Exit Taxation for entrepreneurs and shareholders
Tax risks in Germany when moving abroad
Globalization and European integration lead to an increased mobility of taxpayers. For german entrepreneurs and shareholders in particular, however, moving abroad can trigger a considerable special tax burden. Within the scope of the so-called exit taxation, the tax burden is increased for GmbH shares and, if applicable, also for shares in partnerships such as the KG, or GmbH & Co. KG or the GbR, hidden reserves are released and taxable.
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Legal expertise in german exit taxation
Our team of lawyers, tax advisors and specialist solicitors for tax law has many years of experience in advising on international taxation. The scope of services provided by our attorneys includes the following areas:
- Examination of the requirements for exit taxation
- Arrangements to avoid exit taxation
- Support in appeals and lawsuits before the fiscal courts in connection with exit taxation
- Expert opinion on individual questions of exit taxation
Requirements for exit taxation
The departure abroad of a natural person who holds shares in corporations in Germany (e.g. GmbH or AG) as part of his or her private assets regularly triggers the departure tax situation as defined in § 6 of the Foreign Tax Act (AStG). The prerequisite is that the taxpayer has been subject to unlimited tax liability in Germany for the last ten years, that he has owned at least 1% of the shares in a company within the last five years, and that he has permanently given up his German residence. It does not matter whether the company is a German or a foreign corporation (for example the British Limited / Ltd.). If, on the other hand, the move is only temporary, the exit tax can be waived.
Differently than the designation of the departure taxation lets assume, this intervenes not only with the departure of the taxpayer, but also if one of the following supplemental facts is fulfilled:
- The transfer of shares due to death or gift to a person who is not an unlimited taxable person in Germany.
- If a domicile is maintained but, under a double taxation agreement (DTA), the taxpayer is considered to be resident in the other state.
- Contribution of the shares to a business or permanent establishment in a foreign state.
- Generally when Germany may no longer tax the gains from the sale of the shareholding.
Legal consequence of the exit taxation
If the exit tax is triggered, the taxpayer is taxed as if he had sold his investment. Thus, the taxation of a fictitious sale takes place. The so-called hidden reserves are disclosed. In simplified terms, this means that the difference between book value and market value is taxed at the taxpayer's personal income tax rate. Taxation is based on the partial income method.
Moving away within the EU and the EEA member states
Shareholders who are nationals of a member state of the European Union or the European Economic Area can benefit from the deferral provision of § 6 para. 4 AStG when moving away from Germany within the EU or EEA. The prerequisite for this is that a tax liability comparable to the German unlimited income tax liability exists in the country of immigration and that administrative assistance and mutual support in the collection of the tax owed between Germany and this country is guaranteed.
This means that although the exit tax is generally due, it will be deferred, interest-free, without security and for an unlimited period. However, the deferral is revoked if the shares are actually sold or the taxpayer moves on to a third country outside the EU and EEA.
Moving to Switzerland
In a recent decision, the European Court of Justice has dealt with the question of how the German exit tax should be assessed when moving to Switzerland. The court concluded that there was a violation of the principle of equal treatment, which constituted an unjustified restriction of the freedom of establishment guaranteed by the Agreement on the Free Movement of Persons between Switzerland and the European Community. Therefore, the European Court of Justice is of the opinion that a deferral possibility is necessary with regard to a move to Switzerland. The tax authorities have reacted to this by means of a coordinated country decree and decreed that until a legal amendment of the Foreign Tax Act is made, in cases where the principle of equal treatment of the Agreement on the Free Movement of Persons is affected, a deferral is to be granted in five equal annual installments upon request. Interest is to be paid on this deferral. It remains to be seen whether the legislator will adopt this procedure or whether it will additionally allow an interest-free deferral.
Strategies for avoiding exit taxation
In the legal literature, several of possible solutions to avoid exit taxation are suggested. The following is a brief overview.
- The most obvious solution is not to make a permanent move. This means either that only a temporary departure of a maximum of five years (extendable to a total of ten years) is made or that the residence in Germany is not given up at all. If the taxpayer retains his or her residence in Germany and thus remains subject to unlimited tax liability in Germany as a tax resident, the exit tax is not triggered. It should be noted, however, that in the event of a move to a state with which Germany has concluded a DBA, the retention of a domestic residence may not be sufficient for the taxpayer to continue to be subject to unlimited tax liability in Germany. In cases where the taxpayer is no longer subject to unlimited tax liability in Germany, the taxable event of § 6 AStG is triggered, even if a residence in Germany is maintained.
- Legal literature often recommends the contribution of the shares to the business assets of a partnership or the conversion of the corporation into a partnership (for example into a GmbH & Co. KG). Both ways require a certain amount of creative effort. In particular, the partnership must be structured in such a way that it continues to have its registered office exclusively in Germany. This will usually not be the case when the managing partner moves away. The consequence would be that although no exit taxation would be triggered, the so-called enmeshment taxation according to § 4 para. 1 sentence 3 of the German Income Tax Act (EStG) would be triggered, with the same tax law effect: the disclosure of hidden reserves. Especially when moving to a country with which Germany has concluded a DTA, there are sometimes quite high hurdles to be overcome.
Tax and legal advice when moving abroad
Moving abroad requires careful planning, especially - but not only - in the area of tax law. In cases in which a tax on departure is imminent, it must always be examined individually and on a case-by-case basis to see what possibilities exist in the specific case. In addition, a number of other questions that arise when moving to another jurisdiction must be considered in advance. This applies not least to aspects of inheritance law and inheritance tax law.
At ROSE & PARTNER we offer you at our offices in Hamburg, Berlin, Frankfurt, Munich and Milan the appropriate experts, attorneys at law, specialists in tax law and inheritance law as well as tax advisors with proven expertise in the most diverse constellations of relocation of residence abroad.