Many myths are about so-called tax havens or tax havens. Often these are countries with which you associate a nice, comfortable life. But above all, one thinks of tax exemption in these places. For example, countries whose taxation system is based on the principle of territoriality offer the possibility of keeping foreign income virtually tax-free. Then the question of the residence of the taxpayer is also important. In many cases, it is quite easy to obtain tax liability in these places. Of course, this also applies to any companies that a taxpayer runs. In addition, it may also be necessary for a double taxation agreement to exist with Germany in order to secure tax privileges. This also includes avoiding exit taxation. So as you can see, the search for the perfect tax haven has to be considered differentiated. In addition to your own personal preferences, many other factors should therefore also be included in the determination of the individual tax haven.

Avoid Exit Tax (without double taxation agreement)

1st myth of a tax haven

A tax haven, often referred to as a tax haven, is generally understood as a country or a special, tax-autonomous territory in which you pay hardly any taxes or even no taxes. Although this idealized picture may have certain correspondences in reality and also be very good with other parameters beyond the topic of taxes, such as the climate or the possible lifestyle. However, the tax consideration is in fact usually linked to many factors, some of which only partially provide positive aspects for the classic representatives among the tax havens. Therefore, it should be made clear right at the beginning of our contribution that there is no perfect tax haven in all aspects.

Who has now accepted this unexpected truth, but still wonders why we have continued to write on this article, will be rewarded in the following with very specific information on this exciting topic for his further reading.

2. What makes a tax haven?

Now one may use various criteria to form a definition of the term tax haven. However, the most important component in this regard is the fact that there is little or no tax payable in such a country. However, there may be several reasons for this. Is it because of a particularly low tax rate? If so, does it apply to both individuals and businesses? Or is there no tax on principle?

We have only mentioned a few in a series of possible criteria that can play a role in the study of the phenomenon of tax havens. Other parameters, which are outside the tax nature of the eligible countries (and also have no relation to palm trees, beaches and sunshine), are based on the situation of the taxpayer willing to emigrate himself. They can also be decisive whether a country is suitable as a tax haven. These include, for example, the type and extent of income or the willingness to actually leave the Federal Republic forever. Because many emigrants sometimes suffer from a natural homesickness as well as a new entrepreneurial idea for projects in which the infrastructure in Germany is perhaps much more attractive than in the tax haven. Therefore, the possibility of a possible return to Germany must also be considered in the analysis.

Differentiation of criteria for selecting an individual tax haven

Nowadays it has become very easy to choose an individually suitable residence in the world. Travel is easy, fast and comparatively safe, communication is as good as anywhere and anytime possible. So why take a different approach to lifestyle and taxation?

This is why we are now looking at some of the most important points that are tax relevant when choosing a personal new home.

3.1.Emigration permanently or only temporarily?

Let’s start with the intention of a taxpayer regarding a possible homecoming. If the taxpayer intends to stay abroad permanently, so that a return to Germany is excluded, then significantly more options can be considered than if one assumes a later return, or at least not to exclude them.

3.1.1. Permanent emigration

In the case of a permanent cessation of unlimited tax liability in Germany, it must be checked whether a limited tax liability could possibly exist in the future. This is the case if you establish your residence or habitual residence outside the Federal Republic, but at the same time receive income that arises in Germany. Because then a taxation of these incomes in the country is very likely. In detail, of course, it must then be examined whether a double taxation agreement regulates this differently, but usually the tax sovereignty in such constellations lies with the Federal Republic.

If, however, all financial ties with the homeland are cut during emigration, then there is usually no longer any tax liability towards Germany. In this case, of course, an emigrant has more options in choosing his destination.

3.1.2. Temporary extinguishing tax liability

Even if one intends to leave Germany permanently, one should keep in mind that it may sometimes be necessary to return so that the unlimited tax liability occurs again. This can often also lead to tax consequences, which can be avoided if this eventuality is also included in the determination of the destination country and income abroad. Because even if you originally intended the opposite, a personal reason can lead to a return to Germany.

Therefore, this section is also of interest to those who are relatively sure that they want to stay abroad permanently. Because here we briefly go into the aspects that have to be considered if you only temporarily give up your tax liability to Germany.

The most favourable tax situation is for entrepreneurs who set up a corporation during their stay abroad and then return to Germany. Because then the taxation takes place in the tax cheaper abroad. In comparison, the establishment of a partnership abroad when the taxpayer returns to Germany leads to an inclusion of these incomes in this country. So then comes what was originally to be avoided. Although partnerships abroad offer the opportunity to save considerably on taxes, this applies only as long as you are also a taxpayer locally.

By the way, before moving abroad, it can be helpful to communicate this intention to the tax office and also mention a later return, if provided. This avoids situations in which the financial administration in its later assessments starts from the opposite.

Furthermore, in many cases where there is a limited tax liability with Germany, the existence of a double taxation agreement may be helpful. Because with this one can usually achieve that, instead of Germany, the tax-cheaper foreign country receives the tax sovereignty over the income earned in Germany.

3.3. Tax certificate as proof of tax liability abroad

In order to be able to prove that you are actually taxable abroad when applying a double taxation agreement, German tax offices usually require proof of the residence of the limited taxpayer. This proof, about the tax liability located abroad, provide so-called tax certificates. The conditions under which a state issues a tax certificate can be very different. For example, in most EU countries it depends on the person in question having a residence there for at least 183 days a year. In addition, other options can also be used to obtain a foreign tax certificate. For example, Malta, Cyprus, Italy or Greece offer the issue of a tax certificate if an investment above a certain minimum amount or a flat-rate tax is paid in return.

