My husband is a proprietary director of a German company and works in Germany for 3 days a week and pays tax there. He lives in Ireland for more than 183 days a year and so is resident in Ireland. Under Double Taxation Agreement he is entitled to double taxation relief. I am self-employed in Ireland.
In calculating the double taxation relief due, it is my understanding that we calculate the German effective rate - Tax paid in Germany divided by German Income.
We then have to calculate the Irish effective rate. This is done by taking all sources of income - German income, my self-employment income, minus pension contributions and calculating the Irish (provisional) liability and thus the Irish effective rate. The lower of the two rates is taken and the German income figure is regrossed at that lower of the two rates. The double taxation relief is then calculated by multiplying the regrossed German income figure by the lower of effective rates and dividing by 100.
The problem I have is that when calculating the Irish effective rate I am not sure if it is correct to include all our income sources and pension contributions. If I do the calculation with 0 pension contributions, I get a certain figure but if I redo the calculation with for example 20,000 pension contribution I do not end with a corresponding 41% relief on that pension contribution. This is because a high pension contribution brings down the Irish effective rate and upsets the regrossed figure and double taxation relief figure so that we are not coming out with anything like 41% relief on the pension contribution.
I realise that this is a very specialised area but would really appreciate any glimmers of advice. We have gone to a reputable accountant who did not have a clue - we knew more than he did - but he charged us all the same. I also want to know the correct way to do this myself so we can plan pension contributions in advance.
In calculating the double taxation relief due, it is my understanding that we calculate the German effective rate - Tax paid in Germany divided by German Income.
We then have to calculate the Irish effective rate. This is done by taking all sources of income - German income, my self-employment income, minus pension contributions and calculating the Irish (provisional) liability and thus the Irish effective rate. The lower of the two rates is taken and the German income figure is regrossed at that lower of the two rates. The double taxation relief is then calculated by multiplying the regrossed German income figure by the lower of effective rates and dividing by 100.
The problem I have is that when calculating the Irish effective rate I am not sure if it is correct to include all our income sources and pension contributions. If I do the calculation with 0 pension contributions, I get a certain figure but if I redo the calculation with for example 20,000 pension contribution I do not end with a corresponding 41% relief on that pension contribution. This is because a high pension contribution brings down the Irish effective rate and upsets the regrossed figure and double taxation relief figure so that we are not coming out with anything like 41% relief on the pension contribution.
I realise that this is a very specialised area but would really appreciate any glimmers of advice. We have gone to a reputable accountant who did not have a clue - we knew more than he did - but he charged us all the same. I also want to know the correct way to do this myself so we can plan pension contributions in advance.