Case Study: An Abu Dhabi Villa When One Spouse Returns to Germany

If only one spouse moves back to Germany while the other continues to live in the jointly owned property in the UAE, only the returning spouse's co-ownership share falls within German income tax from the date of the move. This asymmetry is the core of the case.

Mr. and Mrs. T., both German nationals, gave up their residence in Germany in October 2022 and have lived in Abu Dhabi since then. Mrs. T., mother of two-year-old twins, runs a consulting business there as sole shareholder; Mr. T. is a medical specialist. In February 2023 they bought a villa on Saadiyat Island - one of the investment zones in which foreigners may acquire freehold title - in equal 50 percent shares for AED 8.9 million; including acquisition costs and refurbishment, the total cost amounts to AED 10.1 million. The family has lived in the house since June 2023; in fall 2026 its market value is AED 11.4 million (approx. EUR 2.74 million). The purchase was 70 percent financed through a loan from Emirates NBD, which is in Mrs. T.'s name alone and serviced by her alone; the outstanding balance today is AED 5.8 million.

Mr. T. takes up a senior position at a German hospital on 1 August 2027 and moves in July 2027. Mrs. T. remains in the villa with the children and is expected to follow at the end of 2028.

The spouses consider the current market for villas on Saadiyat Island unfavorable and expect further appreciation; they therefore want to keep the house at least until the end of 2028 without a later gain being taxed in Germany. Mr. T.'s start date cannot be moved, the bank must approve any change in ownership, and Mrs. T. has her own liquidity. The obvious first idea is for Mr. T. to transfer his share to his wife before he moves.

Yes - for Mr. T.'s share, if the villa is sold after 2027 and before February 2033 and he no longer lives in it himself. Under Section 23(1) sentence 1 no. 1 of the German Income Tax Act (EStG), the gain from selling real property is taxable as a private disposal transaction (privates Veräußerungsgeschäft) if no more than ten years lie between acquisition and sale; for a person with unlimited tax liability, this also applies to property abroad.

Upon moving, Mr. T. becomes subject to unlimited tax liability on his worldwide income under Section 1(1) sentence 1 EStG. A double tax treaty with the UAE has not existed since 1 January 2022. German law provides no step-up of the acquisition costs to the value at the time of the move for privately held real estate: Section 23(3) sentence 1 EStG compares the sale price with the historical acquisition and production costs. The appreciation that arose before the move would therefore also be taxed.

Owner-occupied residential property is exempt under Section 23(1) sentence 1 no. 1 sentence 3 EStG. A continuous period of own use suffices if it covered at least one day in the year of sale and in the second year before it, and the entire year in between (Federal Fiscal Court (BFH), judgment of 3 September 2019 - IX R 10/19). A disposal by 31 December 2027 therefore remains tax-free for Mr. T., even after his move; from 2028 onward, his own use in the year of sale is missing. A second home can suffice (BFH, judgment of 27 June 2017 - IX R 37/16); however, if only the other spouse uses the house after one spouse has moved out, there is no own use by the spouse who left (BFH, judgment of 14 February 2023 - IX R 11/21, on a divorce case).

Only up to a value of EUR 500,000. Despite the residence in Abu Dhabi, the gift is subject to German gift tax: the extended unlimited tax liability (erweiterte unbeschränkte Steuerpflicht) under Section 2(1) no. 1 sentence 2 letter b of the German Inheritance and Gift Tax Act (ErbStG) treats German nationals as residents for five years after they give up their German residence, and it is sufficient for either the donor or the recipient to be a resident.

For Mr. and Mrs. T., this period runs until October 2027. Waiting does not help: Mr. T. establishes a residence in Germany as early as July 2027 and is then a resident under letter a of the same provision. Between spouses, EUR 500,000 remains tax-free under Section 16(1) no. 1 ErbStG; several gifts within ten years are aggregated under Section 14(1) ErbStG. The exemption for the family home does not help either: Section 13(1) no. 4a sentence 1 ErbStG covers only property in Germany, the European Union and the European Economic Area.

No, if the loan is owed by the recipient alone. Under Section 10(1) sentence 1 ErbStG, the taxable amount is the recipient's enrichment; it is reduced only by consideration the recipient provides (R E 7.4(1) of the German Inheritance Tax Guidelines 2019). A recipient who already owes the loan alone assumes nothing.

A widespread assumption is that a mortgage limits the value of a gift to the proportionate equity; in this case that would be AED 2.8 million (EUR 672,000) and around EUR 18,900 in gift tax. Mr. T., however, owns half of the villa without any debt of his own. If he transfers it, Mrs. T.'s assets increase by the full value of the share of AED 5.7 million (EUR 1.368 million), while her loan obligation remains unchanged. The fact that the mortgage also encumbers the transferred share does not change this: taking over merely the in-rem liability is not consideration (BFH, decision of 6 December 2000 - II B 161/99) - all the more so when it secures the recipient's own debt. The fair market value is applied (Section 12(7) ErbStG, Section 31 of the German Valuation Act (BewG)).

If Mrs. T. bore the purchase price and the loan alone, Mr. T.'s acquisition of half the co-ownership in 2023 may itself have been a gift to him - within the five-year period and without the family home exemption. This transaction needs to be reviewed independently of any further structuring.

