Anyone who moves their residence abroad thinks first about health insurance, pensions and deregistration. The existing German life insurance policy is easily overlooked. That can be expensive: unlike many other forms of investment income, the income from a life insurance policy with a German insurer frequently remains taxable in Germany after the move, irrespective of whether the new state of residence also taxes the same income. This article explains what happens to the contract itself, how limited tax liability under Section 49 EStG (German Income Tax Act, Einkommensteuergesetz) applies, how withholding tax is deducted and what role double taxation treaties and the Foreign Tax Act (Außensteuergesetz, AStG) play.
This article concerns existing endowment life insurance policies (Kapitallebensversicherungen), unit-linked life insurance policies and private pension insurance policies with a lump-sum option. The protection of a policy against creditors is dealt with in the article on garnishment-proof life insurance.
What Happens to the Life Insurance When You Move Abroad
Under the Insurance Contract Act (Versicherungsvertragsgesetz, VVG), a change of residence to another country does not give the insurer a right to terminate. The policyholder can terminate a life insurance policy with ongoing premium payments at any time with effect from the end of the current insurance period under Section 168 (1) VVG. The insurer has a right to terminate above all where the policyholder is in default with a subsequent premium after the insurer has, without success, set a payment deadline of at least two weeks in text form (Section 38 (1) and (3) VVG). Even then, the life insurance is in principle converted into a paid-up policy; if the agreed minimum insured benefit is not reached, the insurer instead pays out the surrender value (Section 166 (1) in conjunction with Section 165 (1) VVG). In addition, rights arising from a breach of the pre-contractual duty of disclosure may also be relevant (Sections 19 et seq. VVG); a mere move is not sufficient for this.
In practice, an existing policy can therefore as a rule be continued after the move, including premium payments and the later payout. However, some insurance terms contain clauses under which cover is restricted in the event of a longer stay abroad. This mainly affects term life insurance, but can also affect endowment life insurance, because it also includes a death benefit. The terms of each policy should therefore be checked for clauses on stays abroad and on an increase in risk (Gefahrerhöhung) before the move.
It is also advisable to notify the insurer of the move in writing. The correct address and the new state of residence are important for the correct tax treatment of the payout.
Limited Tax Liability after the Move
When residence and habitual abode in Germany are given up, unlimited tax liability under Section 1 (1) EStG ends. It is replaced by limited tax liability under Section 1 (4) EStG to the extent that German-source income within the meaning of Section 49 EStG continues to be earned. Exactly where the line for giving up residence lies is one of the most frequent points of dispute with the tax office; it is explained in the article on the rule of 183 days and habitual abode.
Section 49 EStG lists German-source income exhaustively. Ordinary interest, for example from a German savings account, is generally not included and remains untaxed in Germany after the move. How this affects other investments is described in the article on withholding tax on investment income after emigration. For life insurance, however, this correct observation easily leads to a false conclusion.
Why the Income from a German Life Insurance Policy Can Remain Taxable
Income from life insurance is governed by Section 20 (1) No. 6 EStG. What is taxable is not the entire payout but the difference between the insurance benefit and the total premiums paid. This applies to contracts concluded after 31 December 2004. If the benefit is paid out after the age of 60 has been reached (for contracts concluded from 2012: the age of 62) and after a contract term of at least twelve years, only half of the difference is to be taken into account (Section 20 (1) No. 6 sentence 2, Section 52 (28) sentence 7 EStG). For contracts concluded before 2005, the old law applies; their income may be completely tax-free under the earlier conditions (Section 52 (28) sentence 5 EStG).
The decisive provision for emigrants is Section 49 (1) No. 5 (a) EStG. It expressly covers investment income within the meaning of Section 20 (1) No. 6 EStG if the debtor, in this case the insurer, has its residence, place of management or registered office in Germany. For an insurer with its registered office in Germany, this domestic connection is normally present. The assumption that the move eliminates any German tax on the later income is therefore wrong for precisely these contracts. The position may be different for policies of foreign insurers.
Withholding Tax and Final Withholding Effect
On payout, the insurer deducts withholding tax on investment income (Kapitalertragsteuer) of 25 percent plus a solidarity surcharge of 5.5 percent on it. The basis of assessment is the full difference, even if in substance only half is taxable (Section 43 (1) sentence 1 No. 4 EStG). Church tax is generally not payable without a residence or habitual abode in Germany.
For persons with limited tax liability, income tax on this income is in principle settled by the withholding (Section 50 (2) sentence 1 EStG). One exception is important for life insurance: if half-taxation under Section 20 (1) No. 6 sentence 2 EStG applies, the person with limited tax liability can apply for an income tax assessment (Section 50 (2) sentence 2 No. 6 EStG). In this way, the tax attributable to the non-taxable half can usually be recovered; in the assessment, however, the standard income tax rates apply (Section 32d (2) No. 2, Section 50 (1) sentence 2 EStG).
