OBJECTIVE Type 2 diabetes mellitus (T2DM) is characterized by insulin resistance (IR) and β-cell dysfunction. Ectopic fat accumulation in liver and muscle causes IR. Since bariatric and metabolic surgery significantly improves fatty liver disease, we hypothesized that coexistence of liver steatosis (i.e., when hepatic IR contributes in T2DM) would be associated with greater diabetes improvement after surgery. RESEARCH DESIGN AND METHODS A total of 519 patients with T2DM who underwent Roux-en-Y gastric bypass and simultaneous liver biopsy and had a minimum 5-year follow-up were analyzed to assess the independent association between biopsy-proven liver steatosis and postoperative long-term diabetes remission (glycated hemoglobin <6.5% [48 mmol/mol] off medications). RESULTS Of the 407 patients with biopsy-proven liver steatosis, long-term diabetes remission was achieved in 211 (52%) patients compared with remission in 44 out of 112 (39%) patients without steatosis (P = 0.027). In multivariable analysis, presence of liver steatosis was an independent predictor of long-term diabetes remission (odds ratio 1.96 [95% CI 1.04–3.72]; P = 0.038). Hepatocyte ballooning, lobular inflammation, or fibrosis at baseline did not predict diabetes remission. CONCLUSIONS This study, for the first time, suggests that in patients with T2DM who are considering bariatric and metabolic surgery, coexistence of liver steatosis is associated with better long-term glycemic outcomes. Furthermore, our data suggest that there are distinct variants of T2DM in which metabolic responses to surgical weight loss are different. A subgroup of patients whose T2DM is characterized by the presence of hepatic steatosis (presumably associated with worse IR) experience better postoperative metabolic outcomes.