The extended limited tax liability under § 2 AStG

Structure of the rule

The convention allows Germany to tax, but German domestic law must still impose the tax. After the end of unlimited tax liability, a person who has left Germany is subject only to limited tax liability under § 1 paragraph 4 of the Einkommensteuergesetz (EStG). This liability covers the domestic income enumerated in § 49 EStG, such as income from a German business, from German real estate or from employment exercised in Germany. Since 1972 German law has added a further layer for emigrants to low-tax countries in § 2 AStG, the erweiterte beschränkte Steuerpflicht. It applies to a German national who has been subject to unlimited German tax liability for at least five years during the last ten years before his departure. He must move to a country with low taxation or to no country of tax residence at all while retaining substantial economic interests in Germany. For the year of departure and the following ten years, such a person is taxed on all income that is not foreign income within the meaning of § 34d EStG, a category wider than the domestic income of § 49 EStG.¹ The difference is considerable, since the category of non-foreign income includes, for instance, interest paid by German banks and gains that § 49 EStG would not reach. The rule applies only where the income subject to the extended limited liability exceeds a threshold of 16,500 euros in the year concerned.

The concept of substantial economic interests is defined in § 2 paragraph 3 AStG. It covers a participation as a partner or shareholder in a German business, including a holding of at least 1 per cent in a German corporation. Income or assets in Germany also qualify if they exceed certain relative or absolute thresholds. For income these are 30 per cent of the total income or more than 62,000 euros of non-foreign income. For assets the thresholds are 30 per cent of the total assets or more than 154,000 euros of non-foreign assets.² The typical German entrepreneur who moves to Zurich while retaining his company in Germany and real estate there meets these conditions without difficulty.

Is Switzerland a low-tax country?

The decisive question for Germans in Zurich is therefore whether Switzerland counts as a country with low taxation. The statute answers it by a comparison. Under § 2 paragraph 2 AStG, low taxation exists if the income tax levied in the foreign state on an unmarried resident with a taxable income of 77,000 euros is more than one third lower than the German income tax on the same income. The taxpayer may, however, prove that the taxes actually levied on his total income in the foreign state amount to at least two thirds of the income tax he would have to pay in Germany if he were subject to unlimited liability. A second alternative covers preferential taxation, under which the foreign state grants the person a substantial reduction of the tax compared with ordinary taxation.³ The second alternative was historically aimed at the Swiss lump-sum taxation, which the German tax administration has long treated as a form of preferential taxation.

For ordinary taxation in the canton of Zurich the answer depends on the model calculation, which must take into account the federal, cantonal and communal taxes at the specific place of residence. Advisers practising on both sides of the border report that the central Swiss cantons generally fulfil the definition of low taxation, while the position of the higher-tax cantons depends on the individual commune.⁴ The counter-proof becomes possible when the taxpayer’s actual income is high, because the progression of the Zurich tariff and the wealth tax then bring the Swiss burden closer to the German one. The comparison must be carried out year by year and documented carefully. Many advisers treat Switzerland as a low-tax country for the purposes of § 2 AStG unless the counter-proof can be furnished with certainty.

Reform and interaction with the convention

The German administrative principles for the application of the Außensteuergesetz were comprehensively revised by a letter of the Federal Ministry of Finance of 22 December 2023, which replaced the principles of 14 May 2004.⁵ The legislative amendments made to the Außensteuergesetz by the ATAD Implementation Act of 25 June 2021 concentrated on the exit tax and on the controlled foreign company rules discussed below. They left the basic structure of § 2 AStG intact.⁶

The relationship between § 2 AStG and the convention is governed by Article 4 paragraph 4. During the first five years after the move, the convention permits Germany to tax German-source income without the usual treaty limits, and § 2 AStG provides the domestic basis for extending the tax to non-foreign income. For the remaining years of the ten-year period of § 2 AStG, the convention again limits the German taxing right to what the ordinary articles allow. In practice the extended limited liability therefore has its greatest effect during the first five years, although its reporting obligations continue throughout the full period. The rule is also relevant for the progression clause of § 2 paragraph 5 AStG, under which the tax rate applicable to the German income is determined by reference to the taxpayer’s worldwide income.

Notes

1. Wohnsitz Ausland, “Erweiterte beschränkte Steuerpflicht 2026: § 2 AStG erklärt & vermeiden”, https://www.wohnsitzausland.com/steuerwissen/erweiterte-beschraenkte-steuerpflicht/, summarising the four conditions of German nationality, five years of unlimited liability in the last ten years, residence in a low-tax territory and substantial economic interests, and the duration of the year of departure plus ten full years. ↩
2. Wohnsitz Ausland, “Erweiterte beschränkte Steuerpflicht 2026”, cited above. Happe and Kistler, Steuer Revue 12/2019, cited above, add that a participation of more than 25 per cent in a German partnership also constitutes a substantial economic interest. ↩
3. Wohnsitz Ausland, “Erweiterte beschränkte Steuerpflicht 2026”, cited above, which describes the model comparison at a taxable income of 77,000 euros and the counter-proof that the actual tax burden amounts to at least two thirds of the German income tax. ↩
4. Happe and Kistler, Steuer Revue 12/2019, cited above, who note that the cantons of central Switzerland typically satisfy the statutory definition of low taxation. ↩
5. Bundesministerium der Finanzen, “Grundsätze zur Anwendung des Außensteuergesetzes”, BMF-Schreiben of 22 December 2023, https://www.bundesfinanzministerium.de/Content/DE/Downloads/BMF_Schreiben/Internationales_Steuerrecht/Allgemeine_Informationen/2023-12-22-grundsaetze-zur-anwendung-des-aussensteuergesetzes.html. The ministry’s page describes the document as a new version of the principles. ↩
6. Gesetz zur Umsetzung der Anti-Steuervermeidungsrichtlinie (ATAD-Umsetzungsgesetz – ATADUmsG) of 25 June 2021, BGBl. 2021 I p. 2035, Article 5. The application rules of § 21 paras. 2 and 4 AStG, https://lxgesetze.de/astg/21, refer to the 2021 version of § 1 para. 2 and of §§ 7 to 10, 12, 13, 15 to 18 and 20 AStG, besides the new exit tax of § 6. They contain no transitional rule for § 2 AStG. ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of September 2025.