Tax residency determination: Germany
A business owner based in Germany has set up a company in Hong Kong, believing that income sourced from outside Hong Kong is not taxable there. The company holds a bank account in Kazakhstan and conducts transactions globally, including with European countries. The owner assumes that by signing all contracts in Hong Kong, they can avoid German taxes. However, their physical presence in Germany raises questions about where taxes should be paid.
Input Data
- Company type: Hong Kong-incorporated company
- Country of incorporation: Hong Kong
- Management location: Germany
- Bank account location: Kazakhstan
Jurisdiction Conflict
Country of registration — The company is formally registered in Hong Kong, where it benefits from a territorial tax system that exempts foreign-sourced income from local taxation.
Country of effective activity — Despite the Hong Kong registration, the company's management and control are effectively conducted from Germany, where the owner resides and makes key business decisions.
Conflict — The discrepancy between the formal registration in Hong Kong and the effective management in Germany creates a risk of the company being considered a German tax resident, potentially subjecting its worldwide income to German taxation.
AI Analysis
Scenario A — German Tax Authority Interpretation
- The German tax authority may interpret the place of effective management as being in Germany due to the owner's residence and decision-making activities there.
- This could lead to the company being taxed on its worldwide income in Germany.
- Risk: The company may be deemed a German tax resident, triggering additional tax liabilities.
Scenario B — Hong Kong Tax Authority Interpretation
- Hong Kong may not impose taxes on the company's foreign-sourced income, as long as the income is not remitted to Hong Kong.
- The company might avoid Hong Kong taxes but still face scrutiny from German authorities.
- Risk: Misalignment between Hong Kong's territorial tax system and Germany's worldwide tax system.
Scenario C — Double Taxation Risk
- Without proper application of double tax treaties, the company could face double taxation on the same income.
- This could result in increased tax liabilities and compliance costs.
- Risk: Failure to apply tax treaties correctly could lead to double taxation.
Key risk indicators
- Management decisions made in Germany
- Contracts signed in Hong Kong
Output of Richys AI Analysis
- AI assesses exposure based on the location of management and control.
- AI matches facts with tax residency criteria in Germany.
- AI highlights the need for expert escalation to address potential tax authority challenges.
Expert Boundary
Involvement of a verified EU expert is required for:
- country-specific interpretation of the center of vital interests
- application of the Germany–Hong Kong tax treaty to concrete facts
- selection of a defensible filing position
- preparation for potential tax authority inquiries
Case Conclusion
The determination of tax residency is triggered by the location of effective management, not merely the place of incorporation. Income generated by the Hong Kong company is scrutinized when management decisions are made in Germany. Risk arises from unclear documentation of management activities and assumptions about tax exemptions based on foreign registration. The risk becomes enforceable when German tax authorities assess the company's control and management location.
Start case analysisThis case is for illustration purposes only. Real outcomes depend on residence, income structure, documents and timing. For your specific situation, use structured case analysis with AI and verified EU experts.
Sophie Bizelle
AI assistant – Business Setup