Passports and taxes: why your citizenship doesn't decide where you pay tax

A passport is a right, not a permission. It says which state you belong to, where you may enter and who protects you. In Germany, it says almost nothing about your taxes. That separation is good news, because it turns a second passport into a building block you can choose freely, without a tax office having any say.

What Germany taxes you on: residence, not passport

The Income Tax Act (Einkommensteuergesetz, EStG) opens with a sentence that answers the whole question. Individuals who have a residence or their habitual abode in Germany are subject to unlimited income tax liability. Citizenship isn't mentioned at all. A French national living in Munich pays income tax in Germany. A German who has genuinely given up both residence and habitual abode here is no longer subject to unlimited tax liability.

Unlimited means: on worldwide income. If you live in Germany, you are in principle taxed here on everything you earn anywhere in the world. Once you no longer live here, only certain income from German sources is caught, such as the rent from a flat in Hamburg.

That gives you a clear rule: as long as you live in Germany, you stay taxable here on everything, whether you hold one passport or three. When a residence exists, and what the much-quoted 183-day rule really means, is explained in the article on the 183-day rule and habitual abode (in German). What an additional citizenship means for your taxes is summed up in taxes and a second passport.

Austria and Switzerland: the same principle

If you come from Austria or Switzerland, you'll find the same logic. The Austrian Ministry of Finance writes that people with a residence or habitual abode in Austria have unlimited tax liability, and expressly adds that citizenship is not decisive. In Switzerland, under the Federal Act on Direct Federal Taxation (DBG), individuals are taxable by virtue of personal affiliation if they have their tax domicile or residence in Switzerland.

So three of the four countries tax people where they live. Only one follows its citizens around the world.

Dual citizenship and taxes: what changes

When you first think about dual citizenship and taxes, the worry is almost always the same: paying twice. The answer is reassuring. A second passport doesn't make you any more taxable in Germany than you already are. And the new country doesn't tax you because you are now its citizen, but, if at all, because you live there or earn income there.

Since 27 June 2024 there's a second advantage. The Federal Office of Administration (Bundesverwaltungsamt) confirms that Germany now generally accepts multiple citizenship and that acquiring another nationality no longer costs you your German one. So you keep your German passport, and your tax position stays exactly as it is. The legal framework for Germans with several passports is set out in the overview of dual citizenship in Germany.

Your bank looks at residence too. For the automatic exchange of account information between countries, the Common Reporting Standard, it asks you for a self-certification to establish your tax residence. The Federal Central Tax Office (Bundeszentralamt für Steuern) puts it unmistakably: citizenship alone does not also determine tax residence. The exception the office names itself is the US.

Passport and tax residence are two different documents

Just how separate the two are becomes clear with Sierra Leone. You obtain citizenship there entirely remotely, with no travel and no embassy appointment, and Sierra Leone accepts multiple citizenship without restriction. A tax residency certificate is available as a separate, optional service for a one-off USD 10,000 per application. So even the programme country treats passport and tax residence as two separate things.

For the German tax office, nothing changes: what counts is whether you have a residence or your habitual abode in Germany. Which programme suits your family, your budget and the places you want to travel is shown in the comparison of all programmes.

Citizenship-based taxation: where it exists

Taxing people by citizenship is the great exception worldwide. Two states stand for it.

The US: a tax liability that travels with you

The US tax authority, the IRS, puts it bluntly: US citizens are taxable on their worldwide income from all sources. Abroad, the rules on filing returns and paying estimated tax are in principle the same as in the US. If you are an American citizen, you stay obliged to file with the US tax authorities whether you live in Lisbon, Dubai or Düsseldorf.

That affects more Germans than you might think: children born in the US, Germans with an American parent, green card holders who have naturalised. For them, the question of passports and taxes is anything but theory. What applies in the German-American case is shown in the article on German and US dual citizenship. How filing obligations, exclusions and tax credits work in detail is explained in the guide to US taxes for dual citizens.

Eritrea: the diaspora levy

The second example is Eritrea. According to the Eritrean embassy in Washington, the government issued the Proclamation on the Recovery and Rehabilitation Tax in 1995. Under it, Eritreans abroad pay 2% of their net income to the state. That hardly compares with the American model, but it shows one thing: where a state wants to tax its citizens abroad, it ties the tax to the passport.

None of this applies to Germans, Austrians or Swiss. Their home countries ask where you live, not which passport you carry.

Is citizenship-based taxation coming to Germany?

The worry isn't plucked out of thin air. In document 18/4206 of 4 March 2015, the Left Party parliamentary group (DIE LINKE) tabled a motion in the Bundestag headed "Tie tax liability to citizenship". The federal government was to present a bill making German citizens subject to unlimited tax liability in Germany on their worldwide income and worldwide assets, regardless of where they actually live. The motion expressly named the US as its model. Taxes paid abroad were to be credited, with the difference payable in Germany.

