German tax residence
von Peter Scheller
Residence is one of the most common criteria for the taxation on income. Most states tax the worldwide income of a person who is a resident within their territory. Unfortunately every state is free to define the term residence differently. The alternative definitions of residence lead to confusion amongst people moving abroad. The situation is aggravated by the fact that some states tax people on the basis of other criteria such as citizenship or domicile. Therefore the term tax residence can have different meanings in different countries.
The vast majority of countries have alternative definitions for tax residence. This is the case for both individuals and corporations and of course this also applies for Germany.
German tax residence of individuals
Germany has two types of tax residence:
- Place of residence
- Habitual abode
A person has his/her place of residence where the person has a home which implicates that he/she intends to retain this home and use it (§ 8 General Fiscal code). This home can be of very modest character and it must not be the main residence. The person must have the authority of disposal over this place. It is irrelevant whether he or she owns or rents this place. A hotel room in general does not provide a person the required authority of disposal. However, a hotel may be deemed as a place of residence if a specific hotel room is rented on a long-term basis.
Tax resident in Germany could also be a person who works for a longer period abroad and keeps his home at his/her disposal. This is even the case if the person does not use the home for a longer period and is de-registered with the registry office. If this person rents the place out and cannot use it for the period of rent he/she loses its status as tax residence in Germany.
The second type of tax residence is the habitual abode (§ 9 General Fiscal Code). A person has its habitual abode at a place or an area where this person stays not only on a temporary basis. This is the case if the stay exceeds six months and is not interrupted for a longer period. Short-term breaks abroad do not interrupt the six-month period. However, vacations, health treatments or other private purposes do not lead to a tax residency in Germany if the stay does not exceed one year. This means that a job or business related stay in German hotels for a period of more than six month lead to a tax residency in Germany.
If a person is a tax resident in Germany they are subject to German income tax with their total income wherever it is earned. However, foreign sourced income might not been taxed in Germany if a Double Taxation Convention provides a respective cover.
If a person is not a tax resident in Germany it will only be liable to German income tax with income from German sources defined in § 49 Income Tax Code.
If a person is tax resident in Germany he/she is also liable to German inheritance and gift tax. This applies for a decedent or donor as well as a beneficiary.
German tax residence of corporations
A corporation is tax resident in Germany if it has its statutory seat or its effective management in Germany (§ 1 (2) Corporation Tax Code). This means that a foreign company can be a tax resident in Germany if the management performs its substantially important executive tasks in Germany.
Residence in Double Taxation Conventions
Double taxation conventions define the term of residence in a different way. First of all the person has to have a permanent home. This requires the physical use of the home as a residence. A long-term absence from the house or flat is not considered to be a permanent home. This is a main difference to German tax law.
Secondly there can only be one tax residence in the meaning of a Double Taxation Convention. If a person is considered to be a tax resident in both countries the so called Tie-breaker-rule comes into force. This rule states that a person with two permanent homes is a resident where he/she has their centre of vital interests. A married person with family has this centre of vital interest always where the family lives. In other cases the application of this rule may be tricky.
Example: A husband is living and working in Germany on a long-term contract and his wife lives and works abroad. The couple have no children. Their flats in Germany and elsewhere abroad are of the same size and comfort. In this case the husband might be a tax resident in Germany and his wife abroad.
Corporations are resident at the place of effective management. However, proper clarification may not be easy.
Example: A Limited company has it statutory seat in Ireland. Its managers reside in Germany, Sweden, Australia and India. The management doesn’t meet on a regular basis. Management decisions will be made in online conferences. In cases like this it may be difficult to figure out where the place of effective management is.
Tax residence in other countries
As mentioned earlier, other countries define the term tax residence in differing ways. The following examples show the wide variety of this term.
For example every US citizen is liable with his or her worldwide income. Even if a US citizen lives abroad for a long period he or she remains tax liable to the Federal Income Tax and other personal taxes. The same applies in the USA for
- Persons with the status as a Lawful Permanent Resident under the immigration laws (Green Card holder)
- Persons who pass the Substantial Presence Test
In the UK a person is liable to British Inheritance Tax if it has its domicile in Great Britain. The term domicile neither corresponds with the term residence nor with nationality. Even if the person lives abroad for years it can be subject to British inheritance tax.
|Permanent home||Ständige Wohnstätte|
|Habitual abode||Gewöhnlicher Aufenthalt|
|General Fiscal Code||Abgabenordnung|
|Income Tax Code||Einkommensteuergesetz|
|Corporation Tax Code||Körperschaftsteuergesetz|
|Inheritance and Gift Tax||Erbschaft- und Schenkungsteuer|
|Double Taxation Convention||Doppelbesteuerungsabkommen|
|Centre of Vital Interest||Mittelpunkt der Lebensinteressen|
Author: Peter Scheller, Steuerberater – Master of International Taxation
- Double Taxation Convention
- German corporation tax
- German income tax
- habitual abode
- Inheritance and Gift Tax