German international income tax law
Section 1(3) EStG: unlimited German tax liability on application
Individuals who have neither a residence nor a habitual abode in Germany are generally subject only to limited German income tax on German-source income. Section 1(3) of the German Income Tax Act (EStG), however, allows them to apply for treatment as if they were subject to unlimited German income tax where the German-taxable income represents the substantial part of their worldwide income or their other income remains below a statutory threshold.
Deemed unlimited tax liability
No German residence, but treatment similar to an unlimited taxpayer
Section 1(3) EStG applies to individuals who have neither a German residence nor a habitual abode but receive German-source income within Section 49 EStG. Without an application, these individuals are generally subject to limited German income tax under Section 1(4) EStG.
On application, the person can be treated as subject to unlimited German income tax for the relevant German-source income. This can materially improve the tax result because a number of personal deductions and tariff benefits that are restricted under limited tax liability may become available again.
Section 1(3) EStG does not mean that Germany suddenly taxes the person's entire foreign worldwide income. Foreign income is primarily relevant for the entry tests and, where applicable, for the progression clause.
Statutory requirements
When can Section 1(3) EStG be claimed?
The provision combines personal requirements with two alternative income tests. In addition, the amount of income not subject to German income tax generally must be certified by the competent foreign tax authority.
No residence or habitual abode in Germany
Section 1(3) EStG is relevant only if the person is not already subject to ordinary unlimited German income tax under Section 1(1) EStG by reason of a German residence or habitual abode.
German-source income required
The individual must receive German-source income within Section 49 EStG. Typical examples include certain German pensions, income from German real estate, employment income for work performed in Germany and certain business income.
No automatic application
Treatment under Section 1(3) EStG applies only on application. Without the application, the default is generally limited tax liability under Section 1(4) EStG.
Section 1(3) sentence 2 EStG
The 90% test or the basic personal allowance test
It is sufficient to satisfy either one of the two alternative income thresholds.
At least 90% of income is subject to German income tax
At least 90 percent of the individual's income for the calendar year must be subject to German income tax.
In simplified terms, the relevant worldwide income determined under German tax principles is compared with the portion that is subject to German income tax.
Foreign income does not exceed the basic personal allowance
Alternatively, the income not subject to German income tax may not exceed the basic personal allowance under Section 32a(1) sentence 2 no. 1 EStG.
For tax year 2026, the basic personal allowance is EUR 12,348. Under Section 1(3) sentence 2 EStG, this amount may be reduced where appropriate by reference to the conditions in the taxpayer's country of residence.
Calculating the thresholds
Which income is included in the Section 1(3) analysis?
Determine worldwide income under German rules
The starting point is an income calculation under German income tax law, irrespective of how the residence country classifies or calculates the income.
Determine the portion subject to German tax
The analysis then identifies which part of the income is actually subject to German income tax.
Consider treaty-limited German income
German-source income for which Germany's taxing right is limited under a treaty can be treated as income not subject to German income tax for purposes of the threshold calculation.
Certain tax-exempt foreign income can be excluded
Income not subject to German tax can be disregarded where it is not taxed abroad and comparable income would be tax-exempt under German law.
Common cases
Where Section 1(3) EStG frequently appears in practice
Retiree living abroad
A person living abroad who receives a German statutory pension may initially be subject to limited German tax under Section 49 EStG. If other income is low, an application under Section 1(3) EStG can be advantageous.
German rental property while living abroad
Rental income from German real estate is generally German-source income. Where the individual's income is concentrated in Germany, Section 1(3) EStG may become relevant.
German-source income after emigration
Once a German residence is given up, ordinary unlimited tax liability may end. If significant German-source income continues, Section 1(3) EStG can be an alternative to limited tax liability.
Foreign residence, work performed in Germany
Employees without a German residence can fall within Section 1(3) EStG where employment income is wholly or predominantly taxable in Germany.
German and foreign pensions
Where several pensions are received, the allocation of German and foreign taxing rights must be determined precisely. Treaty rules can materially affect the 90% calculation.
Foreign interest and dividends
Even relatively small foreign investment income can matter for the threshold tests. The income is classified under German income tax law.
