Taxation is one of the most important issues when living and working abroad. Especially for people from high-tax countries like Germany, taxation can be a breaking point in their plans to live and work in another country. In order to avoid double taxation in both countries (home country and country of the expats), most countries, therefore, have signed DTAs.
A short survey of the Double Tax Agreement between Germany and the UAE
The first DTA of 1995 came into effect on August 10, 1996. The term was set for 10 years and was later extended for a further 2 years until 2008. In December 2008 a new DTA was initiated, but never signed and published.
The current tax agreement between Germany and the UAE, the second since 1995, came into effect on July 14, 2011 with a term limited to 10 years. An extension of the agreement would have been possible if both countries had agreed on the extension before June 30, 2021. However, Germany decided on June 14, 2021, not to renew the agreement with the UAE. Therefore, the current DTA expires on December 31, 2021.
What are the consequences for UAE residents?
The taxation of all relevant tax assessments that have been issued by December 31, 2021 is taxed according to the current tax agreement, even if the term of the double taxation agreement has already expired.
The general principle “All income is taxed in Germany if the taxpayer is resident in Germany“
continues to apply.
The point of reference for this principle is the unlimited tax liability. A natural person is subject to unlimited income tax liability (§ 1 Income Tax Law Germany) when he or she has a domicile or a usual place of residence in Germany. As for a legal entity, the domicile and management in Germany are decisive. But even if there is no unlimited tax liability, it may be possible that there is a limited tax liability with regards to domestic income (§ 1 section 4 in conjunction with § 39 Income Tax Law Germany or § 2 Corporation Tax Act Germany), since the abandonment of the domicile or usual place of residence in Germany comes with certain requirements.
The current double taxation agreement between Germany and the UAE stipulates that a natural person who is domiciled in the UAE and who is a national of the UAE is a resident (Art. 4 (1) b (i) double taxation agreement). As one of the requirements is UAE citizenship, it rarely applies. It is therefore important to know how the DTA term resident in a contracting state” compares to the domestic term unlimited tax liability”. Article 4 DTA is linked to personal ties to a country, which usually leads to unlimited tax liability under national tax law. This means that the term resident of a contracting state” is a person who is subject to (unlimited) taxation there under the law of that state due to their place of residence, permanent residence, place of management or any other characteristic.
For individuals following ranking for the residency criterion applies, (i) permanent residence”, (ii) centre of life interests”, (iii) habitual abode” and if this is not resulting in a clear result (iv) nationality” and a (v) mutual agreement procedure”. If one or more of the above criteria apply, the natural person is resident in the contracting state and falls under the DTA.
What are the changes in regards of taxation as of January 1, 2022?
As of January 1, 2022, the taxation of income from activities in the UAE will be based solely on the national German tax law.
Similar to the DTA, the German tax law for the unlimited tax liability is tied to the residence (§ 8 Fiscal Code) or the habitual abode (§ 9 Fiscal Code) for an individual and for a legal entity the management of the company (§ 10 Fiscal Code) and the registered office (§ 11 Fiscal Code). If none of these points apply, there is still a possibility that there is a limited tax liability for income from domestic sources.
The German tax law defines the terms resident and habitual abode which apply for an individual slightly different, contrasting than the DTA. So shall a person be resident at the place at which they maintain a dwelling under circumstances from which it may be inferred that they will maintain and use such dwelling, see § 8 Fiscal Code.
In addition, it is important to know that the German tax office takes an objective approach, i.e. all subjective motives are irrelevant. This means that the apartment must be objectively suitable for living and, overall, must reflect the personal and economic circumstances of the taxpayer. In addition, the taxpayer must also live in the apartment, i.e. actually be able to dispose of it and not only use it temporarily.
The apartment is used if the taxpayer stays in it permanently or at least with a certain regularity and it is important to know that the authorities assess the overall circumstances of the individual case. A residence abroad together with an apartment held in Germany nevertheless represents a residence within the meaning of § 8 Fiscal Code, since according to German tax law several places of residence (domestic and foreign) are possible.
The authorities have already recognized the following residences:
• Furnished room;
• Weekend and/or hunting lodge;
• Hotel room under long-term use or
• Permanently fixed caravans.
The term habitual residence is defined as follows: a person has their habitual residence at the place where they are staying if circumstances indicate that their residence at this place or in this area is not only temporary, see § 9 Fiscal Code. Ordinary residence is always given for an uninterrupted stay of more than six months. When evaluating this term, the German tax authorities apply the following criteria: (1) the actual physical presence, (2) not only temporarily and (3) the period of six months.
The same applies to a legal entity with regard to the registered office and management of the company. The registered office of the legal entity within the meaning of § 10 Fiscal Code is at the location specified by law, statutes, foundation deed or similar. The management of the company (§ 11 Fiscal Code) is defined as the center of the overall management, also the place where the decision-making of the management of the company and the ongoing management takes place.
What should be considered now?
With the end of the double taxation agreement on December 31, 2021, nothing will change for most of the people already resident in the UAE. Nevertheless, it is a good opportunity to get an overall picture of your personal situation and the situation of your companies either in the UAE or in Germany.
Also, there will be no DTA starting from January 1, 2022, the German tax law has unilateral measures to avoid double taxation”. Germany can use either the imputation system (§ 34 c section 1 Income Tax Law, § 26 section 1 Corporation Tax Act), according to which the foreign tax can be credited against the German tax or the deduction of the foreign tax from the domestic tax base (§ 34 c section 2 and 3 Income Tax Law). But in the case of the UAE and Germany, both alternatives do not lead to any relief due to lack of tax collection in the UAE. This means the income earned in the UAE is therefore taxable as domestic income if the legal entity and/or the person fulfill the requirements for the unlimited tax liability.
Since your lifestyle and/or your company are always changing, we recommend to do such an overview on a regular basis to keep track of the changes. If you have questions regarding these matters, you can contact either our office (email@example.com) or send your inquiry directly to Ms. Verena Nosko (firstname.lastname@example.org)