What preparations need to be made?
Moving abroad, whether temporarily or permanently, requires careful preparation. Looking for a new home, finding the right school for the children, clarifying health insurance matters, cancelling club memberships, and so on... are all time consuming.
However, the potential legal and tax consequences of moving away should also be determined well in advance. This does not just relate to matters of taxation in Germany. In order to avoid unpleasant surprises, one must contact local advisors in the state of entry before moving. This identifies any unfavourable local (tax) law risks.
“It is not just tax law that involves hidden risks. Particularly existing prenuptial agreements and wills should undergo an ‘exit check’.”
Dr. Nils Häck
Partner
What are the pitfalls of moving abroad?
The (tax) law risks of moving abroad are manifold. Luckily, they can generally be managed with careful planning.
“Exit tax” often presents a particular obstacle for people wishing to move abroad. This entails the German state assuming that the shareholder of a corporation has sold his or her shares at market value for tax purposes when moving away. For emigrants, this risk has a profound effect. In some cases, exit tax effectively prevents people from being able to fulfil their desire to move abroad.
By contrast, less attention is paid to smaller risks that can also have significant negative consequences. Anyone who acquired free float shares before 1 January 2009, for example, can generally sell them tax-free if they are resident in Germany. After moving away, it depends on the local tax law of the state of entry whether or not the profits are taxed. The tax exemption of gains from the sale of real estate outside the (German) speculation period can also be forfeited if the state of entry taxes these gains under its tax law and is not prevented from doing so by a double taxation treaty. Usufruct cases often become uncomfortable in terms of tax if the creator of the usufruct moves away and Germany attributes the income to the beneficiary of the usufruct whereas the state of entry attributes the income to the creator of the usufruct for tax purposes. Beneficiaries of German family foundations are increasingly encountering unexpected tax implications. This occurs when – not infrequently – the state of entry looks beyond the foundation status in terms of tax or directly attributes its income to the beneficiary irrespective of a distribution. There is also a common misconception that German inheritance and gift tax is no longer relevant after moving away from Germany.
However, it is not just tax law that involves hidden risks. Particularly existing prenuptial agreements and wills should undergo an “exit check”. Depending on the structure and local law of the state of entry, agreements or dispositions that were once carefully constructed may no longer maintain their intended legal consequences.
How can the monthly “Global Mobility” event series help?
IIn monthly webinars, we highlight typical (tax law) key areas that become relevant when moving abroad. In the first part of the series, which has already been completed, we dealt with general tax law topics such as exit taxation and the tax consequences of manager and executive mobility. However, topics such as the inheritance and family law consequences of moving abroad were also discussed. Each month, in the second part of the series, we select and analyse one state of entry that has practical relevance in these matters. Together with a local advisor from that respective country, we will discuss peculiarities of local (tax) law specific to that territory. Of course, this also includes the special tax regimes created in some countries, such as Italy, Spain and Switzerland.