Update: Extended limited tax liability if income is subject to U.K. tax on remittance basis?

A taxpayer resident in the U.K. who exercises his right under U.K. tax law  to pay tax on income not earned in the U.K. on a "remittance basis" is caught by the preferential taxation regime of Sec. 2 (2) No. 2 Foreign Tax Act and subject to extended limited tax liability in Germany.


The taxpayer (plaintiff) is a German national who lived in Germany until 2000 and in London thereafter. He had opted to tax non-UK income on a remittance basis. By using the remittance basis of taxation, you pay UK tax on UK sourced income and gains but only pay UK tax on foreign income and gains if they are brought (remitted) to the UK. In 2006, the year of dispute, the appellant received income from the rental of German real estate and various German source investment income (interest and dividend income). The German tax office included this latter income in their tax assessment. It held that the investment income was subject to the extended limited tax liability regime of Sec. 2 Foreign Tax Act (FTA) and that the tax in the U.K. was reduced by way of “preferential (low) taxation” pursuant to Sec. 2 (2) No. 2 FTA.

Sec. 2 FTA deals which the extended tax liability of individuals who have been resident in Germany for at least five years prior to moving abroad: The individual is subject to a limited tax liability for a period of ten years after the year in which the unlimited tax liability ended and under the following preconditions: First, if the burden of income tax levied in the foreign territory is more than one-third below the burden of German income tax for individuals under otherwise identical conditions (Sec. 2 (2) No. 2, 2nd half-sentence FTA). Furthermore, the individual living abroad must continue to have substantial economic ties in Germany.

Under the UK tax regime, the option to be taxed on a remittance basis is not available to all taxpayers, but only to those taxpayers who are "resident" in the UK, but not both "ordinary resident" and "domiciled" at the same time. The term "resident" essentially corresponds to the term "domicile", which is to be determined on the basis of an overall view of the circumstances. "Ordinary resident" roughly relates to the main place of residence (the center of the taxpayer’s vital interests).


After careful consideration, the lower tax court is of the opinion that the UK "remittance basis" taxation applicable (i. a.) for certain "investment income" is a preferential taxation within the meaning of Sec. 2 82) FTA. Preferential taxation exists where a taxpayer or a group of taxpayers is granted significant tax relief which is not available for UK taxpayers subject to general taxation in that country.

The plaintiff opted for the application of the "remittance basis" taxation in the UK. Since the investment income was not transferred to the UK, it was also not included in the UK tax base and thus exempt from tax. In the opinion of the court, this represents a significant reduction compared to general taxation. Therefore, it does not require to further determine precisely at what percentage the criteria mentioned in Sec. 2 (2) No. 2, 1st half sentence FTA (i. e. “significantly reduced foreign income tax”) is exceeded. The plaintiff has also not provided evidence of relief as to the one-third threshold pursuant to Sec. 2 (2) No. 2, 2nd half-sentence FTA (“one-third below the burden of German income tax”).

Also, the court does not agree with the plaintiff's view that Sec. 2 FTA should be resubmitted to the Federal Constitutional Court for review to examine the provision regarding the Ability-to-Pay Principle and the principle of consistency.

The court went on to say, that Germany's right of taxation under Sec. 2 FTA is not excluded by the double tax treaty between Germany and the U.K. (DTT). Under the applicable treaty of 1964 (in force since 1967), Germany is entitled to levy income tax on the interest and dividend income at issue here and in accordance with Sec. 2 FTA. For this investment income, the right of taxation is with the country of residence. However, the right to tax interest and dividends falls back to Germany pursuant to Art. II (2) DTT, if the UK does not exercise the right of taxation due to the lack of transfer of the investment income to the UK (taxation on remittance basis).

Furthermore, the application of Sec. 2 FTA does not lead to a violation of overriding EU law, i. e. the free movement of capital in Article 63 of the Treaty on the Functioning of the European Union - TFEU (ex Article 56 TEC). The application of Sec. 2 FTA does not put the plaintiff in a worse position, since the tax burden arising under the extended limited tax liability does not exceed the tax which would arise under the unlimited tax liability.

To assess whether the taxation on "remittance base" was preferential as such, the regional tax court obtained an expert opinion on the position and significance of such an option within the UK tax framework. Finally, and based on this expert opinion, the court decided that it was indeed a case of preferential taxation.

Note: The comments of the regional tax court of Munich on treaty law cannot generally be applied to other more recent cases because the current case of dispute still referred to the "old" DTT, which has been replaced by the DTT in force since 2010.

Update (21 February 2024):

The matter has meanwhile been transferred to the 11th Senate of the Supreme Tax Court, now pending under case no. IX R 37/21.


Regional tax court of Munich, decision of 26. March 2021 (8 K 883/17). – In the meantime, an appeal was filed with the Supreme Tax Court (case ref. I R 20/21).

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