On May 19, 2023, The German Department of the Interior (Bundesinnenministerium – BMI) published a proposal for a reform of the nationality law (Citizenship Act – Staatsangehörigkeitsgesetz – StAG). If passed in parliament, the new law will significantly change the rules on naturalization in Germany. It will make the acquisition of German citizenship much easier and faster. For the first time, Germany will generally allow dual citizenship.

According to some surveys some 400.000 additional professionals are needed per year to maintain Germany’s industrial output. In light of this severe shortage of skilled labor and professional talent, the German government has taken a array of measures to bring qualified foreigners into the country. Just recently, a new immigration law (“the Fachkräfteeinwanderungsgesetz”), which is, in part, based on Canadian immigration law as a model, was introduced, to create incentives for employment-based immigration. The changes to the nationality law that are being proposed now are one further step to attract qualified immigrants. They also to give immigrants a realistic perspective for a long-term future in Germany – which will include the prospect to become a German citizen.

The most important changes are:

Germany will allow dual citizenship

Under the current law, foreigners who apply for German citizenship (except those from other European Union countries or Switzerland) must relinquish their original citizenship before German citizenship is given to them. There are some exceptions to this rule. Most notably, in cases where the loss of the foreign citizenship would create a financial or economic hardship, the German government will allow applicants to retain their other citizenship. In fact, more than of half of the applicants are being granted an exception under theses rules, according to recent numbers from the Federal Bureau of Statistics. However, getting the authorities to accept a claim of “financial hardship” or other exceptional circumstances can be a challenging and lengthy process.

Under the new proposed rules, the general principle to avoid dual citizenship will be done away with. Given that this principle had long been a pillar of German nationality law, (under the current nationality law, even Germans who acquire a foreign citizenship will have their German citizenship revoked), this change of course can be called something just short of a small revolution.

Lawmakers seem to finally have come to believe that aspects such as language skills, education, the ability to support oneself from one’s own resources, participation in society, and the support of the democratic constitutional order are more important than whether a person has one or more nationalities.

Shorter wait times – Five years of residency sufficient

A reduction in the required period of residence in Germany is also planned. Accordingto the the draft law, it will be possible to acquire citizenship after only five years instead of the current eight years. In certain cases, especially where applicants can show “special integration achievements” the wait time for citizenship will be further reduced to only three years. Examples of “special integration achievements” are outstanding educational, professional or vocational accomplishments, or volunteer work for community projects, and particularly good language skills (language test of level C1).

The reduction of the required period of residency in Germany will also apply to children born in Germany to foreign parents. As of now, these children will acquire German citizenship at birth if one parent has been physically present in Germany for eight years prior to the child’s birth. In the future, this period will be reduced to five years as well.

Lower requirements for the acquisition of the German language

The requirements for German language proficiency are to be relaxed for certain groups. The proposed new rules include easier proof of language proficiency and the abolition of the obligation to take a naturalization test for those who are 67 years old or older. For younger naturalization applicants, there will be a hardship clause that will make it possible to waive the language test. In exceptional cases – for example, due to the need for care of a family member – it will be sufficient to be able to communicate orally in German in everyday life without significant problems. Generally, a German language skill level of “B-1” will still be required.

Criminal offenses will not allow dual citizenship

While certain severe criminal offenses, but not petty offenses will prevent applicants from obtaining German citizenship, the new rules will put an emphasis on anti-Semitic, racist, xenophobic and other acts that are considered incompatible with the guarantee of human dignity in the of the German Constitution. Such offenses will per se exclude the acquisition of German citizenship in the future.

Outlook

For many foreigners living in Germany, the potential loss of their original citizenship has been a major deterrent from applying for German citizenship. The prospect of having this obstacle removed, combined with significantly shorter wait times to apply for naturalization will make applications for German citizenship much more attractive.

It remains to be seen if and when the new rules will take effect. At the current stage of the legislation process (as of July 1, 2023), the draft law that was introduced by BMI is being discussed among the members of the Federal government (the “Bundeskabinett”). It is expected to be sent to parliament for debate after the summer break and will likely be enacted in the Fall of 2023. Germany will generally allow dual citizenship.

If you would like to apply for German citizenship in Berlin or any other location in Germany, and you would like legal guidance and assistance to accompany you in this bureaucratic and often lengthy process, BÜDDING LEGAL is here to help.

You have lived in Germany for a number of years and would like to become a German citizen?

Here are the requirements in a nutshell:

Legal residence in Germany

You must have lived in Germany for the approprate length of time:

8 years, or
7 years with completed integration course, or
6 years with better German skills than level B1, or
3 years, if you have been married to a German citizen for at least two years (or have lived a civil partnership for an equivalent period).

During these periods you must have had uninterrupted legal residence in Germany.

