Employment Income from Germany with Residence in Denmark (Limited) German Tax Liability

Anyone who lives abroad but works in Germany for a German employer must pay tax on their salary in Germany. These taxes are generally considered settled through the wage tax withheld by the German employer, which is paid monthly to the German tax authorities. In this case, the employee is treated as limited tax liable in Germany and usually does not have to file a German tax return.

The Disadvantages of Limited German Tax Liability

For many people, “limited tax liability” initially sounds better than “unlimited tax liability.” However, this is often not the case. Taxpayers who are unlimited tax liable can claim significantly more deductions. Therefore, in many cases — though not always — unlimited tax liability can be considerably more favourable than limited tax liability.

„Unlimited Tax Liability“ Can Be Applied for, Under Certain Conditions

Unlimited tax liability can be requested if one of the following conditions is met:

– 90% of total worldwide income is earned in Germany, or
– Foreign income is below the German basic tax allowance

If one of these conditions is fulfilled, more expenses can be deducted than in the case of limited tax liability. These include, for example, insurance contributions, childcare expenses, child-related tax benefits, craftsmen services and other deductible expenses. However, when applying for unlimited tax liability, foreign income must also be declared. These foreign earnings must always be calculated according to German tax rules.

They are then considered under the so-called progression clause (Progressionsvorbehalt). This means that foreign income is used to determine the applicable tax rate, even though the income itself is not directly taxed in Germany.

„Unlimited Tax Liability“ May Entitle You to German Child Benefit

In many cases, unlimited tax liability also results in entitlement to German child benefit (Kindergeld). However, this is only paid as the difference between the child benefit in the country of residence and the German child benefit. This can be particularly advantageous for Danish residents whose children are studying.

„Unlimited Tax Liability“ May Also Have Disadvantages

Before applying for unlimited tax liability, it is important to ensure that all potential consequences are clearly understood and carefully assessed.