Germany’s foreign tax credit under Section 34c of the Income Tax Act (EStG) lets residents offset foreign income taxes against the German tax owed on the same earnings, capped at the German tax attributable to that foreign income and calculated separately for each source country. Any foreign tax above the ceiling is permanently lost, because German law does not allow unused credits to be carried forward or back. Getting the calculation right, and choosing between the credit and the deduction alternative, is often the most consequential part of a return with income from abroad.
Who Can Claim the Credit
The credit is available only to taxpayers with unlimited tax liability in Germany. That means natural persons who have either a domicile (Wohnsitz) or a habitual place of abode (gewöhnlicher Aufenthalt) in the country. If you meet either test, Germany taxes your worldwide income, and Section 34c exists to keep that worldwide reach from producing double taxation on earnings already taxed abroad.1Finanzämter Baden-Württemberg. Under What Conditions Am I Liable for Income Tax?
Non-residents with only limited tax liability cannot use the credit. Germany taxes only their domestic income, so there is no double-taxation problem for Section 34c to solve. Corporations managed from within Germany get equivalent relief, but through Section 26 of the Corporate Income Tax Act rather than directly through 34c.
Which Foreign Income Qualifies
Section 34d EStG lists the categories of income that count as foreign-source. The main ones are business profits from a commercial operation carried on abroad, self-employment income earned there, wages for work performed abroad, interest and dividends where the debtor sits outside Germany, rental income from foreign real estate, agricultural and forestry income from abroad, and capital gains on the sale of foreign assets.
The catch: foreign income has to be recalculated under German tax principles before it feeds into the credit formula. German deduction standards, depreciation schedules, and accounting methods apply. The recalculated net figure often differs from whatever the foreign country taxed, and that difference matters when you hit the ceiling.
Which Foreign Taxes Qualify
A foreign levy qualifies only if it is comparable to German income tax. It has to target net income the way German income tax does. VAT, sales taxes, excise duties, property taxes, and social security contributions all fall outside the scope.
The tax also has to be final and actually paid. Assessed-but-unpaid amounts don’t count, and refundable withholdings don’t count until the refund question is settled. If the foreign country later refunds part of the tax, the refunded portion has to come out of the credit. You carry the burden of proof, so keep the assessment notice and evidence of payment.
The Federal Fiscal Court (Bundesfinanzhof) has confirmed that U.S. federal income tax, including the Alternative Minimum Tax, qualifies as a creditable foreign tax even where the U.S. applies different rate schedules to different income types. What matters is whether the tax ultimately reaches the taxpayer’s total income rather than functioning as an indirect levy.2Bundesfinanzhof. Anrechnung ausländischer Steuer nach 34c EStG (Urteil vom 15. März 2023, I R 8/20)
How the Credit Ceiling Is Calculated
The credit can never exceed the German tax that would otherwise fall on the foreign income. That ceiling, the Anrechnungshöchstbetrag, comes from a straightforward ratio:
Maximum credit = German income tax × (foreign income ÷ total worldwide income)
Suppose your total German tax liability is €30,000 and your foreign income makes up 20 percent of your worldwide earnings. The ceiling is €6,000. If you paid €9,000 in foreign tax on that income, you can credit €6,000 and the other €3,000 is excess.
Per-Country Limitation
You run the calculation separately for each source country. Credits do not pool across borders. Excess French tax cannot shelter German tax owed on income from a low-tax jurisdiction; each country’s ceiling stands on its own. The rule exists to stop taxpayers from using over-taxation in one country to offset German tax on income earned in another.
No Carry-Forward, No Carry-Back
German law has no mechanism for carrying unused foreign tax credits to a different year. Excess in one year is gone. That is what makes the per-country ceiling high-stakes, and it is the specific reason to look hard at the deduction alternative before filing.
Credit or Deduction: Section 34c(2)
Section 34c(1) provides the credit. Section 34c(2) lets you deduct the foreign tax as an expense against taxable income instead. The deduction applies on request, so you have to actively choose it.
