Anyone coming back after years abroad thinks about housing, schools and health insurance. But returning to Germany also has tax consequences: from the day of return, Germany taxes worldwide income again, gains in value that accrued abroad can grow into German taxation, and gifts or inheritances are once more fully subject to German inheritance and gift tax. This article explains when unlimited tax liability begins again, how the year of return is assessed, what happens to shareholdings, business assets, real estate and foreign pensions, and which reporting obligations apply (legal position: October 2026).
When Do You Become Subject to Unlimited Tax Liability Again After Returning?
Under Section 1 (1) of the Income Tax Act (Einkommensteuergesetz, EStG), anyone who has a residence or habitual abode in Germany is subject to unlimited income tax liability (unbeschränkte Steuerpflicht). One of the two criteria is enough. Nationality is irrelevant: a German returnee is treated no differently from a foreign national moving to Germany for the first time.
Residence under Section 8 of the Fiscal Code
Under Section 8 of the Fiscal Code (Abgabenordnung, AO), a person has a residence (Wohnsitz) if they hold a dwelling in circumstances that indicate they will keep and use it. The actual circumstances decide, not registration with the residents’ registration office. Ownership is not required; a rented flat, a furnished flat or, in some circumstances, a permanently available room in the parents’ house can be enough. Unlimited tax liability therefore usually begins on moving in, even if the stay later lasts only a few weeks.
Habitual Abode under Section 9 AO
If there is no residence, a habitual abode (gewöhnlicher Aufenthalt) can establish tax liability. Under Section 9 sentence 2 AO, a continuous stay of more than six months is always, and from the beginning, regarded as a habitual abode; short interruptions are disregarded. This means: once the six-month limit is exceeded, tax liability begins retroactively on the first day of the stay. Under Section 9 sentence 3 AO, an exception applies to stays exclusively for visits, recreation, a cure or similar private purposes that last no longer than one year. How residence and habitual abode are distinguished in detail is explained in the article Habitual abode in tax law.
The often-cited rule of 183 days does not help here: it comes from the articles of the double taxation treaties (Doppelbesteuerungsabkommen, DBA) on employment income and only regulates which state may tax salary for temporary work, not when German tax liability begins.
Residence under a Treaty and States Without a Treaty
If you also keep a residence in your previous state, you can be subject to unlimited tax liability in both states. Where a DBA exists, its residence article with its tie-breaker rules determines which state counts as the state of residence. The basics are set out in the article on double taxation treaties when emigrating. With some states there is no DBA; the former treaty with the United Arab Emirates, for example, expired at the end of 2021. Then only domestic law applies, and double taxation is at best mitigated by a credit under Section 34c EStG.
The Year of Return: Two Phases in One Assessment
Income tax is an annual tax (Section 2 (7) sentence 1 EStG). In the year of return, however, you are typically subject to unlimited tax liability for only part of the year. The law treats this situation as follows:
- Period before the return: Foreign income from this period is not taxed in Germany. German-source income from the period of limited tax liability, such as rent from a German flat, is included in the assessment for unlimited tax liability under Section 2 (7) sentence 3 EStG.
- Period from the return: From the start of unlimited tax liability, worldwide income is subject to German taxation, unless a DBA allocates the right to tax to another state.
- Progression clause (Progressionsvorbehalt): Under Section 32b (1) sentence 1 no. 2 EStG, the foreign income from the period before the return is taken into account when calculating the tax rate that is applied to the income taxable in Germany. Income that is tax-exempt under a DBA increases the tax rate under Section 32b (1) sentence 1 no. 3 EStG, subject to the exceptions in Section 32b (1) sentence 2 EStG.
Example: The fictitious returnee Lena earns EUR 90,000 abroad until the end of June and EUR 45,000 in Germany from July. Only the EUR 45,000 is taxed, but at the rate that would apply to EUR 135,000.
For employees, the progression clause also means an obligation to file an income tax return if the income subject to the progression clause exceeds EUR 410 (Section 46 (2) no. 1 EStG). Incidentally, you keep your tax identification number even after years abroad; under Section 139b AO it is not issued again.
Receipt Principle: When Payments Arrive Is What Counts
For surplus income, the decisive factor is in principle receipt (Zufluss, Section 11 EStG). Bonuses, severance payments or lump sums from foreign pension schemes that are paid only after the return can therefore be taxable in Germany even though economically they relate to the time abroad. Whether a DBA allocates salary paid retroactively to the former state of employment depends on the treaty. How the previous state taxes such payments is a question for an adviser on the ground there.
