Anyone who moves abroad and owns a let property will almost always first ask whether, and when, a sale makes sense from a tax perspective. That question is addressed in a separate article on this blog. At least as often, however, the property simply remains let – whether because a sale is not desired, because the ten-year period under Section 23 EStG (Einkommensteuergesetz, the German Income Tax Act) is still running, or because the property is intended to serve as a long-term investment. In that case, a different question arises, one that is frequently muddled in practice: which state taxes the ongoing rental income – and under what rules?
The answer depends decisively on which of two fundamentally different scenarios applies. They follow different legal logics and should therefore be considered cleanly separately.
Two Scenarios That Should Not Be Confused
Scenario 1: A person emigrates from Germany but retains a let property in Germany. Here the question is whether, and how, Germany continues to tax the rental income despite the move abroad.
Scenario 2: A person – whether still subject to unlimited tax liability in Germany or already emigrated – owns a let property abroad. Here the question is which state has the right to tax, and how double taxation is avoided.
Both scenarios can arise at the same time, for instance where someone holds both a German and a foreign rental property after moving abroad. Legally, however, these are two separate assessments with different legal bases.
Scenario 1: Moving Abroad While the Property Stays in Germany
Limited Tax Liability Does Not Change the German Taxation of Rental Income
Anyone who relocates their residence and habitual abode entirely abroad generally becomes subject in Germany only to limited tax liability. Taxpayers with limited tax liability are subject to German income tax only on their domestic-source income within the meaning of Section 49 EStG (Section 1(4) EStG) – the worldwide income principle of unlimited tax liability no longer applies.
Under Section 49(1) no. 6 EStG, this domestic-source income expressly includes income from letting and leasing within the meaning of Section 21 EStG, “where the immovable property […] is located […] within Germany”. A let property located in Germany therefore remains subject to German taxation regardless of the owner’s place of residence. Unlike the exit taxation under Section 6 of the Foreign Tax Act (Außensteuergesetz, AStG) for GmbH shares, the move itself does not trigger a separate taxable event – no deemed disposal takes place. The rental income, however, continues to be taxed year after year as before, only now under limited rather than unlimited tax liability.
Why No Double Taxation Agreement Changes This
Because this is domestic-source income within the meaning of German tax law, it does not even matter, for this taxation, whether a double taxation agreement (DBA) exists with the new state of residence. Internationally too, this allocation follows the recognised principle of the location of the asset (lex situs): under Article 6(1) of the OECD Model Convention, income from immovable property may be taxed in the state in which the property is situated – here, Germany. As a rule, therefore, a double taxation agreement does not take this right away from Germany, but confirms it. If the new state of residence taxes worldwide income and includes the German rental income, it is for that state’s relevant double taxation agreement, or its domestic law, to avoid the resulting double taxation through exemption or credit – not a task for Germany.
Practical Features of Limited Tax Liability
For taxpayers with limited tax liability, several particular features apply when determining and taxing rental income, governed by Section 50 EStG as a special provision for taxpayers with limited tax liability:
- Restricted deduction of income-related expenses. Business expenses or income-related expenses may only be deducted to the extent that they are economically connected with the domestic-source income. For a single property let exclusively in Germany, this is usually unproblematic in practice, since all costs – interest, management, maintenance – are directly attributable to that property in any event. It becomes more critical with mixed or cross-border financing structures.
- No basic tax-free allowance. Unlike for taxpayers with unlimited tax liability, taxable income is increased by the basic tax-free allowance (Grundfreibetrag) for the purposes of calculating the tax rate. As a result, the progressive tax rate applies to taxpayers with limited tax liability from the very first euro, without any tax-free subsistence minimum being taken into account.
- Obligation to file an assessment rather than withholding at source. Unlike wages or certain investment income, there is no final withholding tax at source for rental income. The tax must therefore be assessed by way of tax assessment under Section 25 EStG – the person living abroad remains obliged to file an annual income tax return. The competent tax office is generally the one in whose district the property is located.
