While a relocation to Germany requires a careful tax planning, moving away from Germany to another country can trigger German tax issues as well. This applies to entrepreneurs who already are shareholder when relocating to Germany, but also to entrepreneurs who start investing in different businesses while living in Germany. One thing to consider is the German exit taxation (so called “Wegzugsbesteuerung”).
What is the German exit taxation?
In brief, if Germany loses the taxation right for an investment due to a relocation of the shareholder, then German Tax Law requires a taxation of the hidden reserves in the investment before the shareholder moves away.
There is a tax law change for the German exit taxation that will be effective from January 1, 2022. While the following blog post refers to the new conditions mainly, it should be noted that the German tax law includes the German exit taxation since 1972. So, this is not a new rule per se.
The German exit taxation applies if the following conditions are met:
- Shareholders with participations of at least 1% in German or foreign corporations (e.g. German GmbH, US LLC treated as corporation for German tax purposes)
- Who lived in Germany for at least 7 years during the last 12 years before moving away
- Will be taxed considering the fair value of the participation
Moving away from Germany is seen as a “fictitious” sale of the participation. The shareholder has to pay taxes in Germany even without receiving cash through a selling price. This leads to huge liquidity issues. Thus, a tax planning is required to avoid this tax bill.
Moving away – what does this mean?
Moving away is qualified as a sale of the shareholder’s participation if
- The shareholder is giving up its German residence or habitual abode. Both conditions qualify for an unlimited taxation in Germany
- The participation is transferred to a non-resident person e.g. after death, through a gift etc.
- The German taxation right to tax the profit from the sale of the participation is limited or excluded
Returning back to Germany
In case, the shareholder intends to move away from Germany only temporarily, the exit taxation can be suspended. However, this is only the case, if
- The shareholder comes back to Germany within 7 years
- The participation has not been sold or transferred to another company in the meantime
- A profit distribution or equity repayment is only made in the limits of the law
- The taxation right of the participation lies with Germany after the return
In case of an intended return, a tax relief will be granted for the exit taxation upon application. However, a security payment is to be paid.
Of course, in practice it is not easy to prove that an intention to return is given. Thus, it is recommendable to have supporting documents at hand e.g. shareholder will work temporarily for a foreign group company etc.
Level of taxation & Terms of payment
In case the conditions for an exit taxation are fulfilled then, first, an evaluation of the participation is required at the time the shareholder is moving away.
This fair value less the acquisition costs are the basis for the taxation in Germany. However, Germany grants a 40% discount on this basis, so that only 60% of the profit is taxable in Germany. The individual tax rate of the shareholder applies. Assuming the individual tax rate amounts to 45% (the highest tax rate in Germany) the effective tax rate for the exit taxation is 27% (plus 5.5% solidarity surcharge and church tax if applicable).
On principle, the exit tax is due immediately after the “exit”. However, the shareholder can apply to pay the exit tax in seven installment payments together with a security payment upfront. To get this payment relief, there are several conditions to consider e.g. installment payments are paid in a timely manner, obligations to cooperate are fulfilled.
How to avoid the exit taxation
There are several options to avoid an exit taxation through a careful tax planning.
One option is to change the corporation into a partnership or to transfer the participation to a partnership.
Keeping the German residence might also be an option if the residence according to a Double Tax Treaty will not be transferred to the other country.
It can also be an option to pay the exit tax if the later taxation of a sale is tax beneficial.
For a better understanding, this article refrains from using complicated technical terms and is presented in shortened form with regard to the individual preconditions required by law. An individual examination in your case is recommended.
Disclaimer: This article does not constitute legal or tax advice but is for general information only. Every personal/company situation is unique, so that your tax situation might be different as described in this article. Therefore, I always recommend professional advice to avoid any tax disadvantages.
Last updated on October 12, 2021
