Limited / unlimited tax liability


Why is the distinction between limited and unlimited tax liability so important?

Whether the tax is determined according to limited or unlimited tax liability determines to a considerable extent the calculation and thus the amount of the tax.In the following, the differences between limited and unlimited tax liability are outlined and the requirements for being treated as an unlimited taxpayer are explained.

Limited tax liability:

Persons who are subject to limited income tax liability pursuant to Section 1 para. 4 of the EStG [income tax law] are those who neither have a residence in Germany nor stay in Germany for more than 183 days, but receive certain domestic income pursuant to Section 49 of the EStG. If you also earn foreign income or domestic income that is not mentioned in Section 49 of the EStG, this is not taken into account when assessing you as a person with limited tax liability.

Income tax for persons with limited tax liability is calculated according to the basic tax scale without taking into account the basic allowance (Section 50 para. 1 sentence 2 of the EStG). The basic allowance is already included in the basic rate table for all taxpayers. Therefore, for persons with limited tax liability, the applicable income tax is first calculated by increasing the taxable income by the basic allowance and then applying the basic tax rate to this increased taxable income in accordance with Section 32a, para. 1, sentence 2, no. 1 of the EStG.

Numerous personal and family-related benefits are not taken into account in the assessment for limited tax liability. For example, extraordinary burdens are not tax deductible and the spousal splitting cannot be claimed.

Donations and membership fees to political parties and to independent voters’ associations are deducted directly from the tax liability at half each, up to a maximum of € 825. Insofar as donations to political parties are higher, they are taken into account as special expenses up to €1,650.

Allowances for children, including care and education costs, as well as the relief amount for single parents may also not be granted.

Income-related expenses are only deductible in proven amounts if they are directly economically related to domestic income. In the case of pension income, at least the flat-rate amount for income-related expenses will be taken into account as of the 2009 assessment period if no higher income-related expenses in direct economic connection with the income are proven.

Tax ID

eliminates the need for employees with limited tax liability to reapply annually for the certificate for wage tax deduction (“tax class 1â€).(German) tax identification number (IdNo.) is sufficient!

The German employer registers the employee in the ELSTAM database. This provides the employer with information on the:

  • Tax class

Caution:

  • limited taxpayers who apply for the wage tax deduction procedure to take into account a tax allowance in accordance with Section 39a of the EStG (e.g. travel costs)
  • on application unrestricted (Section 1 para. 3 of the EStG) and extended unrestricted taxpayers (Section 1 para. 2 of the EStG) (e.g. for “tax class IIIâ€)

(as before) apply for the “certificate for wage tax deduction” at the employer’s tax office.If the employee does not (yet) have a tax identification number, this can be applied for at the employer’s tax office. The download ‘Application for assignment of tax ID’ is available below.

Important: A copy of the identification documents must be enclosed with the application

Unlimited tax liability on application:

Provided that at least 90% of your total world income in the calendar year is subject to German income tax, you can apply to be treated as an unlimited taxpayer under Section 1 para. 3 of the EStG. This also applies if your income that is not subject to German income tax does not exceed € 9,408 (for 2019, the amount was: € 9,168).

Due to the treatment as an unlimited taxpayer, personal tax benefits as well as a number of family-related benefits can be claimed, taking into account the individual requirements – unlike in the case of limited tax liability – so that this type of assessment can lead to a lower income tax.

In particular, special expenses, extraordinary burdens and expenses for household-related employment or household-related services can be claimed as tax-reducing. Furthermore, tax reductions for children and the deduction of maintenance expenses for dependents are possible.

In contrast to limited tax liability, foreign income must also be declared in the case of unlimited tax liability. Although this is not taxed, it is included in the calculation of the tax rate for domestic income (Section 32b para. 1 no. 5 of the EStG).

In the case of unlimited tax liability, income tax is calculated according to the income tax scale. Income up to the amount of the basic tax-free allowance is not taxed (Section 32a, para. 1, sentence 1, no. 1 of the EStG)

According to Section 1 a of the EStG, it is possible to be assessed together with the spouse and to benefit from the more favourable splitting tax rate if one of the two spouses fulfils the requirements for being treated as an unlimited taxpayer. In addition, it is required that the applying spouse is a citizen of an EU or EEA state, that the respective other spouse has their residence or habitual abode in an EU or EEA state and that the joint income does not exceed the double limits of Section 1 para. 3 sentence 2 of the EStG (Section 1a para. 1 no. 2 sentence 3 of the EStG).

If the requirements for the application under Section 1 para. 3 of the EStG are met and a corresponding application has been made, an income tax return for unlimited taxpayers must be submitted (form ESt1A), and a completed “EU/EEA certificate†must be enclosed to declare the foreign income if you are a national of a member state of the EU or the EEA.

(Text adopted from the Neubrandenburg tax office)

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