For employees on assignment in Germany, the determination of eligibility for child payments is based on several factors. Our expert guide takes you through the complexities.

Like many other European countries, the German government grants cash payments (Kindergeld) to working parents to help them assume the financial burden of raising children.  These monthly payments are received upon an application filed with the local 'family agency' (Familienkasse).  The payments function as advance child credits.

The tax office 'assumes' parents have received the cash whether they did or not

When the parents file their German income tax return at year-end, the tax authorities will compare the amount of the cash child payments to the tax benefit that the taxpayers would receive through the application of the child exemptions (Kinderfreibetrag). 

If the tax benefit of the exemptions is higher than the cash child payments received, the tax authorities will add back the child payments on the taxpayers' income tax assessment and apply the exemption instead.  If the child payments were more favourable, no child credit is given on the return.

The child payment is EUR 154 per month/per child for up to three children and EUR 179 for the fourth and each additional child per month.

Up until the end of the tax year 2003, the tax authorities performed this reconciliation of child payments and child tax credits based upon the amount of actually paid child allowances.

As of 1 January 2004, however, the Tax Office no longer takes the actually received cash payments into account, but, rather, will assume that the parents received the cash, if they were eligible for child payments, whether or not they actually received it.

Taxpayers who are deemed to have received child payments, but in fact have not, may be placed at a severe disadvantage. The tax authorities will add back the phantom child payments for the computation of the better child benefit (allowance or exemption). 

If the deemed cash payments are found to bring a more favourable result, no child tax exemptions will be granted and the taxpayers will therefore not get any child benefit.  If the application of the child exemptions yields the better result, the exemptions will be allowed but their benefit will be greatly reduced since no cash payments were received. 

In that case, the taxpayers are only receiving the difference in tax credit between the cash allowances and the-exemptions instead of a full benefit. If taxpayers wish to protest their assessment, the burden of proof that they are, in fact, not eligible for child payments, is upon them.

Unfortunately, for individuals working in Germany under a foreign assignment programme, the determination of eligibility for child payments is not as simple as often assumed. 

In the past, a frequently heard statement was: "You are eligible for child payments if you are paying into the German social security system."  Under this formula, employees who remained under their home country social security scheme were automatically disqualified. 

With hindsight, that statement appears at best simplistic; at worst, erroneous.  A closer scrutiny of the actual rules that followed the controversy surrounding the deemed receipt of child payments highlights the extreme complexity of the interaction of domestic social security laws, European social security regulations, bilateral social security agreements concluded by Germany with non-European countries, and German tax law.

Whether an international assignee working in Germany is eligible for child payments depends first upon the existence of a social security agreement between Germany and his/her home country, and whether child payments are covered under that agreement.

Four main possible scenarios result:

1. Persons assigned from another member country of the European Economic Area or Switzerland:

Typically, a European citizen assigned to Germany will be in possession of a certificate of coverage (E 101) and will continue to receive the child allowances according to his/her home country rules.  If the European citizen is not in possession of an E 101 form and consequently subject to the German legislation on social security, he/she is entitled to German child payments. Non-European citizens without an E 101 form require a special residence permit in order to receive child benefits.

2. Persons assigned from a country that has concluded a Social Security Agreement with Germany within which child allowances are specifically covered:

Examples are Morocco, Tunisia and Turkey.

Unless an application for exemption from the German provisions on social security based on the agreement is filed, the assigned citizen of the other contracting state is eligible for child payments in Germany, even if not in possession of a valid residence permit.

3. Persons assigned from a country that has concluded a Social Security Agreement with Germany without provisions for child allowances:

Examples are Canada, USA, and Japan.

In that case, the eligibility for German child payments is determined mainly under German income tax regulations.  If the assignee is a tax resident of Germany, has a special residence permit and is not exempt from contributions to German unemployment tax, he/she is eligible for German child payments.  This will come as a surprise to many.

4. Persons coming from a country with whom Germany has not concluded any Social Security Agreement:

Same result as in preceding example.

The above four scenarios represent a highly simplified overview.  The rules are extremely complex and it is recommended that those who are not sure of their status should obtain expert advice.

Conclusion

Since the burden of proof of non-eligibility rests with the taxpayers, foreign assignees with children, who are working in Germany, should file an application for German child payments with their local family agency. 

If they are denied the benefit, the written notification should help them secure the child credit in their tax returns.  Child payments may be applied for retroactively to 1 January 2004.  The family agencies, however, apparently already suffer from a large backlog of such applications, presumably due to the new rules.

Should the family agency deny the child payments, it is recommended to file an objection against this decision and request its suspension until the final income tax assessment for the relevant year has been issued and it can be demonstrated that the tax authorities have added back the child payments to the taxable income.

One must note that further complications arise in the case of assignees whose employer is bearing the burden of German income taxes under their assignment agreement. Cash German child payments received by the assignee will offset the child tax credit within the tax return.

This will lead to a higher tax liability payable by the employer, who must then turn to the employee for the reimbursement of the 'windfall' child payments already received.  Things were much simpler when assignees did not have to take any action to secure their child tax credits.

March 2005

Matthias Henne (mhenne@deloitte.de) [telephone:  +49 (0) 211/8772-2684]
and Anja Wessels (anwessels@deloitte.de) [telephone: +49 (0) 211/8772-2716] are based in Deloitte's Düsseldorf offices.

Subject: Expatriate support and tax