For nationals of an EU or EEA state, there is, subject to certain conditions to be examined on a case-by-case basis, the possibility of applying under Section 1(3) EStG to be treated as a person with unlimited tax liability, where domestic-source income makes up the vast majority of worldwide income. Among other things, this can open up access to the basic tax-free allowance, but it is subject to strict conditions and merits separate examination.
Scenario 2: The Property Is Located Abroad
Under Most Double Taxation Agreements, the State Where the Property Is Located Has the Right to Tax
The position is quite different where it is not Germany but a foreign country that is the state where the property is located – that is, where the person lets a property situated abroad (whether continuing to do so or doing so afresh). Here too, the same principle of the location of the asset under Article 6(1) of the OECD Model Convention regularly applies internationally: the right to tax rental income from immovable property belongs, in the first instance, to the state in which the property is located – here, therefore, the foreign state, not Germany.
Whether, and how, Germany also taxes alongside that state depends decisively on the person’s tax status:
- If the person has already emigrated completely and is subject in Germany to neither unlimited nor limited tax liability, Germany plays no role at all for this foreign rental income from the outset. Foreign real property does not fall within the exhaustive list in Section 49 EStG, so that no German taxing right exists for it under German law in the first place – regardless of whether a double taxation agreement exists with the state where the property is located.
- If, on the other hand, the person remains subject to unlimited tax liability in Germany – for instance because a residence in Germany is retained despite a stay abroad, or because the move abroad has not yet been finally completed – the worldwide income principle applies in principle: the foreign rental income would, as such, also be taxable in Germany. Whether this actually happens depends on the relevant double taxation agreement and the method it provides for.
The Exemption Method or the Credit Method
Where a double taxation agreement exists with the state in which the property is located, it provides, in addition to allocating the right to tax, a method for avoiding double taxation. Most – though not all – German double taxation agreements follow the exemption method for income from immovable property; a growing number of newer or revised agreements instead provide for the credit method. Which method applies in a given case follows exclusively from the specific method article of the relevant agreement and must be checked there.
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| Feature | Exemption method | Credit method |
|---|---|---|
| Basic principle | Germany waives taxation of the foreign rental income | Germany initially taxes the rental income as well, but credits the tax paid abroad |
| Effect on the German tax assessment | Rental income is generally left out of account | Rental income is included in the tax base; German tax is reduced by the foreign tax |
| Progression clause | May apply under Section 32b(1) sentence 1 no. 3 EStG (see below) | Does not apply – the income is included in full in any event |
| Precondition | Relevant only where unlimited tax liability in Germany continues | Relevant only where unlimited tax liability in Germany continues |
The Progression Clause – and an Important Exception for EU/EEA Properties
If the person remains subject to unlimited tax liability and the exemption method applies, the foreign rental income is indeed exempt from German income tax. However, under Section 32b(1) sentence 1 no. 3 EStG, income exempted under a double taxation agreement is, in principle, subject to the so-called progression clause (Progressionsvorbehalt): it does not directly increase the tax burden, but it does increase the tax rate applied to the remaining income taxable in Germany.
There is, however, a practically significant exception to this rule. Under Section 32b(1) sentence 2 no. 3 EStG, the progression clause does not apply to income from the letting or leasing of immovable property where that property is “located in a state other than a third state” – that is, within the EU or the EEA (with certain restrictions for individual EEA states, depending on their being treated as equivalent to EU member states). If the let property is located, for example, in France, Spain, or Italy, and the exemption method applies, the rental income is therefore not only exempt from German tax but also has no effect on the tax rate applied to the remaining income. For a property in a third state outside the EU/EEA – for instance Switzerland, the United States, or the United Kingdom – the progression clause continues to apply.
