We are a beacon in the tax darkness!

Some questions come up again and again in our day-to-day routine at the firm. Here is an overview of the classic ones we get together with practical answers.*

If you would like to know more or have your own particular questions, please do not hesitate to get in touch with us at any time.

International Tax Law

1. When am I required to pay taxes in Germany?

You have unlimited tax liability in Germany if your residence (§ 8 of the Fiscal Code of Germany (AO)) or your habitual abode (§ 9 AO) is in Germany.
If you do not reside in Germany, you may have limited tax liability if you earn domestic – i.e. German – income in the context of § 49 of the German Income Tax Act (EStG).
Moreover, a tax liability may also apply as a result of special standards, e.g. German Foreign Tax Law (Außensteuergesetz).

2. What is a fiscal domicile?

A fiscal domicile is the place at which someone “maintains a dwelling under circumstances from which it may be inferred that they will maintain and use such dwelling”.

Simple habitability with water and power supply is sufficient. Furthermore, you must have power over the keys to your domicile. A room at a friend’s place which is at your permanent disposal or a flat which is only used sporadically during the term of a secondment may also qualify as such.

A hotel room, on the other hand, is not normally considered to be a residence. Even if the flat is rented out during the secondment, this no longer constitutes a residence since it is no longer available for one’s own use.

Cases in actual practice are often unclear, and it is necessary to take a close look at the individual circumstances.

3. What is a habitual abode in tax law?

“Persons shall have their habitual abode at the place at which they are present under circumstances indicating that their stay at that place or in that area is not merely temporary. An unbroken stay of not less than six months’ duration shall be invariably and from the beginning of such stay regarded as a habitual abode in the territory of application of this Code; brief interruptions shall be excepted.”
The time stipulation of six months does not apply where the stay in Germany is undertaken exclusively for visiting, recuperation, curative or similar private purposes and does not last more than one year.

4. What happens if I give up my residence?

If you no longer have your residence or habitual abode in Germany but have domestic income (e.g. resulting from rentals), you will be subject to limited tax liability in future.

If this is not the case, you are generally no longer required to pay taxes in Germany. Albeit, there may be a tax liability in some constellations, e.g. as a result of the German Foreign Tax Law (Außensteuergesetz), which will require clarification by an expert.

Furthermore, some tax-related benefits, e.g. the child allowance, use unlimited tax liability as a basis. These are lost if you give up your residence.

5. I have given notice of departure from Germany. In so doing, have I also given up my fiscal domicile?

No. Merely giving notice of departure from a residence within the scope of the Registration Law (Melderecht) does not lead to there no longer being a residence with regard to taxes (cf. fiscal domicile).

6. Do I receive the child allowance abroad?

The entitlement to the child allowance is generally linked to unlimited tax liability. So if you keep your residence, you will continue to be entitled to the child allowance. When you give up your residence, you lose your entitlement to the child allowance unless you have employment which is subject to social insurance contributions.

Please note however that in any case you are to notify your family benefits office (Familienkasse) about the move abroad.

7. Do I have to pay church tax (Kirchensteuer) in Germany if I am a foreigner?

If you belong to a religious group which is entitled to tax, you have to pay church tax.

If you are Protestant, you are only required to pay church tax if you declare that you belong to a Protestant church in Germany.

On the other hand, if you were baptised Roman Catholic, you are required to pay church tax in Germany since the Roman Catholic church is a global universal church. It is of no consequence whether you declare membership in Germany or whether the Roman Catholic church in your home country receives church tax.

8. Registering at your bank as a non-resident taxpayer

If you are no longer subject to unlimited tax liability in Germany, then you are considered to be a non-resident taxpayer. You should let your bank know this since in many cases it is possible to avoid the deduction of capital gains tax on your capital earnings.

9. What is the significance of the centre of vital interests in the case of double taxation treaties?

Double taxation treaties regulate the allocation of taxes between two countries. It is assumed for this that there is a country of residence and a country of activity.

The country of residence is the country in which you have a residence. If, however, you have a residence in both countries, the country which is the centre of your vital interests is considered to be the country of residence. Present and future economic and personal criteria are evaluated, whereby the latter are more greatly weighted.

