Personal Finance

For expatriates moving to or living in Germany, it is essential to plan carefully to make sure your personal finances are not adversely affected by your time spent overseas!

For many expats moving to the eurozone, the first and most obvious implication of a change will come with the change of currency. If you are or will be paid in Euros, then it is likely you will need Euro denominated current and saving accounts in order to avoid exchange charges and currency risks. Many expats will also continue to have obligations in their home currency and will therefore need to change money cost effectively. Many offshore banks offer multi currency accounts that can be used for this purpose.

The decision then has to be made as to whether to leave your investments abroad or base them in Germany. One of the keys to this decision will be how long you plan to live in Germany, where you expect to move next (if anywhere) and where you expect to retire. One of the great advantages of offshore investing is that your investments can be flexible and portable, allowing you to adapt your strategy as your circumstances and country of residence change. However, while offshore funds may be able to grow free of tax, it is important to work closely with a specialist adviser to avoid a tax headache while you are in Germany or a potential tax time bomb when you return to your country of residence.

Generally speaking if you do have investments outside Germany and are living in Germany for a relatively short period without bringing an income from the offshore funds into Germany, then you will probably have few problems. If you are staying in the country for more than five years and/or will draw some of the proceeds, then those proceeds could incur a tax liability and advice should be taken.

You'll find the investment climate in Germany quite different from what you may be used to at home. Germans up to now have been very conservative and haven't had a thriving stock market culture. Change is in the air, however and they have recently been turning more to stocks (Aktien), bonds (Anleihen) and mutual funds (Fonds). But old habits persist and few take independent financial advice.

They simply invest in the internal funds run by the major banks, which, in contrast to AngIo-American ones, are universal, offering the consumer a very wide range of financial services beyond deposit taking and lending. At just about any of them you can exchange currencies, purchase stocks, bonds, insurance, travelers checks and precious metals, take advantage of portfolio and asset management, take out a mortgage, buy real estate and make electronic transfers around the globe. They tend not to be very service-orientated, though, and there can be problems when members of the staff don't speak English.

Also, investing in Germany may have some pitfalls for those who aren't here for a long period. It may limit the choice of funds available to you. Hedge funds, for example, have not been available historically. An exception, for those moving permanently to Germany or expecting to live here for more than 12 years, might be a regular premium life insurance policy. It can have tax benefits for long-term German residents, because the country has stopped taxing premium payments and taxes payouts instead.

Many expatriates will be members of their company's pension scheme and may well be able to remain members while working in Germany. The rules are complex and depend on both residence and employment circumstances. It is sensible to seek professional guidance. If the move to Germany is for the long term, local advice should also be sought as to whether investing in a German pension scheme will meet your long term aims.

Complicating matters for expatriates in particular is the implementation of the EU Savings Directive, which was agreed by the EU Council of Ministers in June 2003. These are now being enshrined into law in the various EU member states and all new relationships between investors and investment companies are now covered by these arrangements.

Provisions of the Directive took effect in July 2005. The Directive requires that one of two things take place on those investments subject to the Directive. Either 1) information is exchanged between the country of domicile of the investment and the EU member state of residence (e.g. Germany) or 2) that tax on interest is deducted at source in what is known as a transitional arrangement. Under this, the tax will start at a rate of 15 percent, rising to 20 percent after three years and to 35 percent three years later.

Most EU member states have now agreed to exchange information. However, Switzerland, Belgium, Luxembourg and Austria prefer to deduct tax at source. Jersey, Guernsey and the Isle of Man can offer individual clients the option of either taxation at source or exchange of information. Income payments covered are interest on bank savings accounts, gifts, fixed interest securities and corporate bonds. These provisions may also extend to funds which invest in holdings of this type. On the other hand, equity funds which are already taxed at source will not be included in these arrangements.

These rules are not designed to include companies or corporate entities such as professional trustees. A good alternative here is a savings plan with an offshore insurance company. These plans, based in such places as the EU, Channel Islands, Luxembourg, Switzerland and Bermuda, offer accounts in a multitude of currencies, and do not report interest earnings to any tax authority.

Their benefits include tax efficiency, access to savings before retirement, ability to save for several objectives within one plan, and investment flexibility at retirement age. It should be remembered, though, that the cost of these arrangements may be more than the tax itself; that they lack the safeguards of, say, approval by the American SEC, and that the EU Savings Directive may complicate things in the future.