Double Taxation Treaties and Refund under Section 50c EStG
Whether Germany may tax the income at all under a double taxation treaty depends on the treaty in question. Which treaty article applies has not been uniformly settled. Such income is predominantly treated as interest in the sense of income from debt claims, so that the interest article of the respective treaty is decisive; alternatively, the article on other income may apply. Many treaties limit or exclude Germany’s right to tax interest. A general statement for all states is therefore not possible. The basics are explained in the article on double taxation treaties for emigrants.
If, under the treaty, Germany has no right or only a limited right to tax, the insurer must nevertheless initially deduct the withholding tax (Section 50c (1) EStG). Prior exemption from withholding is not available to private individuals for this withholding tax. The refund must be applied for from the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt) (Section 50c (3) EStG). The application must be submitted electronically and accompanied by a confirmation of residence from the foreign tax authority (Section 50c (5) EStG). The deadline is four years from the end of the year in which the payout was received. How to obtain such a confirmation is explained in the article on the certificate of tax residence.
For liquidity planning, this means that some time may pass between payout and refund. Anyone who wants to use the payout abroad immediately should plan for this.
Unclear legal position: obtain a binding ruling. Where the tax treatment in Germany is not certain or is foreseeably liable to change, an application for a binding ruling (verbindliche Auskunft) from the tax office (Section 89 (2) AO, German Fiscal Code, Abgabenordnung) should come before implementation. It binds the tax office to the ruling given for a precisely defined set of facts that has not yet been implemented, and it is subject to a fee. In our view, a tax adviser who does not recommend this in such a situation is acting irresponsibly: the client risks having to litigate over the outcome years later, and that costs time and money. The German ruling, however, binds only the German tax authorities. Where necessary, it should therefore also be examined in the new country of residence whether a comparable binding ruling is available there; in Spain, for example, tax law provides for written enquiries to the tax administration whose answers are binding on the Spanish tax authorities (consulta vinculante, Articles 88 and 89 Ley General Tributaria).
Risk of Double Taxation in the New State of Residence
Even a refund claim against Germany does not mean that the income ultimately remains tax-free. Many states tax their residents on their worldwide income and include the income under their own rules. If the German tax remains in place and the state of residence does not credit it, a double burden arises. Whether and how the state of residence takes the German tax into account depends on its law and on the treaty article on the elimination of double taxation. This aspect should be clarified with an adviser in the destination country before the move.
Extended Limited Tax Liability under Section 2 AStG
In addition, extended limited tax liability under Section 2 AStG may play a role. It affects German nationals who were subject to unlimited tax liability for at least five years in the last ten years before the move, who are resident in a low-tax territory within the meaning of Section 2 (2) AStG or in no state at all, and who retain substantial economic interests in Germany (Section 2 (1) to (3) AStG). It applies until the end of ten years after the end of the year in which unlimited tax liability ended, and only if the income concerned exceeds EUR 16,500 per year. An applicable double taxation treaty limits it.
For the income from the life insurance itself, Section 2 AStG usually adds little, because that income is already covered by Section 49 EStG anyway. Something else is significant: a high-value policy with a German insurer can, as domestic assets, count towards the substantial economic interests, for example if domestic assets exceed EUR 154,000 in total (Section 2 (3) No. 3 AStG). The policy can then contribute to Section 2 AStG applying to other income.
Do Not Confuse: Section 6 AStG Concerns Shares in Corporations
Some people fear that the move will also trigger exit tax (Wegzugsteuer) on the life insurance. That is not the case. Section 6 AStG covers shares in German and foreign corporations within the meaning of Section 17 EStG, that is, holdings of at least one percent within the last five years, if the person moving away was subject to unlimited tax liability for at least seven years in the last twelve years. The shares are then deemed to have been sold at fair market value (gemeiner Wert). A life insurance policy is not such a holding. Anyone who holds company shares in addition to a policy should examine both issues separately but in a coordinated manner; details can be found in the article on exit tax on GmbH shareholdings.
Terminate, Continue or Switch?
Given these mechanics, the question naturally arises whether the German policy should be terminated before the move. There is no general answer. The relevant factors include:
- Guaranteed interest rate and age of the contract: older contracts sometimes contain guaranteed interest rates that are no longer offered today. Termination ends this guarantee permanently, often combined with deductions from the surrender value.
- Tax advantages: contracts concluded from 2005 that have been in force for twelve years at payout and are paid out after the age of 60 or 62 respectively benefit from taxation of half the income. Old contracts from before 2005 may be completely tax-free under the earlier conditions. Early termination can cause these advantages to be lost.