Tax certificates are also helpful in other ways. Because if it should actually happen that you return to Germany after giving up the unlimited tax liability, then tax offices often require proof of the temporary tax liability of the returnee. For example, if a Perpetual Traveler cannot provide such a document due to his circumstances, then the tax authority may be inclined to assume that the unlimited tax liability has never been abandoned. A tax certificate is therefore always helpful.

3.4. observe withholding taxes, also in tax havens

Although certain locations abroad appear more attractive than Germany in terms of corporate tax payable, it may happen that these supposed tax havens actually collect a withholding tax. However, if there is a double taxation agreement with a country where the taxpayer is resident, the withholding tax can be taxed through this bilateral agreement. However, if there is no double taxation agreement, the withholding of the withholding tax remains. Even with a double taxation agreement, a foreign tax certificate should also be available to underpin the argument to avoid withholding tax.

The issue of withholding taxes is also related to the approach of operating expenses for large, international corporations. In order to tax licence fees in the places where the profit is generated, a company based abroad is required to grant the licence for a fee. At the same time, however, a withholding tax must also be avoided. In order to make this tax as optimal as possible, however, interlinked international relationships are often necessary, which only large corporations can afford.

3.5. use low tax rates in tax havens

This is so self-evident that this paragraph could actually end with very few words. But we also want to offer our readers a little more insight. Because in many countries that are considered tax havens, because there (supposedly) no taxes are levied, this is due to the application of the territoriality principle in taxation. This principle is of Anglo-Saxon origin, but has experienced worldwide spread due to the colonial history of the British Empire.

In the territoriality principle, taxation is linked to the state in which a taxpayer is resident. Only income generated in that country and received by the taxpayer is subject to taxation. However, this also means that foreign income is then subject to tax jurisdiction abroad. Thus, income received by a taxpayer from abroad is considered tax-free in a country that follows the territoriality principle.

In addition, the opposite of the territoriality principle should also be mentioned in some respects. One speaks here fittingly of the world income principle, which Germany also follows in the orientation of its tax law. In this case, all income of an unlimited taxpayer is subject to taxation, regardless of where the source of the income is to be located.

3.6. EU/EEA location: Legal certainty as an advantage

What many emigrants often hardly consider is the fact that in the EU or the EEA area you can also build on the advantage of a fairly uniform legal system in certain aspects. Although most of the legal competences still lie with the respective national legal system, many (tax) legal aspects are regulated uniformly throughout Europe. This is especially the case with important legal content. In addition, the European Court of Justice monitors compliance with these common rules at national level. For this reason, the EU/EEA abroad is a real alternative for German emigrants.

To give an example, a tax certificate issued in an EU or EEA country is recognised in all other Member States. For tax certificates from less trusting countries, the financial administration can also decide differently.

3.7. Tax havens with a favourable investment climate

A further distinction with regard to the country to which one wishes to emigrate is to be made from the point of view of the income to be achieved in the future. Because there are countries that reward domestic investments for tax purposes, while others are more attractive to investors. The former are characterised by low personal tax rates, which primarily favour individual entrepreneurs and partnerships for tax purposes, but at the same time strengthen the domestic economy. Therefore, this is often associated with an emerging economy that also offers other locational advantages, such as skilled staff at low wages. Other countries are more likely to portray investors in a favorable light because they tax dividends low, especially those from foreign sources (the territoriality principle).

So it is also possible to check whether these two advantages, which can be realized in different countries, are combined. In the case of appropriate planning, a later return from the tax haven back to Germany can perhaps take place without having to give up the tax privileges built up until then.

3.8 Exit tax? I'll save myself!

Finally, we point out a curiosity in international tax law. Because in this specific case, you can move abroad as a shareholder of a German corporation without an exit tax.

This is about a move to the United Arab Emirates to Dubai. Because there is a double taxation agreement with this country, which grants the United Arab Emirates tax sovereignty if you are resident there. But this would also mean that one is subject to the exit taxation in Germany. But you can circumvent this by living in Dubai, but refraining from issuing the tax certificate. Instead, it ensures that a residence remains available in the Federal Republic. As a result, the United Arab Emirates cannot claim tax sovereignty. Thus, the unlimited tax liability remains in the Federal Republic, while you yourself live in Dubai.

Although maintaining a residence in Germany is often exactly what you want to avoid as an emigrant to a tax haven for precisely these tax reasons, in some cases it can also be advantageous if you remain taxable as an emigrant in Germany. In Dubai you can change this at any time by issuing a tax certificate. Finally, you get the local privilege of not having to pay income tax.

However, if you want to set up a corporation in Dubai, you basically do not need a local residence. Instead, the employment of a managing director is also sufficient. He also does not need to have a residence in Dubai. For this, however, a permanent residence permit of the United Arab Emirates must be applied for. However, the validity expires if no entry is documented in the passport of the managing director within 180 days.

Conclusion: Saving Taxes in a Tax Paradise – an Illusion?

The statement made at the beginning about the existence of a perfect tax haven, or rather its absence, should now have been confirmed by the plethora of different criteria to be observed in the election. Of course, many of the classic tax havens are still very well represented in an international ranking. But in the end, the assessment always depends on the many parameters that also have to be taken into account. Since these are also often very individual in nature, a correspondingly differentiated analysis is necessary in order to determine the most favorable target possible. The actual amount of tax payable in the chosen country is often only a minor aspect. However, if the widest possible tax exemption is added as a bonus to the other advantages existing at the destination, then you have really arrived at the individual-perfect tax haven.