Shareholdings and Securities: What Happens to Gains in Value That Arose Abroad
If you sell after returning, Germany in principle calculates the gain from the difference between the sale price and the original acquisition costs. For private assets, the law provides for a step-up to the value at the time of return only in narrowly defined cases.
Securities in Private Assets (Section 20 EStG)
For shares, funds and bonds that do not fall under Section 17 EStG, there is no rule that exempts unrealised gains existing at the time of arrival. Anyone who built up a securities account abroad and sells it after returning therefore also pays tax on the increase in value that arose there, at the separate rate for investment income. Income from foreign securities accounts without German tax withholding must be declared in the tax return (Section 32d (3) EStG). Whether a sale before the return makes sense depends on taxation in the previous state, which an adviser on the ground must assess.
Substantial Shareholdings (Section 17 EStG): Value Linkage Where a Foreign Exit Tax Was Levied
For shares in corporations with a holding of at least 1 percent within the last five years, Section 17 (2) sentence 3 EStG contains a special rule. If the seller proves that the shares were already attributable to them when unlimited tax liability was established, and that the increase in value that arose up to that point was subject in the previous state to a tax comparable to the German exit tax (Wegzugsteuer) under Section 6 of the Foreign Tax Act (Außensteuergesetz, AStG), the value on which the other state based this tax replaces the acquisition costs, but at most the fair market value (gemeiner Wert).
Three practical points follow:
- No step-up without a foreign exit tax. If the previous state levies no comparable tax, the historical acquisition costs remain.
- Burden of proof on the taxpayer. You should document the assessment, valuation and payment abroad.
- Exclusion in the German return case. Under Section 17 (2) sentence 4 EStG, the value linkage does not apply if an earlier German exit tax under Section 6 (3) AStG lapses because of the return.
Anyone who was taxed under Section 6 AStG when leaving Germany and becomes subject to unlimited tax liability again within seven years can, subject to further conditions, have the tax claim lapse; on application, the period can be extended by up to five years. The original acquisition costs then apply again. The article on exit tax in seven annual instalments and the return rule sets out the details.
Example: The fictitious entrepreneur Jonas acquired 30 percent of a foreign limited company in 2019 for EUR 50,000; when he returns in 2026, the holding is worth EUR 800,000. If his previous state levies no exit tax, a later sale for EUR 900,000 produces a gain of EUR 850,000 to be reported, taxed at 60 percent under the partial income method (Teileinkünfteverfahren). Had the previous state levied a comparable exit tax on EUR 800,000, only the increase of EUR 100,000 would be reported.
Foreign Companies After the Return: Place of Management and Attribution Taxation
Anyone who runs their own company abroad and continues to run it after returning must keep two risks apart.
Place of management. Under Section 1 (1) of the Corporation Tax Act (Körperschaftsteuergesetz, KStG), a corporation is subject to unlimited corporation tax liability if it has its place of management (Geschäftsleitung) in Germany. Under Section 10 AO, the place of management is the centre of commercial control. If the essential decisions are actually taken in Germany after the return, the company can become taxable here even though it is registered abroad. A German office can also create a permanent establishment within the meaning of Section 12 AO. Corporation tax of currently 15 percent (falling to 10 percent by 2032: 14 percent in 2028, 13 percent in 2029, 12 percent in 2030, 11 percent in 2031), the solidarity surcharge and, depending on the municipality, trade tax then become payable.
Attribution taxation (Hinzurechnungsbesteuerung). If the place of management stays abroad, passive income of a controlled foreign company can be attributed to the German shareholder under Sections 7 to 13 AStG, even without a distribution. Prerequisites include control exercised by the taxpayer alone or together with related persons (Section 7 (2) AStG) and low taxation. Since 2024, a burden of income taxes of less than 15 percent counts as low (Section 8 (5) AStG); before that, the threshold was 25 percent. The article on attribution taxation of foreign companies explains the details.
