Global
Global Mobility Insights - Frühling / Spring 2023 The umbrella taxation in the relationship between Germany and Switzerland Author: Dr. Uwe Dörnbrack, Alexia Huber & Partner (Germany) The double taxation treaty between Germany and Switzerland (DTA D-CH) contains a practice-relevant special provision in Art. 4 para. 3 DTA D-CH - the socalled umbrella taxation - which is often overlooked. The regulation agreed there applies unilaterally only in favour of Germany. Under certain conditions, it opens up an extended right of taxation for Germany, which goes beyond the general allocation of taxation rights agreed in the DTA D- CH. In individual cases, this extension of the German right of taxation has farreaching tax consequences which - as is probably often not recognised by the tax authorities - can lead to expensive surprises. Natural person Only natural persons can be affected, not companies. Swiss residency The persons concerned must be deemed to be resident in Switzerland within the meaning of Art. 4, para. 2 of the DTA D-CH. German permanent residence or German residence of at least 6 months A further requirement is that these persons also either have a permanent residence in Germany or alternatively have a habitual residence of at least 6 months in the taxable period (calendar year). A permanent place of residence is deemed to exist if a place of residence can be used on a sustained basis over a longer period of time and is also used on a regular basis. A longer period is deemed to exist if the relationship of use exists for at least 12 months. In addition to the classic dual residency, this affects both cases of a shift of residency from Germany to a residency in Switzerland while maintaining a German permanent residence or with at least 6 months of domestic residence, as well as cases in which a permanent residence is taken up from Switzerland without shifting the Swiss residency in Germany or a habitual residence of at least 6 months in the tax year is taken up in Germany. 26 convinus.com
Global Mobility Insights - Frühling / Spring 2023 Extension of the German right of taxation - umbrella taxation For the group of persons concerned, the overarching taxation means that Germany may exercise further taxation rights in the same way as they result from the national German taxation rules in the case of unlimited tax liability, irrespective of the general allocation of taxation rights in the DTA D-CH. This results in overlaps with the taxation rights allocated to Switzerland under the general allocation rules of the DTA D-CH. In order to avoid double taxation that would otherwise occur, the income subject to double taxation is either tax-exempt under the German taxation system, depending on the type of income earned, subject to progression, or taxed with credit for Swiss taxes. Due to the existing tax rate differential between Germany and Switzerland, the greatest tax effects of the umbrella taxation arise in the case of income for which a credit for Swiss taxes has been agreed. In particular, the Swiss taxation is offset against the resulting German tax in the case of income from capital assets or employee activity, which is frequently affected in practice. In general, it should be noted that Germany also takes into account income that is not subject to direct German taxation within the framework of the progression proviso for the determination of the tax rate. Income from capital assets In the case of income from capital assets, all investment income is taxed according to German law with the final withholding tax. In this case - which is particularly bitter - capital gains that are tax-free in Switzerland are also included in German taxation. Swiss taxes paid are only credited up to the amount of the final withholding tax of 25% plus solidarity surcharge. Example: The German taxpayer emigrates to Switzerland in the second half of the year. He has a share portfolio and sells shares at a profit after moving away in the same year. Germany will continue to tax this accruing capital income via the umbrella taxation, despite the previous departure. A Swiss tax would be credited. In fact, 27 convinus.com
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