For individuals who are resident in Turkey but have a residence in Germany and spend certain periods of time in Germany during the year, tax residency and the associated risk of full tax liability are among the most critical compliance issues. Particularly when serving as a general manager/member of the management body in a company resident in Germany, the tax consequences are not limited to ‘how many days were spent there’; the provisions of the Turkey–Germany Double Taxation Avoidance Agreement (DTAA) must be assessed holistically.
This article summarises the key risk areas and practical priorities from the perspective of DTAA Article 4 (Residency) and DTAA Article 16 (Remuneration of Board Members) in the context of a frequently encountered scenario in practice.
Tax Residency and DTAA Article 4: How is ‘Residency’ Determined?
DTAA Article 4 determines in which country a person is considered a “resident”. When residency claims arise under the domestic legislation of both countries, the agreement provides a solution through ‘tie-breaker rules’. In practice, the following steps are particularly decisive:
- Permanent residence: In which country the person has a permanent home ready for their use
- Centre of vital interests: The country with closer personal and economic ties
- Habitual residence: The place where the person is actually present more frequently during the year
- Citizenship and, where necessary, mutual agreement of the competent authorities
- Time criteria such as 183 days do not automatically determine the outcome on their own. In most cases, where ties such as a residence in Germany exist, the assessment of the centre of vital interests is decisive.
Distinction between limited and full tax liability in Germany: Why does the scope of taxation change?
In the German tax system, two basic statuses are generally important:
a) Limited tax liability
- As a rule, only income sourced in Germany is taxed in Germany.
- Income originating in other countries (e.g. Turkey) is not intended to be included in the scope of declaration in Germany.
b) Full tax liability
- As a rule, all worldwide income may be included in the scope of declaration in Germany.
- This may also create tax obligations in Germany with regard to income in Turkey (the provisions of the CVOA and the interaction of domestic legislation are assessed separately).
Therefore, strengthening an individual’s ties to Germany (residence/domicile, property, actual stay, intensification of economic ties, etc.) may increase the risk of transitioning from limited tax liability to full tax liability.
DTA Article 16: Critical Point Regarding Remuneration for General Managers/Board Members
One of the areas most frequently overlooked in practice is DTA Article 16. This provision may provide for a special regime regarding the taxation of remuneration received from a company resident in Germany in the capacity of a board member/general manager.
In this context, the following distinction is important:
- Even if the person’s residence remains in Turkey, taxation in Germany may come into play for remuneration falling under Article 16 from the company in Germany.
- Therefore, the result of ‘residence in Turkey’ does not mean that ‘all income will be taxed only in Turkey’ in all cases. In particular, management board/general manager remuneration should be assessed separately.
This distinction is critical in terms of both compliance risks and the correct structuring of tax planning.
German Residence Permit and Residency Risk: Points to Consider
A residence permit or right of abode can have a significant impact on the residency analysis under Section 4 of the CVOA by strengthening the individual’s ties to Germany. This is particularly true when considered in conjunction with residential ties in Germany:
- Strengthening residence status may increase the risk of a result in favour of Germany in the assessment of the centre of vital interests.
- Conversely, while aiming for taxation limited to income sourced solely in Germany, there may be a risk of falling within the scope of full tax liability.
Therefore, for individuals with a residence permit plan, legal status, actual use, duration of stay, and economic ties should be analysed together.
Priority Risk Management Headings in Practice
In order to maintain residency in Turkey and manage the tax scope in Germany, the following headings generally become critical, although they vary depending on the specific case:
(i) Strengthening the analysis of the centre of vital interests
- The weight of business and economic activities in Turkey
- The location of family and social ties in Turkey
- The predominant source of income being in Turkey
(ii) Controlled management of ties in Germany
- The manner of use of the residence in Germany and its status as a ‘permanent residence’
- The actual effects of the residence/domicile status
- Regular monitoring of periods of stay in Germany
(iii) Documentation and compliance infrastructure
- Recording of periods of stay
- Supporting documentation showing Turkey-based ties
- Correct structuring of the legal nature and payment structure of management body fees
(iv) Correct tax positioning of fees under Article 16
- Clarification of the management body/job description
- Correct determination of the legal basis for the fee and the payment flow
- Assessment of potential declaration and withholding tax obligations in Germany
The existence of a residence in Germany, the actual time spent in Germany, the management relationship with the company in Germany, and the residence/domicile status; when considered together, these factors make residency and taxation outcomes multi-layered.
Therefore, the correct approach in similar cases is:
Section 4 of the German Tax Code (residency) and Section 16 of the German Tax Code (management body remuneration),
analysing both the risk of full tax liability and the remuneration taxation regime separately and on a case-by-case basis.
As ÖzbekCPA, you can contact us at contact for a detailed analysis and a roadmap tailored to your situation.
