What's wrong with John's plan?

[manwithtoupe]

John is a resident of a high tax EU country. Let's pretend that it's Germany.

- John decides to leave Germany for good, and become a "digital nomad".

- Once he has left Germany, he incorporates a zero-tax offshore company for his online business.

- John manages this company from a variety of countries (never staying more than a few months in each). John never goes back to Germany.

- He still maintains his personal tax residence in Germany.

- All profits are reinvested into the company. He never pays himself a salary.

Questions:

Given that John never goes back to Germany, can Germany ever claim that the company is managed and controlled from there?

If not, is John obliged to inform the German Tax Authorities about the company?

Will John run into trouble once he decides to stop travelling and settle down in a new country? I'm assuming he would have to declare his ownership in the company to the German Tax Authorities at that point, and pay some kind of exit tax on his shares.

 

[neweraoffshore]

Man, are you studying law right now or why are you writing in this assessment style text, hahah?
If John still has his tax residency in Germany that it is his tax residency, right?! So this sentence should already answer your question. Tax residence = Tax residence ?!

Does your "John" (still have to laugh about the text style) have an apartment in Germany which is not rented and he has the power over the key so he could come back at any given moment?
Does "John" have a residence somewhere else? In case John has a company with a "moving place of business" and no pro forma residence somewhere else the tax may go through to the origin of his passport and makes him a German tax resident again.
So John may end up to pay corp tax in Germany. He then also may violate German profit-making intent laws if he doesn't pay a salary.
The moment John wants to settle down and change his tax residency from Germany to somewhere else he has to pay exit tax in Germany.

Basically you... eh sorry, I mean John, has to leave Germany (and sell or long term rent everything to an independet 3rd party, not family, not girlfriend etc.) and get a pro forma residence somewhere. You need a pro forma residence anyway otherwise you will never get a bank account. Good pro forma residence countries are Georgia, Dubai etc. . Or a country within in Europe which differentiates between residence and tax residence. Poland for example. No tax on foreign income if you don't have your vital interests there and it is very easy to get bank and trading accounts etc. as they have this PESEL system and you will get a PESEL the moment you form your pro forma residence there.

 

[manwithtoupe]

Does "John" have a residence somewhere else? In case John has a company with a "moving place of business" and no pro forma residence somewhere else the tax may go through to the origin of his passport and makes him a German tax resident again.

So the company will become a German tax resident even though there is no permanent establishment in the country? John does not own anything there, and never spends a day in the country while running the company.

How can Germany ever claim that it's being run from there?

 

[neweraoffshore]

If you have a German passport and no pro forma residence/tax residence somewhere else, so your last tax residence was Germany, yes.
It was possible long time ago. But not anymore. That's why they also change the sticker they put on your German ID card from "Kein Wohnsitz in Deutschland" to "Keine Wohnung in Deutschland" when you leave Germany. As no "Wohnsitz" would also imply that you also don't have a tax residence, but "Keine Wohnung" implies that you can still have a tax residence.

 

[manwithtoupe]

If you have a German passport and no pro forma residence/tax residence somewhere else, so your last tax residence was Germany, yes.
It was possible long time ago. But not anymore. That's why they also change the sticker they put on your German ID card from "Kein Wohnsitz in Deutschland" to "Keine Wohnung in Deutschland". As no "Wohnsitz" would also imply that you also don't have a tax residence, but "Keine Wohnung" implies that you can still have a tax residence.

Just to be clear, I''m talking about the company here, not the individual. I agree that John remains an individual tax resident in Germany, and will need to pay German tax on any salary/dividends received from the company.

Will the company be considered tax resident in Germany, and be forced to pay German corporate tax?

As far as I can see, the company does not trigger PE anywhere, and certainly not in Germany (since John spends 0 days there).

