Taxation of severance payments for residents in England
August 16, 2011 | 100,00 EUR | answered by Dipl.BW/SB Ulrich Stiller
I am currently living in Germany (I am a German citizen) and planning to move to England (Coventry) for tax optimization purposes. I already have a house in England which is currently occupied by relatives.
A severance payment of 500,000 euros will be paid out in March 2012, covering the salary loss for 8 years until the age of 65 as early retirement.
When should I move to England, giving up my German residence, in order to fall under English taxation regarding the German severance payment (Double Taxation Agreement with the UK)?
Would moving in March 2012 be enough to fulfill the 183-day requirement?
Can I make use of the Non-Dom rules, as mainly applied to the City of London, in my case?
Dear inquirer,
Thank you for your inquiry, which I would like to answer based on your information and in the context of your situation in a preliminary consultation as follows:
If you do not have a residence or habitual abode in Germany, there is no unlimited income tax liability.
However, you may be subject to limited income tax liability if you earn income within the meaning of § 49 EStG.
The severance payment for termination of employment is covered under § 49 (1) No. 4d EStG and is therefore subject to limited income tax liability in principle. According to the new double taxation agreement (DBA) of 30.12.2010 Article 14 (1), taxation is carried out in the residence country, England. According to Article 4 of the agreement, you are considered resident in England if you are subject to tax there due to your residence or habitual abode.
However, there is the so-called "Remittance Base Clause", under which German tax authorities tax severance payments in Germany if it is not proven that the payment was remitted to England.
Due to the DBA of 30.12.2010, the payment of the severance in Germany would be tax-free if you no longer have a residence or habitual abode in Germany in March 2012 when the severance is paid out, but have a residence or habitual abode in England and the severance payment is actually transferred to an English account. In this case, you can make use of the Non-Dom rules, as the severance is paid to an English account.
I hope this information is helpful to you.
Kind regards,
Ulrich Stiller
Tax Advisor/Graduate Business Administrator
