Germany is an attractive place to live in the center of Europe and the EU. It is safe, relaxed and highly developed. Its political system is stable and reliable, while its powerful economy is the largest in Europe. Known for its long and rich cultural history, Germany offers a very high standard of living. All these reasons make Germany a favorite destination for foreigners from inside and outside of the EU. However, there is no free lunch! Moving to Germany triggers very often some unexpected tax consequences, which everyone should consider carefully before coming to Germany. It is very easy to become tax resident in Germany! However, a tax residency in Germany very often does not fit to the individual’s carefully planned tax setting. In details:
1. Prerequisites for becoming tax resident in Germany pursuant to German domestic law
Pursuant to German domestic law, an individual becomes subject to German resident taxation, if the individual
- either stays in Germany for more than 6 consecutive months in a year with only minor interruptions (habitual abode or “gewöhnlicher Aufenthalt“), or
- holds a dwelling in Germany under circumstances indicating that the individual intends to keep and use it (residence or “Wohnsitz“).
Thus, a residence does not require necessarily the actual or regular use of the dwelling. It is sufficient that the individual can use such dwelling whenever the individual wishes to do so. An individual could have different residences in Germany and/or abroad. It is in particular not required that such residence is the individual’s center of vital interest. A tax residency in Germany in particular does not require that the individual is a German citizen.
2. Consequences of being tax resident in Germany pursuant to German domestic law
An individual’s tax residency in Germany means in particular that such person
- becomes subject to German income taxation with his/her worldwide income (subject to applicable double taxation treaties) at an income tax rate up to 47.475 % (including solidarity surcharge) depending on the amount of the taxable income;
- is obligated to file annual income tax returns with the responsible German tax office regarding his/her worldwide income;
- becomes subject to German exit taxation if he/she has been subject to German resident taxation for at least 10 years and ceases to be tax resident in Germany;
- becomes subject to German gift taxation as a donor in case of a donation to anybody elsewhere in the world with respect to the donor’s worldwide estate at a gift tax rate between 7 % and 50 % depending on the value of the donation and the degree of relationship between the donor and the donee;
- becomes subject to German gift taxation as a donee (subject to applicable double taxation treaties) at a gift tax rate between 7 % and 50 % depending on the value of the donation and the degree of relationship between the donor and the donee;
- is obligated to file gift tax returns with the responsible German tax office in case of a donation to (i) anybody elsewhere in the world with respect to his worldwide estate and (ii) the individual tax resident in Germany irrespective from the fact whether the donated asset is located in Germany;
- triggers the German inheritance tax liability of the deceased individual’s heir and/or legatee with respect to the deceased individual’s worldwide estate at an inheritance tax rate between 7 % and 50 % depending on the value of the estate and the degree of relationship between the decedent and the heir and/or legatee;
- triggers the heir’s and/or legatee’s obligation to file inheritance tax returns with the responsible German tax office irrespective from the fact whether (i) the heir and/or the legatee is tax resident in Germany, too, or (ii) the estate is located in Germany;
- becomes subject to taxation both in Germany and in other countries with respect to the same income or donation subject to applicable double taxation treaties or unilateral law granting tax exemptions or tax credits for mitigating the double taxation;
- triggers the heir’s/legatee’s taxation with inheritance tax and the donor’s taxation with gift tax in Germany besides other countries with respect to the same estate or donation
Please note that this applies irrespective from the individual’s tax liability in another country according to this country’s domestic law applicable.
Please note that an applicable double taxation treaty might hinder Germany from taxing such individual person fully, but has no impact on this person’s obligation to file its tax returns fully and completely with the German tax authorities. While Germany has agreed upon a large number of double taxation treaties dealing with income taxes, Germany has agreed only on six double taxation treaties dealing with inheritance and gift taxes (United States of America, Switzerland, Denmark, France, Greece and Sweden). Thus, one should not rely on the protection by double taxation treaties only!
Finally, please note that an individual person’s residency in Germany could also result in a foreign company’s resident tax liability in Germany with its worldwide income. This happens if e.g. the individual person’s residence in Germany also qualifies as the company’s place of actual management. This is the case if the individual person acts as an organ representative of a foreign company also from his/her dwelling in Germany.
Before an individual person establishes his/her residency in Germany, the consequences resulting therefrom need to be analyzed in advance very thoroughly for avoiding disadvantageous legal and tax consequences.
An individual could establish such tax residency very easily by acquiring or renting a dwelling or by simply using a dwelling more or less exclusively without having acquired or rented it. For a tax residency in Germany, a German passport or a permit of residence is not required. Thus, a thorough analysis and adaptation of the respective individual’s current tax setting prior to establishing an individual’s tax residency in Germany helps to avoid unpleasant surprises. We are prepared to assist you!