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10.07.2020 | Perpetual Traveler: center of life and habitual residence as a criterion for taxation (this contribution)

13.07.2020 | Limited and unlimited tax liability in Germany

22.07.2020 | Functional relocation and functional doubling in International Tax Law

Perpetual Travelers are people who stand out through a special lifestyle: permanent travel. A side effect that many Perpetual Travelers strive for, at least secondary, is the avoidance of taxation, both in Germany and abroad. The decisive factor is that you only stay in one place for a certain time. Because if you travel a lot abroad, but from a tax point of view still more than 183 days in a place in the country, this is considered the usual stay. So this criterion determines the fundamental question of tax liability. On the other hand, someone who stays in Germany less than 183 days a year can also be taxable in Germany. In this case, the existence of a center of life determines the tax liability. This is the case, for example, when you return to your own family or have the key power over a living space. Even if there is no domestic reporting obligation, this condition can still be met.

In the video we explain the advantages & disadvantages of the commercial stamp of a classic GmbH & Co. KG and the possibilities of avoidance.

1st Definition of Perpetual Traveler

1.1. What is a Perpetual Traveler?

For many people, the idea of a continuous world trip is very tempting. Some idealists consider themselves globetrotters because they see themselves as inhabitants of this globalized world. For these cosmopolitans, nationalities and national borders are concepts from bygone times, which they still constantly encounter during their travels. Others travel constantly from country to country for tax reasons. For permanent travelers with such or similar motives, the term Perpetual Traveler has been minted in English.

1.2 Tax liability – a question of residence?

All these extraordinary persons have one thing in common: they do not have a permanent residence – neither at home nor abroad. However, in some cases this can only be verified by a more precise analysis. However, because the place of residence and comparable situations decide on the tax liability of a person, this question is often of high relevance for Perpetual Traveler. Again, very often the tax framework in which they find themselves in their situation is rather unclear to them. This also applies to many emigrants. Therefore, we dedicate our contribution to the topic of residence, residence and center of life from a tax point of view.

However, other people who travel around the world because of their profession may also be the subject of an in-depth analysis regarding their tax liability in Germany. For example, members of the Handelsmarine or internationally active commercial representatives are affected. That is why we include their situation in our considerations.

2.Legal framework on tax liability in Germany

Of course, our article only covers the effects of the criteria residency, habitual residence and center of life on the tax liability of a Perpetual Traveler from the point of view of German tax laws. However, this only succeeds if factors that are relevant abroad are also included. Even the first important condition that we want to shed light on is of equal importance in most other countries of the world.

2.1. Residence and residence

2.1.1. Tax law and reporting law are independent of each other in Germany

Residence plays a central role here. Because who has a residence in a country, can also be considered resident there. Those who object that this also applies to holiday apartments are even right. However, at least in German tax law, residence is to be understood as the place where one mainly intends to live. Therefore, a distinction is also made in the registration right between a primary residence and a second residence.

In this context, a further reference to the legal term residence is required. Because the residence in Germany is the subject of several important laws. Thus, in § 8 AO one encounters him from a tax point of view, whereas in a similar definition he also found his way into the Social Security Act. And of course, as I said, it is also the subject of the right of reporting, albeit with its own definition, which is irrelevant in tax law.

2.1.2. And the register can be of fiscal importance

2.1.2.1. Verification of the residence of an emigrant abroad

On this basis, it is understood that a Perpetual Traveler does not have a residence. In contrast, a classic emigrant simply exchanges his domestic residence for a foreign one. However, if you fail to indicate the task of the old, domestic residence at the registration office before moving, this can lead to the fact that you can still be considered a taxable person in Germany. Here, the proof of the registration authority abroad usually helps to clarify this fact.

2.1.2.2. Perpetual travelers are without residence

If, however, a Perpetual Traveler should forget to register with the registration office before his final departure from Germany, then he later lacks the opportunity to prove that he was instead resident abroad and therefore taxable there. After all, the Perpetual Traveler is usually without a permanent residence. Thus, they are not actually resident in any country. In this situation, the tax administration is likely to insist on continuing to regard him as a taxable person. Because even if there is no direct connection between the registration right and the tax law, the tax authority can consider an officially existing in the registration register domestic address of a Perpetual Traveler as a sufficient indication for a residence in Germany and thus for a tax liability in Germany.

