Non-Dom Status

What does Non-Dom mean? What are the Non-Dom rules?
Non-Dom stands for Non-Domicile – if you are resident in the UK but not domiciled, there are special tax rules that apply to your foreign (from a UK perspective) income and capital gains.

In short, you are able to choose whether you are taxed on a remittance basis in the UK. In this case, only that part of the foreign income (and foreign profits) that you bring into the UK in the relevant tax year will be taxed in the UK, by whatever means (e.g. including gifts or introductions of assets purchased with foreign assets generated during UK residence status).

You will still be liable to UK tax on any UK income and capital gains received in the UK.

If you have previously been taxed on a remittance basis for at least 7 UK tax years within the last 9 tax years, you will be liable to pay an annual lump sum tax of £30,000 for subsequent years.

If you have applied the rule in at least 12 UK tax years within the last 14 tax years, you will be liable to pay annual flat-rate tax of £60,000 for subsequent years.

However, taxation on a remittance basis does not work with all countries: for example, regarding German income: the Germany / UK Double Taxation Treaty of 30.12.2010 introduced a so-called “fallback clause”, under which the tax law for German income reverts to Germany if it would be taxable in the UK under the basic rules of residence taxation but the UK does not exercise its right to tax it, as in the case of taxation on a remittance basis.

Non-Dom rules also exist in the Republic of Ireland, Malta and Cyprus

In Ireland, there is currently no lump-sum tax after a certain number of tax years in which the Non-Dom status was used for tax purposes.

Malta has introduced a flat-rate minimum tax of €5,000 with effect from the 2019 tax year.

For both countries there is currently no fallback clause in their double taxation agreements with Germany regarding taxation on a remittance basis.

Change of residence to a low-tax country – Extended limited tax liability

An individual may withdraw from the domestic unlimited tax liability (i.e. the tax liability on his world income) by transferring his residence abroad. Thereafter, he is only subject to the so-called limited tax liability, i.e. only income with a special domestic connection (e.g. profits of a business in Germany, rents from domestic real estate) is subject to German taxation.

In order to reduce the incentive to do so, some countries have established a so-called extended limited tax liability in their tax laws.

In Germany, for example, section 2 AStG postulates an extended limited tax liability when the unlimited tax liability ends due to a transfer of residence abroad, if the following (somewhat simplified) conditions are cumulatively fulfilled:

  • Relocation of residence to an area with low taxation (low-tax country)
  • The taxpayer was subject to unlimited tax liability as a German citizen for at least five years in the last ten years prior to departure (note: remarkably, nationality is used here, which is practically never the case in German tax law)
  • The taxpayer still has significant economic interests in the domestic market.

If these conditions of the extended limited tax liability are fulfilled, further income is subject to German income tax for a period of ten years in addition to the limited tax liability, unless this is excluded by a double taxation agreement.

This includes, for example, interest on credit balances at domestic banks, which would otherwise not be subject to German income tax in the case of persons with limited tax liability.

Section 4 contains a comparable regulation for inheritance and gift tax, which is aimed at cases in which the donor/ testator has transferred his residence abroad prior to the gift/ succession.

A change of residence to Austria can already be an advantage compared to Germany. Austria currently has no foreign tax law, but certain anti-avoidance rules in the Corporate Income Tax Act do. Furthermore, a tax-efficient holding structure with Cyprus is currently possible if the entrepreneur is resident in Austria.