Moving abroad - Capital gains tax on investments
November 11, 2011 | 80,00 EUR | answered by Michael Herrmann
Dear Sir or Madam,
In one of the coming years, I am planning a longer stay abroad starting in April (a world trip lasting 3-4 months to 1.5 years). Currently, I am self-employed, but my office space has already been terminated and will be given up. My wife is a civil servant on a three-year parental leave. A return to Germany is likely, and new office space will be sought for rent upon return, so the old space will not be used again.
Currently, we are renting an apartment, which we want to sublet for the same price we are paying in rent, furnished and for a limited time, and then reoccupy upon return. We will store our belongings and furniture in the apartment, but it will not be accessible to us. In addition, we own a rental property in Bochum, which has never been used by us and is fully rented out. There is no rental to relatives. We are aware that the rental income from the property in Bochum must continue to be taxed in Germany even upon leaving.
Our consideration now is to deregister from Germany (destination unknown or alternatively an EU country - such as Spain or any other country worldwide). We are likely not going to register anywhere else and will not spend more than 6 months in any country during our trip. Deregistering would, in our opinion, allow us to realize capital gains tax-free from certificates and stocks we hold while we are deregistered from Germany. However, it would likely mean that child benefit and parental benefit would not be paid to us. The financial benefits would outweigh the disadvantages as long as tax-free realization is possible. We are aware that dividends must still be taxed in Germany even upon leaving.
Our questions are:
1) Is a tax-free sale of certificates and stocks shortly after leaving possible without any kind of exit tax / valuation tax taking place (we hold significantly less than 1% of the corresponding companies as stocks or certificates)? Is it sufficient to provide the deregistration certificate to the bank holding the stocks beforehand?
2) Can we expect our departure to be accepted for tax purposes? Are there any obstacles due to the sublet apartment or the rental property (all ties to Germany must be severed, no living space must be available)?
3) What timeframes do we need to adhere to? Is a few months' deregistration sufficient, or must there be at least half a year of deregistration in the calendar year, or even more? Is the relevant reference period a calendar year, or does half a year of absence over the New Year count? Must the periods be consecutive, or is the total duration of absence considered?
4) Is it relevant what destination we specify upon deregistration (unknown, EU country, other country)?
5) Are there any other tax / financial disadvantages of deregistration apart from the loss of child benefit and parental benefit, as well as the necessary adjustments to insurance policies?
Dear inquirer,
First of all, thank you very much for your inquiry, which I would like to answer based on the information provided and in the context of your request for initial consultation. The response is in accordance with the facts presented. Missing or incorrect information about the actual circumstances can affect the legal outcome.
It is important to consider that unlimited tax liability is only eliminated if you do not have a domicile or habitual residence in Germany throughout the entire year. Otherwise, there is a temporary unlimited tax liability, so the special provision of § 32b (1) No. 2 of the Income Tax Act (EStG) in conjunction with § 2 (7) sentence 3 of the EStG applies.
By explicitly including § 2 (7) sentence 3 of the EStG, it is ensured that the emigrant/immigrant with domestic income is taxed according to his ability to pay through the application of the progression clause. Taxable income then includes domestic income. Foreign income is tax-free, but is added to determine the tax rate. A tax exemption for capital income may not be possible in some cases.
Regarding 1) Only if you are not, even temporarily, subject to unlimited tax liability in Germany in a calendar year, your capital income is tax-free. This applies to all capital income (interest, dividends, distributions, capital gains, etc.), with the exception of the income mentioned in § 49 (1) No. 5 EStG (including dividends from domestic debtors). Withholding tax as a form of income tax collection cannot be levied on non-resident taxpayers, as there is no right of assessment. Therefore, the new state has the right to tax capital income from the time of establishing residence. There are no transition periods for this.
You must provide the bank with a residence certificate issued by the foreign tax authority. This allows the bank to assume that there is only limited tax liability in the country.
Regarding 2) Aside from the temporal component (temporary unlimited tax liability), the central issue here is the abandonment of residence.
Unlimited tax liability according to § 1 (1) EStG is eliminated when any residence and habitual abode in the country is abandoned, even if no new residency is established worldwide, such as in the case of a world tour. However, the tax office must be able to see a long-term absence. Therefore, temporary rental or leaving the apartment vacant is to be viewed critically.
Regarding 3) As described at the beginning, only temporary absence leads to temporary unlimited tax liability in Germany. You are subject to unlimited tax liability exactly for the period during which you have a residence or habitual abode in Germany, even if it is only for one day.
Regarding 4) This is of course relevant. For the period in which you are not or only partially subject to tax liability in Germany, your income is subject to taxation in the country of your choice. You will only save taxes if the tax laws in that country tax the relevant income at a lower rate. Please note point 1) that you will only be exempt from withholding tax if it is certified that the income is taxed in another country.
It is also important to consider the exit taxation to low-tax areas. In this case, according to §§ 2-5 of the Foreign Tax Act, domestic capital assets can continue to be taxed for 10 years if the assets remain with domestic banks.
Regarding 5) Unfortunately, this question is too general to be deeply discussed in this online consultation. Questions about non-tax issues cannot be answered here.
I hope that with this information, I have provided you with a sufficient overview of the situation within the scope of your request and this initial consultation.
Best regards,
Michael Herrmann
Tax Advisor
Diploma in Financial Management (FH)
