Exit taxation - If you move abroad, check your taxes first!
What is exit taxation about and who is affected?
If a taxpayer in Germany - who holds shares in a corporation - moves abroad, the German state loses access to the capital gains from the shares in the corporation. That is why the tax authorities want to levy tax when the taxpayer leaves the country.
What is special about the exit tax is that it is applied to profits that have not yet been realized. The tax office implements this in the form of a fictitious sale of the shares in the company at the normal market value and applies income tax on the basis of this fictitious profit. Even if an individual moves abroad - the hidden reserves on shares held as private assets will be taxed.
On 24.03.2021, the German government passed the draft law on the implementation of the Anti-Tax Avoidance Directive (ATAD-Umsetzungsgesetz - ATADUmsG). Taxpayers with exit plans for 2021 should seek advice!
When does the exit taxation take effect?
- If the taxpayer was previously resident for tax purposes in Germany for at least 10 years
- If they are a German citizen
- If they held at least 1% of the shares of a corporation within the last 5 years (in Germany or abroad)
- If they definitively give up the German residence
The starting point for the emergence of the exit taxation was the emigration of Helmut Horten, a German wealthy owner of a department store chain, in 1968. He emigrated from Germany to Switzerland. By moving away, he was able to collect the profits from the sale of his company completely tax-free. Since the German treasury had already lost tax revenues in similar cases, this formed the basis of the exit taxation.
From January 1, 2022 new rules for exit taxation
As of 01.01.2022 the exit taxation (§ 6 AStG) has been reformed. Lose right to taxation in case of taxpayer's departure. Until 31.12.2021, every taxpayer who has been subject to unlimited tax liability in Germany for at least 10 years was subject to exit taxation. From shareholders in a family business to start-up entrepreneurs, every entrepreneur with a stake of at least one percent in a corporation (GmbH, AG) who wants to relocate his or her residence abroad is potentially affected.
NEW is that the period with regard to unlimited tax liability has been shortened from 10 years to 7 years. Taxpayers who have moved to Germany will be subject to exit taxation 3 years earlier - i.e. after 7 years. In addition, the deferral in the case of departure to an EU/EEA state has been abolished. Now the tax must be paid in 7 annual installments. As a result of these tightening measures, there is increasing pressure to think through the tax consequences carefully before moving abroad and to secure Germany's right to taxation through optimal tax structuring - despite the move - in order to avoid substantial tax payments.
Should taxation have been reduced or actually avoided at the time of departure, later inheritance tax consequences must also be considered. If the testator was resident abroad but the heirs are resident in Germany, German inheritance tax applies again. Here, too, it is important to examine all possible alternatives from a tax point of view in advance.
Are you a shareholder of a corporation? Get tax advice before moving abroad! This will help you avoid unnecessary and uncertain financial burdens.
We will explain to you the tax aspects associated with a transfer of residence from Germany. In doing so, we focus especially on your individual problem areas and your personal tax situation in order to achieve the best possible tax structuring options for you. Our work focuses on the links between German and the respective foreign tax law (emigration country EU or third country) - taking into account all criteria from the relevant double taxation agreements. In addition, we clarify critical issues of your company valuation by the tax authorities.
Proposed German Exit Tax Revisions Are Subject of Controversy by William Hoke
Article by William Hoke “Proposed German Exit Tax Revisions Are Subject of Controversy,” Tax Notes Federal, May 3, 2021, pp. 657-658.
Original publisher: Tax Analysts
TAX NOTES FEDERAL, VOLUME 102, MAY 3, 2021