Extended limited tax liability pursuant to Section 2 AStG -
Taxation after departure
Never pay taxes in Germany again! This is the wish of many entrepreneurs who leave Germany. In many cases, however, this is a mistake.
Overview
TAXATION AFTER MOVING AWAY
In addition to the one-off exit tax (link to blog post) at the time of departure, German taxation continues to apply in many cases.
German income such as rental income or commercial income is still taxable in Germany.
Although there is no longer an unlimited tax liability (taxation of global income) due to the departure, there is a limited tax liability (taxation of German income). In these cases, a German tax return must still be submitted.
In addition, the legislator would like to keep the expatriate in Germany for tax purposes and limit foreign tax advantages through the so-called extended limited tax liability pursuant to § 2 AStG .
WHAT IS THE EXTENDED LIMITED TAX LIABILITY ACCORDING TO § 2 ASTG?
The extended limited tax liability extends the emigrant’s “normal” limited tax liability for 10 years after departure. This applies in particular to entrepreneurs who move from Germany to a so-called low-tax country.
This means that the scope of taxable income is extended and the tax rate is determined according to the global income. This means that the entrepreneur is obliged to disclose his worldwide income to the German tax office – despite moving away!
The extended limited tax liability includes the entire global income less foreign income within the meaning of Section 34d EStG.
The regulation only applies to assessment periods in which the extended limited taxable income amounts to more than € 16,500 (exemption limit).
REQUIREMENTS FOR EXTENDED LIMITED TAX LIABILITY PURSUANT TO SECTION 2 ASTG
The regulation is quite complex and applies in the following constellations:
- A natural person,
- who has been subject to unlimited tax liability as a German for at least 5 years in the 10 years prior to moving away
- is resident in a low-taxed foreign country after the move or is not resident in any foreign country
- And continues to have significant economic interests in Germany
WHAT IS CONSIDERED A LOW-TAX COUNTRY IN THE CASE OF EXTENDED LIMITED TAX LIABILITY?
To determine whether the foreign state is a low-tax country within the meaning of the extended limited tax liability, the law provides for a comparison of burdens (§ Section 2 (2) AStG ).
The question therefore arises as to whether the tax burden abroad is lower than taxation in Germany.
The comparison is based on a flat-rate income of EUR 77,000. The corresponding tax abroad for this income is set in relation to the corresponding taxation in Germany. If the foreign taxation is one third lower than the German taxation, the foreign country is deemed to be a low-tax country within the meaning of the extended limited tax liability pursuant to Section 2 AStG.
Example: In 2023, German taxation for an income of EUR 77,000 will be approx. 29%. Low taxation abroad is therefore assumed to be less than 19%.
Low taxation abroad also applies if the entrepreneur benefits from preferential taxation abroad. This includes, for example, Swiss lump-sum or expense taxation.
In both cases, it is possible to carry out an actual tax burden comparison. In this case, the expatriate can demonstrate that the total tax burden abroad is at least two thirds of the tax burden in Germany. In principle, a kind of target/actual tax analysis must be carried out in this case.
WHAT ARE MATERIAL ECONOMIC INTERESTS IN THE CASE OF EXTENDED LIMITED TAX LIABILITY?
The extended limited tax liability only applies if the entrepreneur still has significant economic interests in Germany.
Material economic interests exist if the person
- is a sole proprietor or co-entrepreneur of a German commercial enterprise or holds at least 25% of the German commercial enterprise as a limited partner.
- holds at least 1% of the shares in a domestic corporation.
- German income that amounts to more than 30% of total income or more than EUR 62,000 in the case of unlimited tax liability
- Domestic assets which, in the case of unlimited tax liability, amount to more than 30% of total assets or exceed EUR 154,000
PRACTICAL TIP
- In practice, the scope of application of the extended limited tax liability is restricted to only a few types of income. Nevertheless, the provision may affect the tax liability of a shareholder who has moved away.
- An example case is a loan granted by the departed shareholder to the German company without collateral in the form of German real estate. In this case, the interest income of the shareholder who has moved away is subject to German taxation within the scope of the extended limited tax liability.
- Potential for structuring: Such taxation can be avoided by securing the loan with foreign real estate.
- Before an entrepreneur moves away, all sources of income should be checked in order to avoid an extended limited tax liability.
- If the entrepreneur holds shares in other companies in low-taxed foreign countries, the income of the foreign intermediate company is also attributed to the expatriate. In principle, the add-back taxation also applies in the case of extended limited tax liability (Section 5 AStG).
For interested readers, here is the blog post on add-back taxation (Blog post on add-back taxation)
Do you need tax advice to check whether you are still liable to pay tax in Germany despite moving away?
I am happy to support you in the following areas
- Examination of the requirements for extended limited tax liability
- Design to avoid extended limited tax liability
- Assistance with appeals and lawsuits before the tax courts in connection with the extended limited tax liability
- Expert opinion on individual issues relating to extended limited tax liability
- Support with the declaration of extended limited tax liability
Please feel free to contact me!
Disclaimer
The article uses simple language for better understanding and is also abbreviated with regard to the individual conditions required by law.
This article does not constitute legal or tax advice, but is for general information purposes only. Every situation is individual, so I always recommend professional advice to avoid tax disadvantages.
Last updated May 2, 2023
