tax is credited. Expert tax advice from an internationally experienced tax advisor is strongly recommended in these cases.

The issue of local reporting obligations should also not be underestimated: Many countries require non-resident landlords to file local tax returns regularly-in Spain, for example, quarterly using Form Modelo 210. Failure to do so can result in fines, even if the actual tax burden is low. Managing a foreign property thus often requires more bureaucratic effort than expected.

Withholding Tax and Inheritance Tax on Foreign Real Estate

In addition to rental income and capital gains, the inheritance of a foreign property can also give rise to withholding tax issues. If a decedent residing in Germany leaves behind a property in Spain, France, or another country, the country where the property is located may levy inheritance tax. Whether and how this is credited against German inheritance tax depends on the respective DTA-though Germany has concluded specific inheritance tax DTAs with only a few countries. Double taxation is therefore a real risk when inheriting foreign real estate. Early estate planning involving an internationally experienced tax advisor or notary is recommended.

Practical Tip for Property Owners in Nuremberg and Franconia

Property owners in the Nuremberg metropolitan region who own and rent out a vacation home in another European country should ensure that they fully report their foreign income on their German tax return. Tax authorities are increasingly exchanging information (automatic exchange of information under the Common Reporting Standard, CRS). Since 2017, the CRS has applied to over 100 countries worldwide-failing to report foreign income is therefore effectively no longer a calculable risk.

We recommend consulting a tax advisor with an international focus at an early stage; there are several tax advisory firms in Nuremberg that specialize in international tax law. Especially when planning to sell or bequeath a foreign property, the tax situation should be structured years in advance to avoid unnecessary back taxes.

Frequently Asked Questions

As a German citizen, do I have to pay withholding tax if I rent out my Spanish apartment?

Yes. Spain levies a withholding tax (IRNR - Impuesto sobre la Renta de No Residentes) on rental income from Spanish real estate earned by non-residents. The tax rate for EU citizens is 19 percent. The Spanish tax can be credited against income tax in Germany, provided that the Germany-Spain DTA provides for the credit method.

How does the automatic exchange of information between tax authorities work?

Under the OECD’s “Common Reporting Standard” (CRS), EU member states and many other countries automatically exchange account data and income information annually. Real estate income is also increasingly being reported. This allows foreign income that was not declared on the German tax return to be uncovered.

What happens if I do not report foreign income in Germany?

Failing to disclose tax-relevant foreign income can be considered tax evasion (Section 370 of the German Fiscal Code). This may result in back taxes, interest, and, if applicable, penalties. A voluntary disclosure that exempts one from penalties is possible if the income has not yet been discovered by the tax authorities. In case of doubt, a tax attorney should be consulted immediately.

Is foreign real estate worth it from a tax perspective despite withholding tax?

That depends on the individual case. The decisive factors are the applicable DTA mechanism, the actual tax burden in the source country, and the personal marginal tax rate in Germany. In many cases, the total tax burden for a foreign property is no higher than for a comparable German investment-however, the complexity of the tax obligations is considerably greater. Anyone who does not actively manage their tax obligations in the source country risks fines and interest, which significantly reduce the return on investment.

Back to the Real Estate Glossary.