Four routes are available; for the first and the last, 31 December 2027 is the latest date. The figures are based on current values, an exchange rate of EUR 0.24 per dirham and a marginal tax rate of 42 percent; currency effects and selling costs are disregarded.

6.1 Sale to a third party by the end of 2027

If the villa is sold by 31 December 2027, the gain of AED 1.3 million (EUR 312,000) is not taxable in Germany for either spouse: Mrs. T. is not subject to unlimited German tax liability at that point, and Mr. T. meets the exemption for owner-occupied property.

Advantages: From a tax perspective, this is the cleanest solution - no income tax, no gift, no subsequent holding periods, and the proceeds are available before the return.

Disadvantages: The spouses would sell in a market they themselves consider unfavorable and forgo the hoped-for appreciation. Mrs. T. and the children would have to live elsewhere until their own move; the broker's commission and the seller's share of the transfer fee reduce the proceeds. In Abu Dhabi, the fee is 2 percent of the purchase price and is usually split equally.

6.2 Holding without a transfer

If ownership remains unchanged, Mr. T.'s share is taxable in Germany on a sale between 2028 and February 2033.

Advantages: No costs, no liquidity requirement, full flexibility in choosing the time of sale.

Disadvantages: At today's value, his share would account for a gain of AED 0.65 million (EUR 156,000) and around EUR 65,500 in income tax plus solidarity surcharge. It is precisely the appreciation the spouses are waiting for that would be taxed. Relying on use as a second home is not secure, as shown in section 3.

6.3 Outright gift of the share

Advantages: Mr. T. is no longer an owner when he moves. Mrs. T. takes over his acquisition data, no new ten-year period begins (Section 23(1) sentence 3 EStG), and no money changes hands.

Disadvantages: The gift tax amounts to EUR 164,920 (EUR 1,368,000 less the allowance, at 19 percent under Section 19(1) ErbStG) - more than twice the income tax that would arise if the property were held.

6.4 Part-gratuitous transfer to the wife

A mixed gift (gemischte Schenkung) is a transfer in which the consideration deliberately falls short of the value of the transferred asset; only the gratuitous part is subject to gift tax. If Mrs. T. buys the share for AED 3.9 million (EUR 936,000), the gifted part amounts to AED 1.8 million (EUR 432,000) and stays EUR 68,000 below the allowance.

Advantages: No German gift tax arises, and Mr. T. exits from a tax perspective: before his move, the sale is not taxable in Germany because property abroad does not give rise to German-source income within the meaning of Section 49 EStG; until the end of 2027, the own-use exemption applies. Mrs. T. acquires around 34 percent of the house at an acquisition cost of AED 3.9 million; for the gifted 16 percent or so, she steps into her husband's holding period (BFH, judgment of 11 March 2025 - IX R 17/24). A transfer ahead of a later sale is in principle not an abuse of legal structuring options (BFH, judgment of 23 April 2021 - IX R 8/20).

Disadvantages: Mrs. T. must pay EUR 936,000 from her own funds, which must remain with Mr. T.; economically, she pays a second time for a share she has already financed. Deferring the price interest-free may itself be a gift (BFH, judgment of 27 November 2013 - II R 25/12). A new ten-year period begins for the purchased part. Added to this are a valuation report, the bank's consent and the transfer fee; at 2 percent of the purchase price, that would be AED 78,000 (EUR 18,720), and how it is assessed for transfers between spouses should be clarified in advance with the Abu Dhabi Real Estate Centre. A higher price up to market value avoids the gift altogether but increases the liquidity requirement and the part subject to a new holding period.

What applies to all routes in which the villa stays in the family

As soon as Mrs. T. moves to Germany at the end of 2028, her share also falls within German tax. A sale after the year of her move is taxable until February 2033 - for a purchased part, until ten years after the purchase. Rental income is subject to German tax under Section 21 EStG; under Section 2a(1) sentence 1 no. 6 letter a EStG, losses can only be offset against rental income from the UAE. Every gift must be reported to the German tax office within three months, even if no tax arises (Section 30 ErbStG).

Assessment

For Mr. and Mrs. T., a sale to a third party is the best solution from a tax perspective; the only argument against it is their view of the market. Because the sale and the part-gratuitous transfer share the same deadline, the decision can be kept open into fall 2027: the valuation and the bank's consent are prepared, and depending on market conditions, the villa is either sold to a third party or transferred within the family.

Check, before even one spouse returns, in whose name ownership and financing of the property abroad are held - they determine the value of a gift. Treat the five-year gift tax period and the ten-year period under Section 23 EStG as separate calendars, and note 31 December of the year of the move as the last tax-free date. Have the market value established by an expert before a price is agreed between spouses.

Cross-border matters between Europe and the UAE are complex. The right approach must take into account the legal situation in both jurisdictions - corporate, tax, regulatory, and personal considerations.

Eisenberg Europe & Middle East is a German law firm with offices in Abu Dhabi, Dubai, Frankfurt, Hamburg, and Tel Aviv.

We advise individuals, families, and companies on structuring their affairs between the German-speaking region and the UAE - from relocation planning and company formation to real estate transactions, asset protection, and intergenerational succession.

If you would like to learn which options may suit your situation, we would be pleased to offer you a confidential initial consultation.