The question of whether a tax residence in Germany remains after an alleged move from Germany to a foreign country is of utmost importance in practice. It is not uncommon for cases to arise in which taxpayers are superficially certain that there is no (longer) unlimited tax liability in Germany. On closer examination, however, the tax situation often turns out to be different. The regional tax court of Baden-Württemberg (“court”) recently had to rule on such a case (ruling of 4 August 2022 – 1 K 2898/21). In addition, the ruling contains valuable information on the order of examination in the context of determining residence under treaty law.
The plaintiff was born in China and is married. The joint child was born in Germany. The wife is also the mother of a child from her first marriage. The plaintiff and the wife are German nationals. The plaintiff has a German and a Chinese driver’s license. In China, he was first granted a tourist visa, then a residence permit and later a work permit. Together with the wife, a house (property area 1,703 sqm, living area 801 sqm) was built and occupied during the years in dispute. During an inspection of the property, the absent plaintiff admitted by telephone that the property was available to him at any time. A car used by the plaintiff was parked on the property. The plaintiff had a dressing room in the house, including personal clothing, as well as a safe stocked with cash. A laptop was confiscated, the memory of which contained pictures of family parties and other celebrations. The housekeeper questioned stated that the plaintiff had been to Germany several times a year and lived in the house regularly. The plaintiff’s wife had stayed in the house at all times except for vacation days. The plaintiff was also authorized to dispose of the accounts of two domestic limited liability companies and maintained business relations with a domestic bank. Upon reviewing the credit card statements, it was determined that the plaintiff had regularly made purchases in supermarkets and visited numerous restaurants in Germany.
Back in September 2007, the plaintiff and his wife purchased a property in China, each with half co-ownership. The real estate has a floor space of 939,14 square meter and is thus surface-moderately larger than the house in Germany. In China, as in Germany, the plaintiff also owns a considerable fleet of vehicles. He is the owner of various companies with approximately 320 employees in China and three to four employees in Germany. In total, he has ten companies in China and Taiwan. Regarding his income, the plaintiff states in this respect that he “paid himself only a little managing director’s salary” in the years in dispute. Rather, he had “lived predominantly from … (the) profit distributions (of the Chinese companies)”.
The plaintiff essentially argued that he had moved abroad from Germany in 2008. He had been living separately from his wife and his family since 2006. The house in Germany was merely a “building for the wife” and a “place of retreat in the event of a political crisis in China”. His residence is exclusively in China, “as he lives, works, receives his family and friends there, keeps his personal belongings and runs his companies from there since 2007.” When he was in Germany on business, he often did not stay in a hotel, but “at his former residence” for cost reasons. During vacation periods, such as Christmas, Chinese New Year, New Year’s Eve and Easter, the plaintiff always received his family in China and did not come to Germany. Family, friends and acquaintances regularly held barbecues and parties at the villa in China. For tax purposes, the Chinese tax authorities certified the plaintiff to be a “Chinese fiscal resident”.
The court had to clarify whether the plaintiff’s unlimited tax liability had ended due to an abandonment of his domestic residence and, if this was not the case, in which country the residence under treaty law was located. The different connecting factors – economic, personal and factual – to China and Germany required extensive consideration.
Decision of the court
Residence under domestic tax law
The court concluded that the plaintiff always had a residence in Germany and was therefore subject to unlimited tax liability in the years in dispute. A residence in Germany is characterized by premises suitable for permanent living, which the taxpayer can use at any time, whereby no minimum period of residence is stipulated. The decisive factor is the so-called key power, which in the opinion of the court the plaintiff undoubtedly held. The plaintiff was entitled to a right of use due to the co-ownership position, which was not limited by agreements. In addition, the design and furnishings of the premises were tailored to the plaintiff and went far beyond a simple sleeping accommodation.
If a family residence exists, it must be determined separately for each person whether the family residence also constitutes a tax residence. In principle, in the case of spouses who do not live separately, the place where the family lives is deemed to be the residence. It is irrelevant whether the spouses are physically distanced, e.g. because one spouse primarily resides abroad. Contrary to the plaintiff’s view, in the Senate’s opinion the plaintiff did not live separately from his wife. Rather, the plaintiff and his wife lived in a domestic community according to an overall view, which can exist even if the apartments are separate. The fact that the spouses jointly regulated matters concerning the house, spent important celebrations and occasions with the children together and the spouses also worked closely together professionally is an indication of the existence of an existing domestic community. Financially, too, there was a mutual authority to dispose of the spouse’s private account. This does not correspond to “the reality of life” of a couple living separately.
The plaintiff’s explanations regarding his property in China, which is larger and just as well tailored to him, were not otherwise able to convince the Senate. The fact that the plaintiff also has a place of retreat in China to which a bond exists is harmless. A taxpayer may have several residences and domiciles at the same time. The mere establishment of a residence abroad does not result in the domestic residence losing its quality as such. Rather, it must be consciously abandoned.