How narrowly this exception is to be construed was recently confirmed by the Federal Fiscal Court (Bundesfinanzhof, BFH): in its judgment of 21 May 2025 (case no. I R 5/22), it held that the exception under Section 32b(1) sentence 2 no. 3 EStG applies only to income that is subject to the progression clause because of a treaty-based exemption under Section 32b(1) sentence 1 no. 3 EStG – not to income that is included in the calculation only through some other basis for progression. This shows that the practical scope of this exception cannot be determined in general terms, but only reliably on the basis of the specific individual case.
Without a Double Taxation Agreement: Unilateral Credit Under Section 34c EStG
Where no double taxation agreement at all exists with the state in which the property is located, the unilateral credit method under Section 34c EStG applies, provided unlimited tax liability in Germany continues. Under Section 34c(1) sentence 1 EStG, foreign tax assessed and paid that corresponds to German income tax is credited against German income tax to the extent it relates to the foreign rental income. Alternatively, under Section 34c(2) EStG, the taxpayer may instead apply to deduct the foreign tax when determining income – usually advantageous where only a low German marginal tax rate would apply in any event. These provisions likewise presuppose that unlimited tax liability in Germany still exists at all; if the person has already emigrated completely, the question of a credit in Germany does not arise in the first place.
Illustrative Example
*The following example is entirely fictional and serves illustrative purposes only; it does not describe any real case or real person.*
A person permanently emigrates to Portugal and fully deregisters their residence in Germany. They retain a let flat in Cologne and also own a smaller holiday flat in the south of France that has been let for years. For the Cologne flat, they remain subject to limited tax liability in Germany under Section 49(1) no. 6 EStG and must continue to declare the rental income each year in a German income tax return – regardless of how Portugal treats this income. For the French holiday flat, by contrast, Germany no longer has any taxing right once the move abroad is complete: this rental income is henceforth subject exclusively to French and, where applicable, Portuguese taxation under local law and the agreement in force between France and Portugal – a matter in which Germany is no longer involved.
Practical Recommendations
- Clarify before moving abroad which properties remain subject to German tax liability at all – properties in Germany practically always do; properties abroad generally no longer do, once unlimited tax liability has ended.
- For rental properties remaining in Germany, clarify in good time which tax office is responsible, and ensure the annual filing obligation is reliably organised even from abroad.
- Where unlimited tax liability continues and a property is held abroad, examine the specific double taxation agreement with the state where the property is located – in particular, whether the exemption or the credit method applies.
- Where treaty exemption applies to income from EU/EEA properties, bear in mind the exception from the progression clause under Section 32b(1) sentence 2 no. 3 EStG, but do not assume it applies without further examination, given the narrow BFH case law.
- Where no double taxation agreement exists with the state where the property is located, decide at an early stage whether crediting the foreign tax or deducting it as an income-related expense under Section 34c EStG is more advantageous.
Conclusion
The ongoing taxation of rental income after a move abroad follows two separate logics that can easily be conflated but must be kept clearly apart. For a property remaining in Germany, moving abroad changes little about the tax liability – limited tax liability under Section 49(1) no. 6 EStG applies regardless of any double taxation agreement, combined with restricted deduction of income-related expenses, no basic tax-free allowance, and a continuing obligation to file a tax return. For a property abroad, by contrast, what matters decisively is whether the person remains subject to unlimited tax liability in Germany and which method the relevant double taxation agreement provides – exemption with a possible progression clause, or credit. Once the move abroad has been completed, Germany’s taxing right over the foreign property generally lapses entirely. Anyone who keeps both scenarios cleanly separated from the outset avoids unnecessary queries from the tax office as well as unexpected double burdens.
Individual Advice on the Taxation of Rental Income After Moving Abroad
Fiala law firm has published extensively on international tax law and helps clients establish, with legal certainty, the ongoing taxation of rental properties in Germany and abroad following a move abroad – from limited tax liability for German properties through to the correct application of the exemption or credit method for properties abroad. Anyone retaining a let property in Germany, or owning or acquiring one abroad, can contact the firm for an individual assessment of their own situation.