It never became law. To this day, the Income Tax Act ties liability to residence and habitual abode. But the idea keeps resurfacing in debates about tax flight and the wealthy, and if you live an international life, you're well advised to take it seriously.

Why a second passport would protect you

If Germany ever taxed by citizenship, there would be exactly one clean way out: giving up German citizenship. And that way out is only open to someone who already holds a second one. Section 26 of the Nationality Act (Staatsangehörigkeitsgesetz, StAG) leaves no doubt: a German may renounce German citizenship if they hold more than one citizenship. The renunciation is declared in writing and must be approved by the competent nationality authority.

If you only start thinking about a second passport once a law has been passed, you'll be standing in the queue with everyone else. If you already have one, you decide calmly. Today you don't have to give up anything: you keep your German passport and still keep the door open. What renunciation involves, and why it's rarely necessary today, is covered in renouncing German citizenship.

Where German citizenship does count in tax law

German tax law doesn't manage entirely without the passport. Citizenship plays a role in two places, and both are narrowly drawn.

The first concerns the public service. German citizens who have neither a residence nor a habitual abode in Germany, but are employed by a German public-law body and paid for that work from a German public fund, remain subject to unlimited tax liability. That covers diplomats and civil servants posted abroad, for example.

The second concerns leaving the country. Extended limited tax liability under Section 2 of the Foreign Tax Act (Außensteuergesetz, AStG) can apply if, in the last ten years before your unlimited tax liability ended, you were subject to unlimited tax liability as a German for at least five years in total, you move to a low-tax territory or are no longer resident anywhere, and you keep substantial economic interests in Germany. It applies until ten years have passed from the end of the year in which your unlimited tax liability ended.

So the rule looks backwards: it asks whether you were taxable as a German during those years. A second passport acquired later changes nothing about that. Who it catches and how it works is explained in the article on extended limited tax liability (in German).

Taxes and your German passport: what the Passport Act allows

There is one link between taxes and passports that many people only notice when it's too late. It doesn't run through tax liability, but through the travel document itself.

Under Section 7(1) no. 4 of the Passport Act (Passgesetz, PassG), a passport must be refused if facts justify the assumption that someone intends to evade their tax obligations. Section 8 allows a passport that has already been issued to be withdrawn on the same grounds. What the law requires is facts that justify such an assumption, not a final conviction. Where refusing outright would be disproportionate, the authority can instead restrict the passport geographically or in time, and the restriction is noted in the passport.

Sebastian Sauerborn personally knows at least four people whose German passport was withheld or declared invalid over tax matters.

For you, this means two things. First: keep your German tax affairs in order, especially when you leave, because the Passport Act is no paper tiger. Second: a second passport doesn't lift any German measure and doesn't replace any obligation you have in Germany. But it makes sure your entire existence as a citizen doesn't hang on a single state. If your German passport is lost or stolen, or is sitting at an embassy for a visa application, the second one gives you a lawful travel document in your hand. What the Passport Act allows in detail is explained in the article on passport withdrawal.

Stateless and tax-free? A stubborn myth

In online forums, the idea persists that anyone with no passport at all is beyond the reach of every tax office. The law sees it differently. The Income Tax Act simply speaks of individuals with a residence or habitual abode in Germany. Whether someone is German, Brazilian or stateless plays no part in unlimited tax liability.

So statelessness doesn't take a single tax off your hands, but it does take almost everything else: the right to a passport, to entry, to consular protection. It is the opposite of what a second passport gives you. Why becoming stateless is no freedom, while a second passport is, is explained in becoming stateless.

Thinking about passport and residence together

If your passport doesn't decide your taxes, what do you need it for? For everything a residence can't give you. A residence permit is a permission that can be extended, refused or revoked. Citizenship is a right that stays. It opens borders, gives your children a second home country and gives you a place you can always return to.

Tax freedom, on the other hand, comes through where you live. If you really leave Germany, you end your unlimited tax liability by giving up your residence and habitual abode. What matters when you do is explained in the article on ending unlimited tax liability (in German).

You're in the strongest position when the two fit together:

1. The passport gives you freedom of movement and a Plan B, wherever you happen to live.
2. Your residence decides where you pay tax, and it can change when your life changes.
3. Planning the two separately means you can acquire the passport today without touching your residence, and tackle the move later, when it suits you.

How emigrants combine passport and residence from the very start is shown in emigrating with a second passport. The bigger picture, with passport, residence, company and assets in different countries, is described in flag theory. And why a second passport can be one of the smartest decisions of your life even without any tax effect at all is shown in the eight reasons for a second passport.

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