2.2. What is the habitual stay of a Perpetual Traveler?

Another condition that can determine whether someone is taxable in a particular country is determined by his habitual residence. In the German tax code, it is defined as a basically temporal stay over a period of more than half a year (§ 9 AO). This also applies, even if short-term stays abroad fall within this period. So even if you assume a leap year and you halve the number of your days, you get a period of 183 days. So a Perpetual Traveler who wants to avoid being considered a taxable person in Germany should make sure that he does not meet these criteria.

In addition, the legal provision for habitual residence is held in a very general form. This also allows the use of an alternative condition to determine a person’s tax liability domestically. This means the term center of life, which we focus on in the following section.

2.3.1.1. The focus of life – more than homesickness

Basically, the legislator defines habitual residence as the place for which, on the basis of various, indeterminate indications, it can be generally assumed that a person associates with it more than a short-term interest in a residence. In a word, this is the centre of life. In addition to the family or a permanent friendship or partnership, this also includes the opportunity to gain access to this place of residence at any time. Therefore, it does not matter in this respect whether someone has a regular residence neither in Germany nor abroad or whether he always stays shorter than 183 days a year on site. Even the fact that there is a regular residence abroad can only serve as a counter-argument to a limited extent in some cases. Thus, this particular interest in a place in Germany, to which one occasionally returns, is enough to justify a tax liability in Germany.

2.3.1.2. When a living space becomes the center of life

This place is to be understood as a living space located in Germany. Basically, four walls and everything you need to spend the night are enough to create a taxable situation. Because if you can get access to this housing at any time and independently of other people, then this is also tax relevant. After all, despite the usual life on a trip, this ensures a place to which you can return at any time. So if you really want to spend your life all over the world as a Perpetual Traveler, you should avoid from a tax point of view, such a place for the occasional or later retreat.

And what applies to Perpetual Travelers is also important for tax purposes in other comparable situations. Thus, the presence of a center of life in Germany is also relevant for tax purposes when planning a multi-year trip around the world (for example by sailboat) or a longer study stay abroad. But it can even affect emigrants who think that with a residence abroad, the tax liability in Germany automatically expires.

2.3.2. Example on the fiscal significance of the center of life

In fact, this very circumstance led to the fact that a legendary German tennis player, despite the opposite motives, was considered taxable domestically from the point of view of the financial administration for many years. Because he had a key with which he could gain access to a single living space in Germany at any time and independently of others. Although this apartment belonged to the tennis professional’s sister, it was for the tax administration, who only learned about this secret place some time later, rather a confirmation of their view that tax evasion was present. Although the accused officially stated that he had his residence in Monaco, his center of life was still in Munich. Thus, the general condition of the legal definition of habitual residence via the criterion of the center of life has been fulfilled in this case. Consequently, the disregard of the duty to tax the income of the tennis star was punished as tax evasion.

3. Two types of tax liability in Germany

At this point a small excursion into a closely related topic is appropriate. Because what we have generally called tax liability in this article so far is actually subject to a differentiated consideration. In principle, two types of tax liability in Germany must be distinguished, the limited and the unlimited tax liability. This also applies to most other countries in the world. However, because this is a separate issue, we also want to devote a separate, detailed contribution to it.

4th tax advice before leaving Germany saves taxes

Once again, it shows how important professionally competent tax advice is for tennis players and other potential tax evaders, but above all for Perpetual Travelers. Because without clarifying these important tax aspects before leaving Germany, you can experience surprises if you enter German soil again. Therefore, all those who flirt with a move out of Germany – whether because of the adventure or for other private reasons – the forward-looking clarification of their future tax liability in Germany but also in all other destinations relevant to them is recommended. Of course, this is especially true if the departure is in a tax context.