10. I’ve been sent abroad by my employer. Am I still required to pay taxes in Germany?

That depends. If you still have your residence or habitual abode in Germany, you will continue to be subject to unlimited tax liability. If you no longer have your residence or habitual abode in Germany but have domestic income (e.g. resulting from rentals), you will be subject to limited tax liability in future.

If this is not the case, you are generally no longer required to pay taxes in Germany. Albeit, there may be a tax liability in some constellations, e.g. as a result of the German Foreign Tax Law (Außensteuergesetz), which will require clarification by an expert.

11. In the case of a secondment, where do I declare taxes on my salary?

In general, the country of activity has tax jurisdiction. However, this does not apply if:

  • The 183-day limit is not exceeded
  • Wages are not paid by or for an employer who resides in the country of activity
  • Wages are not borne by a commercial operation which the employer maintains in the country of activity

Ascertainment of the 183-day limit varies from one double taxation treaty to another and can be based either on the tax year, the calendar year or a 12-month period.

If these conditions are met cumulatively, tax jurisdiction returns to the country of residence.

In this case, too, there are peculiarities in many double taxation treaties, e.g. for cross-border commuters, supervisory board members, executives as well as in the case of general reversion clauses.

When determining how to count the days, you need to ensure that the actual days spent in the country in question are counted. For instance, if you were in France from 1 March to 31 August (184 days), you exceed the 183-day limit. Any interim holiday in another country is to be deducted from this however!

12. I was in the country in question for less than 183 days. Do I continue to declare taxes in Germany?

No. As shown here , the 183-day limit is just one of three conditions which must be met.

13. I was in the country in question for longer than 182 days. Do I declare taxes abroad?

Generally yes, unless there is a regulation which applies to this exception.

14. What does exemption with progression mean?

Exemption with progression means that some income may by tax-free but is considered for the determination of your individual tax rate. This income increases your tax rate, which is ultimately applied to taxable income in Germany.

15. What is the Edict on Employment Abroad (Auslandstätigkeitserlass)?

The Edict on Employment Abroad (ATE) grants tax exemption on wages to employees with unlimited tax liability who work for their domestic employer for at least three months in a foreign country for which there is no double taxation treaty.

This only applies to work in connection with setting up or maintaining commodities, finding or extracting natural resources, development aid or consulting in these areas.

Asset and succession planning

1. Formalities

a. Do I have to report my inheritance/gift to the tax authorities?

Even if the tax exemption limit is not exceeded in the case of a gift or inheritance, every acquisition must be reported to the corresponding tax authorities within a period of three months after gaining knowledge of the asset received. In the case of a gift, this applies to the donor as well as to the donee.

However, reporting is not mandatory if the acquisition is as a result of a disposition by will initiated by a German probate court or a German notary public since the tax authorities are notified by these offices in such a case.

b. Do I have to file an inheritance tax declaration? / Do I have to file a gift tax declaration?

You are initially only required to report  the gift / inheritance to the tax authorities. You are not required to file an inheritance tax declaration or gift tax declaration until ordered to do so by the tax authorities.

Albeit, there may also be tax obligations abroad as a result of the place of residence, citizenship or foreign assets (e.g. interest in a closed foreign fund). The USA in particular has very strict deadlines which are enforced by means of heavy fines.

c. How do the tax authorities find out that I have inherited?

Many public offices and institutions such as banks, courts and notaries public are required to submit a corresponding notification to the inheritance tax authorities. In addition, the inheritance tax authorities can obtain information themselves.

d. Which tax authorities are responsible for inheritance tax?

Many local tax authorities have ceded their jurisdiction for inheritance and gift tax. Thus, the Fulda tax authorities are responsible for Frankfurt am Main. Please use the following link to find out about jurisdictions for Hessen:

https://service.hessen.de/html/Ansprechpartnersuche-7652.htm

2. Calculation of inheritance tax / gift tax

a. What tax categories apply to the taxation of inheritances and gifts?

Depending on the personal relationship of the acquirer to the bequeather or donor, one differentiates between three tax categories:

Tax category I:    Spouse, registered partner in a civil union, children and stepchildren and descendants of these children and stepchildren, parents and forefathers in the case of gains acquired by will

Tax category II: Parents and forefathers in the case of gifts, siblings and the children of siblings, stepparents and parents-in-law, children-in-law, divorced spouses

Tax category III: All other acquirers

b. How high are the tax rates in the case of inheritance tax and gift tax?

