Germany Q&A for American Expats
Germany is a great place to live, work, and retire. That said, it can be challenging to invest your wealth wisely while living there as an American expat. Creative Planning International highlights six common investment management, financial planning, and estate planning concerns that our clients face living in Germany. If you’re an American expat or an American considering living in Germany, learn more in our Q&A below.
#1 – Is investing in Germany different than investing in the U.S.? Why shouldn’t I just work with a local German advisor?
A few significant issues make investing as an American expat difficult in Germany.
First, U.S. citizens and permanent residents are uniquely subject to citizenship-based taxation. No matter where you reside, you still have to file U.S. taxes annually and stay compliant with U.S. regulations – most notably those around Passive Foreign Investment Companies (PFICs). PFICs, like foreign mutual funds, are taxed very harshly under U.S. law – e.g. tax rates of up to 50% on gains with annual tax filings that take over 36 hours each year to complete per IRS estimates.
For this reason, you’ll want to avoid buying German or other European mutual funds – all considered PFICs – and stick with buying U.S.-based funds that are exempt from PFIC rules. See why Americans should avoid owning non-U.S. mutual funds for more details on PFICs.
Additionally, working with a German advisor may incur Germany’s 21% value-added tax (VAT). International (non-German) financial advisors are exempt from VAT.
#2 – To avoid PFICs, why shouldn’t I just invest with a U.S. brokerage firm like American residents?
There is one major hurdle here, too. Because of European Union (EU) laws, most notably MiFID II, legislation that regulates European financial markets, many U.S. financial institutions have stopped working with EU residents or U.S. expats living in Germany. Many U.S. firms will even proactively close your account when they find out you are living overseas. Read more on why U.S. brokerage accounts of American Expats are being closed.
That said, MiFID II contains a clause that allows U.S. expats and others to buy U.S.-based investment funds as long as they work with an experienced non-EU registered investment advisor who purchases U.S. funds on their behalf.
Excerpt from MiFID II:
(111) The provision of this Directive regulating the provision of investment services or activities by third-country firms in the Union should not affect the possibility for persons established in the Union to receive investment services by a third country firm at their own exclusive initiative. Where a third-country firm provides services at the own exclusive initiative of a person established in the Union, the services should not be deemed as provided in the territory of the Union.
#3 – What other financial planning and investment concerns should my family and I be aware of as American expats in Germany?
Germany has some unique tax regulations that require forethought when planning. Examples include the treatment of investment fund distributions, capital gains, and Roth IRA accounts. Germany also has unique considerations for estate planning including its gift and inheritance tax regime.
The U.S. and Germany are party to three separate treaties/agreements around 1) income tax, 2) estate tax, and 3) Social Security that are intended to help residents avoid double taxation and other penalties. These treaties can be helpful in terms of coordinating taxing authority between the two countries and reducing the potential for double taxation. However, properly interpreting these treaties and correctly applying their provisions requires training and experience. Treaties do not eliminate all complications that can result in double taxation.
For investments, Germany implemented new laws in 2018 that changed the way investment funds are taxed. These laws made the rules around foreign (i.e. non-German) funds much more complex, and added additional taxation to funds that do not distribute certain amounts of income (such as gold or accumulating funds). You will want to ensure that your investment strategy factors in these tax rules.
#4 – What do I need to consider for gifting and estate planning?
This is a very complicated topic from a cross-border perspective, so this guide will only touch on the highlights.
Germany uses a unique 10-year rolling period for calculating gift and estate taxes (Erbschaftsteuer).
Germany has much smaller exemptions for gifts and inheritances than the U.S., so German tax exposure is likely a larger concern than U.S. gift and estate taxation. The size of the German inheritance exemption depends on the relationship between the decedent/gifter and the inheritor/recipient. The exemptions range from €500,000 for spouses/partners to only €20,000 for siblings, non-immediate family, and others.
The tax rates for gifts and inheritances are the same, and those rates depend on the relationship between the donor/decedent and the beneficiary. Spouses/partners, children, and grandchildren pay the lowest tax rates when they receive gifts or bequests subject to German transfer taxes: 7-30% depending on the amount. Siblings and parents usually pay tax rates of 15-43%. All others are taxed at 30% or 50%.
The U.S. and Germany have an estate tax treaty that is designed to alleviate double taxation on gifts and estates of U.S. citizens and German residents. Should you die while resident in Germany, Germany will have primary authority to impose its laws of succession on your assets except for any U.S. real property or directly-held U.S. business assets.
German inheritance tax is payable on the worldwide property of a decedent deemed a German resident at the time of death. Furthermore, inheritance tax will be imposed on wealth received from abroad by residents of Germany, even if the decedent has no other tie to Germany. Gift tax will also apply in a similar fashion.
A person who dies within five years after leaving Germany is deemed to still be a resident in Germany if they were a German national at the time of their emigration. The same five-year emigration rule also applies to gifting. If the individual moved to the U.S., then the five-year period is increased to 10 years under the terms of the U.S.-German Estate Tax Treaty.
Learn more about inheriting from the U.S. while living abroad, with a breakdown of many inheritance tax rules that apply to inheriting Americans living abroad.
#5 – What if I have a trust in the U.S.? Will my U.S. trust help protect my assets?
Your trust may create more problems than it solves. As a civil law country, Germany does not acknowledge trusts which creates a large gray area regarding their treatment. We have seen different experts reach different conclusions depending on their experience and the unique circumstances of the case. This would be a matter to discuss with a competent German estate attorney conversant in cross-border issues.
One potential risk is that Germany completely ignores the trust and your wishes are not followed. Another potential risk is that the trust is deemed to be a third party and, as such, any transfers to/from the trust are taxed at a much higher effective rate than if assets were passed to an heir directly.
#6 – Will Germany assess inheritance tax if I inherit money from a U.S. citizen while I am living in Germany?
Yes, as noted above, German gift and inheritance tax is payable on worldwide assets if the decedent/gifter or the recipient is deemed to be a German resident at the time of the transfer.