Section 1(3) sentence 5 EStG
Certificate from the foreign tax authority
The amount of income not subject to German income tax generally must be proven by a certificate issued by the competent foreign tax authority.
The BFH has expressly held that such a certificate can be required even where the taxpayer states that no foreign income was earned at all. In practice, a so-called zero-income certificate may therefore be necessary.
When preparing the application, it should be clarified early which authority in the residence country can issue the required confirmation and which documents it requires.
Tax effects
Why the application can materially change the German tax result
Deemed unlimited tax liability removes a number of disadvantages that Section 50 EStG imposes on taxpayers with limited tax liability. Which benefits are actually available depends on the specific statutory provisions.
Normal tariff treatment
Under limited tax liability, the basic personal allowance is generally neutralized through Section 50 EStG. Treatment under Section 1(3) EStG can remove this disadvantage.
Broader deduction possibilities
Certain special expenses, extraordinary burdens and other personal deductions can become available where the relevant statutory requirements are satisfied.
Foreign income can affect the German tax rate
Income not taxed in Germany can be taken into account under Section 32b EStG when determining the tax rate applied to German-taxable income.
Relationship to Section 1a EStG
Joint assessment and EU/EEA family cases
Section 1a EStG supplements Section 1(3) EStG, particularly for citizens of EU and EEA member states. Where the statutory conditions are met, a spouse living in another EU or EEA state can be taken into account for German joint-assessment purposes.
EU/EEA citizenship
The family-related extensions in Section 1a(1) EStG are generally tied to citizenship of an EU or EEA member state.
Spouse living in the EU/EEA
A spouse who is not permanently separated can, under the statutory conditions, be treated as subject to unlimited German tax for purposes of joint assessment.
Combined income thresholds
For Section 1a EStG, the income of both spouses is relevant to the statutory thresholds and the basic personal allowance is doubled for this purpose.
No complete “shadow residence”
Section 1a EStG does not mean that every personal circumstance of the foreign spouse is treated in the same way as under genuine unlimited German tax liability.
Federal Fiscal Court case law
Important BFH decisions on Section 1(3) EStG
The Federal Fiscal Court has clarified how the income thresholds are calculated, which foreign income must be included and which evidence the taxpayer must provide.
Tax-exempt foreign benefits and worldwide income
For the Section 1(3) income thresholds, receipts that would be taxable in principle under German law but would qualify for a German tax exemption can, under the statutory conditions, be excluded from the relevant worldwide income. The BFH applied this principle to Dutch sickness benefits.
Such benefits can nevertheless remain relevant later for the progression clause under Section 32b EStG.
Income thresholds are determined under German law
The BFH clarified that the income relevant for Section 1(3) EStG must be determined under German income tax law. The foreign country's tax treatment therefore does not automatically carry over into the German threshold test.
The decision is a central authority for determining worldwide income for Section 1(3) purposes.
Certificate required even where foreign income is zero
The BFH held that the statutory certificate from the competent foreign tax authority must also be submitted where the taxpayer claims to have earned no income outside Germany.
In practice, a zero-income certificate can therefore be required.
Joint assessment and combined threshold calculation
For joint assessment under Section 1(3) together with Section 1a EStG, the BFH looked at the income of both spouses and applied the doubled basic personal allowance. The decision is particularly relevant for EU/EEA family situations.
Limits of the family-related extension under Section 1a EStG
The BFH clarified that including a foreign spouse through Section 1a EStG does not result in unrestricted treatment of all of that spouse's personal circumstances as if genuine unlimited German tax liability existed.
The deemed tax status therefore remains limited to the statutory purpose.
Practical documentation
Which documents are typically required?
Evidence of foreign residence
The residence country and actual residence status should be documented for the relevant tax year.
Certificate from the foreign tax authority
The amount of income not subject to German income tax generally must be officially certified.
Evidence of German-source income
Pension statements, rental records, payroll documents or other records are needed to determine the German-source income under Section 49 EStG.
Recalculate foreign income under German rules
Foreign tax returns are only the starting point. The relevant income for the threshold test must be determined under German law.
Further reading
Related German tax topics
Some detailed German-law pages are currently available only in German. Those links are identified below.
International income tax
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