Moving to Germany: 13 Things worth keeping in mind

Date: 14 Nov 2023

Karen Jones

Whether for private or work reasons, moving to Germany and the potential establishment of a German tax residence in particular may give rise to a number of issues.

Whether for private or work reasons, moving to Germany and the potential establishment of a German tax residence in particular may give rise to a number of issues. This is a brief overview of 13 issues to be borne in mind when considering a relocation to Germany. For further guidance, individual advice should be taken.

I. Residence

As a German tax resident, you will be subject to both income tax on your worldwide income and gift/inheritance tax on worldwide assets. You will be deemed to be a German tax resident (for both taxes) if you have a dwelling you use or which is at least available to you (possession of key) or if you have a habitual abode in Germany. Citizenship or a domicile (as understood under Common Law) in itself are not a criterion for residency. The German tax law stipulates low requirements on the possession of a dwelling. This may also apply in cases where, for example, there is only a vacation home. The German tax authorities have the necessary instruments to determine these facts. Without certainty on whether there is an unlimited tax liability due to a residence in Germany, there is always a risk of unrecognized tax liability. Particular in the area of gift and inheritance tax, this can lead to a late but rude awakening.

II. Necessary Visa

EU citizens generally do not require any title to move to Germany. Non-EU citizens generally need a visa or residence permit if they intend to work or stay for a longer period of time. A visa program specifically targeted at high net worth individuals does not exist in Germany. This means you have to fulfill the necessary immigration requirements.

III. Banks in Germany

In Germany, many banks may require German residence in order to open a bank account. Especially for persons who are (still) a resident or citizen of the United States, it may be hard to find a German bank, because of their fear of the associated compliance requirements (e.g. FATCA). Having a non-German bank and brokerage account on the other hand may result in additional compliance efforts for German tax purposes. German tax law provides for rules which may require a recalculation of income, especially when it comes to investment funds or capital gains taxation. A German bank would provide you with an annual tax certificate which already forms the basis for German tax reporting.

IV. Investment Funds

Germany applies a deemed distribution regime on investment funds. That means even if your investment fund does not pay out any distributions, a portion of the increase in value may be subject to German taxation annually. Such deemed distribution may be credited in case of a sale of the investment fund; if you have already left Germany at that point of time, however, a portion of the capital gain might be double taxed, if the foreign country does not provide a credit or allow a step-up in base.

V. Trusts and Foundations

Settlors and beneficiaries of trusts or foundations may be subject to adverse tax rules in Germany. Additional tax report obligations may be applicable. Furthermore, the income of the trust or foundation might be attributed to German beneficiaries or remaindermen, regardless of actual distributions being made. Individuals who move to Germany should review existing trust or foundation agreements prior to moving.

VI. No Step-up in Basis

The assets held when moving to Germany are normally not revalued with regard to their acquisition costs. Special rules may apply if the individual was subject to an exit tax before relocation. Generally, thus, a socalled step up in basis does not apply. This can lead to capital gains taxation if assets are sold while the individual is tax resident in Germany. It may be recommendable to step up the basis in the assets to the current market value before moving to Germany if the tax rate in the home country is below the German tax rate. One way of achieving this result is to sell the assets and then repurchase them at market value. The repurchase price would then form the basis for German taxation.

VII. Holding Companies / CFC Rules

In Germany, CFC rules (Hinzurechnungsbesteuerung) exist, which can cause income of a foreign corporation (without distribution) to be taxable for a German shareholder. You should be aware of these rules if you own holding companies. Whereas holding companies may have tax benefits in certain tax jurisdictions, such rules can become a major disadvantage under these circumstances. Therefore, if you hold assets through a holding company, the issue should be tackled in more detail with individual German tax advice.

VIII. Place of Management

A corporation may be subject to German corporate tax if the company has a fixed place of business or a place of management in Germany. Working for a foreign business whilst residing in Germany may result in adverse tax consequences for the company. This is because – in addition to the possibly higher tax burden – German tax declaration obligations and a separate determination of profits for the permanent establishment apply. If the individual moving to Germany holds the position of a director of a (holding) company, there is a risk that the company itself acquires German residency for corporate income tax purposes due to the establishment of a place of management in Germany.

IX. Income Tax – Timing

Income (e.g. wages, capital income) is in principle taxable when it is paid to the taxpayer. This in turn

means that the time of receipt – and thus the time of taxation – can be controlled to a certain extent. This can also be of interest, for example, with regard to the progressive income tax rate. However, timely planning is in every case absolutely necessary.

X. Exit Tax

Individuals who have been subject to unlimited tax liability in Germany for a total of at least seven years within the last twelve years and who hold an interest of at least 1% somewhat during the last five years in a corporation will be subject to an exit tax when leaving Germany. The fair market value at the date of relocation will be considered to be the sale proceeds. Thus, careful planning is required and a German tax advisor should be consulted if you have such an interest in a corporation. A different form of exit tax may also arise, depending on the specific circumstances, if the individual leaving Germany holds an interest in a partnership.

XI. Succession Planning

When moving to Germany, you should also take a look at your testamentary dispositions. Unless a choice of law has been made, generally German law will be applicable to the succession if the deceased had his habitual residence in Germany at the time of death. The law applicable to the succession may thus change by relocating to Germany from a German law perspective. This means that German law can – unintentionally – apply in the event of succession.

XII. Inheritance and Gift Tax

Successions and gifts are subject to taxation – even between spouses (depending on the marital property regime). Taxation is primarily linked to the residence or habitual abode of either the transferor or transferee. German nationals who have not resided abroad permanently for more than five years without maintaining a residence in Germany are also subject to unlimited inheritance and gift tax liability. In cases falling within the scope of the Double Taxation Agreement concluded with the United States, this period is extended to ten years. The worldwide inheritance or the gift are subject to German inheritance and gift tax. Germany has concluded only a few Double Taxation Agreements in this area.

XIII. Be Compliant

Under German tax law, there are various tax return and notification obligations to the tax authorities. For example, an income tax return must be filed annually; successions and gifts must be reported within thirty days. These obligations also apply to German citizens who are subject to an extended unlimited German income or inheritance/gift taxation for ten years after departure (cf. sec. 2 and 4 German Foreign Tax Act – Außensteuergesetz). There is also an obligation to report the establishment or acquisitions of businesses, permanent establishments and partnerships abroad as well as in foreign corporations and asset pools under specific circumstances. Failure to report income or other taxable transactions to the competent tax authority in Germany should be avoided under any circumstances.

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