High-Tax Country Resident Planning To Go Offshore: Germany

If you are resident in Germany (which will be the normal situation for a native-born German individual) then you are taxable on your 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.

Many resident individuals will be participating in domestic German tax-privileged savings and investment instruments, and usually these can simply be discontinued on leaving without serious tax penalties.

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 she continued to be tax-resident; this is especially likely if the individual has economic interests in Germany. The transfer of German assets by a tax-resident to a low-tax jurisdiction may equally attract the unfavourable notice of the German tax authorities, although in one case such a transfer was held by a court to be acceptable because the resident emigrated to the same low-tax jurisdiction shortly after the transfer.

There are rigid requirements for the disclosure of 'offshore' assets by residents, which were stiffened in April, 2009, and penal sanctions for non-disclosure.

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. 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%. Virtually all types of private family trust or financial holding company will be caught by this legislation.

Small holdings in foreign investment funds escape these provisions, and will be particularly useful if they are weighted towards capital appreciation, so that income or gains are not generated before residence finishes.

Taking into consideration both the adverse tax treatment of foreign corporate entities and the attitude of the tax authorities, a German tax-resident planning to move to a low-tax jurisidction should definitely take professional advice on the best asset-management strategy prior to departure.

Once a definite decision to move offshore has been made, careful thought should also be given to existing German capital assets, including pension assets. Will it be possible to move them offshore without incurring capital gains tax? Is it desirable to move them early and pay the tax anyway? These are complex questions, and the answer will depend on individual circumstances, but for many individuals there will be interesting tax planning possibilities.

Once German residence has been terminated, and if non-residence is expected to be permanent, then an ex-German resident is free to invest offshore in order to obtain the best possible returns.

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.

Individuals who have significant German business income need to take the residence rules into account. They may be able to make use of offshore corporate tax structures, but anyway need to take expert advice on how to structure this income once emigration has taken place, to ensure that they do not fall within the residence rules.

www.lowtax.net contains details of the corporate and partnership legal structures available in the 35 most prominent offshore jurisdictions, together with descriptions of the most important business sectors in each jurisdiction, local tax regimes, and the international treaties entered into by each jurisdiction.

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.