BFH rules on claw-back of capital allowances under U.K. law

The German Federal Tax Court (BFH) recently ruled that the U.K. taxation according to the rule allowing a “claw-back of capital allowances” does not represent the taxation of capital gains from a German tax perspective (case reference: I R 49/09). Consequently, capital gains arising from the sale of U.K. real property held by a German resident taxpayer that are only subject to taxation under the “claw-back rules in the U.K. may be taxed in Germany according to article XVIII paragraph 2 of the Germany-U.K. tax treaty.

The case involved a German limited partnership that held an interest in a U.K. asset managing limited partnership. The U.K. partnership disposed of real property and, according to U.K. tax law, the disposal did not lead to the taxation of realized capital gains, but only a claw-back of capital allowances previously claimed on certain fixtures that were part of a building. According to article VIII of the Germany-U.K. treaty, capital gains derived from the alienation of immovable property may be taxed in the state in which the property is situated. However, according to the subject-to-tax clause in the treaty, such gains are excluded from taxation in Germany only if they are subject to tax in the U.K.

According to the BFH, the claw-back of prior allowances does not mean that the capital gains are subject to tax in the U.K. because the taxation of the claw-back of the allowances does not include the gains from the disposal, but only adjusts the previous taxation of the gains. The BFH did not follow the earlier decision of the Lower Tax Court of Düsseldorf, which had concluded that any taxation in the U.K. is sufficient to exclude Germany’s taxing rights regardless of whether the taxation is limited to certain parts of the gains (e.g. fixtures) and amounts (e.g. prior allowances).

Ansprechpartner

Dr. Bettina Lieber | Düsseldorf
Maryna Shekhovtsova | Düsseldorf