They work from anywhere – digital nomads . Be it at home, on the go, in the park or in the coworking center. Even more important, however, is that there are no national borders for mobile workers. Her current professional activity can take her abroad at any time, as can her place of residence. However, this has tax consequences, especially when it comes to the issue of limited tax liability . We explain this question and further information in this article.
Limited tax liability – what exactly is it?
You should think about the question of whether unlimited or limited tax liability in good time before taking on a professional activity abroad, because it has a significant influence on the net income that is available to you after taxation.
If you want to create the best tax situation for your situation, you first of all need a basic knowledge of the different forms of taxation. If necessary, you can talk to your tax advisor about the details.
Definition of limited tax liability
The limitation of tax liability under certain conditions basically only affects income tax . This is what it says in the Income Tax Act § 49 EStG : The limited income tax liability applies to all persons who do not stay in Germany for more than 183 days per year (habitual residence) and who do not have a permanent place of residence in the Federal Republic of Germany .
Both requirements must be met together. The tax restriction does not apply if, for example, you have only stayed in Germany for 180 days, but are still registered with your place of residence here.
If both conditions are met, you may be subject to limited tax liability if you earn certain domestic income in accordance with Section 49 of the Income Tax Act despite your stay abroad.
Section 50 (1) sentence 2 EStG applies to income tax on pensions with limited tax liability . In this case, income tax is based on the basic tariff, without taking into account the basic allowance.
Exceptions to the limited tax liability
- A restriction is available from the limited tax liability, however. A number of benefits from the personal or family environment are not taken into account. This applies, for example, to extraordinary loads that you cannot get rid of. You can also not use spouse splitting with limited tax liability.
- Half of your expenses can be deducted from taxes for membership fees to political parties and independent electoral associations and donations. However, there is a maximum limit of 825 euros. If your donations are aimed at political parties, you can offset up to 1,650 euros as special expenses.
- The ambivalence of the limited tax liability can be seen in the treatment of child allowances, including training costs and care costs, as well as the relief amount for single parents. These allowances are not granted in the case of limited tax liability. Children: no, politicians: yes – an approach that is definitely worth discussing.
- In contrast, advertising costs can be deducted. However, only if you can prove it and if it is directly economically related to domestic income. In the case of income from pensions, the flat-rate amount for income-related expenses can be offset since the assessment period 2009 if no higher income-related expenses can be proven.
- For the tax return, you need the ESt1C form for general information and Appendix R for pension income.
Special case: Limited tax liability for athletes and artists based abroad
The separate treatment of the professional groups of art and sport is related to the sometimes above-average income, which can lead to abuse or incorrect assessment. The different forms of activity as an employee, small business owner , freelancer or self-employed often lead to ambiguities.
For self-employed artists residing abroad, as with the other professional groups, an income earned in Germany is the assessment basis . This includes journalistic, literary or artistic activities if they were carried out in Germany.
A special case according to Section 49 (1) numbers 2d, 3 and 4 EStG is the situation when income from a sporting or artistic performance performed in Germany is not paid to the performer himself, but to a foreign-based exploitation company with limited tax liability, for example an agency. In this case, both the amounts paid to the agency and the income passed on by the agency to the athletes or artists are subject to limited tax liability.
Income tax return, limited tax liability
You can only file an income tax return according to the guidelines of limited tax liability if the conditions are met. These are the following:
- No residence in Germany and less than 183 days stay in the respective calendar year .
- Scored income in accordance with § 49 Section 1 of the Income Tax Act
Your documents must contain:
- Income tax return
- If you are not self-employed: Application to set employee savings allowance
- On a case-by-case basis: declaration of the determination of the remaining loss carryforward
If at least 90% of your earned income is subject to German income tax, it can be advantageous to treat the income as unlimited taxable, for example in order to be able to use tax exemptions. In this case, you can submit a corresponding application.
A similar case can exist if the part of the income that is not subject to German income tax does not exceed the basic allowance according to Section 1 (3) EStG .
Find the responsible tax office
Basically, the question of the responsible tax office is easy to answer. It is the office of the place where you currently have your residence . However, this can turn out to be tricky when it comes to special cases. For example, if you lived in Frankfurt in 2018 and have been based in Stockholm since 2019, you do not have to file your tax return for 2018 in Frankfurt, but at your new place of residence in Sweden.
On the BZSt website you will find details on how to find the right tax office, including the tax office search.
Extended Limited Tax Liability – What Does It Mean?
The extended limited tax liability is a special form of the limited tax liability. According to § 2 Foreign Tax Act (AStG) , this special case applies if you move your place of residence to a country with low taxation , for example a tax haven, and at the same time maintain essential economic interests in Germany . This is to avoid tax evasion, i.e. moving out of Germany solely for tax reasons.