Individuals resident in Germany face a rather punishing tax regime. It is true that tax reform has attempted to reduce this burden. The maximum income tax rate has been cut from 48.5 to 42 percent and the base rate from 19.9 to 15 percent. But other taxes have counteracted some of this gain. Levies on smoking, electricity, heating oil and gas are on their way up, with taxes on wealth, inheritance and property expected to follow.

German residents also pay a 5.5 percent solidarity tax and residents officially affiliated to one of Germany's established churches pay an 8 to 9 percent church tax on top of their normal income tax. Whether you pay all these taxes will depend on your residency status and foreign residents employed in Germany will pay tax only on income earned in the country. If you are a permanent resident you will be taxed on income from Germany and abroad.

Expatriates should be able to escape the church tax but not the solidarity tax, which is meant to cover the cost of reunification. But Germany has double taxation treaties with many countries exempting expatriates from being taxed twice on the same income.

The German property market does not move in the same way as, say, the UK and American markets. Renting is popular in Germany with just 45 percent of houses being owner occupied compared to 70 percent in the UK and USA. Legal fees and other costs on a property purchase can eat up to 7 percent of the property value and it will typically take at least five years to recoup this. It is generally advisable therefore to only buy a property in Germany if you plan to live there for the longer term. For those approaching retirement a decision may have to be made as to where to retire. When deciding whether to settle abroad you should not overlook those two certainties; death and taxes. You should consider both inheritance taxation and local succession law, while not forgetting that the law in your country of birth may still have an impact also.

Much depends on whether you are planning to stay abroad for the rest of your days or whether you will return to your home country should your health give way. If, for example, you move to Germany permanently the law of your home country might at some point regard you as domiciled in Germany. If however, your ultimate intention remains to return to your homeland then you may well retain a domicile in your home country while living in Germany.

No matter how much you move around, domicile of birth remains hard to shake for tax purposes. US citizens, for example, continue to be liable to US inheritance and capital gains tax, and even income tax if they earn more than $87,600 a year. UK domiciled residents of Germany will owe no income tax, but can still owe a 40 percent inheritance tax on all assets above £263,000.

Succession law in some countries gives persons the right to do as they like with their assets, subject to making reasonable provision for those who are financially dependent on them. Because of this distinction it is vital to gain advice from someone competent in the regulations of your country of residence.

And what of your assets in your country of nationality? Do your heirs have a legal claim on them? The answer is a straight and unequivocal "depends". For real estate (broadly houses and land) the law of your home country will normally apply. For moveable property (everything else) the law of the nation of your domicile could have significant impact.

The subject of estate and inheritance taxes is very complicated. It may be that more than one country will wish to apply an inheritance tax on your estate. The US federal government imposes an estate tax, but no inheritance tax, while some American states do have an inheritance tax. While the UK inheritance tax is payable at a rate of 40 percent, rates in Germany vary between 7 and 50 percent, depending on the value of the asset and who is receiving it.

Countries may give a credit for any foreign inheritance tax paid but if a person plans on retiring to another country it is important to know what the position will be in advance and draft a will accordingly. Professional advice is essential here.

In terms of local taxation, again how to structure your investment affairs will depend entirely on the country of residence and the country you plan to retire to. It might be advisable to move an investment portfolio offshore into a more flexible and portable form.

Prior to retirement an investment review should take place, covering the risk inherent in the portfolio. It is almost always sensible to reduce risk as retirement approaches in order to protect a capital base. Such a review should also include the income required in retirement and what taxes that income will face. Individuals should review the property market in the country they wish to retire to, to discern whether the move is feasible.

And they should take account of the health service benefits in the country of retirement. The American Medicare service and the British National Health Service shouldn't automatically be relied upon. They often don't make payments abroad. International private medical insurance is available from a number of companies. Policies are available which provide varying levels of cover. Germany is strict about people having to provide for health care so some sort of cover may well be essential.

Finally, retirees have to review the State Pension benefits they will receive should they move country. The American Social Security and the UK State Pension, for example, continue to be paid and increased each year as it would in the homeland for those retiring to Germany.

In conclusion for those working temporarily in Germany and looking to retire abroad, a review should be taken of their currency exposure, pension planning, investment portfolio, local taxation and inheritance tax to make sure their personal finances are not adversely affected by their time spent overseas before any decision is made.

Editor's note: We are grateful to Julian Broom B Eng (Hons) MSFA, who supplied most of the material for this article. He is a financial planner for The Fry Group, experts in investment planning and taxation, and can be contacted at Great Britain (0044) (0)1903 231 545. Further details are available on line at www.thefrygroup.co.uk

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