Financial Planning for Expatriates:
A Global View with a Spotlight on
German-US Legal and Tax Considerations
Friday, March 16, 2012
Sofitel Redwood City, San Francisco
223 Twin Dolphin Drive
Redwood City, CA 94065
Presenters
Jörg Kemkes, Managing Director
BridgehouseTax, Atlanta
Alex Knight, Partner
Habif, Arogeti & Wynne, LLP
Kristin Mäckel, Senior Tax Manager
Habif, Arogeti & Wynne, LLP
Considerations
3
Leaving Germany/Entering U.S.
Permanent
Limited in time
Tax implications
Income tax
Gift/ Estate/ Inheritance tax
Issues to be discussed
4
Agenda
 Income tax issues
• Resident or non-resident
o
o
o
Employee‘s relocation for a short time
Employee‘s relocation for an unlimited time
Impact of tax treaty and US domestic law on residents whose
tax home remains in home country
Issues to be discussed cont.
5
 Taxation and sourcing
• Stock options
• Compensation / severance payments
 Inheritance / estate and gift taxes
•
•
•
•
Resident or non-resident
U.S. taxation based on location of assets
Impact of estate and gift treaty
Inheritance of rental real estate
6
Fact Pattern(1)
Facts: Hans Meier (German citizen)
 Lives in Munich
 Single
 Employee of a German company
 Owns a property in Germany which is rented to
tenants
 Holds 100% of the shares of a German company
(GmbH) - gift from his parents
7
Fact Pattern(2)
Plans: Hans
 Will go to San Francisco for his employer to work
• For a client
• At the US permanent establishment
• At the US subsidiary
 Will stay for 6 months/ for some years/ indefinitely
8
Fact Pattern(3)
Variations:
 He works in more than two countries
during one year/ some years
 He is married with Gretel (German citizen) and has
son and daughter (German citizens)
 His wife is a US-citizen and his son and daughter
are US-citizens….
Every case has different tax consequences
9
Differences between income taxation
system in US and Germany
 United States:
• Right to tax is based on citizenship or permanent
residency. Tax is assessed on worldwide income.
• If a US resident has foreign income, either an income
exclusion or tax credit is available. The foreign tax paid is
credited against US income tax.
10
Differences between income taxation
system in US and Germany
 Germany:
• Right to tax is derived from residency
• For German residents, foreign income is excluded from
German tax base
Challenges
11

What and who will be taxed in which country?
•
•

How will
•
•


Taxable affairs
Personal tax liability
The income be calculated?
The value of the assets be calculated?
How much tax must be paid in Germany?
How does the treaty help to avoid double
taxation (in Germany and the USA)
12
INCOME TAX
Employees‘ relocation
13
Employees' relocation for a short time (1)
Problem:
 Single Hans will work for a German enterprise in
San Francisco for 4 months.
 The employer has no permanent establishment in
the U.S.
 Hans lives in a hotel during his stay.
 His annual salary is 120.000 Euros.
 He has no other income.
14
Employees' relocation for a short time (2)
Answer (German perspective):
 Hans is still fully (unlimited) taxable in Germany
because he:
•
•
•
Keeps his flat in Germany
Will not stay longer than 183 days in the U.S.
Will get his salary from an employer without permanent
establishment in the U.S.
15
Employees’ relocation for a short time (3)
Answer (U.S. perspective):
 Hans is a non-resident of the U.S. and initially
taxable on his salary attributable to U.S.
workdays.
 Hans may claim a treaty exemption and pay no
U.S. income tax.
16
Employees' relocation for an unlimited time (4)
Variation:
 Single Hans will work for a U.S. subsidiary of the
German company in San Francisco for several
years.
 Hans rents a flat and gives up the flat in Germany.
 His annual salary is 120.000 Euros.
 He has no other income.
17
Employees' relocation for an unlimited time (5)
Answer:
 Hans will be fully (unlimited) taxable in the U.S.
because he:
•
•
Gives up his flat in Germany
Will get his salary from an employer with residence in
the U.S.
