German Federal Fiscal Court judgment on extended non-resident tax liability when moving abroad

In its judgment from 14 January 2025 (file ref. IX R 37/21), the BFH defined the criteria for “preferential taxation” more precisely and held that those moving to the United Kingdom and claiming the remittance basis taxation there (expiring on 5 April 2025) may also in principle be subject to extended non-resident tax liability in Germany. 

When does the German extended non-resident tax liability apply? 

The German extended non-resident tax liability affects German citizen who:

• were subject to the German unlimited tax liability for at least five of the last ten years before their German unlimited tax liability ended
• are or become resident in a low-tax country and
• have significant economic interests in Germany.

What is a low-tax country? 

A low-tax country is a country whose taxation of income is less than two-thirds of German taxation (i.e. less than approx. 18.55% in 2025) or where a preferential tax rate, as it is known, is applied. In its recent judgment, the BFH clarified more precisely what is meant by “preferential taxation”. Other tax privileges that new residents are “typically” able to claim should also now have to be measured by this yardstick laid down by the BFH. 

Examples of low-tax countries:

• Zero-tax countries such as the United Arab Emirates (including Dubai), Qatar, Monaco and various Caribbean islands
• Certain Swiss cantons
• Parts of Asia, such as Singapore and Hong Kong
• Parts of South America, such as Paraguay and Bolivia
• Parts of Eastern Europe, such as Bulgaria and Hungary

Examples of preferential taxation:

• The (former) remittance basis of taxation in the United Kingdom, as the BFH established in its recent judgment, or comparable regimes. Please note: the remittance basis of taxation is not being adapted and expires on 5 April 2025.
• Flat-rate taxation regimes in Switzerland and Italy
• Special regimes such as Portugal’s NHR scheme and the Beckham Law in Spain

What are significant economic interests? 

Significant economic interests are considered to exist if at least one of the following conditions is met:

• a share of more than 1% in a German corporation
• a stake in a German commercial partnership
• domestic income of more than 30% of total income or more than 62,000 euros
• domestic assets of more than 30% of total assets or more than 154,000 euros  

Consequences of the German extended non-resident tax liability for income 

After the German unlimited tax liability has ended, taxpayers remains liable to taxation on certain income which is not already subject to the German limited tax liability for a further ten years (known as extended non-resident income tax liability). This is particularly relevant where no overriding double tax treaty (DTT) exists or the other country does not have any particular rules on non-residency. In other cases, a DTT governs the right of taxation, so the primary effect of extended non-resident income tax liability is on tax reporting obligations. 

For example, extended non-resident tax liability applies to:  

• interest on savings and bank balances held with German banks
• interest from loans made to German debtors
• profits from the sale of shares in German corporations 

Consequences of extended non-resident liability for inheritance and gift tax 

An often-overlooked fact is that certain assets not already subject to the German limited inheritance and gift tax liability remain subject to German inheritance and gift tax for ten years after the taxpayer has moved abroad, alongside the resident inheritance and gift tax liability in Germany that continues to apply to German citizen for five years. This includes e.g.: 

• savings and bank balances at German banks
• stocks and shares in German corporations
• shares in German investment funds
• usufructuary rights and rights of use to German assets
• copyrights that are exploited in Germany
• movable assets located in Germany

The only exception to this is if a double tax treaty is in place that regulates the right of taxation (for inheritance and gift tax, Germany only has double tax treaties with Denmark, France, Greece, Sweden, Switzerland and the USA) or it can be proven that a tax equating to German inheritance tax of at least 30% is charged abroad.

Do you have any questions relating to the consequences for tax of moving abroad? Or have you claimed the remittance basis of taxation in the United Kingdom in recent years, or are you wondering whether the tax benefits you claimed when you moved to Germany will result in extended non-resident tax liability? 

We will be glad to provide advice with our expertise and our international network. Contact us for a free consultation.