Expatriates: 10 issues to be considered as a retired person in Germany
von Peter Scheller
In general expatriates relocate to Germany for business or job reasons. However, there is a growing number of expatriates especially from the US and the UK who are moving to Germany when reaching retirement age. The reasons for this move are numerous: family roots, German partners, political reasons. However, there are various issues to be considered before moving to Germany.
This article describes the 10 most common topics without providing final answers to all questions. It is designed as a checklist for interested individuals. This list should help expatriates consider the important issues. In most cases it will be necessary to seek professional advice from specialized lawyers and tax advisers.
Residence and work permit
US-citizens (as citizens of other non- EU/EEA-member states) do not need a visa if they want to stay in Germany for less than three months within a period of half a year. If they want to stay longer they need a residence permit. There are different types of residence permits. The application for a residence permit has to be submitted to the immigration authority within the first three months of staying in Germany. Long-term visas sometimes require a reasonable command of the German language. If US-citizens want to work in Germany they need also a work permit.
UK-citizens (just like other EU-citizens) do not need a residence or work permit. However, UK-citizens who want to stay in Germany for a long period should observe the upcoming Brexit-negotiations and the possible scenarios for UK-expatriates living in other EU-member states.
There are so many different scenarios that it is virtually impossible to give more than a short overview. The following questions have to be answered.
- Does an expatriate receive a social security pension, a company pension or a private pension?
- Does the expatriate receive pensions from different states?
- Is the pension paid by an EU-member state or an institute of this member state?
- Is the pension paid by a Non-EU-member state and does Germany have a Social Security Agreement with this state?
- Does the pension derive from a tax-privileged pension plan?
In general pensions of individuals who are tax resident in Germany will be taxed in Germany. There are different tax regimes for different types of pensions. Therefore the type of respective pensions have to be analyzed carefully in order to find the correct tax treatment.
Whether the state from where the pension originates is taxing this pension as well depends on the tax law of this state and the double taxation treaty between Germany and this state.
There are other things to be considered. For instance some states do not allow payments to other countries. In this case the pensioner needs a bank account in this state to receive payments and has to transfer the money to Germany.
Nearly all states, their institutions or insurance companies pay pensions only in the local currency. If this state is not in the Euro-zone, pensioners have to consider that exchange rate fluctuations may affect their disposable income.
Senior citizens often receive income from their home countries such as rental or capital income.
Capital income (dividends, interests, capital gains) of German resident expatriates is always subject to German income tax. This applies also for income from foreign sources or capital investments deposited at foreign financial institutes. Foreign withholding taxes on this income can be credited against German income tax up to certain maximum amounts. Quiet often it is necessary to apply for a tax reduction or refund abroad in order to avoid a partial double taxation.
Rental income from real estate property situated abroad is often tax-free in Germany. However, this income has to be declared in the German income tax return since it has an effect on the progressive income tax rate. For more information see here.
German inheritance law is different to Anglo-American law or the law of Roman countries. According to German international inheritance law, succession is governed by the law of the country of which the decedent was a citizen. Where the decedent had his domicile is irrelevant. German law does not distinguish between movable or immovable property (unlike US or Anglo-Saxon law). Therefore successors and heirs of expatriates who die in Germany may be confronted with more than one law.
Special rules apply for EU-citizens from August 16th, 2015 on because of the European Succession Regulation. Under its provisions the entire estate is subject to the law where the decedent has his habitual residence at the time of death. An EU-citizen can also choose the law of his home country by instruction in his will. The regulation does not apply for citizens from non-EU-member states. They also do not apply for EU-citizens from the UK, Ireland and Denmark since these countries are excluded from the directive.
Expatriates have to make sure that existing testaments (wills) and other inheritance arrangements will be valid and appropriate if moving to Germany. Careful succession planning is essential.
Subject to German inheritance law is the entire estate of a person who dies in Germany. Liable to inheritance tax is also the inheritance of heirs and beneficiaries who are resident in Germany. German inheritance tax law provide relatively high personal allowance for spouse (500,000 Euro) or children (400,000 €). For spouses and relatives in direct line the preferable tax class I is applicable. Far less favorable is the tax treatment of heirs or beneficiary who are distant relatives or non-relatives. The tax rate for these persons can be up to 50% of the net-value of the estate.