18
Employees’ relocation for an unlimited time (6)
Variation:
 Married Hans will work for a German enterprise
in San Francisco for several years but his family
and main home remain in Germany.
Answer:
 Hans may claim that he has a closer connection
to Germany and may claim that he is a nonresident of the U.S.
19
INCOME TAX
Stock incentives
20
Participation in stocks (1)
Problem (page 1):
 Single Hans has worked for a German Company
in Germany since 2007.
 He received the right to buy 100 shares (not
publicly traded) for 150 Euro each share after 8
years (end 2014: market price 200 Euro).
 Hans will have worked in three different countries
between 2007 and 2014.
Participation in stocks (2)
21
Problem (page 2):
 Hans worked:
•
•
•
In Germany from 2007 until 2009
In the U.K. in 2010 and 2011
Will work in San Francisco from 2012 onwards
 What will happen after 8 years (in 2014), if Hans
still lives in the U.S?
Participation in stocks (3)
22
Answer:
 The benefit for Hans (difference between the
purchase price 150 and the market price 200) is
subject to tax. The benefit (50*100) will be split
pro rata over the time period 2007 to 2014.
 That means (simplified):
•
•
•
Taxable in Germany 3/8
Taxable in the UK 2/8
Taxable in the U.S. 3/8
23
INCOME TAX
Compensation/severance payments
Compensation payment (1)
24
Problem:
 Single Hans (German citizen) has been working for
a German Company in San Francisco since 2005.
•
•
•
He leaves the Company in 2012.
He receives an additional payment.
He goes back to Germany
Compensation payment (2)
25
Challenges:
 Two countries will want to tax the payment
•
•
U.S. (country of employment)
Germany (country of residence)
 Considerations
•
•
What was the reason for the payment?
In which country is Hans a resident in the year in which
he receives the compensation?
Compensation payment (3)
26
Answer:
 Reason of payment
•
•
•
•
For his work in the past (like a bonus)?
For the loss of the job?
For pension compensation?
For a non competition clause?
 Payment until Hans leaves the U.S. or payment
after return to Germany?
Compensation payment (4)
27
Variation:
 Single Hans (German citizen) has been working for
a German Company in the U.S. since 2005.
•
•
•
He leaves the Company in 2012.
He receives an additional payment.
He decides to go to Spain; the payment:
o
o
Is paid while he is still residing in the U.S.
Is paid while he is already residing in Spain
Compensation payment (5)
28
Next variation:
 Single Hans has been working for a German
Company in San Francisco since 2005.
•
•
•
He has dual citizenship (U.S./ German)
He leaves the Company in 2012
He receives an additional payment
Expatriation Tax/Wegzugsbesteuerung
29
USA:
 Citizens or Green Card holders that renounce their
citizenship/Green Card may be subject to it if
certain income/net worth levels are exceeded
 Applies to those who relinquish U.S. citizenship and
those who have held U.S. green card for eight out
of the last fifteen years.
30
Expatriation Tax/Wegzugsbesteuerung
 USA cont.,
 Average net income tax liability exceeds
$147,000 or net worth exceeds $2.0 million
 Mark-to-market tax on gains in excess of
$636,000 (i.e. deemed sale of an individual’s
assets)
31
Expatriation Tax/Wegzugsbesteuerung
Germany:
 Citizens and residents that were German tax
residents for at least 10 years, and that hold a
significant stake in a corporation, are subject to it
 Tax is assessed on the unrealized gain of the
investment
 Calculation is based on a “deemed sale of assets”
32
GIFT/ INHERITANCE TAX
33
Difference between inheritance tax system in
the US and Germany
US:
 The assets/estate is the tax subject, not the heir
Germany:
 The beneficiary or heir is subject to tax
Gift/Inheritance (1)
34
Problem (page 1):
 Hans (German/American citizen) has been living
with his wife in San Francisco for 30 years.
