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Where Taxpayers and Advisers Meet

Overseas Tax Question

btokes
Posts:4
Joined:Wed May 13, 2020 7:39 am
Overseas Tax Question

Postby btokes » Wed May 13, 2020 7:49 am

Morning

Was looking for some advice on how the double tax treaty between Germany and the UK works. I may have a situation due to the coronavirus situation, whereby I am tax resident in both the UK and Germany for this tax year. Last tax year I would have qualified as non UK resident under the full time working overseas rule.

I am employed in Germany by a German based company, while my family resides in the UK and all my income is derived from employment and taxed in Germany. I am unclear as to how the tax situation would be if i am considered UK resident too for this year. The centre of my vital interests is the UK, but would this mean that all my income becomes taxable in the UK? Practically would this mean, I would need to pay income tax in the UK on all that employment income, and would the double tax treaty then allow me to claim a refund of all income tax paid in Germany, or is it not as simple as that?

Thank you!

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Overseas Tax Question

Postby maths » Wed May 13, 2020 5:22 pm

If, for the same tax year, you were a resident of Germany under their rules and a resident of the UK under the UK rules you would be classified as dual resident.

Under the UK/Germany double tax agreement(DTA) this dual status would be resolved under Article 4. The relevant bits provide:

(a) "he shall be deemed to be a resident only of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident only of the Contracting State with which his personal and economic relations are closer (centre of vital interests);

b) if the Contracting State in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either Contracting State, he shall be deemed to be a resident only of the Contracting State in which he has an habitual abode;"

It is likely (but will depend upon the facts) that you only have permanent home in the UK; if you have such a home in UK and Germany then the vital interest test applies which you say is UK. The odds are therefore that your dual residence would be resolved in favour of the UK.

Therefore for DTA purposes you would be UK resident.

Article 14 would then give the UK primary taxing rights and would tax you on the German source employment income. However, Germany could also levy their tax on the employment income as they are not precluded from doing so under Article 14.

The UK would then grant a tax credits against any UK tax charge for any German tax paid (you would end up paying the higher of the two taxes).

btokes
Posts:4
Joined:Wed May 13, 2020 7:39 am

Re: Overseas Tax Question

Postby btokes » Thu May 14, 2020 11:59 am

Thank you so much. Very clear and helpful.

Two additional questions if you don't mind.

1. In order to mitigation this potential higher UK tax (UK tax will be higher for me), could I pay into my UK pension, and use that to offset my UK tax charge, which would ultimately remove the incremental additional amount above German tax?
2. I have a cash flow concern - Would i have to pay the UK tax first and then claim a rebate for the offset, or would i need to only physically pay any additional amount.

Thanks !

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Overseas Tax Question

Postby maths » Thu May 14, 2020 12:41 pm

1. Yes

2. As you are employed by a foreign company no UK tax at source will be deducted. Presumably German tax will therefore be paid first. When you complete your UK tax return including Supplementary Pages you will claim foreign tax credit relief for German tax paid which will be offset against the UK tax thus meaning you only hand over to HMRC the net UK tax charge.

btokes
Posts:4
Joined:Wed May 13, 2020 7:39 am

Re: Overseas Tax Question

Postby btokes » Thu May 14, 2020 2:09 pm

Thank you!

btokes
Posts:4
Joined:Wed May 13, 2020 7:39 am

Re: Overseas Tax Question

Postby btokes » Sun Jun 21, 2020 2:31 pm

Trying to ensure I understand the DTA which is not so easy to follow. It states the following:

1. "an individual is a resident of both Contracting States, then his status shall be determined as follows:
a) he shall be deemed to be a resident only of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident only of the Contracting State with which his personal and economic relations are closer (centre of vital interests)"

Without question I would be consider a resident of the UK here, and not Germany.

2. It then goes on to state under the Income Tax section:

"salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State."

This is the bit I'm struggling with. Is this saying that the salary in Germany which I guess is the "other Contracting State", is taxed in Germany? This then allows me to offset this as Foreign Tax Credit Relief. Is that correct? Thanks


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