Decision by the Bundesfinanzhof

The German Supreme Court of the Federation for Taxes and Customs (Bundesfinanzhof) has just published its decision dated January 14, 2025 (docket number IX R 37/21) and finds that the UK's remittance basis taxation is a preferential taxation regime.

This effectively allows the German tax authorities to collect tax on capital gains that are taxable in the UK but not taxed due to lack of remittance.

The plaintiff, a German national who relocated to the UK in 2000, had earnings from Germany in the Fiscal Year 2006 from

• rental and leasing income in amount of 103.339 Euro
• capital gains (interest and dividends earned through a German bank) in amount of 30.979 Euro

She lost her final appeal before the German Supreme Tax Court against a tax assessment by the German tax authorities requiring her to pay German tax on all her non-resident income from Germany, including interest income, which is not normally taxed in Germany for non-residents.

The Germany-UK Tax Treaty's Distribution Rules...

Tax agreements are bilateral treaties under international law entered into by the representatives of the people of the United Kingdom and Germany, who have each enacted them into national law.

Articles 6, 10 and 11 of the UK-Germany tax treaty limit taxing rights as follows:

• As the property is located in Germany, rental and leasing income may be taxed in Germany.
• Dividends are taxable up to 15% in Germany
• Interest is taxable in the UK only

...are overwritten by national law, ...

The tax treaty does not, however, override the provisions of other national laws that apply to particular circumstances.

Since the plaintiff was a German national, the Foreign Tax Act extended the taxation rights of Germany beyond the UK-Germany Tax Treaty.

In the case in question, a German national left Germany and relocated to the UK in 2000.

...the German Foreign Tax Act (Außensteuergesetz, short AStG)

Natural persons, who are German nationals and who leave Germany must observe whether they had been tax residents in Germany for at least five years in the ten years prior to emigration. Under these circumstances, German nationals who have left Germany for a low-tax jurisdiction remain taxable in Germany for ten years under the German Foreign Tax Act. These rules are applied when income sources in Germany exceed the non-intervention threshold of 16.500 Euro annually.

The taxation includes their non-foreign (German) income from all seven income types, particularly:

1. Income from agriculture and forestry,
2. Income from business operations,
3. Income from self-employment,
4. Income from employment,
5. Income from capital gains,
6. Income from rental and leasing,
7. Income from other types defined in § 22 German Income Tax Act (Einkommensteuergesetz, EStG).

Definition of low tax jursidiction according to German Foreign Tax Act

The German Foreign Tax Act defines a low-tax jurisdiction. If the tax burden for an unmarried single taxpayer earning 77.000 Euro is more than one third (1/3) lower in the new tax jurisdiction than in a comparable domestic (German) tax case, the law defines this as a low-tax jurisdiction.

In the present case decided, no tax was levied on account of the remittance basis tax regime in the UK, and thus, German national law awarded Germany the right to tax the plaintiff's capital gains entirely.

Law Resources

• § 2 (1) AStG (Außensteuergesetz, German Foreign Tax Act)
• § 2 (2) AStG (Außensteuergesetz, German Foreign Tax Act),
• § 2 (1) EStG (Einkommensteuergesetz, German Income Tax Act)
• § 49 (Einkommensteuergesetz, German Income Tax Act),
• § 34d EStG (Einkommensteuergesetz, German Income Tax Act).