Tax evasion with real estate in Dubai

In Germany, unrestricted taxpayers who rent real estate in Dubai without specifying this income in their tax return in Germany commit tax evasion. For quite some time, this was largely possible with impunity, because there was no significant exchange of information in the field of taxes between the United Arab Emirates (UAE) and Germany. In the meantime, however, Germany has come into possession of data sets containing information about persons taxable in Germany who have real estate in Dubai. In addition, since 2017, an exchange of information with the UAE actually takes place, namely via the internationally widespread Common Reporting Standard (CRS) procedure.

1st Tax Evasion with Real Estate in Dubai – Introduction

Property in Dubai is enjoying increasing popularity among investors. They are still relatively affordable, but promise enormous returns. Be it through rental or through a later sale – real estate in Dubai is a worthwhile investment. But with the rental, the first tax challenges are already taking hold. Where are the rental income taxable? And they hardly end up selling either. But all these questions can certainly be solved in advance with good tax advice. Even tax optimization is possible. On the one hand.

On the other hand, one can also logically argue that the property in Dubai is taxable according to general regulations in the UAE. After all, the location principle usually applies when it comes to real estate. Therefore, it is probably irrelevant for the German Treasury whether to rent or sell real estate in Dubai. So why even draw attention to this in the tax declaration? The fact that this question and the often unthought-out implication of not making a report about it can lead to the impasse of tax evasion is likely to remain unconscious in many cases for many of those affected who think and act in this way. We show that this is a mistake.

2 When is there tax evasion?

Tax evasion is a criminal offence that has complex requirements. It is certainly essential to reduce taxes (§ 370 AO). This is of course always the case if you pay less taxes than the law actually stipulates. However, this statement is also applicable to quite legal tax design models. Or on a tax request, for example in the context of an operating audit. Of course, these are not tax evasion cases, because under law and law taxes can be lower than previously planned. There must also be an illegal component. One of the most important criteria is therefore also the existence of a conscious intention to reduce taxes unlawfully. Anyone who can make it credible that a tax reduction has arisen solely for other reasons should argue this with meaningful evidence if necessary.

Tax evasion is not a crime that is strictly bound by national borders, which is therefore also relevant in the context of renting real estate in Dubai. In Germany, this is primarily due to the fact that we have a tax law in Germany that levies taxes according to the world income principle. Anyone who is subject to unlimited tax in Germany pays taxes on global income. Only secondarily can tax restrictions apply here, for example through double taxation agreements (DTA), or through national regulations (§ 34c EStG). They serve only to avoid double taxation at home and abroad.

Why is Germany allowed to levy taxes on real estate in Dubai?

3.1. Tax Properties in Dubai according to the World Income Principle

The world income principle is also the reason why Germany also accesses rental income from renting real estate in Dubai. For the German Treasury, it does not matter where a person who is taxable without restriction in Germany draws his rental income. Only in the case of a limited taxable person, taxation is limited solely to rental income in the country; The world income principle does not apply here. On the other hand, we consider the case in which the world income principle applies, i.e. in Germany unlimited taxpayers.

3.2. factor unlimited tax liability in Germany

3.2.1 Criterion 1: Residence in Germany

In the question of the application of the world income principle, the status as an unrestricted taxable person plays a central role. In the design of German tax law, the legislature was faced with the choice of how it wanted to determine who is taxable in this country or under what circumstances this should be the case. In doing so, a rather comprehensive approach has been used: persons are subject to unlimited taxation under German tax law if they have a residence or habitual residence in Germany.

A residence can be defined relatively easily, although this was also specified by later jurisprudence. For example, you are considered a resident in Germany if you have unlimited access to a living space in this country. Often this is called the so-called key power. How little such a living space is ultimately equipped is irrelevant. Also irrelevant for the question of the existence of a residence in Germany is whether it has been made known to the registration authorities. It is clear that a reporting obligation exists and must be adhered to, but this is not a tax-relevant fact.

So when we talk about tax evasion with real estate in Dubai, we first have to check this criterion. If this is to be denied, a further step is taken.