Moving In With Business Assets: Entanglement Instead of Exit Tax
As a mirror image of the disentanglement (Entstrickung) on departure, Section 4 (1) sentence 8 second half-sentence EStG provides that establishing Germany’s right to tax the gain from the sale or use of an asset is treated as a contribution (Verstrickung). Under Section 6 (1) no. 5a EStG, the asset is then in principle to be recognised at the fair market value. If the other state taxes the loss of its right to tax, the value recognised there applies, but at most the fair market value.
For returnees with a sole proprietorship, a professional practice or an interest in a partnership, this means: hidden reserves that arose before the move generally remain outside German taxation if the asset becomes entangled only on arrival. If, on the other hand, a foreign permanent establishment remains whose profits the DBA exempts, nothing changes in that respect. The valuation at the date of arrival should be documented promptly, for example by a valuation report, because the tax office often reviews the recognition only years later.
Foreign Real Estate, Pensions and Investment Income
Real Estate Abroad
After the return, rental income from foreign real estate forms part of worldwide income. Under most DBA, the state where the property is located has the primary right to tax; depending on the treaty, Germany either exempts the income subject to the progression clause (with the exception for EU real estate in Section 32b (1) sentence 2 EStG) or credits the foreign tax. Without a DBA, Germany taxes the rent under its own law.
For a sale, Section 23 (1) sentence 1 no. 1 EStG applies: if no more than ten years lie between acquisition and sale, the gain is in principle taxable, unless the property was used for the owner’s own residential purposes in the year of sale and the two preceding years, or exclusively for such purposes. A flat bought abroad and sold shortly after the return can therefore be taxable in Germany, unless the DBA exempts it.
Foreign Pensions
Foreign pensions must be declared in Germany after the return. How they are taxed depends on the type of benefit and on the DBA: for retirement pensions from private employment, many treaties allocate the right to tax to the state of residence, for pensions from public funds often to the paying state; for social security pensions, treaties differ. Life annuities from a foreign scheme comparable to the German statutory pension insurance are generally taxed at the taxable portion under Section 22 no. 1 sentence 3 letter a double letter aa EStG. Lump-sum capital payments can be fully taxable depending on their structure; whether they are paid before or after the return is therefore important.
The social security side, such as foreign insurance periods or access to statutory health insurance, is a separate area of law. The article on pension insurance when emigrating offers a starting point.
Investment Income and Withholding Taxes
Interest and dividends from foreign accounts and securities accounts are taxable in Germany from the return. Foreign withholding tax is credited under Section 32d (5) EStG only up to the rate permitted under the DBA; you must reclaim the rest in the source state. Through automatic exchange of information, the tax administration receives account data from numerous states. What is reported is described in the article on CRS reporting obligations for foreign accounts.
Reporting Obligations After the Return
In addition to registering with the residents’ registration office within two weeks of moving in (Section 17 (1) Federal Registration Act (Bundesmeldegesetz)), returnees face tax notification obligations:
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| Obligation | Legal basis | Content | Deadline |
|---|---|---|---|
| Foreign shareholdings | Section 138 (2) sentence 1 no. 3 AO | Acquisition or sale of holdings in foreign corporations of 10 percent or more, or where the acquisition costs of all holdings exceed EUR 150,000 | with the tax return, at the latest 14 months after the end of the year (Section 138 (5) AO) |
| Businesses, partnerships, third-country companies | Section 138 (2) sentence 1 nos. 1, 2 and 4 AO | Establishment or acquisition, changes in holdings, first-time control | as above |
| Payments with foreign countries | Section 67 Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung) | incoming and outgoing payments above EUR 50,000 to the Deutsche Bundesbank | ongoing under the AWV |
The law ties the notification obligations under Section 138 (2) AO to events such as acquisition or establishment. Whether and to what extent holdings that already existed before the return must be reported in the year of return is not expressly regulated by the wording. Because of the fines threatened for violations, there is much to be said for declaring existing foreign holdings in the year of return as a precaution and agreeing the question with the tax office.
Inheritance and Gift Tax: Unlimited Again With the Return
Under Section 2 (1) no. 1 of the Inheritance and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz, ErbStG), unlimited tax liability applies to the entire acquisition if the deceased, the donor or the recipient is a resident of Germany (Inländer). Under sentence 2 letter a, residents are natural persons with a residence or habitual abode in Germany; under letter b, they also include German nationals who have not stayed permanently abroad for more than five years without having a residence in Germany.
