Tax Traps - Important Considerations for Moving Back to Germany

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published on 12 August 2022 | reading time approx. 3 minutes


Non-representative surveys show time and again: Those who consider returning to Germany after a few years of exciting and successful work in the PRC hardly ever return for tax reasons!

Nevertheless, it is very important to check the tax implications of a withdrawal in good time and, if necessary, to take measures to avoid the threat of double taxation. The complex topic will be briefly illustrated by means of a few examples:

Case 1: Acceptance of a possible inheritance in Austria

The Family E. has German and Austrian roots. Mr. E. is an engineer for a Munich company. Mrs. E. is to receive an extensive real estate asset transferred within the framework of the so-called anticipated succession. In order to manage the assets, she must live 'close to home' in Austria.

Solution: Germany levies gift and inheritance tax on the worldwide donated/inherited assets for unlimited taxpayers. Austria abolished gift and inheritance tax in 2008. The People's Republic of China does not have gift and inheritance tax. If the family moves to Germany and Mrs. E. receives the Austrian real estate property transferred, the transferred assets are subject to German gift tax. It would have to be examined to what extent a transfer before withdrawal is possible and how the transfer has to be made so that no gift tax is incurred.

Case 2: Shares in a Chinese company

Mr T. is a shareholder and managing director of a Chinese company. He has also built up an extensive securities portfolio which is managed outside the PRC by an asset manager in Hong Kong. He would like to spend his retirement in Germany. The shares in the Chinese company are to be sold to his Chinese partner.
Solution: If Mr. T. sells the shares in the Chinese company after retiring to Germany, the capital gain (sales price minus acquisition costs/equity) is subject to German income taxation. Important here - the capital gain in the PRC is also taxed in Germany, unless the Sino-German double taxation agreement stipulates otherwise. The same applies to the increase in value of the securities account. The capital gains from the securities account held abroad are subject to German income tax in Germany as income from capital assets.

Case 3: Programmer working in China

Mr. K. works as a programmer for the Chinese subsidiary of a smaller German company. Mr K's wage tax and social security contributions are paid to the local competent authorities in the PRC. Due to the pandemic, Mr. K. would now like to work in Germany in the future, but no secondment is to take place: Mr K. plans to work 'remotely' in a home office in Germany for the Chinese company and continue to receive his salary from China.

Solution: In addition to social security aspects, it is important to clarify in this case whether the Chinese subsidiary may establish a permanent establishment for tax purposes through Mr. K.'s permanent activity in Germany. Furthermore, Mr K. is certainly subject to unlimited income tax liability in Germany, as he maintains a 'home office' in Germany - which implies a place of residence. Presumably, therefore, the salary is also subject to wage tax in Germany. It would have to be checked locally in China to what extent Mr K. is no longer subject to wage tax there.

Case 4: Senior management receives wages from Germany

Mr. N. holds a responsible position as "Legal Representative" at a Chinese subsidiary. In the future he is to drive the business forward in Germany again to a greater extent. He will only travel to China sporadically. Nevertheless, he is to receive a salary in China from the subsidiary there.

Solution: As a "legal representative", Mr. N. is certainly subject to wage taxation in China for his salary paid out by the subsidiary. At the same time - insofar as he lives and works almost exclusively in Germany - Germany will have the taxation right on the income, including the salary paid out and taxable in China.  It must be examined to what extent double taxation can be avoided, e.g. by splitting and allocating the wage and by applying for DTA benefits.

Conclusion

The danger of double taxation of income and the possibility of taxing unrealized profits earned during the foreign phase should not be underestimated.  Often, a precise analysis of the facts and an exact planning of the timing already helps to avoid tax pitfalls. We therefore recommend that the possible tax burdens resulting from a withdrawal be examined with experts at a very early stage.

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