date | theme

10.07.2020 | Perpetual Traveler: center of life and habitual residence as a criterion in taxation

13.07.2020 | Limited and unlimited tax liability in Germany (this contribution)

22.07.2020 | Functional relocation and functional doubling in International Tax Law

02.10.2020 | Founding a company abroad: tax and other implications

30.10.2020 | Avoid moving tax: establishing a family foundation and transferring GmbH shares

In Germany, a distinction is made between the limited and the unlimited tax liability of a taxpayer. Corresponding tax standards also apply in most other countries of the world. Here, the unlimited tax liability depends essentially on whether the taxpayer has his residence or habitual residence in Germany. The presence of a center of life in Germany can also justify an unlimited tax liability in this country. Furthermore, the scope of an unlimited tax liability extends in principle both to all domestic and foreign income. However, in order to avoid double taxation of income generated abroad both in Germany and in the corresponding third country, the Federal Republic of Germany has concluded so-called double taxation agreements with more than 100 other states. This is also relevant for a limited tax liability. This includes income from Germany that a taxpayer resident abroad has to tax here.

Is it possible? This man does not pay taxes!

1. Tax liability in Germany

When considering whether someone is taxable in Germany, various aspects come into consideration. This includes determining whether someone has a permanent residence in the country. This criterion is equivalent to the situation if there is a habitual residence in Germany. Even if neither of the two conditions applies, there may still be a tax liability in this country. This is the case if the person in question instead has his or her center of life in the Federal Republic.

As you can see, the determination of a tax liability depends on many aspects that are based on the behavior of a person. In addition, however, a further distinction must also be made, regardless of which of the abovementioned criteria is fulfilled. Because here is the question of where someone generates his income. Consequently, the amount of income which may have to be taxed both domestically and abroad is also of great interest. In this context, a distinction is made in principle between an unlimited and a limited tax liability.

Distinction between limited and unlimited tax liability

2.1. Scope of unlimited tax liability in Germany

2.1.1. Unrestricted tax liability: the rule

The simplest case is when someone locates either his residence, his habitual residence or his center of life in Germany. Because then the Federal Republic of Germany can enforce tax sovereignty within the framework of the laws it enacts. This also includes the fact that the amount of income to be taxed in this country includes both those arising in the country and those accruing to a taxpayer from abroad. The state affiliation of the taxable person is just as irrelevant as their age or other attributes of a personal nature. Once you are born and earn income, you are potentially considered taxable.

2.1.2. Unrestricted tax liability in special exceptions

But there is an exception to this, namely in relation to citizenship. German citizens who are neither resident in Germany in terms of tax, but receive income from an employment relationship in which a legal person under public law is employer in Germany, are also regarded as unrestricted taxable persons. In addition, this rule also applies to all members of the household of such an unrestricted taxable person, provided they also have German citizenship. However, it also applies if the relatives in question either do not receive any income at all or if income is earned abroad, but these are taxed only to an extent comparable to the German limited tax liability. Relevant is this addition, which is enshrined in § 1 (2) EStG, in particular for employees of the Federal Foreign Office working abroad and their families, if they also live abroad.

2.1.3. Practical effects of an unlimited tax liability

Of course, as an unrestricted taxable person, you may not have to pay taxes. Because some revenues are tax-free by type or size or even not taxable altogether. Many people who move to Germany from abroad, but also many German citizens in Germany, are unknown these fine, but tax-important distinctions. Some only become aware afterwards that they are regarded as unrestrictedly taxable by fulfilling the corresponding criteria. It may even be expected that this will constitute tax evasion. Therefore, it is always advisable to inform yourself. Because only by submitting a corresponding, of course fully completed tax return has one fulfilled his duty as a taxpayer.

In contrast to unlimited tax liability, the limited tax liability is relevant for those persons who have neither a residence, nor their habitual residence or center of life in Germany. Because if in this case they still have income that flows to them from Germany, then in principle there is the obligation to tax them here.

In contrast, no income from abroad is subject to taxation in Germany. However, they must still be stated in the income tax return. The reason for this is that they contribute to the progression reservation. Like the actual taxable income, they must be taken into account when determining the applicable tax rate. In this way, they indirectly affect the level of the tax.

2.2.1.1. Extent of limited taxable income

Although in many other countries of the world the principle applies that one is to invest with all income, i.e. domestic as well as foreign, unlimited. This is accompanied by the consequence that one and the same income is subject to unlimited taxation in two or more countries. In order to avoid this basically unreasonable double taxation, the Federal Republic of Germany concludes bilateral double taxation agreements with other states. But more on that later.

More important at this point is the question of how the financial administration proceeds with a limited tax liability. There are differences here too. Thus, § 49 EStG explicitly lists all types of income that are subject to the limited tax liability in Germany. A shortened and simplified list of the most important items: