Anyone preparing to move abroad who has incurred tax losses in the preceding years – whether from self-employed or business activity, from investment income, or from a let property – often overlooks a question that can easily get lost in emigration planning: what happens to an existing loss carryforward (Verlustvortrag) under Section 10d of the German Income Tax Act (Einkommensteuergesetz, EStG) once unlimited tax liability in Germany ends? Unlike the exit taxation of shares in corporations under Section 6 of the German Foreign Tax Act (Außensteuergesetz, AStG), or the speculation period (Spekulationsfrist) under Section 23 EStG, the issue here is not an impending additional tax burden, but rather whether a tax advantage already earned remains usable after the move. The answer depends decisively on whether any tax liability in Germany – now only limited tax liability (beschränkte Steuerpflicht) – continues after emigration, and against which types of income a loss carryforward may then be set off.
Section 10d EStG: How the Loss Carryforward Works in Principle
Where a negative total amount of income (Gesamtbetrag der Einkünfte) cannot be fully offset within the current assessment period (Veranlagungszeitraum), Section 10d EStG provides for two mechanisms:
- Loss carryback (Verlustrücktrag, Section 10d(1) EStG): Negative income may be deducted, up to an amount of EUR 1,000,000 – EUR 2,000,000 for spouses assessed jointly – from the total amount of income of the immediately preceding assessment period.
- Loss carryforward (Verlustvortrag, Section 10d(2) EStG): Any loss remaining thereafter is carried forward into subsequent assessment periods. There it is fully deductible up to a total amount of income of EUR 1,000,000 (EUR 2,000,000 for joint assessment), and beyond that only up to a certain percentage of the excess amount – the so-called minimum taxation rule (Mindestbesteuerung). For assessment periods 2024 to 2027 this percentage has been temporarily raised to 70 percent (by the Growth Opportunities Act, Wachstumschancengesetz); from the 2028 assessment period onward, the statutory default of 60 percent automatically applies again, unless the legislature extends the increase once more.
The loss carryforward remaining at the end of an assessment period is separately assessed (gesondert festgestellt) under Section 10d(4) EStG. This assessment notice (Feststellungsbescheid) is procedurally independent: although it is determined on the basis of the taxable amounts in the relevant income tax assessment notice (Einkommensteuerbescheid), it can still be issued or amended even where the income tax assessment notice itself can procedurally no longer be changed. This matters for emigration planning because the continuation of this annual assessment is the procedural basis on which a loss carryforward remains demonstrable over the years – including across an emigration.
End of Unlimited Tax Liability: The Loss Carryforward Does Not Automatically Lapse
Emigration generally ends unlimited tax liability (unbeschränkte Steuerpflicht) under Section 1(1) EStG, which is tied to a residence or habitual abode within Germany. A common misconception is that a loss carryforward already assessed lapses along with the end of unlimited tax liability. That is not correct. The loss deduction under Section 10d EStG is personal in nature: it attaches to the taxpayer, not to any particular type or uninterrupted duration of tax liability. A loss carryforward separately assessed at the time of emigration therefore generally continues to exist – even across assessment periods in which neither unlimited nor limited tax liability exists in Germany. If tax liability later revives, for instance through a return to Germany or newly arising German-source income, the surviving loss carryforward can generally be used again once the requirements of Section 10d(2) EStG are met once more.
This does not mean, however, that the loss carryforward can simply continue to be used immediately after emigration. Whether, and to what extent, that is the case depends decisively on whether any tax liability in Germany – now limited tax liability – continues to exist after the move.
Limited Tax Liability After Emigration: Set-Off Only Against German-Source Income
Anyone who, after emigrating, has neither a residence nor a habitual abode in Germany is subject only to limited income tax liability under Section 1(4) EStG – and then exclusively in respect of German-source income (inländische Einkünfte) within the meaning of Section 49 EStG. This includes, for example, income from a let property situated in Germany, from a German permanent establishment (Betriebsstätte), or – within the narrow limits already described elsewhere – from the sale of German real estate. Foreign-source income, by contrast, is no longer captured by German taxation at all once emigration has taken place.
