It is a dream for many: a holiday property under the sun of Italy, Spain or Portugal. But with the purchase of such a property, tax questions are inevitable. Can the foreign state levy taxes on this property? What about tax liability abroad?
Unlimited tax liability through residence
Unlimited tax liability is usually linked to the existence of a place of residence. So anyone who owns a holiday property and spends a long time there should check carefully whether this also entails tax liability abroad.
Double unlimited tax liability?
If you own a home in Germany and abroad that you use yourself, you are subject to unlimited taxation in both countries. This may seem disadvantageous at first, but this is where double taxation agreements (DTAs) come into play. They are designed to prevent your income from being taxed in both countries. The agreements regulate which country can tax which income.
How do double taxation agreements work?
DTAs are agreements between two countries that regulate how income is taxed by people residing in both countries. There are two main methods of avoiding double taxation: the exemption method and the imputation method. The exemption method means that one country exempts from taxation the income that the other country is also allowed to tax. The imputation method, on the other hand, allows both countries to tax the income, with the tax paid in the other country being credited against their own tax liability.
What does residency mean in the context of double taxation?
Residence is a key concept in international tax law. If you have residences in two countries, you must determine where you are resident within the meaning of the DTA, because only one country can claim residence in this sense. This is determined by the DTA and the criteria set out therein, such as permanent residence and center of vital interests.
Beware of exit tax
A change of residence can have significant tax consequences, such as the emergence of exit tax. If Germany loses taxation rights due to the change of residence, exit tax arises even without giving up the domestic residence. In order to avoid exit tax, it is important to keep a close eye on the time of the change of residence.
Conclusion
When purchasing a holiday property abroad, you should not only find out about the local tax laws, but also about the tax consequences in your home country. Get advice from experts who specialize in cross-border tax cases to avoid unwanted surprises.