Tax Residence and its significance for Taxation in Germany

A distinction between the residence and the habitual residence according to German Law and a Double Taxation Agreement

A mandatory requirement for unlimited tax liability in Germany is a place of residence or habitual abode in Germany. Only then all global income and not just income from “German” sources is taxable in Germany. However, in some cases, it is not so straightforward to determine the place of residence or habitual abode. For this reason, we will highlight the differences between place of residence and habitual residence according to German law and the Double Taxation Agreement (DBA) as well as some peculiarities and living arrangements.

A. Residence
1. Residence according to Paragraph 8 AO
According to Paragraph 8 of the German Tax Code (AO), a person has a place of residence where he or she may have an apartment that indicates “use” either rented or owned. The definition of residence as stated by Paragraph 8 AO is linked to actual circumstances. The registration alone is therefore not sufficient to determine the place of residence. It can only be used as an indication. In connection with the term “tax residence”, the term should be interpreted broadly.

For the establishment of a tax residence, all rooms that can be used for living come into consideration. Therefore, a permanent habitable room is sufficient, which is furnished with furniture, equipped with cooking facilities and can also be heated. A tax residence can therefore also be a furnished room, a second home, a vacation apartment or a vacation home or accommodation in a communal barracks. Even a fixed caravan that is permanently used for residential purposes or a hotel room that is used on a long-term basis (with cooking facilities) can constitute a residence for tax purposes.

In addition, the potential taxpayer must occupy the tax residence (premises). This requirement is met if the taxpayer can dispose of the premises at will. It is not the actual but rather the legal power of disposal that is decisive. The legal right of disposal does not apply, for example, if the premises have been rented out for a longer period.

Furthermore, the apartment must be visited with a certain regularity. This can also be done at longer intervals. However, a minimum length of stay per year is not required. If an apartment is only visited occasionally, e.g. for visiting and recreational purposes, this is not sufficient. In case of occupational stays abroad, the possession of an apartment can be assumed if the apartment is maintained in Germany, can be used at any time and is appropriately furnished. Additionally, there is a time component for occupying an apartment, which should not be less than six months.

2. Residence according to DTA
The “permanent place of residence” in the sense of the DBA serves to determine the “place of residence” and is the transfer of the right to tax the various types of income. Please note that it is generally the responsibility of the country of residence to avoid double taxation either by exempting foreign income or by offsetting foreign taxes.

In contrast to the term “residence” in Section 8 AO, the term “permanent residence” according to the DTA must have a special qualification. The “permanent residence” therefore requires particularly intensive use and, according to the Federal Fiscal Court of Germany, must be a place which is included in the general rhythm of life of the taxpayer itself. And similar to the length of stay from Paragraph 8 AO, the taxpayer should be able to use his premises at any time.

B. Habitual residence
1. Habitual residence according to paragraph 9 AO 
In comparison, a habitual residence according to Paragraph 9 AO exists if he or she is staying under circumstances that suggest that he or she is not only staying temporarily at this location or in this area. If the taxpayer does not meet the residence requirements, he or she can still be subject to unlimited tax liability, since the term “habitual residence” applies to the actual circumstances of the potential taxpayer and therefore constitutes a separate examination.

It should be emphasized that the habitual residence is linked to the actual residence in a certain place or area. In addition, there must be objective circumstances that underline that the stay is not only temporally.

According to Paragraph 9 AO, a normal stay is always an uninterrupted stay of more than six months. It should be noted that the 6-month period does not have to be met in one calendar year. However, it must be an uninterrupted stay. Several short-term stays may not be added together when determining the time limit.

As an exception, a stay of less than six months can establish a habitual residence, if a stay of more than six months was originally planned. The assessment of whether there are a number of short stays or only short interruptions of a long-term stay must be based on the taxpayer’s discernible will.

2. Habitual residence according to DTA
The term “habitual residence” in the DTA does not have the same requirements as the term in Paragraph 9 AO, but must be interpreted independently from the respective DTA according to its wording, systematics and sense and purpose. According to the DTA, a taxpayer can have a habitual residence in both contracting states, which is not possible as stated in Paragraph 9 AO.

C. Brief overview of special types and living arrangements
1. Standby Apartment
In a case of stand-by apartments, the Hessian Finance Court decided that there is no tax residence within the meaning of Section 8 AO if the employee shares an apartment with colleagues in constant change of time and without unrestricted disposal. This can look different and lead to unlimited tax liability if the employee uses the stand-by apartment alone without the interference of other professional colleagues.

2. Residences of married couples
Married taxpayers usually have their residence/habitual residence where their families live. This also applies, if they occasional stay overnight or live abroad for a longer period of time. The regulation is gender-neutral and therefore applies to both spouses if they live abroad.

3. Serviced Apartment
In the case of a serviced apartment, the Munich Finance Court ruled that a serviced apartment
or boarding house is not a place of residence within the meaning of the Income Tax Act. The stay in a serviced apartment and/or boarding house is usually limited in time. However, if you stay for more than six months, you may have a habitual residence, so we recommend checking the living conditions in advance in order to avoid unrestricted tax liability.

4. Postal address/Mailing address
The postal address at the single-family house or other does not represent a place of residence. This can be different for a room in a single-family house and justify a place of residence and unrestricted tax liability and should therefore be checked carefully.

D. Conclusion
At first glance, a determination of residence or habitual residence may seem simple, but it can still lead to various pitfalls. Since the existence of domicile or habitual residence is of considerable tax significance, we recommend a careful examination in any case.

In order to avoid limited and unlimited tax liability, it is imperative not to meet any of the conditions.

For further information please contact Verena Nosko (verena@meyer-reumann.com)

Verena

Author: Verena Nosko

Senior Lawyer