Overlapping taxation in Switzerland:
Tax liability in Germany despite moving away
Switzerland offers attractive tax benefits and thus attracts many individuals and entrepreneurs who want to reduce their German tax burden. Moving to Switzerland does not necessarily lead to complete exemption from German tax liability. Rather, the German tax authorities may benefit from the more favorable taxation in Switzerland.
A partial departure from Germany, a secondment by the employer or a new employment relationship in Switzerland can quickly lead to a continued German tax liability despite a change of residence.
This article examines the so-called overlapping taxation in relation to Switzerland – a special provision in the double taxation agreement (DTA) between Germany and Switzerland (hereinafter referred to as the Swiss DTA). It can lead to a continued tax liability in Germany even after moving away.
There are basically two types of umbrella taxation:
- The overlapping taxation due to a dual residence according to Art. 4 para. 3 DBA Switzerland
- The churn regulation of the Art. 4 para. 4 DBA Switzerland
Overview
Residence for taxation in Germany
In principle, tax liability in Germany is determined by the principle of domicile and habitual residence.
Anyone who maintains a home in Germany or spends more than 183 days a year there is considered to have unlimited tax liability and must pay tax on their worldwide income in Germany.
However, if you move your place of residence abroad, you normally lose your tax liability in Germany – but not always.
Income from German sources is taxable in Germany within the scope of limited tax liability even after moving away. In addition, the present overriding taxation in relation to Switzerland also leads to a German tax liability.
Dual residence in Switzerland and Germany: when is there a risk of double tax liability?
Many internationally mobile people keep an apartment in Germany after moving away, whether for professional or private reasons. In such cases, a dual residence may arise if a residence is also established in Switzerland.
This raises the question: Where does the person in question have to pay their taxes?
The double taxation agreement between Germany and Switzerland (hereinafter referred to as the DBA-Switzerland) determines where a person is resident for tax purposes in cases of dual residence.
The tie-breaker rule of the Art. 4 para. 2 DBA-Switzerland uses the following criteria to determine the country in which the company is resident for tax purposes:
- Permanent residence - In which country does the person have a permanent residence? If a person has a permanent residence in both countries, the next criterion is checked.
- Center of life - Where does the person have their closest family, social and economic ties?
- Usual residence - Where does the person spend most of their time?
- Nationality - If the first three criteria are not clear, nationality is decisive.
- Mutual agreement between the tax authorities - If none of the above criteria allows a clear decision, the tax authorities of both countries reach an agreement.
The criteria are checked in exactly this order.
Overlapping taxation in Switzerland - Why moving away is not enough
The overlapping taxation of Art. 4 para. 3 DTA-Switzerland means that Germany retains the unlimited right of taxation, even if the person is deemed to be resident for tax purposes in Switzerland in accordance with the tie-breaker rule of Art. 4 para. 2 DTA-Switzerland. The prerequisite for tie-breaker taxation is that the person has a permanent residence or habitually resides there for at least six months per year.
If this provision applies, Germany can tax the person concerned irrespective of other provisions in the DTA-Switzerland.
Double taxation is avoided through tax offsetting in accordance with Art. 24 para. 1 DBA-Switzerland for certain income and assets.
The emigration rule
It also contains Art. 4 para. 4 DBA-Switzerland There is also a special regulation for people who emigrate to Switzerland.
Art. 4 para. 4 DTA-Switzerland applies to persons without Swiss nationality who move their place of residence to Switzerland but have been subject to unlimited tax liability in Germany for the last five years prior to their departure.
In these cases, Germany remains entitled to continue to treat the person as having unlimited tax liability for a period of five years after the departure.
German taxation includes income originating from Germany and assets located in Germany.
This regulation serves to prevent tax-motivated short-term relocations to Switzerland.
However, double taxation is avoided by Germany crediting the taxes paid in Switzerland in accordance with Art. 24 DTA-Switzerland.
Exceptions are cases in which the person became resident in Switzerland for tax purposes in order to carry out genuine dependent work for an employer. The person must not have a shareholding in the employer or any other significant economic interests.
The most important facts summarized
The overlapping taxation and the emigration rule make it clear that a change of residence to Switzerland does not automatically mean the end of tax liability in Germany.
In the case of a dual residence, the overlapping taxation may result in a tax liability in Germany.
In addition, a complete abandonment of the German residence can also lead to a further unlimited tax liability in Germany for five years after moving away.
PRACTICAL TIP
Anyone moving their place of residence abroad should carefully examine the effects of the Swiss DTA and plan ahead for their taxes.
- In which country do you reside?
- Will you have a dual residence?
- Where will the center of your life be?
- What income do you have, especially from German sources?
In addition to the overarching taxation, exit taxation could also be an issue under certain circumstances. For more details, please refer to my blog article: Goodbye Germany – Focus on exit taxation .
Are you planning to move to Switzerland and need tax advice?
Please feel free to contact me!
Disclaimer
The article uses simple language for better understanding and is also abbreviated with regard to the individual conditions required by law.
This article does not constitute legal or tax advice, but is for general information purposes only. Every situation is individual, so I always recommend professional advice to avoid tax disadvantages.
Last updated September 13, 2024