Legal residence means that you hold a permanent or temporary residence permit (Aufenthaltserlaubnis or Niederlassungserlaubnis). Certain types of temporary permits, for instance student residence permits and researcher residence permits, are not sufficient. (EU citizens and citizens of Switzerland do not need a residence permit in Germany).

Proof of your identity and nationality

Can be established with a valid national passport or ID card.

Support of the German constitution

You are not a member or supporter of any organganization that engages in terrorist or extremist activity.

Self-sufficiency

You must be able to support yourself. If you or your family receive long-term unemployment benefits or social walfare payments („Hartz IV“) you do not qualify.

Repudiation of your current nationality

As a general rule, Germany does not allow dual citizenship. You are expected give up your current nationality when naturalizing in Germany. However, there are certain exceptions to this rule, for example, if giving up your current nationality would mean a hardship – especially financially – to you. For example, if your job or professional activities require you to be able to travel to your home country and work there, and you would suffer substantial losses, if you lost that ability, you may be given permission to retain your home nationality when naturalizing in Germany.

Citizens of the EU and Switzerland will not have to repudiate their nationality.

No criminal record

Misdemeanors and minor offenses will not be considered, if they did not result in sentences of fines equivalent of 90 days’ earnings or prison sentences of over 3 months.

German language skills

You have an oral and written knowledge of German at least at the B1 level.

Civics test and social integration

You will have to pass a civics test, in which you will have to answer 33 questions out of a catalouge of 310, 17 of which you will have to answer correctly in order to pass the test. The questions mainly cover the areas democracy, equality and civil rights under the German constitution, and freedom of religion. If you have successfully completed university studies in law, social, political or administrative sciences in Germany, the civics test will be waived.

Where and how to apply

You need to apply at the local immigration office (Staatsangehörigkeitsbehörde) at the municipality where you reside.

In Berlin, for example, the boroughs (Bezirke) offer (and require) initial consultations (free of charge), where you will receive detailed information and the application forms. You will need to bring an valid passport or government ID card to the appointment. Procedures in other municipalities are similar.

The naturalization process may take several months or over a year, depending on where you reside. An administrative fee of 255,00 Euro per person (51,00 Euro for children) applies.

Contact us today, if you have any questions regarding the naturalization process in Germany.

U.S. citizens and permanent residents are required to file and pay American taxes no matter where they live. This means, Americans living in Germany still need to file their taxes with the IRS. (The only way out of this is to renounce U.S. citizenship, a decision which should not be taken lightly, but is something we can advise on for those who are interested.) Luckily, there are so-called double taxation treaties between many countries, including between the U.S. and Germany, which set out what taxes are paid to which country in cases where a person would have to pay taxes in more than one jurisdiction. This helps the countries attract foreign business and workers by not doubling their tax burden, and it also helps individuals and businesses by making sure they don’t have to pay the same tax twice in two jurisdictions. U.S., citizens and permanent residents who file their income taxes have two options under the U.S.-German double taxation treaty to limit their tax liability: either the Foreign Earned Income Exclusion or the Foreign Tax Credit.

Foreign Earned Income Exclusion – IRS Form 2555

The Foreign Earned Income Exclusion allows a U.S. citizen or permanent resident to exclude a portion of the income they earned outside the U.S. – reducing their taxable income in the U.S. The amount that can be excluded changes slightly every year, and is $107,600 for the 2020 tax year. That essentially means that no U.S. income taxes would need to be paid on the first $107,600 of income for a U.S. citizen or permanent resident earning income outside the U.S.

Note: You still have to file even if your income is below the threshold! An IRS Form 2555 will have to be filed to declare the foreign earned income in addition to the regular tax forms.

Note: Amounts earned in foreign currencies must be calculated into USD for the purposes of filings and determining income and credit amounts.

Example: John Smith is a U.S. citizen living and working in Berlin with an annual income of €60,000. Because he is a U.S. citizen, he files and pays his German taxes and files his U.S. taxes with the IRS using From 1040 and Form 2555. The foreign income of €60,000 is then excluded from his U.S. taxable income, and because it is under the $107,600 threshold, he owes no U.S. taxes on that income.

In order to qualify for the Foreign Earned Income Exclusion, you need to meet one of two tests:

Bona Fide Residence Test

The the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.

Physical Presence Test

You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during any period of 12 consecutive months including some part of the year at issue. The 330 qualifying days do not have to be consecutive.

Foreign Tax Credit – IRS Form 1116

The other option available to U.S. citizens and permanent residents is the Foreign Tax Credit. The Foreign Tax Credit is – as its name implies – a tax credit – meaning it is subtracted from the tax amount payable (as opposed to reducing the taxable income). With the Foreign Tax Credit, the amount of taxes paid outside the U.S. is subtracted from the tax amount owed in the U.S.: The Foreign Tax Credit may alternatively be used as a tax deduction – meaning the amount is subtracted from your taxable income. This is similar to the Foreign Earned Income Exclusion, but the difference is that the taxable income is reduced by the amount of taxes paid abroad, as opposed to the amount of income earned abroad.