Section 10d EStG itself contains no restriction excluding or specially limiting the loss deduction for taxpayers with limited tax liability; the provision generally applies without distinction to taxpayers with unlimited and limited tax liability alike. The practical difference lies elsewhere: for a taxpayer with limited tax liability, the total amount of income against which a loss carryforward can be deducted after emigration consists exclusively of German-source income within the meaning of Section 49 EStG. A loss carryforward that arose during a period of unlimited tax liability can therefore, after emigration, only be set off against income that remains subject to German taxation even after the move. If no relevant German-source income arises after emigration, the loss carryforward does not lapse, but it effectively lies dormant for as long as that remains the case. In view of this, it is advisable to keep the annual assessment under Section 10d(4) EStG on the radar even in years with no or only minor German tax liability, so that the loss carryforward remains documented and demonstrable in the event of a dispute.
Relationship to Section 23(3) EStG: A Separate, Narrower Set-Off Category
At this point it is worth looking at Section 23(3) EStG, which separately governs the set-off of losses from private disposal transactions (private Veräußerungsgeschäfte) – for example, the sale of real estate within the speculation period or of crypto-assets within the one-year holding period. Losses from such transactions may expressly not be deducted under Section 10d EStG in the current year; under Section 23(3) sentence 7 EStG they may only be offset up to the amount of a gain from private disposal transactions realised in the same calendar year. A carryback or carryforward into other years is possible, but under Section 23(3) sentence 8 EStG it is likewise restricted to future or preceding gains from private disposal transactions; the provision merely refers, by analogy, to the assessment procedure under Section 10d(4) EStG, not to its substantive set-off rules.
For emigration planning, this results in two separate loss categories that need to be considered independently:
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| Feature | General loss carryforward (Section 10d EStG) | Loss carryforward from private disposal transactions (Section 23(3) EStG) |
|---|---|---|
| Set-off in the current year | Against the total amount of income from all types of income | Only against gains from private disposal transactions in the same calendar year |
| Carryforward to subsequent years | Against the total amount of income, limited by the minimum taxation rule under Section 10d(2) EStG | Only against future gains from private disposal transactions, Section 23(3) sentence 8 EStG |
| Usability after emigration (limited tax liability) | Set-off against German-source income within the meaning of Section 49 EStG, where such income exists | In practice, only against gains from the sale of German real estate, Section 49(1) no. 8 EStG |
| Separate assessment | Section 10d(4) EStG | Applicable by analogy via the reference in Section 23(3) sentence 8 EStG |
After emigration, the general loss carryforward under Section 10d EStG can – within the scope of limited tax liability – be set off against any type of German-source income within the meaning of Section 49 EStG, provided such income arises. A loss carryforward under Section 23 EStG, by contrast, remains strictly limited even after emigration to future gains from private disposal transactions – and, as described in the article on the speculation period on emigration, such gains are themselves, for taxpayers with limited tax liability under Section 49(1) no. 8 EStG, further restricted to gains from the sale of German real estate. A Section 23 loss carryforward arising before emigration from movable assets – crypto-assets, for example – can therefore, as a rule, no longer be put to any practical use after emigration, unless further German real estate sales are pending or unlimited tax liability arises again.
Practical Planning Considerations Before Emigration
This structure gives rise to several considerations that are best addressed before, rather than after, emigration:
- Bring forward loss realisation where a disposal is intended anyway. Anyone who intends to dispose of a loss-making position in any event – securities, a shareholding, or another asset – can, by selling it before emigration, ensure that the loss arises during the period of unlimited tax liability and is fully absorbed into the general loss carryforward under Section 10d EStG. A disposal motivated purely by tax considerations, without any underlying economic rationale, is viewed critically, however, and may in individual cases be measured against Section 42 of the German Fiscal Code (Abgabenordnung, AO), the general anti-abuse provision.
