Exit taxation - If you move abroad, check your taxes first!
What is exit taxation about and who is affected?
Exit taxation - Tax issues when moving abroad
If a taxpayer resident in Germany who holds shares in a corporation moves abroad permanently, Germany usually loses the right to tax the capital gains from the sale of these shares. This is usually regulated by double taxation agreements between Germany and the host country.
However, the aim of exit taxation is to tax the hidden reserves that have arisen up to the time of departure. This regulation is set out in Section 6 of the Foreign Tax Act (AStG) and applies to persons who are subject to unlimited tax liability in Germany and transfer their domicile or habitual residence abroad. The exit tax was extended at the end of 2024: From 2025, it will also include equity investments in ETFs and funds.
Interesting fact
The exit tax was first introduced in 1972 to prevent wealthy people (such as department store magnate Helmut Horten) from losing tax revenue by moving away. Horten had left Germany in 1970 without his assets of one billion marks being taxed in Germany.
Who is affected by exit taxation?
The exit tax regulations primarily affect medium-sized entrepreneurial families and founders of start-ups. If a family member or founder moves away from Germany, the hidden reserves, i.e. the unrealized profits from company shares, often have to be taxed. A relief for EU and EEA relocations, which previously allowed a deferral, has been abolished since January 1, 2022.
What is special about exit taxation
Exit taxation records unrealized gains by the tax office assuming a fictitious sale of the shares at market value and charging income tax on them. Disputes about the amount of hidden reserves (i.e. the valuation of the shares) are frequent. Important: exit taxation affects both private individuals and entrepreneurs, regardless of whether the shares are held as business assets or private assets.
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
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