The decision to move abroad can be influenced by a variety of factors that include both personal and professional aspects, such as lower cost of living or a more pleasant climate. However, moving abroad during the year can lead to significant tax consequences, which should be carefully considered.

1.Taxes when moving abroad during the year – Introduction

Important for taxation is tax liability. In Germany, a distinction must be made between unlimited and limited tax liability.

1.1. The unlimited income tax liability

The unlimited income tax liability is according to § 1 (1) sentence 1 EStG, if a natural person in Germany, a residence or habitual residence unlimited tax liability applies the so-called world income principle, and the entire worldwide income of the taxable person is liable to income tax in the sense of the income tax law.

1.2. The limited income tax liability

The limited income tax obligation exists when a person is not subject to unlimited taxation but receives domestic income. Domestic income is regulated in § 49 EStG. In principle, such income is derived from activities carried out or exploited in Germany. The limited tax liability now means that only domestic income is subject to income tax.

1.3.Differences in limited and unlimited tax liability

Unrestricted taxpayers enjoy extensive tax advantages: They can use the complete range of tax allowances such as basic allowance and child allowance and have extensive deduction options for advertising costs, special expenses and exceptional charges. In contrast, limited taxpayers are subject to significantly more limited tax treatment. Their tax liability relates exclusively to income earned in Germany, and they have only limited tax deduction options available.

2.Taxes when moving abroad during the year: Income tax

When moving abroad during the year, there is a so-called “splitting of the tax year”. This means that the tax year is divided into two parts: the period of unlimited tax liability in Germany until the departure date and the period of limited tax liability thereafter. For the first period, all worldwide income is taxed in Germany, while for the second period only certain domestic income is subject to German taxation. This distribution can have a significant impact on the tax burden, as, for example, the basic allowance and other allowances are only taken into account proportionally. For reasons of simplification, however, only a tax return for the entire period has to be submitted.

3.Taxes when moving abroad during the year: Social Security and Pensions

During the year, moving abroad has a significant impact on social security status and pension entitlements. As a rule, the obligation to take out insurance in the German social security systems ends with the departure. This concerns health, nursing care, unemployment and pension insurance. Depending on the country of destination and employment situation, new insurance obligations may arise, especially within the EU due to social security agreements. For pension entitlements, it is crucial whether contributions are still paid into the German pension insurance. Without further deposits, acquired entitlements remain, but there is no further increase. Depending on the country, pensions abroad can be subject to restrictions or cuts – or tax benefits, for example in Greece.

4.Taxes when moving abroad during the year: Taxation in the country of destination

When moving abroad, it is important to consider the possible property taxes in the new country of residence. By international standards, Germany is considered a “low-tax country” in terms of property taxes, with a burden of less than one percent of gross domestic product. Some countries, such as the United Kingdom, the United States, Canada, Japan and France, have significantly higher capital tax rates, which account for between three and three and a half percent of GDP. This is often due to a greater burden of real estate ownership in these countries. In Switzerland, for example, a property tax is levied on natural persons in some cantons. It is therefore advisable to carefully examine the specific regulations in the target country, as they can differ significantly from German practice.

5.Taxes on under-year departure abroad – Conclusion

An under-year move abroad entails complex tax consequences that require careful planning. The change from unlimited to limited tax liability, the splitting of the tax year and possible changes in social security status are central aspects that must be considered. In addition, other tax regulations may apply in the new country of residence, in particular in relation to property taxation. In order to avoid financial disadvantages and to benefit from possible advantages, early and comprehensive tax advice is essential. This is the only way to take individual circumstances into account and develop an optimal tax strategy for moving away.