While the U.S. has allowed dual citizenship since 1967, Germany has traditionally taken a more restrictive approach. Until recently, many U.S. citizens seeking German citizenship had to consider renouncing their American nationality to obtain German citizenship. (Exceptions to this rule existed, depending on factors such as the applicant’s country of origin, birthplace, and residency status in Germany, but the process was challenging.) (1)
However, recent changes to Germany’s citizenship laws have relaxed these restrictions. The Act on the Modernization of the Citizenship Law (StARModG) was adopted by the Bundestag in January 2024 and took effect on June 27, 2024. (2)
This development opens up new opportunities for U.S. citizens.
Below, we outline what dual citizenship is, factors unique to Americans considering applying for dual citizenship in Germany, and financial planning considerations to be aware of when residing in Germany as an American citizen.
What is dual citizenship and why is it attractive to Americans?
Dual citizenship allows individuals to hold citizenship in two countries simultaneously, enjoying the rights, privileges, and responsibilities of both. Examples of these rights and privileges include the ability to vote in local and federal elections and access to financial institutions and accounts in both countries.*
For U.S. citizens, holding dual citizenship can provide significant advantages, such as the ability to live and work freely in another country while maintaining American citizenship.
*Access to financial institutions and accounts in multiple countries is rarely as straightforward as it sounds. If you have questions about how moving to Germany or living in Germany could affect your financial plan, please schedule a preliminary call.
Can U.S. Citizens Hold Dual Citizenship with Germany?
Yes, U.S. citizens can now hold dual citizenship with Germany under specific conditions.
Historically, Germany’s laws made it difficult for non-EU nationals to retain their original citizenship when applying for German nationality. However, with the new legal changes, U.S. citizens can now obtain German citizenship without renouncing their U.S. citizenship through various pathways:
- Naturalization: U.S. citizens living in Germany may apply for German citizenship after fulfilling specific residency requirements, such as living in Germany for several years, demonstrating integration, and passing language and citizenship tests. (3)
- Descent: U.S. citizens with German parents or grandparents may be eligible for German citizenship by descent.
- Marriage: U.S. citizens married to German nationals may qualify for naturalization after living in Germany for a set period.
- Birth: Children born in Germany automatically gain German citizenship if at least one parent has been a legal resident for five years, down from the previous eight-year requirement.
This is excellent news because Germany is one of the most powerful passports in the world with visa-free access to over 192 countries (this is even stronger than the U.S. passport which allows for visa-free access to 186 countries).
Living in Germany as a U.S. Citizen: Tax and Residency Considerations
From a tax perspective, if you are a U.S. citizen there may not be a significant difference between being a German citizen and a resident of Germany. The U.S. follows a system of citizenship-based taxation, meaning that U.S. citizens must continue to file tax returns on their worldwide income, even after acquiring German citizenship.
In contrast, Germany operates on a residence-based taxation system. This means that your tax obligations remain the same as long as you reside or earn income in Germany, regardless of citizenship.
Although holding dual citizenship may not drastically change your tax situation, staying informed about your filing responsibilities in both countries will make cross-border planning less overwhelming. Navigating the tax laws of both Germany and the U.S. requires careful attention, particularly for individuals with investments, rental properties, or business interests in both countries.
Navigating Investment Income and Taxation for U.S. Citizens in Germany
The U.S. imposes a 3.8% Net Investment Income Tax (NIIT) on high-income individuals, which applies to investment income regardless of where it’s earned. (Types of investment income that may trigger the NIIT include dividends, interest, capital gains, and rental income.) Meanwhile, Germany taxes investment income at a flat rate of 26.375%, including a solidarity surcharge.
Do Americans in Germany owe tax on their investment income in both countries?
It depends. While the U.S.-Germany Tax Treaty allows U.S. citizens to claim foreign tax credits for taxes paid in Germany, these credits may not fully eliminate the double tax burden.
Complex rules govern which taxes qualify for credits, and differences in tax deadlines and reporting requirements between the two countries can make compliance difficult. Careful record-keeping and consulting a cross-border tax advisor are essential to successfully navigating these complexities and minimizing tax liability.
Additionally, U.S. citizens, especially those with dual U.S.-German citizenship, face challenges when investing in foreign mutual funds because the IRS classifies these as Passive Foreign Investment Companies (PFICs). Owning a PFIC requires additional reporting to the IRS and is complex and time-consuming to file.
Dual citizens must carefully plan their investments to avoid U.S. tax complications and should work with a cross-border financial advisor familiar with PFIC regulations. In most cases, investing in U.S.-based funds will be the best financial path forward, even for dual citizens.
German Inheritance Tax vs U.S. Estate Tax
Estate planning is a crucial consideration for U.S. citizens living in Germany, especially for those with significant assets in both countries. Many U.S. taxpayers who are German residents are often surprised to learn that inheritances received from outside of Germany by non-German citizens also fall under German inheritance tax rules.
