Expatriate Executive: Germany

Summary of local taxation situation

If you are resident in Germany for more than 183 days in a tax year, you are subject to German taxation laws.

Ownership of a house or apartment, or simply physical presence in circumstances which suggest that you intend to remain in Germany may also cause you to have resident status.

Cases of dual tax-residence can often be resolved by double tax treaties.

Simple departure from Germany is enough to bring tax residence to an end, although taxation of German-source income may continue for a non-resident.

However, if residence has lasted for five years or more, departure to a low-tax jurisdiction may cause the German tax authorities to continue to tax an individual under certain headings as if he continued to be tax-resident; this is especially likely if the individual has economic interests in Germany.

A German tax-resident is subject to tax on world-wide income and capital gains. However, some types of capital gain are taxed at half-rates, and gains resulting from asset transactions which are neither business-related nor 'speculative' (= held for less than two years) are tax-free.

Tax exemptions for periods of work carried out abroad are mostly dealt with through tax treaties; some do provide for exemption from German tax, eg the Belgian, Spanish, Dutch, Austrian and US treaties; others do not.

German tax law does not recognise the common law concept of the trust, and such entities fall under German tax law dealing with investment corporations, ie those concerned mostly with 'passive' investment activity. Traditionally, if the interest of one or more German tax-residents in a foreign investment corporation is 50% or more, then the undistributed income of the corporation is taxed in the hands of the resident(s); if the investment corporation is resident in a 'low-tax' jurisdiction, the barrier falls to 10%.

Small holdings in foreign investment funds have at the time of writing escaped these provisions, but virtually all types of private family trust or financial holding company will be caught: therefore, anyone about to take up German residence definitely needs professional advice before doing so, to make sure that international investments of any kind will not fall under German taxation.

NB: The German tax rules are considerably more complicated than the above simplified summary, and professional advice on the situation of any particular individual is a necessity.

Offshore Investment Opportunities

It follows from the above that foreign investments made during a period of German tax residence should be limited to small participations in capital-appreciation vehicles, so that tax will be deferred until residence has finished.

On the other hand, the German capital gains tax exemptions for non-business and non-speculative investments mean that there are possibilities for direct investment into property and various types of security, and it may be that this type of investment is more attractive for some individuals than foreign investment.

www.lowtax.net contains extensive information on the investment, tax and legal regimes in 35 of the main offshore jurisdictions. Further information is available in our Investment Information Providers Section, and the four main types of offshore investment are described in the Guide to Offshore Investment on this site.

NB: The suggestions given above do not constitute investment advice. They are intended only to assist individuals in finding appropriate professional advice, which is essential for anyone planning offshore investment.