German Exit Taxation: Requirements, Amount, Advice

According to § 6 of the Foreign Transaction Tax Act, exit taxation requires that the taxpayer living in Germany

• has directly or indirectly held an interest of at least 1 per cent in a domestic or foreign corporation for the last five years,
• gives up his or her domicile or habitual residence in Germany and
• was subject to unlimited tax liability in Germany for at least seven years within the last twelve years before the departure.

The requirements are quickly met. The typical shareholder in a limited liability company is usually affected if they plan to move abroad permanently. Young shareholders to whom the shares have been transferred, e.g. by their parents within the framework of anticipated succession, are of course also covered by this. A move abroad to be with a (future) spouse whom the individual had met while studying abroad therefore needs to be carefully considered.

The exit tax is calculated in three steps:

• The starting point is the fair market value, which is generally the market value of the company shares at the time of the departure.
• The acquisition costs of the capital shares are deducted from this value.
• This results in the notional capital gain.

The capital gain is then taxable at the personal income tax rate of up to 45 per cent plus a solidarity surcharge. Due to the partial income procedure, however, 40 per cent of this remains tax-free. This results in a maximum tax burden of 27 per cent plus a solidarity surcharge and, if applicable, church tax. The amount of the charge is similar to the withholding tax.

As a rule, the exit tax is due when the previously unrestricted taxpayer gives up his or her domicile or habitual residence in Germany. However, it is still possible to pay the assessed tax in seven equal annual instalments upon request.

This is also very important in practice. Because one or the other taxpayer is caught unawares by the sudden tax burden. They, in fact, did not sell their shares and therefore did not receive any liquidity with which they could pay their taxes. The possible payment by instalments mitigates the problem to some extent.

If, after the departure date, it turns out that the company shares have a higher value or a lower value than initially assumed, this does not alter the departure tax once it has been determined. A subsequent increase in value after the departure does not therefore increase the departure tax in Germany. Conversely, a subsequent reduction in the value of the capital shares since 2022 does not reduce the exit tax once it has been determined.

However, a subsequent increase in value will be taxable in the case of a later sale of the shares in the new state of residence (Art. 13 para. 5 of the OECD Model Convention). In detail, this depends on the tax law of the new state of residence and the double taxation agreement (DTA) concluded between the new state of residence and Germany.

To avoid exit taxation, the following measures are conceivable, for example:

• Effective domicile and residence management maintains unlimited tax liability in Germany. For tax purposes, therefore, there is no departure at all - no departure taxation without a departure.
• An upstream gratuitous share transfer to natural persons prior to the departure may also be considered if, in any case, such a transfer is planned for the short- or medium-term.
• Anyone who sells their shares before departing must pay tax on the capital gain. However, exit taxation is then of naturally ruled out.
• In addition, an upstream gratuitous transfer of shares to a family foundation which serves to provide for the founder and/or his family is conceivable. Because the taxpayer does not hold shares in "their" foundation, § 6 of the Foreign Transaction Tax Act (AStG) is meaningless.
• Furthermore, a conversion of the investment company into a partnership (e.g. a GmbH & Co. KG or a dormant partnership) can be considered. However, numerous special features have to be taken into account here. For example, care must be taken to ensure that no alternative disjunction taxation is initiated in the event of a move abroad.

We will be happy to advise you on questions relating to exit taxation and the associated tax structuring options for avoiding taxation or reducing the tax burden. Insofar as the tax law of foreign jurisdictions is affected in your case, we work closely with our numerous foreign cooperation partners, each of whom is an expert in their national tax law. Feel free to contact us.