Forums » Germany » Personal Finance in Germany

• dom_donald

  
   

  March 28, 2007 7:06:46 PM CEST

  Hello, I think i know the answer to this but would welcome some other views..
  
  Here's the situation.
  
  I am British and always lived in UK until I moved to Germany in 2003.
  In 1998 I bought a flat in the UK and lived in it as my sole residence until 2003 when I moved to Germany. I moved of my own accord and not because my employer wanted me to.
  
  I then rented the flat out from 2003 until 2007 when I sold the flat, making a gain of £100k. I am using the money to directly build a house in Germany which will be my sole residence.
  
  What tax do I pay and where?
  
  My current understanding (having ploughed through the double taxation agreements) is that the Capital Gains Tax is payable in the UK because the flat is an immovable asset.
  
  The amount of tax I have to pay is calculated by comparing the amount of time I rented out the flat compared to the amount of time I owned the flat, minus the 3 year "being abroad" allowance, multiplied by the gain of the flat's value upon sale. For me, this is practically nothing in total.
  
  BUT
  
  I don't have pay CGT in Germany, however I MAY (i.e. Germany 'reserves the right') have to pay a higher level of income tax on my normal german income (salary) for a year, because they calculate my income tax rate based on the income as if the income had been supplemented by the gains resulting from the sale of the flat - called "Progressionsvorbehalt". This means about an extra €6k tax for me.
  
  Obviously having to pay the tax in germany would be a nightmare beacuse they would tax it at normal income tax rates of over 40%, costing me €40k!!
  
  That would be a lovely "welcome to Germany" present!! I can't believe that would be the case because I was selling my home simply to move to Germany and buy another one. I rented out for a 3 year period whilst I decided if I wanted to stay or not.
  
  cheers
• onuallainxx

  
   

  March 31, 2007 6:27:14 PM CEST

  I have not reveiwed the Germany-UK DBA but most of Germany's bilateral tax treaties have similar provisions. The rule that the "situs" country for real property has the right to tax income - including gains - from that property is the near-universal standard in double taxation treaties worldwide.
  
  Thus, your understanding of the tax consequences to you of the sale of UK-sited real estate while you are a tax resident of Germany appears correct.
  
  The DBA gives the UK the right to tax the gain on such a sale.
  
  This UK right to tax under the treaty triggers the exclusion of such income under Germany's tax rules. However, that exemption from German tax is subject to "Progresssionsvorbehalt", i.e. the gain - as computed under German rules - is added to your otherwise taxable German income in the year of sale to boost that income into a higher German income tax bracket.
  
  It's too late to help now, but if you had waited until you had owned the property for 10 years, there would be no taxable gain under German tax rules and no progressionsvorbehalt.