The credit is almost always better, because it offsets German tax euro for euro up to the ceiling. A deduction only reduces taxable income, so its value depends on your marginal rate. At a 42 percent marginal rate, a €1,000 deduction saves roughly €420, while a €1,000 credit saves the full €1,000.
The deduction can win in one scenario: when the foreign tax substantially exceeds the credit ceiling. Since excess credit is lost forever, deducting the entire foreign tax from income, even at a fraction of face value, sometimes produces a better result than crediting only the capped portion. Run both calculations. You choose one method per country per year, and you cannot split the same country’s taxes between credit and deduction.
Filing With Anlage AUS
Foreign income and the associated credit go on a dedicated attachment to the annual return called the Anlage AUS. You file it whether or not a double taxation treaty covers the source country, and whether or not Germany ultimately taxes the income or exempts it. Each source country gets its own set of entries, covering the type and amount of income, the foreign tax paid, and the credit or deduction claimed.
Documentation is where these claims succeed or fail. You need official tax certificates or assessment notices from the foreign jurisdiction showing exactly how much was assessed and paid. The Finanzamt will compare these to your Anlage AUS entries. If the foreign tax was withheld at source, a withholding certificate from the payer or the foreign tax authority serves the same function.
Foreign currency amounts have to be converted to euros. Standard practice is to use official exchange rates published by the European Central Bank or the Deutsche Bundesbank for the relevant period. Most taxpayers file electronically through the ELSTER portal, which handles the Anlage AUS inside the overall return.3ELSTER. ELSTER – Private Individuals The Finanzamt may still ask for the original paper certificates, so keep physical copies of every foreign tax document.
Processing times vary. Assessment notices (Steuerbescheide) can arrive within weeks or take up to six months, depending on complexity and local office backlog. Returns with foreign income tend toward the longer end because the comparability check and currency conversions add review steps.
How Tax Treaties Change the Picture
Germany has signed double taxation treaties with more than 90 countries, and where a treaty applies it overrides domestic law. Most German treaties follow the OECD model and use the exemption method for active income such as business profits and employment wages: the foreign income drops out of the German tax base entirely, though it still influences the tax rate on your remaining income through the Progressionsvorbehalt.
For passive income like dividends, interest, and royalties, treaties typically prescribe the credit method, which sends you back to Section 34c for the actual mechanics. Even under a treaty, the domestic credit rules control how the offset is calculated and claimed.
Where Germany has no treaty with the source country, Section 34c operates as the standalone fallback. Same terms, same per-country ceiling, no possibility of the more generous exemption method. Some treaties also contain subject-to-tax or switch-over clauses that pull income back onto the German return when the source country does not actually tax it, at which point relief again runs through the Section 34c credit for whatever foreign tax was in fact paid.
What Happens if You Get It Wrong
Underreporting foreign income or overstating a foreign tax credit carries serious consequences, and German law separates two levels of offense.
Intentional tax evasion (Steuerhinterziehung) is a criminal offense. Filing a return you know understates your tax, or even suspect might, exposes you to fines and imprisonment of up to five years, or up to ten years in serious cases. There is no minimum understatement required to open a criminal investigation.
Gross negligence (leichtfertige Steuerverkürzung) covers understatements caused by carelessness rather than intent. It is an administrative rather than criminal offense, but still carries financial penalties.
The general assessment period is four years, extended to ten in fraud cases. Criminal prosecution runs five years for standard offenses and up to fifteen for serious evasion.
Germany offers a self-disclosure program (Selbstanzeige) that can eliminate criminal liability if you voluntarily correct prior returns before the authorities catch the problem. The disclosure has to be comprehensive, covering all relevant years and giving the Finanzamt enough detail to recalculate the correct liability. It is blocked once a tax audit has been announced, criminal proceedings have started, or the understated amount exceeds €25,000 per individual act. Late-payment interest still applies even when a self-disclosure succeeds in preventing criminal charges.