date | theme

27. January 2021 | Taxation of corporations in the USA: dividends from subsidiaries

4. March 2021 | Founding a company in the USA – you should know these rules as an investor!

5 March 2021 | Taxes in the USA for natural persons: Tax liability & taxation

10. March 2021 | Hiring employees in the USA – Labour law and other special features

17. November 2021 | Emigration to the USA: what wealthy Germans should pay attention to (this article)

Anyone who wants to emigrate to the USA must pay attention to many tax conditions. If assets continue to be arrested for tax purposes in Germany, this can lead to double taxation. Although there are double taxation agreements (DTAs) between the USA and Germany in the area of income taxes as well as inheritance and gift tax, other tax regimes may also be involved. Thus, the DTA applies in the USA only with regard to federal tax. If a US state also levies taxes, the DTA does not apply here. In addition, you should make a tax-free sale of real estate in Germany if possible before the time of emigration, because this is always taxable in the USA. If you continue to live in Germany after emigrating to the USA, you should clearly define the center of life in order to avoid double taxation. In addition, a work permit in the USA requires a tax obligation, even if you live temporarily outside the USA.

For many, emigrating to the USA may still seem like a fulfillment of a long-cherished desire for freedom. A huge country with seemingly endless opportunities for entrepreneurial as well as personal development still awaits people of different origins. But unlike in previous centuries, the hurdles of naturalization in the US are now considerable. In particular, the US attaches importance to not taking in economic refugees. For example, those who are unable to provide regular medical care have little hope of obtaining one of the coveted residence permits.

So a certain minimum level of wealth is quite appropriate for everyone who wants to emigrate to the USA. Anyone who also brings capital to invest in the US economy is of course also welcome. But you also have to consider all tax consequences. After all, a little carelessness can already show delicate financial effects.

For this reason, we now look at some selected aspects that should be considered especially when emigrating to the US. Many of the tax conditions described here are also valid in this or similar form for other destinations.

Our first aspect with regard to emigration to the USA still concerns the previous life of a person willing to emigrate in Germany. If you assume that you have good chances to emigrate to the USA, you should seriously consider selling your home as a homeowner. The sale of a self-used residential property is fortunately tax-free in Germany. However, such a tax privilege is unknown in the United States. This also applies to a tax-free real estate sale in Germany after a ten-year speculative period.

However, those who wait for the sale of such properties until the unlimited tax liability in the USA becomes effective risk the taxation of profits in the new home country. And this can happen faster than you might think. Because as soon as the US immigration authority issues the desired residence permit, you are automatically taxable there – with the world income. Therefore, taxation in the USA also includes the profits from the sale of a German property.

For this reason, the early sale of real estate in Germany before obtaining unlimited tax liability in the USA is of great interest for those who want to emigrate there.

It is often the case that international companies move their employees to locations abroad. So if you move to the USA as an employee in this way, you will also get the work permit there. However, if you leave the USA again without losing the work permit, this implies tax consequences. Because the tax liability in the USA is bound both to your own nationality and to the work permit. Therefore, a later departure from the USA may lead to double taxation in the USA and in the new country of residence, provided that no DTA provides a remedy.

Now to the delicate question of what to consider if you want to emigrate to the USA, but at the same time maintain a second home in Germany. In this case, there is in principle a tax liability both in the USA and in Germany. Due to the bilateral DTA, however, there is a division of the taxation right. This is the way to avoid double taxation. However, in order to determine which of the two countries is entitled to unlimited taxation, one has to determine the center of life.

The center of life is to be understood as the place where the essential personal interests of a taxpayer are founded. If, for example, a worker moves to the USA without taking his family with him, the center of life can continue to be in Germany, depending on the frequency of family home travel. However, if the family also moves along, then the residence orphaned in Germany is hardly tax relevant, because the center of life is now in the USA. In principle, this also applies to all other residences that are maintained as holiday apartments.

As can be seen, the center of life is of particular importance in the tax design of dual residence in Germany and abroad. So if you can tax certain incomes that are particularly relevant for tax purposes in one of the two countries favorably (see our example regarding the sale of real estate), then you should align the conditions when establishing the tax obligation accordingly.

Before emigrating to the USA, the active design of the center of life is also important for another reason. If the conditions with regard to the center of life seem unclear, the tax authorities in both the USA and Germany can find arguments to justify an unlimited tax liability in the respective country. So it is prophylactically advisable to deal with the aspect of the justification of the center of life as early as possible with expert knowledge. Under certain circumstances, binding information from the German tax office may therefore be useful.

However important the center of life may be in establishing unlimited tax liability in the respective country, the DTA is also decisive. However, it can only be used meaningfully when the question of tax liability has been clarified. This is happening at national level. Nevertheless, the DTA has a great influence on taxation, because it contains the rules on which the contracting states have agreed in the distribution of the income tax otherwise applicable in both states on the worldwide income.

Taxation is primarily carried out in the country in which the taxable income is incurred. If, for example, you have established your primary residence in the USA, but at the same time you also receive rental income from renting a property in Germany, then the DBA makes the rental income in the USA virtually tax-free. This leads to a regular taxation of rental income in Germany. For this reason, the taxation of corporate profits must also be seen in a differentiated way. The same applies to other types of income. In particular, the taxation of wages, salaries and other income from contractual labour relations generally takes place in the country where an employee performs his work.

A special exception here are sometimes severance payments that you receive after leaving a company. Because these can be taxable in the new country if a payment is made only after emigrating, for example, to the USA. The taxation of phantom shares can also require tax expertise by a tax consultant in the field of international tax law.

The conclusion of our considerations should be the aspects of gift and inheritance. Just as in Germany, there is also a tax on the transfer of assets in the USA. Whether this takes place in the context of a gift or inheritance, this also affects worldwide income and thus also capital transfers that may take place abroad. So in a situation in which, after emigrating to the USA, while maintaining a residence in Germany, a transfer of property occurs, both states are entitled to an inheritance or gift tax. Fortunately, however, there is a specially concluded DTA between the USA and Germany. Thus, in this area too, one enjoys protection against potential double taxation. And if you do it skillfully, you can even benefit from significantly higher free amounts in the USA.

However, this special DTA applies only at the federal level in the US. If the state in which you are taxable after emigrating to the USA also imposes such a tax, then there is no protection for this. However, this usually occurs to a rather small extent.

Nevertheless, this DTA is a stroke of luck, because only a few countries have signed such an agreement with Germany so far. And in other bilateral tax negotiations, international DTAs have hardly played a role to avoid double taxation in the area of inheritance or gift tax. One may assume, however, that the progressive globalization, which requires a pronounced affinity for emigration, especially among wealthy people, leads to further adjustments and conventions worldwide in this regard.