Finanzamt Neubrandenburg (RiA)Central Tax Office for pensioners residing abroad

How much do I have to pay?

What is the difference between limited and unlimited tax liability? Why is this important when determining the amount of tax?

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The question of how much tax someone has to pay depends on the size of their income and on any expenditure that can be taken into account to reduce the amount of tax. Whether an individual can offset expenses against their taxes depends on what kind of tax liability they have (limited or unlimited tax liability).

Individuals who are not resident in Germany generally have limited tax liability. “Limited” in this context means that the taxes are only calculated on income originating in Germany. In contrast, “unlimited tax liability” means that the whole worldwide income would be included when calculating the amount of tax -- in other words, both German and foreign sources of income.

However, having limited tax liability also means that no personal or family-related expenses can be taken into account when calculating the tax. In this case, the tax is calculated entirely on the basis of the income from Germany. As a result, in the absence of tax-free allowances and exemption thresholds, taxes become due even on very small amounts of income.

Someone who has their residence or place of habitual abode in Germany is subject to unlimited tax liability. Individuals subject to unlimited tax liability have the right to a tax-free minimum amount of income that is needed for subsistence (Existenzminimum). They can also take advantage of other tax benefits related to their personal and family situation.

However, if certain conditions are fulfilled, there is the option of applying to be treated as a person with unlimited tax liability even if your residence is outside Germany. In this case, individuals who would normally have limited tax liability can take advantage of almost all the tax benefits that are available to a German resident.

The type of tax liability therefore has a large impact on the amount of tax that needs to be paid. The following section has more details about the two kinds of tax liability.

Unlimited tax liability

An individual with limited tax liability can submit an application to be treated as having unlimited tax liability. If you have unlimited tax liability, personal and family-related tax benefits and the basic personal allowance can be granted, just as if you were resident in Germany. Generally speaking, being treated as an individual with unlimited tax liability means that less tax needs to be paid.

The precondition for submitting an application is that your income is “entirely or at least mainly” received from Germany and that it is to be taxed in Germany. The meaning of “entirely or at least mainly” is defined in the Income Tax Act on the basis of two income thresholds. According to section 1 subsection (3) of the Income Tax Act, if more than 90% of an individual’s worldwide income is taxable in Germany, or if the amount of their worldwide income that is not taxable in Germany does not exceed the basic personal allowance in the respective calendar year, then the individual may be treated as having unlimited tax liability. (The basic personal allowance was €8,130 in 2013, €8,354 in 2014, €8,472 in 2015, €8,652 in 2016, €8,820 in 2017, and €9,000 in 2018.) For purposes of evaluating the income limits, the amount of the basic personal allowance is to be reduced where necessary and appropriate in light of the conditions in the taxpayer’s country of residence.

It is essential to submit proof of your income!

When applying to be treated as having unlimited tax liability, the amount of your income that is not subject to German income tax must be verified through certification by the competent foreign tax authority. The form “EU/EEA Certificate” or “Non-EU/EEA Certificate” (if your residence is outside the EU/EEA) can be used to provide certification. The forms are available in various languages to facilitate the certification process for the foreign tax authority (see downloads).

A foreign tax notice can also be used as certification if it contains comprehensive information on the income that is subject to tax abroad. You still need to submit proof of the income taxed abroad even if you have not received any income abroad. In this case, the field “Other income” on the “EU/EEA Certificate” or “Non-EU/EEA Certificate” should be scored out, or a sum of zero euros should be entered, and this should be confirmed by the foreign tax authority.

For persons with unlimited tax liability, income tax is calculated using the progressively increasing income tax schedule. Income up to the amount of the basic personal allowance is not taxed (cf. section 32a subsection (1), first sentence, number 1 of the Income Tax Act).

If you are married and a citizen of an EU or EEA member state, you can file your tax returns jointly with your spouse if your spouse has their residence in an EU or EEA member state. In the case of joint filing, the income of both spouses is included when calculating the tax due; the basic personal allowance is also doubled (section 1a subsection (1) number 2, third sentence, of the Income Tax Act).

If you would like to apply to file your returns jointly, then proof of any income that is not taxable in Germany must also be provided for your spouse.