Germany’s inheritance tax is based on residency rather than citizenship
This means that if you are a resident of Germany, not only your worldwide estate but also any inheritance you receive from abroad could be subject to German inheritance tax. This broad application of the tax can come as an unexpected burden, particularly for those receiving inheritances from U.S.-based assets.
In contrast, U.S. estate tax is based on citizenship, meaning U.S. citizens face U.S. estate tax exposure regardless of where they live. The U.S. has a high estate tax exemption, currently set at $13.61 million per individual through 2025, (4) but Germany’s thresholds are significantly lower.
German inheritance tax rates and exemptions vary depending on the relationship between the deceased and the beneficiary
Close family members, such as spouses and children, benefit from higher exemptions and lower tax rates. On the other hand, distant relatives or unrelated individuals face higher tax rates. Spouses are exempt up to €500,000 and children up to €400,000. However, distant relatives have lower exemptions of €20,000 and may be taxed up to 50%. (5)
These rates also apply to gifts and the exempt thresholds reset every 10 years making proactive planning in Germany especially important.
Potential strategies to plan for your inheritance as a U.S. citizen residing in Germany
There are a few strategies that may be worth considering when planning your inheritance. However, you should confirm their suitability for your specific circumstances with a professional. Potential options include:
- Establishing Qualified Personal Residence Trusts (QPRTs) to transfer valuable real estate at a reduced gift tax cost. (6)
- Utilizing tax-free gifting (up to $17,000 per recipient annually in 2023, $18,000 in 2024) for wealth transfer. (7)
- Exploring lifetime gift tax exemptions to potentially transfer wealth to heirs tax-free during your lifetime.*
*Note that the current sizeable exemption is only guaranteed through 2025. If you have pressing concerns around how to tailor your estate for cross-border efficiency, don’t hesitate to connect with us at your convenience.
Taxation and Tax Incentives for Property Ownership Between the U.S. and Germany
The tax treatment of personal and rental property differs between the U.S. and Germany, affecting both ownership and sales. In the U.S., homeowners can benefit from tax deductions on mortgage interest and property taxes, and rental property owners can deduct expenses related to maintenance, repairs, and depreciation.
In contrast, Germany does not offer the same level of tax incentives for personal residences. Mortgage interest is generally not tax-deductible, and while property taxes are lower in Germany, they are also not deductible.
For rental property owners in Germany, however, there are benefits. Rental income is taxed as part of regular income, but owners can deduct expenses such as repairs, maintenance, mortgage interest, and depreciation. Depreciation follows a fixed rate and is applied over a longer period—typically 50 years for residential buildings.
When it comes to selling property, the tax treatment also varies
In the U.S., homeowners can exclude up to $250,000 (or $500,000 for married couples) in capital gains on the sale of a primary residence, provided they meet the residency requirements. (8)
In Germany, capital gains from selling a primary residence are generally tax-free if the property has been owned and used as a primary residence for at least two years, or if it has been owned for at least ten years, regardless of use.
However, U.S. citizens selling property in Germany must also report the sale to the IRS and may still face U.S. tax obligations, making cross-border tax planning essential to avoid double taxation.
Closing Thoughts on Dual Citizenship in Germany
While dual citizenship in Germany has recently become more accessible for qualifying U.S. citizens, it’s important to understand that obtaining German citizenship and residing in Germany do not end your U.S. tax obligations.
Additionally, holding U.S. citizenship can make building wealth more challenging for Americans living in Germany. (For example, investment strategies that would typically benefit German residents may trigger PFIC filing requirements in the U.S.) The only way to end your U.S. tax filing obligations is to renounce U.S. citizenship.
In sum: While dual citizenship in Germany offers tremendous benefits, it also requires careful tax planning.
Contact our team today to discuss how proper planning can prepare you to navigate the complexities of dual citizenship and create a strategy that leverages your citizenship in both countries for your long-term financial success.
References
- Obligation to choose one citizenship
- Retention Permit to keep German citizenship when naturalizing in the US / “Dual citizenship”
- Germany sees highest number of naturalisations in 23 years
- What's the Estate Tax Exemption For 2024? | Kiplinger
- Germany - Individual - Other taxes (PwC)
- Qualified Personal Residence Trust (QPRT): Overview and Examples
- Gift Tax Thresholds
- Topic no. 701, Sale of your home
- U.S. Military in Germany: What You Need to Know
Dual Citizenship U.S. and Germany - FAQ
How many Americans live in Germany?
There are an estimated 120,000 Americans living in Germany.
Why Does the U.S. Have Military Bases in Germany?
The U.S. military presence in Germany today is a result of the Convention on the Presence of Foreign Forces in the Federal Republic of Germany, signed in 1954 by West Germany. It allowed eight NATO members, including the U.S., to have a permanent military presence in Germany. (9) Today, the U.S. also benefits from the strategic geopolitical positioning afforded by having troops stationed in the largest EU country, which also lies at the gateway to Central Europe and beyond.
Does Germany have a wealth tax?
Germany used to have a wealth tax. It has been suspended since January 1, 1996, due to the then government’s inability to reconcile inconsistencies in its application to various financial assets such as property and investments.