Consequences in german tax law when moving abroad

Extended and limited tax obligations for emigrants and tax fugitives

Nowadays, leaving Germany is often motivated by tax law. However, while residence in Germany automatically results in tax liability in Germany, a transfer of residence abroad does not necessarily lead to termination of tax liability.

On the one hand, the German tax authorities continue to have partial tax access to income (income tax) and gratuitous transfers of assets (inheritance tax, gift tax) as a result of the limited as well as the extended limited tax liability, and on the other hand, the tax on departure even triggers a (sometimes substantial) tax liability only after the move.

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Legal expertise when moving abroad

As a tax law firm, we advise private individuals, entrepreneurs, partners and investors nationwide and internationally on all tax law issues. Our team of lawyers, tax advisors and specialist solicitors for tax law has many years of experience in advising on international taxation. In connection with moving away from Germany we offer the following services in particular:

1. Examination and, if necessary, recommendations on how to deal with tax liability in Germany in the event of a planned move abroad
2. Examination and advice on moving to Germany as well as the resulting pitfalls in the event of a later planned return abroad
3. Assistance with appeals and lawsuits before the tax courts in connection with relocation
4. Drafting or reviewing wills, prenuptial agreements and other dispositions related to foreign countries
5. Expert opinions on individual questions when moving to Germany or moving abroad

In the following we will give you an overview of the so-called unlimited, limited and extended limited tax liability in the area of income tax as well as inheritance and gift tax when moving abroad.

Income tax liability after moving abroad

Unlimited income tax liability if resident or habitually resident in Germany

Basically, the following applies: The person whose residence or habitual abode is in Germany is subject to income tax in Germany according to German taxation law with his "world income", i.e. with his complete income - regardless of the state in which he earns it. This depends exclusively on the purely actual situation and not on the observance of legal reporting standards.

In cases in which the taxpayer is also liable to pay taxes abroad, this can lead to double taxation if necessary, provided that there is no double taxation agreement with this state and a credit according to German tax law is not possible.  

Limited income tax liability for income in Germany after moving abroad

If a person has neither a domicile nor his habitual residence in Germany, but at the same time generates income in Germany, he is subject to limited income tax liability. This means that in this case there is no taxation of world income but only of income earned in Germany.

Also in this case, double taxation agreements with the country of residence as well as a possible credit for foreign tax must be taken into account.

Extended limited income tax liability for German nationals abroad

The limited income tax liability is extended for a period of ten years after the transfer of residence abroad to those incomes that do not qualify as so-called foreign income. This includes income from the rental and leasing of movable assets.

The extension of the limited income tax liability presupposes that the taxpayer is a German citizen and has been subject to unlimited tax liability in Germany for at least five of the last ten years before moving abroad. In addition, the so-called extended limited tax liability only applies if the taxpayer moves to a so-called low-tax country and only if the taxpayer continues to have significant economic interests in Germany.

Gift and inheritance tax liability for emigrants

Unlimited tax liability for tax residents

Under gift and inheritance tax law, unlimited tax liability exists in cases where the donor or testator on the one hand, or the acquirer on the other hand, is a tax resident, i.e. either has his residence or his habitual abode in Germany. In addition, German nationals who have not resided abroad permanently for more than five years without having a domicile in Germany are also qualified as tax residents for the purposes of gift and inheritance tax.

Here, too, double taxation is imminent in various constellations. A double taxation agreement in the gift and inheritance tax law currently exists only with Denmark, France, Greece, Sweden, Switzerland and the USA.

Corporations, associations of persons and assets as well as foundations and associations are subject to gift and inheritance tax if they have their management or registered office in Germany.

Limited gift and inheritance tax liability for domestic assets

If neither the donor or the testator nor the acquirer is considered resident in Germany under German tax law at the time of the transfer, the so-called domestic assets are nevertheless subject to gift and inheritance tax liability under § 121 of the Valuation Act. This includes in particular assets located in Germany, such as domestic real estate, agricultural and forestry assets, domestic business assets and shares in a corporation located in Germany.

Extended limited tax liability in inheritance tax law

In those cases where a donor or testator has had the extended limited income tax liability at the time the tax arises, the limited gift and inheritance tax liability is extended to those assets whose income does not qualify as foreign income.

Exit taxation - dangerous boomerang in tax evasion abroad

In addition to the extended limited tax obligations, the so-called exit tax must also be taken into account. This tax applies to a move out of Germany if the taxpayer holds shares in a corporation as private assets. The legal consequence is the taxation of hidden reserves, i.e. the difference between acquisition costs and the value at the time of the move at the personal income tax rate.

Here you can find further information on exit taxation for entrepreneurs and shareholders: Exit Taxation for entrepreneurs

Conclusion: Seeking legal advice!

While in today's globalized times a move abroad often seems attractive, especially with regard to tax advantages abroad, it should always be taken into account that the termination of residence alone does not necessarily mean tax exemption in Germany at the same time. A careful examination of each individual case is necessary in order to recognize all pitfalls in time and take appropriate measures.

Attention should be paid not only to tax law, but also to a number of other questions that arise when moving to another country.  This applies, for example, to aspects of inheritance law and family law. Only by considering all the implications for all parties involved can an assessment be made as to whether tax evasion abroad is actually sensible and advisable.