- Match Section 23 losses with Section 23 gains in the same year, where possible. Because of the narrow set-off restriction under Section 23(3) EStG, it is worth examining whether a foreseeable loss from a private disposal transaction can still be set off, before emigration, against a planned gain from another such transaction in the same assessment period, rather than letting the two events fall into different years.
- Keep the year of emigration itself in view. Under Section 2(7) sentence 3 EStG, income earned before and after the change in tax liability status is combined into a single assessment for the year of emigration. This can open up a final opportunity for a loss to be set off against a broader range of income, before access narrows to German-source income taxable only under limited tax liability.
- Actively continue the assessment procedure. Anyone with no, or only irregular, German-source income after emigration should keep the separate assessment under Section 10d(4) EStG in view, so that the loss carryforward can be used without dispute over its amount in the event of a later return or newly arising German-source income.
- Factor a possible return into the planning. Whether bringing forward a loss realisation is worthwhile at all also depends on whether, and when, a return to Germany or new German-source income can be expected – a loss carryforward with no foreseeable set-off opportunity initially remains no more than a formal position.
Example: Loss Carryforward on Emigration
The following example is entirely fictional and serves illustrative purposes only; it does not describe any real case or real person. A self-employed person incurs a loss from their freelance activity in the year before a planned emigration, which cannot be fully offset by carrying it back to the preceding year; the remaining amount is separately assessed as a loss carryforward under Section 10d(4) EStG. In the following year, the person permanently relocates their residence abroad; unlimited tax liability ends. They retain a let residential property in Germany, however, from which they continue to derive income from letting and leasing (Einkünfte aus Vermietung und Verpachtung) – German-source income within the meaning of Section 49(1) no. 6 EStG, in respect of which they remain subject to limited tax liability. The loss carryforward assessed before emigration does not lapse as a result: it can continue – within the minimum taxation rule under Section 10d(2) EStG – to be set off against the positive German rental income, even though the person is no longer subject to unlimited tax liability. Had they instead had no German-source income at all after emigration, the loss carryforward would have continued to exist, but would initially have lain dormant for lack of any income to set it off against.
What You Should Check Before Emigrating
- Whether, and in what amount, a loss carryforward under Section 10d(4) EStG has been, or should still be, separately assessed at the time of the planned emigration.
- Whether German-source income within the meaning of Section 49 EStG is likely to arise after emigration, against which an existing loss carryforward can be set off.
- Whether a separate loss carryforward from private disposal transactions exists under Section 23(3) EStG, and whether it can still be set off, before emigration, against a gain from comparable transactions.
- Whether a loss realisation that is planned in any event can be brought forward in time into the period of unlimited tax liability, without the transaction being motivated by tax considerations alone.
- How emigration affects the combined assessment for the year of emigration under Section 2(7) sentence 3 EStG, and whether this creates one final, broader set-off opportunity.
Conclusion
A loss carryforward under Section 10d EStG does not lapse merely because unlimited tax liability ends as a result of emigration – it is tied to the person of the taxpayer, not to any particular type of tax liability. What matters, however, is whether limited tax liability with German-source income within the meaning of Section 49 EStG continues after emigration, since the carryforward can only be set off against such income going forward. A separate and narrower set-off category applies to losses from private disposal transactions under Section 23(3) EStG, which, even after emigration, can only be offset against future gains from comparable transactions. Anyone who has incurred losses before an emigration, or is considering realising a loss, should have the set-off options and the assessment procedure reviewed at an early stage – not only once German tax liability has already ended.
The Fiala law firm has published extensively on international tax law and supports clients in correctly assessing tax loss positions in connection with emigration abroad, and in setting the right course before emigration takes place. Lawyer Johannes Fiala has many years of experience advising clients on international tax and asset matters. Please get in touch with the firm if you would like your individual situation assessed from a legal perspective before a planned emigration.