 In 2008, his mother Gerda (American citizen)
passed away in Los Angeles.
 The mother was the owner of four buildings in
Germany, which are rented to tenants. Two of these
were gifted to Hans in 1990, one of these in 2002.
Gift/Inheritance (2)
35
Problem (page 2):
 The German CPA prepared all German tax
declarations but never informed Hans that he has to
fulfill tax obligations in the U.S., too.
 Some weeks after his mother, Gerda, died Hans has
sought help of a US/ German law firm to prepare a
will which considered US and German implications.
 After thoroughly checking the case, the following
issues needed to be discussed:
Gift/Inheritance (3)
36
Answer:
 What relief is available in the U.S. for not filing the
gift tax declarations?
 How is the rental income taxed going forward?
 Is it possible to claim a tax credit for prior years?
 How to avoid late penalties?
Inheritance (4)
37
Variation 1:
 Hans (German/ American citizen) has been living
with his wife in San Francisco for 30 years.
 In 2008 his mother, Gerda (German citizen), passed
away in Munich, Germany. She was the owner of
four buildings in Germany, which are rented to
tenants
 She also owns a second home in San Francisco for
the family.
Compare limited and unlimited tax liability
Inheritance (5)
38
Germany (unlimited tax liability)
Relationship
Son
Tax class
Value of taxable assets
Tax allowance
Taxable amount
II
1 400 000 Euro
400 000 Euro
1 000 000 Euro
Payable inheritance tax (19%)
(tax credit allowed for US estate taxes paid)
190 000 Euro
39
Inheritance (6)
Variation 2a:
 Hans (German/American citizen) has been living
with his wife in San Francisco for 30 years.
 In 2008 his mother, Gerda (German citizen), moves
to the U.S. to live with the son‘s family.
 The mother dies in 2011 in San Francisco.
 She was the owner of four buildings in Germany,
which are rented to tenants, and she had no other
assets.
Inheritance (7)
40
Germany (unlimited tax liability/world assets)
Relationship
Son
Tax class
Value of taxable assets
Tax allowance
Taxable amount
II
1 400 000 Euro
400 000 Euro
1 000 000 Euro
Payable inheritance tax (19%)
190 000 Euro
Inheritance (8)
41
Variation 2b:
 Hans (German/ American citizen) lives with his wife
in San Francisco for 30 years.
 In 2008 his mother, Gerda (German citizen), moves
to the U.S. to live with the son‘s family.
 The mother dies in 2020 in San Francisco.
 She was the owner of four buildings in Germany,
which are rented to tenants.
Inheritance (9)
42
Germany (limited tax liability/only German assets)
Relationship
Son
Tax class
Value of taxable assets
Tax allowance
Taxable amount
II
1 400 000 Euro
2 000 Euro
1.398 000 Euro
Payable inheritance tax (19%)
(will be credited in the U.S.)
265 620 Euro
Inheritance (10)
43
Challenges:
 Extended unlimited tax liability only for German
citizens (living outside of Germany)
 Var. 2a: World wide inheritance or gift within 10
years unlimited tax liability
 Var. 2b: German domestic inheritance or gift after 10
years  limited tax liability
Contact
44
BridgehouseTax Atlanta
The Proscenium, Suite 1775
1170 Peachtree Street, NE
Atlanta, GA 30309-7675
U.S.A.
www.bridgehousetax.us
Jörg Kemkes
T +1 404 898 9122
F +1 404 506 9930
E joerg.kemkes@bridgehousetax.us
Habif, Arogeti & Wynne LLP
5 Concourse Parkway, Suite 1000
Atlanta, GA 30328
U.S.A.
www.hawcpa.com
Alex Knight
T +1 404 898 7428
M +1 770 367 3178
E alex.knight@hawcpa.com
Kristin Mäckel
T +1 770 353 8606
M +1 678 793 4204
E kristin.maeckel@hawcpa.com