 

[neweraoffshore]

If the company doesn't have substance in the offshore jurisdiction it will then be taxed where the owner has his tax residence. So in your case Germany. So yes, it needs to pay corp tax in Germany as Germany will see the offshore company as a German company.
If they can claim it in practice is a different question. Theoretically yes, in practice, maybe.
Just get a pro forma residence/tax residence in a low tax country if you don't want to go back to Germany anyway?! Why do you want to stay with a German tax residence ?! I don't understand what you want to achieve with this.

You may want to look into the Youtube Channel of https://www.youtube.com/channel/UCRXSpcj8K_LKN4eVaXFJkmg/videos . He has some good videos about similar scenarios. However can't recommend him as tax advisor as you will never work with him directly and just some staff member who don't have good knowledge like him. Sadly I guess because of marketing he coorporates with this guy from staatenlos.ch but if you watch the videos before he even debunks some of his approaches compared with German tax laws.

 

[manwithtoupe]

If they can claim it in practice is a different question. Theoretically yes, in practice, maybe.

So a foreign company can be considered tax resident of Germany without having a permanent establishment there?

That's new to me. Do you have more info on this?

How will they claim that it's managed from Germany when there is no substance there (no office, no employees), and when none of the shareholders and directors ever set their foot in Germany?

 

[neweraoffshore]

I edited my post above with the link to a good youtube channel for cases like this.
https://www.youtube.com/channel/UCRXSpcj8K_LKN4eVaXFJkmg/videos
It is up to you if you want to hide from tax or legally not pay tax. If you have the chance to legally not pay tax why bother and go the secret hidden way? They will have a hard time to claim that the company belongs to German tax, yes. But do you really want to take this risk if you can fix this by getting a residence somewhere else?! You even say that you will not come back to Germany?! If you really want to keep German tax residency then you can get the regular offshore setups which aim on keeping the UBO private. But this makes no sense for me why someone should take this risk if he is in a situation like you are.

 

[manwithtoupe]

Just get a pro forma residence/tax residence in a low tax country if you don't want to go back to Germany anyway?! Why do you want to stay with a German tax residence ?! I don't understand what you want to achieve with this.

This would indeed be the cleanest solution (also with regards to exit taxes), but lets assume John wants to travel for a bit and doesn't want to go through the hassle of attaining a residency elsewhere.

How could him not registering the offshore company with the German tax office and not paying German corporate tax be considered illegal? Given that the company has no permanent establishment in Germany?

If you are a perpetual traveller, and you only spend 1 or 2 months in any country during the year, I don't see how you can trigger PE/CFC rules.

 

[seabreeze]

It's clear that the offshore entity won't have a Permanent Establishment in Germany.
However, given that John is still a German taxpayer in the German tax authority's eyes, given that John's new company is in a low-tax jurisdiction, the company will be considered a CFC and John would have to pay German tax on any undistributed income of said company.

 

[Golden Fleece]

This would indeed be the cleanest solution (also with regards to exit taxes), but lets assume John wants to travel for a bit and doesn't want to go through the hassle of attaining a residency elsewhere.

How could him not registering the offshore company with the German tax office and not paying German corporate tax be considered illegal? Given that the company has no permanent establishment in Germany?

If you are a perpetual traveller, and you only spend 1 or 2 months in any country during the year, I don't see how you can trigger PE/CFC rules.

That issue has been discussed before. It is far more difficult to be a PT today.

https://www.offshorecorptalk.com/threads/where-to-create-offshore-company.33090/#post-168778

 

[user9823671]

Be aware many many people say they will never return to their home country. 99% do. Do you have residency somewhere else? Do you have a plan where you intend to get residency / citizenship?

You cannot be resident no where.
Your tax free company company will have no substance so will fall back to your residency.
Aggressive countries like German could claim the company is German for tax purposes.

If you are a perpetual traveller, and you only spend 1 or 2 months in any country during the year, I don't see how you can trigger PE/CFC rules.

There is your mistake. Just because *you* don't see it, doesn't really mean anything

When you set up your business / bank account, you will need to prove your residency. You will use your German details.

