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Financial Planning for Expatriates: A Global View with a Spotlight on German-US Legal and Tax Considerations Friday, March 16, 2012 Sofitel Redwood City,

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Presentation on theme: "Financial Planning for Expatriates: A Global View with a Spotlight on German-US Legal and Tax Considerations Friday, March 16, 2012 Sofitel Redwood City,"— Presentation transcript:

1 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

2 Jörg Kemkes, Managing Director BridgehouseTax, Atlanta Alex Knight, Partner Habif, Arogeti & Wynne, LLP Kristin Mäckel, Senior Tax Manager Habif, Arogeti & Wynne, LLP Presenters

3 3 Considerations Leaving Germany/Entering U.S. Permanent Limited in time Tax implications Income tax Gift/ Estate/ Inheritance tax

4 4 Issues to be discussed Agenda  Income tax issues Resident or non-resident o Employee‘s relocation for a short time o Employee‘s relocation for an unlimited time o Impact of tax treaty and US domestic law on residents whose tax home remains in home country

5 5 Issues to be discussed cont.  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 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 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 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 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 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

11 11 Challenges  What and who will be taxed in which country? Taxable affairs Personal tax liability  How will 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 12 INCOME TAX Employees‘ relocation

13 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 Euros.  He has no other income.

14 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 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 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 Euros.  He has no other income.

17 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 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 non- resident of the U.S.

19 19 INCOME TAX Stock incentives

20 20 Participation in stocks (1) Problem (page 1):  Single Hans has worked for a German Company in Germany since  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.

21 21 Participation in stocks (2) 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?

22 22 Participation in stocks (3) 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  That means (simplified): Taxable in Germany 3/8 Taxable in the UK 2/8 Taxable in the U.S. 3/8

23 23 INCOME TAX Compensation/severance payments

24 24 Compensation payment (1) Problem:  Single Hans (German citizen) has been working for a German Company in San Francisco since He leaves the Company in He receives an additional payment. He goes back to Germany

25 25 Compensation payment (2) 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?

26 26 Compensation payment (3) 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?

27 27 Compensation payment (4) Variation:  Single Hans (German citizen) has been working for a German Company in the U.S. since He leaves the Company in He receives an additional payment. He decides to go to Spain; the payment: o Is paid while he is still residing in the U.S. o Is paid while he is already residing in Spain

28 28 Compensation payment (5) Next variation:  Single Hans has been working for a German Company in San Francisco since He has dual citizenship (U.S./ German) He leaves the Company in 2012 He receives an additional payment

29 29 Expatriation Tax/Wegzugsbesteuerung 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 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 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 32 GIFT/ INHERITANCE TAX

33 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

34 34 Gift/Inheritance (1) 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.

35 35 Gift/Inheritance (2) 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:

36 36 Gift/Inheritance (3) 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?

37 37 Inheritance (4) 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

38 38 Inheritance (5) Germany (unlimited tax liability) RelationshipSon Tax classII Value of taxable assets Euro Tax allowance Euro Taxable amount Euro Payable inheritance tax (19%) (tax credit allowed for US estate taxes paid) Euro

39 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.

40 40 Inheritance (7) Germany (unlimited tax liability/world assets) RelationshipSon Tax classII Value of taxable assets Euro Tax allowance Euro Taxable amount Euro Payable inheritance tax (19%) Euro

41 41 Inheritance (8) 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.

42 42 Inheritance (9) Germany (limited tax liability/only German assets) RelationshipSon Tax classII Value of taxable assets Euro Tax allowance2 000 Euro Taxable amount Euro Payable inheritance tax (19%) (will be credited in the U.S.) Euro

43 43 Inheritance (10) 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

44 44 Contact BridgehouseTax Atlanta The Proscenium, Suite Peachtree Street, NE Atlanta, GA U.S.A. Jörg Kemkes T F E Habif, Arogeti & Wynne LLP 5 Concourse Parkway, Suite 1000 Atlanta, GA U.S.A. Alex Knight T M E Kristin Mäckel T M E


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