Note: You can only use either the Foreign Earned Income Exclusion or the Foreign Tax Credit for a particular set of income. That means you cannot exclude the foreign income and then also get a tax credit for the same income – you have to choose which method you want to apply. (If income is above the $107,600 limit, you may apply the Foreign Earned Income Exclusion to the first $107,600, and then use the Foreign Tax Credit on the income above that amount.)

Example: Tom Miller is a U.S. citizen living and working in Frankfurt with an annual income of €150,000 (calculated to $183,800). Because he is a U.S. citizen, he files and pays his German taxes and files his U.S. taxes with the IRS using Form 1040 and Form 1116. Because his income is above the $107,600 threshold for the Foreign Earned Income Tax Exclusion, he decides to opt for the Foreign Tax Credit. In Germany, he paid €40,000 (calculated to $49,000) in German income tax, which can now use as a tax credit in the U.S. The IRS applies income tax to his entire $183,800 income which comes to $30,000. The $49,000 is then subtracted from the $30,000 owed income tax as a tax credit (30,000 – 49,000 = -19,000), leaving Tom with a tax liability of $0.

Alternatively, Tom could have applied the Foreign Earned Income Tax Exclusion to his first $107,600, and then calculated the tax he paid on the rest of his income above that, and then subtracted that amount from his remaining tax liability in the U.S. So if the German tax paid on the $76,200 amount above the Earned Income Tax Exclusion ($183,800 – $107,600 = $76,200) was $30,000, that $30,000 could then be applied as tax credit and subtracted from his remaining U.S. tax amount.

We are happy to set up a consultation meeting to discuss the international tax system, how it applies to you or your business, and what strategies you can use to minimize your tax liability. We work with top-notch accountants in Germany and the U.S. who are experienced with complex international filings, or we are happy to work with your current accountant to implement an international tax strategy that works for you. Contact us via email or phone to schedule an appointment. We look forward to helping you!

The formation and registration of a Limited Liability Company (Gesellschaft mit mit beschränkter haftung – GmbH), the standard business entity in Germany, is a tedious and and time-consuming endeavor compared with the formation procedures in other European countries. Estonia, for example, offers online company registration to be completed within a matter of days. Not so in Germany. However, new rules are on the horizon.

Commission proposes new EU Directive

On 25 April 2018, the European Commission presented the “Company Law Package” with the aim at digitizing company law. The measures contained in this proposal for an EU Directive are currently being discussed by the EU Council and the European Parliament.

One key element of the Company Law Package is to create the possibility of the online formation of companies in Europe across country borders and the corresponding establishment of local branches. Unlike in some European countries, in Germany and many other EU member states, the electronic formation of corporations is not yet available. The Commission wants this to change, at least for entities like the Limited Liability Company (GmbH and UG (haftungsbeschränkt)). Implementation of the Commission proposal will be optional for all other types of companies.

Online business registration in 5 days

One of the consequences of the planned online establishment of a company would be that the personal presence of the managing director at a notary would no longer be required for commercial register registrations. Instead, the necessary identification could be carried out using new online identification procedures, such as identification by new ID cards with “E-ID function” or by video conference on a smartphone and the use of blockchain technology.

According to the EU Commission, the member states should also implement new rules for the establishment and registration of companies on the national level. The aim is that online company formation should also be completed within five working days.

The Commission’s proposals for the online formation of companies, if implemented, are disruptive in nature for the traditional German company law, where the role of the notary has been pre-eminent. Issues remain, such as protection against digital abuse or the personal responsibility of managing directors and their concrete implementation by the EU and national legislators, but generally, these changes are highly welcome and, as in many other areas, it is about time that Europe strengthens its efforts to keep up with technological trends of the 21^st century.

Notaries no longer involved?

However, and not surprisingly, the Commission proposal has been subject to strong criticism from certain interest groups in Germany and elsewhere. Therefore, in February 2019, the Council and Parliament agreed on an amendment to the Commission proposal and sent the amended version to the Committee of Permanent Representatives of the Member States for an opinion.

One of the changes to the original proposal, among other things, is the possibility for national legislation to implement rules that will include the involvement of notaries in the online filing process. Another one is to limit the availability of the expedited (5-day) registration only in cases where the new company is founded by natural persons (versus legal entities), and only if they use the pre-approved form articles of association envisioned by the Commission.

The Committee’s decision and the formal agreement of the Council and Parliament are still pending and it remains to be seen whether the final result will bring real improvements to the antiquated company formation system that exists in Germany and most European countries, and a step towards a more business-friendly environment that is much-needed in light of the ever-increasing competition from the United States and China.