 

[lokifree]

Also remember that Germany (any some other European countries) imposes exit tax. So if John leaves Germany (changes tax residence) with shares in a company he will have to pay exit tax. If he doesn't leave but has shares in an a foreign offshore company, he will have to pay CFC tax from the gains reached by that company

 

[Golden Fleece]

Also remember that Germany (any some other European countries) imposes exit tax. So if John leaves Germany (changes tax residence) with shares in a company he will have to pay exit tax. If he doesn't leave but has shares in an a foreign offshore company, he will have to pay CFC tax from the gains reached by that company

Wow, that is crazy. Things will get even worse as socialist governments seek more revenue to prop up their bankrupt welfare states.

Legal consequence of the exit taxation
If the exit tax is triggered, the taxpayer is taxed as if he had sold his investment. Thus, the taxation of a fictitious sale takes place. The so-called hidden reserves are disclosed. In simplified terms, this means that the difference between book value and market value is taxed at the taxpayer's personal income tax rate. Taxation is based on the partial income method.

https://www.rosepartner.de/en/exit-taxation-lawyer-lawfirm-germany.html

 

[12345]

If John decides to move outside EU, to Dubai for example and not no pay exit tax what consequences can be drawn from this if he doesn't plan to ever visit Germany?

 

[lokifree]

If John decides to move outside EU, to Dubai for example and not no pay exit tax what consequences can be drawn from this if he doesn't plan to ever visit Germany?

Then John may become a fiscal criminal and his time in Europe will be hard. His time outside Europe maybe not that hard, but still. Banks will not like him. Risky scenario.

 

[12345]

Then John may become a fiscal criminal and his time in Europe will be hard. His time outside Europe maybe not that hard, but still. Banks will not like him. Risky scenario.

Do you know the laws in power in such case? If John ever enters EU will he go to jail? Will banks in UAE or USA know his sins? If it was millions unpaid then probably yes but let's say 50K EUR unpaid tax

I know it is better not to play tricks with developed country tax office like Germany or Norway but It would be interesting to find out what are the steps taken by them if someone leaves the country, thanks

 

[lokifree]

I can't tell you for sure about the other countries, but in my home country (Poland) they will chase you and you could (not necessarily would) be considered a criminal if you fail to pay. Ofc the amount is small and we're talking about income tax and not VAT (which is at spotlight) so the practical chance they will find out that you failed to pay and chase you is small.

But if they do find and start chasing you and you still willingly avoid to cooperate/pay they will go to criminal court and the court will sentence you. Depending on the country for: jail / penalty / etc. So then you will be a convicted criminal. From that point a grey area starts and maybe some of the other members of the forum have more knowledge/experiences of that.

But for sure if there is a jail sentence for such crime in your home country there is a risk they will issue an European Arrest Warrant. Again, this is more about bigger cases than 50K of John's, but still.

 

[user9823671]

Do you know the laws in power in such case? If John ever enters EU will he go to jail? Will banks in UAE or USA know his sins? If it was millions unpaid then probably yes but let's say 50K EUR unpaid tax

I know it is better not to play tricks with developed country tax office like Germany or Norway but It would be interesting to find out what are the steps taken by them if someone leaves the country, thanks

For the sake of a small tax bill for the numbers mentioned here, it would be stupid to not do things legally. Speak to an expert, find out how to reduce it legally as small as possible, but pay it.

If the plan is "I will never return" that is stupid. Weddings, funerals, family issues. Just a longing for home. I've lived away for 12 years now. I meet a lot of people who say "I will never go home", 99% all return home permanently. All visit. All.

It was very naive to say "I will *never*".

 

[12345]

Thank you for your reply. Of course I was not referring to my case, I was just curious to find out. Well even if tax office ends up not taking any action it is still not really worth it when you never know and do not sleep well at night

Only situation I would consider making such decision in is if I lived in 3rd world incompetent country or when they impose some crazy 50% tax.