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Unlimited tax liability
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Personal unlimited tax liability, scope and options

In most other countries, personal unlimited tax liability is linked to residence. You have a place of residence where you have a permanent place to live if the circumstances indicate that you will keep this apartment and not just use it for occasional vacation purposes.

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Ordinary residence - unlimited tax liability

Anyone who stays in a country for a longer period of time, for example staying in a hotel, can thereby establish a so-called habitual residence. For tax purposes, this is treated the same as your place of residence and unlimited tax liability also applies here. Some countries, such as the USA, link unlimited tax liability to nationality. A US citizen is therefore liable to pay taxes in the USA, even if he neither lives there nor has a source of income. At the same time, however, they are subject to unlimited tax liability in the country in which they live.

Residences in several countries lead to: "Multiple unlimited tax liability"

There are people who live in different countries. They are then subject to unlimited taxation in all of these countries and would therefore theoretically have to pay tax on their entire global income several times. This means unlimited tax liability. In cases where a DTA exists at all, the so-called residency is determined in advance. In tax and social security law, this is where you have your center of vital interests.

To put it simply, the center of life's interests is where the heart beats. This is usually where the family lives. But leisure activities and hobbies are also connecting points. If you cannot clearly assign your life interests to a country, you will be asked about sources of income and the location of your property interests. If all else fails, nationality decides. In which country you tax which income depends on other rules. Please read the separate article.

Limited tax liability

Anyone who has neither residence nor habitual residence in a country but receives income from this country is subject to limited tax liability on this income in the relevant country. This does not affect the unlimited tax liability in the other country. Limited taxpayers do not have the same options and deduction options as unrestricted taxpayers. This doesn't necessarily have to be a disadvantage, because the tax liability in itself does not mean that you have to pay taxes in the country. In which country you tax which income, please read the special article.

Electoral rights in Germany

Anyone who is subject to unlimited tax liability in Germany can exercise various options, which lead to different taxes. One of the most important voting rights applies to married people and partners in a registered civil partnership. Anyone who was married for even a single day during a calendar year and was not permanently separated from their partner can choose between individual assessment, separate assessment and joint assessment. The right to vote can be exercised separately every year and therefore differently every year.

 

When jointly assessed, the incomes of both partners are determined separately. The special expenses and other deductions are then treated as joint expenses, which ultimately leads to a uniform taxable income. This income is divided by two and the tax table shows what a single person would have to pay in taxes for half of this total income. This tax times two equals the couple's total tax. The idea behind joint assessment is that both partners have earned half of the family income and each other has paid half of the other deductions. If the income of the two partners is very different, this can result in significant advantages, but also significant disadvantages. We determine which is de facto cheaper for every tax return without being asked.

Regulations within the EU

People who live in an EU member state but receive their income in another EU state are only subject to limited tax liability in the latter country. Therefore, the same voting rights and allowances are not available to those with unlimited tax liability in this country. Anyone who receives at least 90% of their income in Germany can apply to be treated as if they were subject to unlimited tax liability. This opens up further exemptions and deduction options.

 

Couples living separately or those who decide against joint assessment can allocate allowances to each other and exercise other options. This goes so far that maintenance payments to divorced spouses are also tax deductible if the recipient includes these benefits in his or her return. In this way, you can reduce the tax burden for the entire family.

Transfer of a source of income, usufruct

There is also the possibility of transferring a source of income to another person forever or just for a certain period of time. Then they tax the income. This makes sense, among other things, for children who otherwise do not earn any income and therefore pay little or no taxes at all on the transferred source of income. In this way, the state can support the financing of children's studies through tax reductions.

Anyone who does not want to completely give up the source of income, e.g. a portfolio, a property or shares in a company, regulates this via the reservation of usufruct. Tax law allows for very detailed designs here. It's not just about the taxation of income; inheritance law and inheritance and gift taxes can also be managed very well by exercising tax options.

Jürgen Bächle
Jurgen Bachle

has been working as an independent tax consultant and expert in international tax law since 1989 and has been a member of the board of the German Association of Tax Consultants Baden-Württemberg, DSTVBW, for over 20 years.

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