Residence under treaty law
Unlimited tax liability in China
Since the plaintiff has a resident in Germany and is thus subject to unlimited tax liability, he is also resident in Germany pursuant to Art. 4 (1) DTT-China. It was questionable whether he was also resident in China, with the consequence that the tie-breaker rule (Art. 4 para. 2 DTT-China) would have to be examined. Residence under treaty law is to be examined on the basis of location-related characteristics and is not governed autonomously by the treaty (Art. 4 para. 1 sentence 1 DTT-China). Based on the investigations of foreign law by the court, the plaintiff would have had to be permanently resident in China according to Chinese tax rules or stay in China for at least five years without relevant interruptions. Based on the days of residence, the senate considers these requirements not to be met and concludes that the plaintiff is not subject to any personal unlimited tax liability in China. The certificate of residence issued by the Chinese tax authorities has no binding effect on Germany. The plaintiff is exclusively deemed to be resident in Germany. A permanent place of residence or the so-called center of vital interests is not relevant.
Permanent residence and determination of the center of vital interests
In addition, the court states that even if the plaintiff were assumed to have unlimited tax liability in China, he would still be considered a resident of Germany. The plaintiff has premises in China as well as in Germany which he can and wants to use for permanent living at any time, thus a permanent residence (Art. 4 para. 2 letter a DTT-China). Finally, it is relevant where the center of vital interests is located. The decisive criterion is, in particular, the close relationship of the plaintiff to his wife and son, who have their center of life in Germany. The fact that there are also family relationships in China does not create an equivalent personal bond. The court also looks at the economic circumstances, in particular the importance of the plaintiff’s companies in China and Germany, and cannot establish that the economic ties to China predominate. The extensive weighing of the most diverse ties of the plaintiff justifies the assumption that the center of the plaintiff’s life interests is in Germany.
Comments on the decision
Residence under domestic tax law
The classification of the villa in Germany as a tax residence cannot be surprising against the background of the facts described. The decision clearly shows the range of possibilities that are available to the tax authorities to determine the facts of the case. In the present case, the property was observed, searched, account statements evaluated and entries from the registration authorities and the German Federal Financial Supervisory Authority included. For practical purposes, it should be noted that a departure from Germany must be made “if, then also correctly and completely”. The decision is in a series of also older, but publicly effective examples (e.g. Boris Becker and Nadja Auermann), which show that the tax authorities have a broad understanding of a German residence. The most recent example of this is Alischer Usmanow, who, according to a variety of current reports, is given a residence in Germany through a house located at Tegernsee. In the case of unclear circumstances (e.g. inherited parental home in Germany or use of a property as a vacation home), the circumstances should be worked through with the tax advisor and the further course of action discussed.
Residence under treaty law
The decision of the court makes it clear that legal practitioners must deal with foreign law in multi-country constellations. The scope of application of a double taxation treaty is only opened if the person is resident in one or both contracting states. In the present case, the court concluded that there was no unlimited tax liability in China. It should be noted that each country applies different criteria for unlimited tax liability. As soon as a (personal) unlimited tax liability exists on the merits, the foreign state is free to decide in what way and to what extent (factually) this right of taxation is exercised. Whether national preferential regimes exist, such as the relatively recently introduced lump-sum taxation in Italy for certain income, has no effect on treaty eligibility. As a rule, a comprehensive personal tax liability exists irrespective of such special tax concessions. If Germany wishes to make a move to a country with a preferential tax regime unattractive, this requires an adjustment of the DTT. Spain can be cited as an example of this: Spanish tax law has an option for taxpayers to be taxed as “non-residents” for a certain period of time (“Beckham Law”). However, the use of this option requires unlimited personal tax liability in Spain. Consequently, a special provision was included in the protocol to the DTT in order to prevent the persons concerned from becoming residents of Spain under treaty law.
The decision of the court shows that high demands are placed on the abandonment of domestic residence and that this must not be taken lightly. This also applies to supposedly clear-cut cases in which, for example, only a vacation home or an otherwise vacant inherited property exists in Germany. The tax authorities have the necessary tools to determine the facts. Without a legally secure clarification, the sword of Damocles of an unrecognized unlimited tax liability with the associated consequences always hovers over the taxpayers concerned, in addition to possible consequences under criminal law. Especially in the area of inheritance and gift tax, this can lead to a late but rude awakening.
For the purpose of determining residence under treaty law, it must be stated that the necessary attention must be paid to determining the personal tax liability in the foreign state on the basis of the foreign law. If there is a dual residence and the determination of the center of vital interests is necessary, the personal center of vital interests – i.e. the family – must be given greater weight in practice, at least in the case of married persons.
This article was first published in: Handelsblatt online, Steuerboard, 5 October 2022 (in German)