For returnees, this means:
- Gifts to returnees. If the donee is already a resident when the gift is made, it is subject to German gift tax in its entirety, even if the donor and the assets are abroad. The timing should therefore be reviewed before the move.
- New five-year period. If a German national establishes a residence again after the return and later leaves again, the five-year period of Section 2 (1) no. 1 sentence 2 letter b ErbStG starts afresh from the new departure. Even a short return with a residence can therefore postpone a planned succession by years.
- Double burden. Germany has inheritance tax treaties with only a few states. Without a treaty, the credit under Section 21 ErbStG remains. More on this in the article on inheritance tax and double taxation treaties.
Realise Before or After the Return? A Checklist
Whether a transaction should take place before or after the return depends on the law of both states. The overview shows the German side:
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| Transaction | German view if realised after the return | To be clarified before the return |
|---|---|---|
| Sale of securities (Section 20 EStG) | entire gain since acquisition taxable | taxation in the previous state |
| Sale of a substantial shareholding (Section 17 EStG) | value linkage only with a comparable foreign exit tax | evidence of the foreign assessment |
| Sale of foreign real estate (Section 23 EStG) | taxable within ten years, unless exempt under the DBA | own use, DBA method |
| Bonus, severance, lump-sum payment | receipt principle, check DBA allocation | date of payment |
| Gift to the returnee | unlimited gift tax | date of execution |
| Own foreign company | place of management, permanent establishment, attribution | future management structure |
| Business assets | entanglement at fair market value | valuation report at the reference date |
How the previous state treats a sale before the return is something an adviser on the ground there clarifies.
Open Legal Questions: Binding Ruling Before Implementation
Some questions of the year of return are not conclusively settled, such as the allocation of retroactive remuneration, the valuation of entangled assets or the notification obligation for existing holdings. Where the legal position is unclear, you should apply for a binding ruling (verbindliche Auskunft) from the tax office under Section 89 (2) AO before implementation. It binds the tax office to the arrangement assessed but is subject to a fee under Section 89 (3) to (5) AO; the fee depends on the value of the subject matter. Where there is a foreign element, a corresponding ruling in the previous state can also make sense, to the extent its law provides for such a procedure.
Conclusion
Returning to Germany is not a tax-neutral event. Unlimited tax liability begins with residence or habitual abode, in the year of return the progression clause raises the tax rate, and for securities the historical acquisition costs generally apply. Relief for gains in value that arose abroad exists only in certain cases: through Section 17 (2) sentence 3 EStG for substantial shareholdings and through entanglement for business assets. In addition come inheritance and gift tax that is unlimited again, and reporting obligations. Anyone who arranges sales, payments and gifts before the move and clarifies open questions through a binding ruling can avoid many surprises.
Frequently Asked Questions
From which day am I subject to tax in Germany after returning?
As a rule from the day you move into a dwelling within the meaning of Section 8 AO. Without a residence, it begins retroactively on the first day if the stay exceeds six months (Section 9 AO). Registration is only an indication.
Do I have to pay tax on my foreign income from the time before the return?
No, it is not taxed in Germany. Under Section 32b (1) sentence 1 no. 2 EStG, however, it raises the tax rate through the progression clause for the income that is taxable in Germany from the return.
Is the increase in value of my shares from the time abroad taxed in Germany?
For securities in private assets, in principle yes. For holdings of 1 percent or more, Section 17 (2) sentence 3 EStG applies the value that the previous state based a comparable exit tax on, at most the fair market value.
Does my German exit tax lapse if I come back?
Under the conditions of Section 6 (3) AStG, yes, if you become subject to unlimited tax liability again within seven years; on application, the period can be extended by up to five years. In the meantime the shares must not have been sold or used in a harmful way.
Do I have to pay tax on gifts from abroad after returning?
If you are a resident as donee at the time of the gift, the entire acquisition is subject to German gift tax, regardless of where the donor lives. Foreign taxes can be credited under Section 21 ErbStG or a treaty.
Attorney Dr. Johannes Fiala and the law firm, with a focus on international inheritance law, tax law and asset protection in Munich, advise returnees and new arrivals on the tax planning of a return to Germany, from determining when tax liability begins and valuing shareholdings and business assets brought along, to questions of inheritance and gift tax. Dr. Fiala has published extensively on emigration and asset protection. Get in touch with the firm without obligation to discuss your individual situation in an initial consultation.
