Connection Factors
To what extent is domicile or habitual residence relevant in determining liability to taxation in your jurisdiction?
German law does not recognise the concept of domicile. In Germany, tax liability is determined by the concept of residence. An individual has German residence for tax purposes if he or she has either a permanent home or a habitual abode in Germany. The worldwide income and assets of individuals whose permanent home or habitual abode is located in Germany (hereinafter referred to as: “residents”) are subject to:
- income tax; and
- inheritance and gift tax (“IGT”).
If domicile or habitual residence is relevant, how is it defined for taxation purposes?
An individual’s habitual abode is at the place where he or she stays under circumstances that allow the assumption that the stay is not only temporary. Generally, a person is deemed to have a habitual abode in Germany if he or she spends more than six months in Germany without any significant interruptions. An individual has his or her permanent home in Germany if he or she maintains a dwelling in Germany under circumstances indicating that he or she will maintain and use such dwelling.
To what extent is nationality relevant in determining liability to taxation in your jurisdiction?
Generally, German nationality does not trigger any tax liability in Germany. However, German citizens may be subject to extended tax liability after emigration from Germany.
What other connecting factors (if any) are relevant in determining a person’s liability to tax in your jurisdiction?
Besides permanent home and habitual abode, there are no other connecting factors for an individual’s tax liability with his or her worldwide income in Germany. However, even if an individual has no permanent home or habitual abode in Germany, income tax is generally levied on his or her German-sourced income.
General Taxation Regime
What gift, estate or wealth taxes apply that are relevant to persons becoming established in your jurisdiction?
Individuals becoming established in Germany may be liable to taxes if they take up a permanent home or habitual abode in Germany. IGT applies if either the transferor or the transferee is a resident in Germany.
IGT rates range from 7 to 50 per cent depending on the relationship between the transferor and the transferee and the value of the assets transferred. Spouses and descendants pay IGT at a rate of 7 to 30 per cent. Transfers between most other relatives are taxed at a rate of 15 to 43 per cent. Between unrelated persons, the applicable tax rate is 30 or 50 per cent (for more than EUR 6 million). The following tax-free allowances apply:
- spouses receive a personal allowance of up to a maximum of EUR 500,000 and a maintenance allowance of up to a maximum of EUR 256,000; and
- descendants receive a personal allowance of up to a maximum of EUR 400,000 and an age-dependent maintenance allowance of up to EUR 52,000.
Wealth tax has not been levied in Germany since 1997. Since then, there have already been numerous impulses in the political landscape for either reintroducing the tax or introducing a one-time wealth fee. This demand could even be found in some of the parties’ election programmes for the 2021 federal election. Given the current coalition in the federal government, the introduction of a wealth tax is unlikely.
This Q&A ist part of the global guide to Private Clients and was first published in: International Comparative Legal Guides (ICLG), Private Client 2024, pp. 77-85, 31 January 2024
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International Comparative Legal Guide_Private Clients 2024_Chapter Germany