- Timing of the payout: whether a payout before or after the move is more favourable depends on the tax burden in both states and on the treaty.
- Administrative effort: a continued German policy means correspondence with a German contracting party and, where applicable, a refund procedure on payout.
- Currency and transfer: for payouts outside the euro area, the recipient bears exchange rate and transfer risks.
Before terminating, the surrender value, remaining term, guarantees and tax treatment in both states should be compared. Anyone moving within the EU will find information on structuring questions in the article on choice of law for European life, pension and health insurance.
Example
Example: Martin, 63 years old, moves to Spain. His endowment life insurance policy with a German insurer, concluded in 2008, matures after 17 years. The premiums amounted to EUR 80,000, and the benefit is EUR 110,000. The difference of EUR 30,000 is taxable in Germany under Section 49 (1) No. 5 (a) EStG, but because of half-taxation, in substance only in the amount of EUR 15,000. The insurer initially deducts withholding tax on EUR 30,000. The first step is to examine whether Germany may tax at all under the treaty with Spain. For the purposes of the example, it is assumed for simplicity that the income falls under the interest article (Article 11); as explained above, this classification has not been conclusively settled. On this assumption, the right to tax lies with Spain alone; the entire withholding tax must then be refunded by the Federal Central Tax Office under Section 50c (3) EStG. With a different classification, the result may differ. Only to the extent that Germany may tax can Martin apply for an assessment under Section 50 (2) sentence 2 No. 6 EStG in order to recover the tax on the non-taxable half. How Spain taxes the income must be clarified with an adviser there. The figures are fictitious.
Checklist before the Move
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| Step | Content | Timing |
|---|---|---|
| 1. Check the terms | Clauses on stays abroad and increased risk, especially for death cover | A few months before the move |
| 2. Clarify contract data | Year of conclusion (before or from 2005, from 2012), term, guarantees | Before the move |
| 3. Inform the insurer | Notify new address and state of residence | On moving |
| 4. Document giving up residence | Collect evidence under Sections 8, 9 AO | On moving |
| 5. Check the treaty | Classification of the income under the relevant treaty | Before the payout |
| 6. Check Section 2 AStG | Low-tax territory, domestic interests, value of the policy | Before the move |
| 7. Plan the payout | Timing, application for assessment, refund under Section 50c EStG | Before maturity |
| 8. Obtain confirmation of residence | For the refund application to the BZSt | Before the payout |
| 9. Clarify the destination country | Taxation in the new state of residence with an adviser there | Before the move |
Conclusion
A German life insurance policy does not lapse as a result of moving abroad, and a mere change of residence does not give the insurer a right to terminate. From a tax perspective, the situation is more demanding than many assume: the income from a policy concluded from 2005 with a German insurer generally remains subject to limited tax liability under Section 49 (1) No. 5 (a) EStG in conjunction with Section 20 (1) No. 6 EStG even after the move. The insurer deducts withholding tax on the full income, and the tax is thereby in principle settled; where half-taxation applies, an assessment can be applied for, and if a treaty restricts Germany’s right to tax, the Federal Central Tax Office refunds the tax under Section 50c (3) EStG. Those who think these mechanics through before the move are better able to avoid double burdens and lengthy refund procedures.
FAQ
Can the insurer terminate my life insurance if I emigrate?
No, a change of residence alone does not give rise to a right to terminate. The insurer can terminate above all in the event of default in payment under Section 38 VVG; even then, the life insurance is in principle converted into a paid-up policy or the surrender value is paid out (Sections 165, 166 VVG).
Do I have to pay tax on the income in Germany after the move?
Often yes, if the insurer has its registered office in Germany and the contract was concluded from 2005 (Section 49 (1) No. 5 (a) EStG). Whether Germany may keep the tax depends on the double taxation treaty.
How high is the withholding?
25 percent withholding tax plus solidarity surcharge on the full difference between benefit and premiums. Where half-taxation applies, an assessment can be applied for.
How do I get back tax that I have overpaid?
If a treaty restricts Germany’s right to tax, you apply for the refund electronically to the Federal Central Tax Office, within four years after the end of the year of receipt and with a confirmation of residence from your state of residence (Section 50c EStG).
Does the life insurance trigger exit taxation?
No. Exit taxation under Section 6 AStG only concerns shares in corporations within the meaning of Section 17 EStG.
Attorney Dr. Johannes Fiala and the Munich-based firm, with a focus on international tax and insurance law, advise clients on the tax and contractual classification of existing life and pension insurance policies in connection with a move abroad, from reviewing the double taxation treaty to planning the timing of the payout. Dr. Fiala has published extensively on insurance and tax law issues. Please get in touch with the firm without obligation to discuss your situation in an initial consultation.
