Anyone without a residence in Germany who receives German income is, as a rule, subject to limited tax liability (beschränkte Steuerpflicht). This applies, for example, to taxpayers who work in Germany but live across the border, or to pensioners who reside abroad but must, depending on the applicable double taxation agreement, pay tax on their German pension in Germany. Limited tax liability carries a number of disadvantages, e.g.:
- no deduction of the basic personal allowance (Grundfreibetrag) (exception: employees)
- no deduction of certain special expenses (Sonderausgaben) and extraordinary burdens (außergewöhnliche Belastungen)
- no splitting tariff (Splittingtarif).
There is, however, a solution: the so-called notional unlimited income tax liability on application under § 1 para. 3 of the Income Tax Act (EStG). The precondition is that German income amounts to at least 90% of total income, or that foreign income does not exceed the basic personal allowance of currently €8,820. The drawback of this solution is that foreign income is subject to the progression clause under § 32b EStG, thereby increasing the tax rate applicable to German income.
The Fiscal Court of Münster ruled on 7 December 2016 (Case No. 11 K 2115/15 E) on something that should long have been clear: foreign capital income is not subject to the progression clause, since capital income is subject to the flat-rate withholding tax (Abgeltungssteuer) of 25% and not to the standard income tax rate.