For the extended limited tax liability to apply, three conditions must be met:
- You must have completely given up your German place of residence, including your habitual residence , and no longer be subject to unlimited tax liability.
- You have been subject to unlimited tax liability in Germany for five of the last ten years .
- You have to be a German citizen and that for the five years that you have been subject to unlimited tax liability within the last ten years.
The question that remains to be answered is what a low-tax country actually is. This is unambiguously regulated in Germany, because low taxation in the sense of the extended restricted tax liability exists if the foreign tax level is more than a third below the German standard tax case . And what is a standard tax case? This describes the tax burden of a single person with unlimited tax liability and an income of 77,000 euros.
You can apply for an exemption , namely if you can prove that your actual tax burden at your new place of residence is at least two thirds of the standard German tax case. You can fill out the application in the main ESt 1A form (cover sheet). You can enter your details from line 91 under other details and applications.
The other element of the extended restricted taxation, the essential economic interests in Germany , also requires an exact definition. They exist when one of these four conditions is met:
- At the beginning of the assessment period, you are the owner or co-owner of a domestic business . If you are a limited partner in a company, you must hold a profit participation of at least 25%.
- In accordance with Section 17 of the Income Tax Act, you hold a substantial share (at least one percent) in a domestic corporation .
- More than 30% of your total income does not come from your work abroad or your domestic income does not exceed 62,000 euros . In addition to the income from Section 49 EStG, this also includes all income from Section 34d EStG (e.g. pensions and interest).
- More than 30% of the assets from which you generate income come from Germany or they exceed the total amount of 154,000 euros .
By the way: Income according to the extended limited tax liability is not subject to the final effect of the withholding tax deduction . Instead, you must invest them at the progressive tax rate rates of your personal tax rate. This of course leads to a higher tax burden. However, this must not exceed the value that would be applied in the case of unlimited tax liability in Germany (Section 2 (6) AStG).
Difference between limited tax liability and unlimited tax liability
The main task of restricting tax liability when residing abroad is to avoid double taxation in two countries . This means that the parts of the overall taxation that relate to professional activity abroad are omitted from the German tax assessment and replaced by the assessment by the foreign tax office.
The limited tax liability as an alternative to the unlimited is not a tax-saving model . It only serves as an instrument to establish tax justice , according to which the tax should be paid in the country in which the income is generated.
Definition: unlimited tax liability
According to the legislator, a person who has their domicile and habitual abode in Germany is an unlimited taxpayer .
Tax liability begins with birth and ends with death. That may sound absurd at first, but it makes perfect sense. For example, if a baby is the star of a film or a commercial, the resulting income is subject to unlimited tax liability.
Domestic tax liability includes all domestic and foreign income. In order to avoid double taxation of foreign income, you can take advantage of the corresponding double taxation agreements .
By the way
Unlimited tax liability are German nationals who do not have the usual abode in Germany are neither resident when an employment relationship is a domestic legal entity under public law. If you receive wages from a domestic public fund from this activity, you are therefore subject to unlimited tax liability. Typical examples of this special case are German nationals who work in German embassies or consulates abroad .
Application for unlimited tax liability
In certain cases, it can make sense for you to apply to your German tax office for unlimited tax liability even if you live and work abroad . Whether this is a sensible measure for you depends on your personal situation.
If you earn a substantial part of your income in Germany despite your residence abroad , the application for unlimited tax liability can be beneficial for you. This is the case, for example, for cross-border commuters according to Section 1 (3) EStG .
However, one of the following requirements must be met for a successful application:
- Either: The share of domestic income in total income must be at least 90% .
- Or: The foreign income that is not taxed in Germany must not exceed the basic tax allowance . In 2019, for example, that was 9,168 euros for a single person and 18,336 euros for a married person.
If unlimited tax liability is used, you can offset all personal and a number of family- related tax breaks . In the case of limited tax liability, however, this is not possible. These include, for example, special expenses, extraordinary burdens and pension expenses.
If you are a citizen of an EU or EEA member state , you can take advantage of additional benefits if your spouse or child resides in an EU or EEA member state. In this case, the family members can also take advantage of the family-related tax breaks. This is particularly noticeable in the case of joint assessments according to the splitting tariff. The wage tax deduction according to tax class III, the doubling of a number of lump sums and the relief amount for single parents can also be used in this case.
Find your ideal tax status
The ideal tax situation for a stay abroad depends entirely on your personal life and work situation . You should carefully check all framework conditions before you submit your applications.
The limited tax liability for residence and professional activity abroad can protect you from double taxation by two tax authorities. On the other hand, a number of tax breaks , as provided for in unlimited tax liability, are no longer available. The extended limited tax liability applies if you choose to reside in a low-tax country . Depending on your personal situation, it can therefore make sense to apply for unlimited tax liability at your domestic tax office.