The tax rates are dependent on the tax categories and amount to between 7 % and 30 % in Tax category I, between 15 % and 43 % in Tax category II, and between 30 % and 50 % in Tax category III.

https://www.gesetze-im-internet.de/erbstg_1974/__19.html

c. How high are the tax exemption limits in the case of inheritance tax and gift tax?

Spouses and partners in civil unions have a tax exemption limit of € 500,000 and children have a tax exemption limit of € 400,000.

Furthermore, there are numerous tax exemptions on substantive grounds, e.g. for household effects, other movable property (e.g. vehicles) or the family home.

Please use the following link to find out about tax exemption limits for other acquirers:

https://www.gesetze-im-internet.de/erbstg_1974/__16.html

d. Must earlier gifts also be taken into consideration for calculating the inheritance tax or gift tax?

For the calculation of the current tax, for both inheritance tax and gift tax, all previous gifts you have received from the same person over the past ten years must be taken into consideration.

e. Can I claim the costs of inheritance in the inheritance tax declaration?

Yes, the costs of inheritance, e.g. funeral costs, court costs, tax accountant costs, costs for expert reports, can be claimed as inheritance liabilities in the inheritance tax declaration. Since the law governing the costs of inheritance specify a fixed amount of € 10,300, you only need to declare costs which exceed this amount.

3. Inheritance tax planning and emergency measures

a. Is there any way to reduce the inheritance tax or avoid it altogether?

Yes! If planning is done in a timely manner, the tax load can often be greatly minimized or in some cases avoided altogether. This can be accomplished by means of appropriate will planning, optimum use of tax exemptions, repeated gifts over a longer period of time or other options.

b. When should inheritance planning be started?

The more complex and extensive the estate and family situation is, the earlier planning should start. While younger people can only make plans for an emergency situation, when people reach their mid-fifties at the latest inheritance planning should be actively broached and, if required, initial steps should be taken towards its implementation.

c. I’ve inherited money which was earned under the table – what do I have to do?

On the one hand, you are required to retrospectively declare the earnings for which taxes were evaded to the tax authorities and pay the income tax owing. On the other hand, you also need to specify the earnings for which taxes were evaded in the inheritance tax declaration and, if the tax exemption limit is exceeded, pay inheritance tax as well.

If you fail to make this retrospective declaration, you yourself are committing tax evasion.

d. Is it possible to optimize taxes even after the inheritance case is open?

As long as you act fast and do not claim the inheritance yet, e.g. by means of appropriate action, there are often structuring options available even after an inheritance case is initiated.

The popular and frequently used Berlin Testament can lead to considerable tax disadvantages, which however can often still be minimized even after the death of the first spouse.

4. Inheritance tax/Gift tax and foreign countries

a. Am I required to pay taxes in Germany if I am a foreigner?

If the bequeather or heir, or donor or donee had his/her residence  or habitual abode  in Germany, then the entire inheritance is subject to German inheritance tax. The nationality is not relevant in this regard.

However, German citizens who have relinquished their German residence for fewer than five years are also subject to unlimited tax liability.

Those in Germany who are not subject to unlimited tax liability are at least subject to limited tax liability with regard to their domestic assets.

b. I have inherited property abroad. Do I have to pay inheritance tax in both countries?

Whether or not taxation applies in the other country depends first of all on the laws of that other country. If this is the case, then the question to ask is how to avoid double taxation. In contrast to the case with tax on earnings, Germany has only concluded double taxation treaties for the handling of inheritance and gift tax with a few other countries. Therefore, there is a risk of double taxation.

If there is no double taxation treaty, in many cases it is possible to offset the foreign tax against the German tax. However, this is not always possible, and more importantly not always possible to the full extent!

c. With which countries does Germany have a double taxation treaty for inheritance and gift tax?

In contrast with the case of double taxation treaties on income, Germany only has five double taxation treaties which govern inheritance tax. These are with Denmark, France, Greece, Switzerland and the USA. Only three of these, namely the treaties with Denmark, France and the USA, also apply to gifts.

Moreover, the “normal” double taxation treaty with Sweden also contains provisions concerning the taxation of inheritances and gifts.

* The information and answers provided here are in part greatly simplified owing to the highly complex and convoluted nature of the subject. Therefore, it is only possible to give a general explanation. Every individual case must always be separately analysed and assessed in detail.

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