British remittance basis taxation as a preferential tax regime

A so-called preferential tax regime within the meaning of the German foreign tax law is to be assumed if the income tax burden of the taxpayer who has moved abroad is considerably reduced compared to the general taxation system there due to personal residence characteristics. If the person in question is a natural person who has had unlimited income tax liability in Germany for at least five years in the last ten years, gives up her or his domicile or habitual residence there – however, while maintaining her or his essential economic interests – and becomes resident in a so-called low-tax country, she or he is subject to so-called extended limited income tax liability in Germany. Accordingly, all income is taxable under the German Income Tax Act that, in the case of unlimited income tax liability, is not foreign income as defined by Section 34d of the German Income Tax Act. This applies for the year of leaving and the following ten years. In practice, the extended limited tax liability primarily applies to interest, as it does not belong to domestic income as defined by Section 49 of the German Income Tax Act in the context of simple limited tax liability in the absence of real security. In addition, the effects of the so-called progression proviso may apply in the context of the extended limited tax liability.

One example of a lower tax rate under the preferential tax regime is the so-called remittance basis taxation, under which income earned abroad is not taxed in the country of residence unless it is transferred to the domestic market. In order to claim the British remittance basis taxation, the so-called “resident” status is required, which is essentially determined by a physical presence in the United Kingdom and a lasting connection to it. If the taxpayer is also ordinarily resident in the United Kingdom and has her or his home or chosen home there, the British remittance basis taxation cannot be claimed. Since 2004, the German tax authorities have therefore classified the British remittance basis taxation as preferential tax regime within the meaning of German foreign tax law.

Both the Munich Fiscal Court in its judgment of March 26, 2021 (file no. 8 K 883/17) and the German Federal Fiscal Court in its judgment of January 14, 2025 (file no. IX R 37/21) confirmed this view for the 2006 tax year, particularly with regard to investment income received from a bank based in Germany that the taxpayer in the case in question did not transfer to the United Kingdom. The German tax office was therefore right to include this income in the tax base in accordance with the extended limited tax liability.

In the opinion of the German Federal Fiscal Court, the regulations on extended limited tax liability, in particular on the so-called preferential tax regime within the meaning of German foreign tax law, are also compatible with German constitutional principles and the fundamental freedoms under EU law.