Tax aspects of moving from Germany to Dubai

Using the example of the current legal situation until 2024:

Introduction:

There is no income tax or business tax in Dubai. More and more people are therefore considering relocating to Dubai. This article highlights the relevant tax aspects and requirements associated with such a move.

Of particular relevance is the fact that the double taxation agreement with Germany has no longer been in force since 31.12.2021. As a result, when relocating to Dubai, among other things, the domicile and/or habitual residence should be given up completely and the requirements for residency in Dubai must also be met - at least if you want to take full advantage of the tax benefits.

I. Tax framework in Dubai:
An individual's income from non-business activities is not subject to income tax in the UAE. This includes, in particular, income from employment, private investments, dividends and income from the rental and leasing of real estate, provided that this is not earned as part of a commercial activity. All of this income is tax-free in the UAE. However, if individuals earn income of more than AED 1 million (UAE currency, approximately EUR 250,000) from commercial activities, this income is subject to corporate income tax at a rate of 9%, regardless of the individual's place of residence or nationality.

It is important to note that the tax exemption in the UAE only applies to income earned in Dubai. For income earned in Germany by persons living in Dubai, the German tax laws must still be observed. These provide for a limited tax liability on certain income for individuals resident in Dubai (see III below) or an extended limited tax liability (see IV below).

II Termination of unlimited tax liability in Germany:
As already mentioned, no DTA has applied in the relationship between the UAE and Germany since 2022. When moving from Germany to Dubai, the aim of most taxpayers is therefore to end their unlimited tax liability in Germany.

Anyone who is resident or ordinarily resident in Germany is subject to unlimited tax liability in Germany. This means that they are subject to German income tax on all their income worldwide at a rate of up to 45% plus solidarity surcharge and, where applicable, church tax.

In order to end the unlimited tax liability in Germany and thus the taxation of worldwide income, it is therefore necessary to give up residence and habitual abode. This includes, among other things, giving up a home in Germany and the clear (and verifiable) relocation of the center of life to Dubai without any intention of returning in the near future. You must not have "key control" over a habitable area. With regard to the relocation of the habitual residence, it is crucial that it is clearly evident that one will permanently relocate one's life to Dubai from a certain point in time (without the intention to return in the near future). A simple re-registration is not sufficient.

III Termination of limited tax liability in Germany:
However, even after a move to Dubai and the successful termination of unlimited income tax liability in Germany, there is still a limited tax liability for certain sources of income that remain in Germany, e.g. German commercial income and income from renting and leasing the real estate that remains in Germany.

IV. Exit taxation according to § 2 AStG (extended limited tax liability):
In addition, it should be noted that in the case of Dubai, the even stricter extended limited tax liability is regularly applicable (sections 2 et seq. AStG). This is due to the fact that Dubai is a low-tax country. This regulation extends for ten years after the end of the year in which the unlimited tax liability in Germany ended and, despite moving to Dubai, in many cases leads to a continued tax liability in Germany beyond the scope of the limited tax liability under section III. This extended limited tax liability remains in place if there are significant economic interests in Germany.

However, the extended limited tax liability in Germany only applies if significant economic interests exist. This applies, among other things, to entrepreneurial activities in Germany, domestic income exceeding 30% of total income or domestic assets exceeding 30% of total assets. The sale of real estate assets, among other things, is therefore necessary in order to avoid the 10-year tax liability.

V. Residency in Dubai:
To be considered a Dubai tax resident, certain conditions must be met, including principal residence and center of financial and personal interests in Dubai, as well as a minimum number of days of stay in the UAE. Proof of principal and permanent residence will be provided by appropriate certificates or documents.

VI General information for shareholders of a corporation when leaving Germany
Irrespective of the place of departure, shareholders of a GmbH should have the exit taxation in accordance with § 6 AStG checked before moving away. For tax purposes, the departure of a GmbH shareholder to the UAE is (notionally) regarded as a sale of the shares and the (notional) capital gain at fair market value is subject to a corresponding tax burden as a capital gain.

Conclusion:

A relocation from Germany to Dubai requires comprehensive tax planning and implementation in advance in order to meet the existing legal requirements. Paying attention to exit taxation, the sale of real estate assets and meeting the residency criteria in Dubai are crucial in order to minimize tax consequences and ensure a smooth transition.

However, those who take all this into account and can imagine living in Dubai may be able to benefit from a 0% income tax burden.

Please do not hesitate to contact us if you have any questions.