3.2.2. Criterion 2: habitual residence in Germany

The alternative to residence, the habitual residence, also requires an unlimited tax liability in this country. This is the case if there is no permanent residence in Germany, but you still have an interest in a potential stay in Germany for personal reasons. This can be your own family, which has remained in Germany, while you yourself stay abroad. But the presence of other personal interests in Germany can also justify an ordinary residence in Germany. One example is economic interests, another strong friendly ties or intensively used leisure activities. Therefore, if there are significant circumstances indicating that a person abroad has reason to return to Germany, then he may be subject to tax law to a habitual residence in Germany if he stays here without a permanent residence.

3.3. Tax evasion with real estate in Dubai: the overall picture is important

All these factors in one or the other combination lead to the fact that a person in Germany can be taxable without restriction. If she now refuses her tax obligations, so that one can speak of tax evasion, then it is irrelevant whether she withholds rental income in Germany or in Dubai the tax office.

The only way out to avoid an unlimited tax liability in Germany is to cut all ties there. Of course, occasional stays in Germany, such as on holiday or visiting relatives and acquaintances, remain exempt from this regulation.

4. measures of the FRG to combat tax evasion

4.1. Tax evasion as fraud against the state and thus the general public

Taxes finance our state. Therefore, it should not surprise anyone if they pursue their legitimate interest in collecting them, even when it comes to cross-border tax issues. As soon as it is established that there is an unlimited tax liability in Germany, income from foreign sources is also subject to German taxation. Anyone who conceals this information from the competent tax office or tries to obtain false information that the tax is lower than actually planned, commits tax evasion. Point.

Concretely, in relation to our topic, this means that a person who is taxable in Germany without restrictions, who conceals to his tax office that he generates rental income in Dubai with real estate, commits tax evasion. In addition, tax evasion by such a person exists if, instead, they deliberately report lower rental income from their rental of real estate in Dubai than is the case.

4.2. Exchange of information with foreign tax authorities: the CRS procedure

The resources that the Federal Republic now uses to combat such cross-border cases of tax evasion are manifold. By default, it relies on information exchange with foreign financial authorities. In the case of the UAE, however, this has only been possible since 2017. Only this year did the UAE participate in the so-called CRS procedure (Common Reporting Standard), an internationally standardized procedure for the exchange of tax-relevant data between financial authorities. In Germany, the Federal Central Tax Office (BZSt) is available as a contact.

4.3. Purchase of data sets about potential tax evaders

But apparently Germany is willing to take other, unorthodox measures in individual cases to secure its tax income. In 2021, for example, the Federal Ministry of Finance (BMF) decided to purchase a comprehensive dataset on potential taxpayers. A sum of EUR 2 million should have flowed. How the person who offered this data set came into their possession remained secondary. In fact, something similar had already happened several times in the past, although the case described here is still a first, because in the past the initiative was taken by the financial authorities of the federal states and this time for the first time centrally by the BMF.

The BZSt has therefore acquired this data package. Subsequently, the data was evaluated, whereby a separation was made according to the competence of the state financial authorities. The corresponding data have now also been forwarded to these agencies and the investigations into the existence of a tax evasion have started. This takes place as part of a comparison between the data from the Dubai Files and the information provided by the affected taxpayers in their tax returns. In fact, some cases of tax evasion with real estate in Dubai have already been detected. The procedures are apparently still under way. But whether they ultimately justify the purchase of the data set as acceptable is questionable.

5th Tax Evasion with Real Estate in Dubai – Conclusion

In any case, it is now too late for the persons affected by the investigations to file a self-report with impunity. As soon as the authorities start the investigation, this amnesty option is eliminated.

You can logically understand that you come up with the idea of concealing foreign income from the rental of real estate in Dubai in order to save taxes in Germany. Finally, at first glance, there is no reason to believe that the local financial authorities will ever become aware of these revenues. After all, there has been no DTA between Germany and the UAE since 2021. But this is often a fallacy. So even if there is no indication of tax evasion related to real estate in Dubai from the regular data that both countries exchange through the CRS procedure, there are other risks.

Our conclusion is therefore clear: no motivation justifies tax evasion. Anyone who finds this conclusion convincing from circumstances that affect oneself, hopefully still has the chance to improve through correction. Also for this we recommend ourselves as a professional tax consultancy. Because with our help you can submit a penalty-free self-declaration. We also know how you can subsequently protect yourself against further tax risks in connection with the processing of tax evasion. Otherwise, you might one day feel like Uli Hoeneß. Insight alone is always better than in combination with regret.