How does worldwide income affect my tax refund?

Have you worked in more than one country in one year?

In most countries, citizens and resident aliens are subject to tax on worldwide income. You are considered “ordinarily resident” in a country if you have lived there for more than 6 consecutive months and, as such, are subject to unlimited tax liability and must pay tax on your worldwide income there.

Worldwide income is used to determine taxable income, money that is paid the citizens or resident aliens all over the world as wages, income from self-employment or business activities, income from renting and leasing, or capital assets may all be subject to tax by the tax offices.

What is "Local income"?

Local income is the amount from your home country or any other country where you have your permanent address.

For example, if you are a German citizen but your permanent residence is in Italy, your local income will be confirmed from Italy. In such a case, it means that you are deregistered from Germany and have no more permanent address there.

How does worldwide income affect your tax return (debt/refund)?

In order to avoid double taxation, there is usually an agreement between most of the countries and there are some methods to decide whether you have a tax refund or tax debt to pay.

Exemption method:

A revenue generated abroad is tax-exempt in the tax country but is subject to the proviso safeguarding progression. It means that income like unemployment benefits or parental allowance is used for determining the tax rate, without having to pay taxes yourself.

Crediting method:

The foreign income is recorded in the tax country and the tax paid abroad is credited against the tax liability.

Can I decide where I want to have my worldwide income taxed?

First of all, it depends on where you were a tax resident, and the obligation for filing a tax return can be different in the countries. In most cases, at least 90% of the total worldwide income should come from the country where you file the tax return in order to apply to all personal tax or family-related benefits, but for example, it is 75% in Belgium. Still, there can be some special conditions that make you subject to unlimited tax liability.

Let’s take an example: Adriano worked 4 months in Germany (12 000 EUR income), 2 months in Belgium (2000 EUR income), and 6 months in his home country, Portugal (3700 EUR) in 2019. Adriano would be a tax resident in Portugal and need to file a tax return there. He cannot be subject to unlimited tax liability in Belgium because the minimum 75% worldwide income does not come from Belgium. Although his 90% worldwide income does not come from Germany either, his income out of Germany does not exceed the limit of basic tax allowance 6876 EUR which is specified to Portugal for the tax year 2019 according to the German tax law. This makes him subject to unlimited tax liability in Germany and could even apply for a tax refund.

If you are still not sure how to deal with your worldwide income taxes, get in touch with us for a consultation.