Differential allowance, known in Germany as Differenzzuschlag, is a concept that, in the context of the German tax and benefit system, is of crucial importance – it can affect the finances of many workers and their families. What exactly does the term mean and what implications does it have for those working in Germany? This guide will answer that question for you.
Unlimited tax liability in Germany – what does it mean?
Unlimited tax liability means that a taxpayer is required to pay tax on their entire income, regardless of where it was earned. This is a key term for understanding the tax system in Germany, especially for people who plan to move there or start a business.
Unlimited tax liability in Germany means that people with this status will pay tax in Germany on their global income. This rule applies to most people who live and work in Germany (and have been assigned a Steuer-ID).
Unlimited tax liability in Germany – how to obtain it?
Unlimited tax liability in Germany applies to persons who meet at least one of the following conditions: they are registered as residents in Germany, they live and work in Germany for at least six months, or their income from Germany constitutes 90% of their total worldwide income.
However, unlimited tax liability may also apply to persons who do not live in Germany but are employed there, such as posted workers, diplomats, or employees of international organizations.
Application for unlimited tax liability in Germany
A tax residence certificate, i.e. a special certificate issued by the tax office of a given country, can help confirm unlimited tax liability. It is proof that we are treated as a resident for tax purposes in Germany, which we can present, for example, to the Polish tax office. This makes it easier to determine our center of economic interests. However, it is worth remembering that this document is not necessary for unlimited tax settlement – our residence is determined automatically.
So who should apply for the certificate? First and foremost, it will be extremely useful for entrepreneurs who do business in both Poland and Germany. It will allow taxpayers who earn income in more than one country to easily avoid double taxation. The certificate is issued upon submission of an application to the relevant tax office.
Unlimited income tax in Germany – what are the benefits?
The benefits of unlimited tax settlement include, among others, the possibility of taking advantage of various allowances and deductions covering expenses related to work and professional development, running a double household, raising children, and taking care of one’s health. This usually translates into a much more favorable tax refund from Germany, as this form of settlement offers a high tax-free allowance.
Limited tax liability in Germany
In the case of persons who do not have a place of residence or permanent residence in Germany but receive income from that country, we refer to limited tax liability. They pay tax only on income earned in Germany.
So if we have worked in Germany for less than 183 days, this type of taxation will apply to us. In this case, we will have to include our income from Germany in our tax return filed with the Polish tax office – in our country, we will be considered residents and will be subject to unlimited tax liability.
If we work in Germany, this is not the most advantageous form of settlement, as it prevents us from taking advantage of most of the tax privileges available under income settlement. For example, it does not allow us to take advantage of many individual and family allowances. We are not able to deduct income-related expenses, run a double household, or file a joint tax return.
If you do not have unlimited tax liability, you will have to file your tax return in Poland.
Rules concerning unlimited tax liability for entrepreneurs
The basic criterion that determines whether an entrepreneur is subject to unlimited tax liability in Germany is their place of residence or company headquarters. If either of these locations is in Germany, the entrepreneur is required to pay taxes on their entire income, regardless of where it was generated. This means that this obligation applies to income earned both in Germany and abroad.
For entrepreneurs operating in several countries, it is important to understand the rules on double taxation avoidance. Germany has signed double taxation agreements with many countries, which means that income generated abroad may be exempt from tax in Germany or tax paid abroad may be deducted from German tax.
If you plan to stay in Germany permanently, it will be very beneficial to change your tax residence, which will give you unlimited liability. Contact our accounting office Borsuk Podatki, and we will help you with all the formalities related to the German tax office. Take advantage of the services of experienced advisors and enjoy the best conditions when settling your taxes – we invite you to contact us!
