Immersing yourself in the culture and beauty of Germany as an American expat can be an incredible experience. However, Americans moving to Germany will face particular financial challenges, especially when it comes to making investment decisions. In this article, we outline the main considerations for American expat investors in Germany, emphasizing the importance for expats of not just adapting to a new culture, but also to the complexities of a new financial reality.
A complex investment landscape for US expats in Germany
Investment decisions for US citizens and green card holders living in Germany are more complex compared to Americans living in the United States. One of the main reasons for this is that, regardless of their residence abroad, US citizens are subject to both US and German reporting and taxation. This means that financial accounts and investments in Germany held by Americans must be reported to the IRS, and certain types of German investments can trigger new US tax liabilities.
Moreover, American expats in Germany may be limited in investing in US-based funds due to European Union regulations like MIFID II and PRIIPS (Packaged Retail and Insurance-Based Investment Products). These regulations restrict EU residents from investing in non-EU (e.g., US) based funds that don’t have specific characteristics. Nevertheless, specialized expat financial advisory firms can provide tailored solutions for expats to have investment portfolios that align with each individual’s situation, goals, and future plans.
To further complicate matters, Americans in Germany may not be able to maintain a US brokerage account, as many American brokerage firms aren’t able to work with clients who reside in Germany. Again though, specialist US expat financial advisors can offer custom solutions.
The impact of tax rules for American investors
While Germany and the United States have signed income tax treaties and Social Security agreements, the worldwide income of American expats is potentially subject to taxation by both the U.S. and Germany. To mitigate double taxation, there are IRS provisions such as the U.S. Foreign Tax Credit available that expats can claim that offer US tax credits based on the value of German taxes paid. Seeking professional guidance from an expat specialist CPA can help you take full advantage of these tax benefits and reduce your worldwide tax obligations. Note also that Americans in Germany have obligations to report any non-US registered bank and investment accounts they may have, too.
Special expat tax regime in Germany
German income tax law generally does not offer a special tax regime for expats. However, certain expenses related to relocation and business travel can be tax-deductible or reimbursed tax-free under specific conditions:
- Moving expenses: If you move for work-related reasons, certain moving expenses can be claimed as tax-deductible or reimbursed by your employer tax-free. This includes costs like transportation of household goods and travel expenses for house hunting.
- Per diems for business trips: Tax-free per diems can be granted by employers to cover meals and incidental expenses during business trips. The per diem rates vary depending on the duration of the trip and the location.
- Double housing costs: If you maintain two households due to work requirements (e.g., keeping a home in another city or country while working in Germany), you can claim double housing costs as a tax deduction. This includes rent, utilities, and other related costs, but certain criteria must be met, such as the necessity of maintaining both residences for work reasons.
These provisions aim to mitigate the financial burden of relocation and temporary work assignments but are subject to certain conditions and caps.
Investment and taxation
US tax-advantaged accounts and German taxation
The US-German tax treaty doesn’t cover tax-advantaged retirement accounts, meaning that Germany doesn’t recognize the tax benefits of accounts such as IRAs, Roth IRAs, or 401(k)s, so seek advice before deciding how you save for retirement as an expat in Germany.
Owning foreign mutual funds (PFICs)
American expats in Germany should exercise caution when considering investing in non-US mutual funds, ETFs and private pension plans, which the IRS classifies as Passive Foreign Investment Companies (PFICs). These investments can lead to complex US tax reporting and potentially result in new US tax liabilities. It’s normally a more tax-efficient approach for American expats to opt for certain US-domiciled funds and individual stocks through an advisor specializing in expat investment services.
Managing currency exposure
Managing different currencies is another important consideration for American expats in Germany. It’s important to minimize fees associated with currency conversion, whether you’re making investments back in the US, or drawing on existing investments. Furthermore, the value of investments in multiple currencies can rise or fall due to exchange rate movements. Again, your expat financial advisor will provide guidance on how to manage these risks. Factors that affect whether you invest in the US or Germany will include how long you plan to live in Germany, where you’ll be living when you wish to draw on your investments, and where your current income is paid.
Diversification
The best investment strategies for American expats in Germany depend on factors such as your income and your long-term plans and goals. However, the core principle of diversification to mitigate investment risks remains important. How diversification is applied can vary depending on each expat’s particular situation and goals though. For example, it may make sense to invest in both Germany and the US, or it may not, depending on your long term plans and goals. Note also that owning assets in Germany as well as the US will have estate planning implications, too. But the principle of diversifying your investments in terms of currency, geography, and asset class as a strategy to reduce risk remains.
Wrapping up
Germany offers a vibrant and culturally rich experience for American expats, but careful financial and tax planning is crucial when investing as a US expat. Navigating the complexities of investing as an American in Germany ideally requires guidance from a financial advisor with expertise in international investing to ensure that you make informed decisions that optimize your financial while minimizing the risks associated with possible pitfalls.
If you have any questions about financial planning as an American living in the EU, get in touch.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.
