Financial Planning for Expatriates: - PowerPoint Presentation

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Financial Planning for Expatriates: A Global View with a Spotlight on German-US Legal and Tax ConsiderationsFriday, March 16, 2012 Sofitel Redwood City, San Francisco223 Twin Dolphin Drive Redwood City, CA 94065 Slide2

Jörg Kemkes, Managing DirectorBridgehouseTax, AtlantaAlex Knight, PartnerHabif, Arogeti & Wynne, LLPKristin Mäckel, Senior Tax ManagerHabif, Arogeti & Wynne, LLPPresentersSlide3

Considerations Slide4

Issues to be discussedAgenda Income tax issuesResident or non-residentEmployee‘s relocation for a short timeEmployee‘s relocation for an unlimited timeImpact of tax treaty and US domestic law on residents whose tax home remains in home countrySlide5

Issues to be discussed cont.Taxation and sourcingStock optionsCompensation / severance paymentsInheritance / estate and gift taxes Resident or non-residentU.S. taxation based on location of assetsImpact of estate and gift treatyInheritance of rental real estateSlide6

Fact Pattern(1)Facts: Hans Meier (German citizen)Lives in Munich Single Employee of a German companyOwns a property in Germany which is rented to tenantsHolds 100% of the shares of a German company (GmbH) - gift from his parentsSlide7

Fact Pattern(2)Plans: HansWill go to San Francisco for his employer to work For a clientAt the US permanent establishmentAt the US subsidiaryWill stay for 6 months/ for some years/ indefinitelySlide8

Fact Pattern(3)Variations:He works in more than two countries during one year/ some yearsHe 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 consequencesSlide9

Differences between income taxation system in US and GermanyUnited 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.Slide10

Differences between income taxation system in US and GermanyGermany:Right to tax is derived from residencyFor German residents, foreign income is excluded from German tax base Slide11

ChallengesWhat and who will be taxed in which country?Taxable affairsPersonal tax liability How willThe 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) Slide12

INCOME TAXEmployees‘ relocationSlide13

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 120.000 Euros. He has no other income.Slide14

Employees' relocation for a short time (2) Answer (German perspective):Hans is still fully (unlimited) taxable in Germany because he:Keeps his flat in GermanyWill not stay longer than 183 days in the U.S.Will get his salary from an employer without permanent establishment in the U.S. Slide15

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.Slide16

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 120.000 Euros. He has no other income. Slide17

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 GermanyWill get his salary from an employer with residence in the U.S. Slide18

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.Slide19

INCOME TAXStock incentivesSlide20

Participation in stocks (1)Problem (page 1):Single Hans has worked for a German Company in Germany since 2007. 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. Slide21

Participation in stocks (2)Problem (page 2):Hans worked:In Germany from 2007 until 2009 In the U.K. in 2010 and 2011Will work in San Francisco from 2012 onwardsWhat will happen after 8 years (in 2014), if Hans still lives in the U.S?Slide22

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 2014. That means (simplified): Taxable in Germany 3/8Taxable in the UK 2/8Taxable in the U.S. 3/8Slide23

INCOME TAXCompensation/severance paymentsSlide24

Compensation payment (1)Problem:Single Hans (German citizen) has been working for a German Company in San Francisco since 2005. He leaves the Company in 2012. He receives an additional payment. He goes back to GermanySlide25

Compensation payment (2)Challenges: Two countries will want to tax the paymentU.S. (country of employment) Germany (country of residence)ConsiderationsWhat was the reason for the payment?In which country is Hans a resident in the year in which he receives the compensation?Slide26

Compensation payment (3)Answer:Reason of paymentFor 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?Slide27

Compensation payment (4)Variation:Single Hans (German citizen) has been working for a German Company in the U.S. since 2005. He leaves the Company in 2012. He receives an additional payment. He decides to go to Spain; the payment:Is paid while he is still residing in the U.S.Is paid while he is already residing in SpainSlide28

Compensation payment (5)Next variation:Single Hans has been working for a German Company in San Francisco since 2005. He has dual citizenship (U.S./ German)He leaves the Company in 2012 He receives an additional payment Slide29

Expatriation Tax/WegzugsbesteuerungUSA:Citizens or Green Card holders that renounce their citizenship/Green Card may be subject to it if certain income/net worth levels are exceededApplies to those who relinquish U.S. citizenship and those who have held U.S. green card for eight out of the last fifteen years.Slide30

Expatriation Tax/WegzugsbesteuerungUSA cont.,Average net income tax liability exceeds $147,000 or net worth exceeds $2.0 millionMark-to-market tax on gains in excess of $636,000 (i.e. deemed sale of an individual’s assets)Slide31

Expatriation Tax/WegzugsbesteuerungGermany: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 itTax is assessed on the unrealized gain of the investmentCalculation is based on a “deemed sale of assets”Slide32

GIFT/ INHERITANCE TAXSlide33

Difference between inheritance tax system in the US and GermanyUS:The assets/estate is the tax subject, not the heirGermany:The beneficiary or heir is subject to tax Slide34

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. Slide35

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:Slide36

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? Slide37

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 tenantsShe also owns a second home in San Francisco for the family. Compare limited and unlimited tax liability Slide38

Inheritance (5) Germany (unlimited tax liability) RelationshipSonTax classIIValue of taxable assets1 400 000 EuroTax allowance400 000 EuroTaxable amount1

000 000 Euro

Payable

inheritance

tax

(19%)

(

tax

credit

allowed

for

US

estate

taxes

paid

)

190 000

Euro Slide39

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. Slide40

Inheritance (7) Germany (unlimited tax liability/world assets) RelationshipSonTax classIIValue of taxable assets1 400 000 EuroTax allowance400 000 EuroTaxable amount1

000 000 Euro

Payable

inheritance

tax (19%)

190 000

Euro Slide41

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. Slide42

Inheritance (9) Germany (limited tax liability/only German assets) RelationshipSonTax classIIValue of taxable assets1 400 000 EuroTax allowance2 000 EuroTaxable amount

1.398 000 Euro

Payable

inheritance

tax (19%)

(will

be

credited

in

the

U.S.)

265

620

Euro Slide43

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 Slide44

ContactBridgehouseTax AtlantaThe Proscenium, Suite 17751170 Peachtree Street, NEAtlanta, GA 30309-7675U.S.A.www.bridgehousetax.usJörg KemkesT +1 404 898 9122F +1 404 506 9930E joerg.kemkes@bridgehousetax.usHabif, Arogeti & Wynne LLP5 Concourse Parkway, Suite 1000Atlanta, GA 30328U.S.A.www.hawcpa.comAlex Knight

T +1 404 898 7428

M

+1 770 367 3178

E alex.knight@hawcpa.com

Kristin M

ä

ckel

T +1 770 353 8606

M +1 678 793 4204

E kristin.maeckel@hawcpa.com