Tax consequences of an unintentional residence in Germany
Many Germans leaving their home country keep a residence in Germany, which serves as an abode for holidays or for paying a visit to friends and family in Germany as well as a standby residence in case they return. Further, Germany is growing more attractive as a vacation destination or a place for real estate investments for foreign high-net-worth individuals. These situations could have dire consequences from a German tax perspective.
A natural person who has a residence or habitual abode in Germany is subject to unlimited income tax liability. This means that their entire worldwide income is subject to taxation in Germany for personal income tax purposes.
If either the decedent/donor or the beneficiary/donee has his residence or habitual place of abode in Germany, the German inheritance and gift tax will be imposed on any transfer of worldwide net property at death, or by gift or deemed gift. Accordingly, assets bequeathed or inherited by German residents or their heirs or transferred by gift or under some circumstances by setting up a trust can be taxable in Germany. Note that tax liability is not limited to assets located in Germany.
If German tax liability exists, the taxpayer or his heirs are obligated to report all income and taxable transfers to the German tax authorities. Individuals who deliberately or negligently fail to report taxable income or the transfer of assets are considered to commit a tax evasion, which can be punished with fines or a prison sentence.
As outlined above, the tax residence in Germany can dramatically affect the tax treatment of the regular worldwide income and transfers of assets. Therefore, it is decisive to understand the meaning of the tax residency under the German law. An individual’s residence is defined as a place he occupies under circumstances that indicate that he will retain and use it on more than a temporary basis. The length of the stay at the dwelling place in Germany is generally irrelevant. If a dwelling is used regularly (whether owned, rented or otherwise used) – for example, a guest room in a family member’s house or a holiday home that is lived in for several weeks at a time twice a year – the intent to stay will be presumed. Moreover, it is possible to be a resident in different countries at the same time.
Keeping or establishing a tax residence in Germany could be a pitfall from a German perspective for Germans or non-Germans with standby or holiday dwellings in Germany. Even their heirs can be negatively affected. It is possible to trigger tax residency in Germany even without knowing it and lead to significant tax liabilities in Germany. The issue of having a tax residence in Germany should be scrutinized in all relevant cases.