High-Tax Country Resident Planning To Stay Put: Germany

If you are resident and domiciled 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.

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. 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 escape these provisions, but virtually all types of private family trust or financial holding company will be caught: therefore, any German tax resident wanting to shelter assets abroad, whether for asset protection purposes, or simply to minimise tax, will need expert professional advice in order to avoid falling under a continuing tax obligation.

The availability of domestic tax-privileged investment instruments in Germany, and the exemption of many types of investment gain from capital gains tax, mean that for many individuals it will be necessary to balance the advantages of domestic investment against the superior returns that may be achievable offshore.

Pensions investment can also include an offshore element, although the tax advantages of pensions have been steadily eroded vis-à-vis other tax-efficient investments, which are more flexible. In particular, for high earners, the pension provision over and above that allowed for tax purposes can be invested in an offshore Funded Unrecognised Retirement Benefit Scheme (FURBS). The foreign (offshore) life assurance sector has been particularly innovative in these types of product.

For an individual wishing to explore the investment opportunities further afield, www.lowtax.net contains details of the investment and tax regimes for 35 offshore jurisdictions.

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.