If the home country of the expatriate also levies inheritance or estate taxes a double taxation scenario threatens. German inheritance tax law allows the crediting of foreign taxes under specific circumstances. This applies for instance to the tax on foreign real estate. Very risky are capital investments deposited at foreign banks or bank accounts at foreign financial institutes. In this case Germany will not credit foreign inheritance taxes (for more information see here).
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For US-expatriates the risk is limited since there is a Double Taxation Treaty in place. There are a few other German Double Taxation Treaties (e.g. with Switzerland, France or Denmark). However, with most countries Germany did not agree an inheritance tax treaty. This may create problems especially for UK-citizens. The UK levy inheritance tax on the estate of decedents who were domiciled in the UK. Since domicile and residency are defined differently a double taxation may threaten.
Inheritance tax planning is essential.
Trusts are common in the Anglo-American world. Often they are used to avoid long-lasting and expensive probate procedures.
Germany does not have a trust law. This can cause legal difficulties for expatriates moving to Germany. More so German tax regulations on trusts may cause major problems. This applies to settlors but even more to beneficiaries of trusts (for more information see here).
Living and working in Germany: Trusts of expatriates can cause havoc
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Settlors and especially beneficiaries of a trust must seek professional advice in order to avoid very disadvantageous tax consequences.
Bank account in Germany
There is no legal obligation to have a German bank account. However, in daily life it is advisable to have a German bank account since the normal way of paying bills is by bank transfer. Paying by checks is unusual. Furthermore German authorities and companies require a German bank account for payments to individuals.
Every person who is living in Germany is obliged to have health insurance. This might be a private or a social security insurance. If expatriates are still covered by their domestic social security system (such as Medicare in the US or NHS in the UK) there is no need for any additional German health insurance cover. If expatriates are covered by a private health insurances abroad it is necessary that the insurance cover is equivalent to the basic cover of the German social security insurance or a German private insurance. This is also important because the expatriate can only claim an allowance for health insurance premiums in his or her income tax return if the cover by the foreign insurance is equivalent to respective German cover.
Import of household items
Expatriates who want to stay in Germany for a longer period may wish to import household items to Germany. Household items in this sense are furniture, laundry, bicycles, motorcycles, cars for private use, boats and airplanes for sportive use and horses.
The import from other EU-member states is free of any import duties (Customs duties, Import-VAT, Excise taxes). Customs formalities do not have to be observed. There are special rules for certain areas such as the Canary or Channel Islands.
The import from non-EU-member states is free under certain preconditions. The immigrant must have been resident for at least twelve month in a state outside of the EU. The items must have been used for at least six months before moving to Germany. If the items are sold within a period of twelve months after arriving in Germany import duties are due. A customs declaration has to be submitted within the twelve-month period.
If the immigrant imports goods to Germany special issues have to be considered. First of all cars have to meet German ecological and technical requirements. This may require technical alterations on the car.
The car needs to be properly insured. Car insurance from EU/EEA-member states in general provide sufficient insurance cover. This might be different for car insurances from non-EU/EEA-member states. The immigrant is also subject to Germany’s road tax.
Persons who have a driving license issued by another EU-member state or the European Economic area (Norway, island, Liechtenstein) are in general valid in Germany. These licenses remain valid until they expire.
Driving licenses issued by non-EU or EEA-member states are valid for six months. After six months the license has to be converted into a German driving license. Which preconditions have to be fulfilled depends on the state in which the license was issued.
Germany has not general age limitation for elderly people. However, the driving license can be withdrawn by the authorities if a person is not able to maneuver the car safely any more.
|Social security agreement||Sozialversicherungsabkommen|
|European Economic Area||Europäischer Wirtschaftsraum|
Author: Peter Scheller, Steuerberater, Master of International Taxation
- Great Britain
- health insurance
- income tax
- inheritance tax
- social security
- Auswanderer / Expatriates
- Zoll / Customs Duties
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