Exit taxation – is free movement blocked and who is affected from this at all?

In times of net­work­ing, liv­ing abroad, free move­ment with­in the Euro­pean Union, extend­ed glob­al­iza­tion and mobil­i­ty, peo­ple more often do not spend their whole life in one and the same place. Mov­ing abroad is more and more com­mon – either for sev­er­al years or per­ma­nent­ly.
But what hap­pens if some­one owns shares in a com­pa­ny with hid­den reserves and wants to move abroad?

Moving abroad forever or for a certain period of time

In this spe­cial case, per­sons who own shares in a cor­po­ra­tion and move away from Ger­many have to pay the exit tax. This tax has to make sure that hid­den reserves are record­ed in Ger­many. It has also to avoid that no tax­a­tion takes place in Ger­many when the Ger­man tax­a­tion agree­ment leaves Ger­many and the Ger­man tax author­i­ties can­not charge the tax and lose this amount. It is writ­ten in §6 of the Ger­man for­eign tax act (AStG). There is also a „de-entan­gle­ment fact“ includ­ed that is based on a fic­ti­tious sale of shares.

This para­graph (§6 AStG) applies to all nat­ur­al per­sons that used to live in Ger­many with­in the last ten years and had unlim­it­ed tax lia­bil­i­ty. There is also a sub­stan­tial par­tic­i­pa­tion in a cor­po­ra­tion required with at least 1% par­tic­i­pa­tion rate.

In case that the share­hold­er does not only move his res­i­dence to anoth­er coun­try tem­porar­i­ly, tax­es have to be paid for all hid­den reserves. The tax bur­den is deter­mined by a fic­ti­tious cap­i­tal gain. They assume that the com­mon val­ue of the hid­den reserves is the price of sale.

If the exit tax can­not be paid imme­di­ate­ly, the amount can be paid in form of a defer­ral with­in a peri­od of up to five years. The defer­ral is approved or reject­ed depend­ing on an indi­vid­ual deci­sion by the respon­si­ble tax office. Although there was no sale after all and no prof­it was made, there is an exit tax that has to be paid.

However there could be serious changes in the exit taxation very soon

At the end of 2019, the Ger­man Fed­er­al Min­istry of Finance has pub­lished a draft bill for a law that is sup­posed to imple­ment the Anti-Tax Avoid­ance Direc­tive, that is designed to adapt Exit tax­a­tion. Often drafts of laws are pub­lished and are sup­posed to come into force in the near future- more or less. How­ev­er, in this spe­cial case the tight­en­ing of exit tax­a­tion men­tioned in this draft could even come ret­ro­spec­tive­ly on Jan­u­ary 1st 2020. It is com­pre­hen­si­ble, that this draft rais­es uncer­tain­ty among share­hold­ers.

But what changes are in this draft actually?

The cur­rent sit­u­a­tion that is writ­ten in §6 AStG is as fol­lows: Before mov­ing into anoth­er coun­try, the tax­pay­er must have lived in Ger­many for a total of ten years and also must have been sub­ject to tax lia­bil­i­ty with­out restric­tion. The ten-year peri­od is meant to be a life­time peri­od with a total of ten years in a whole life.
Of course, inter­rup­tions are pos­si­ble and if the per­son has not lived ten years in Ger­many in total, mean­ing in the whole life, there is no exit tax­a­tion at all.

The draft now short­ens this peri­od for three years: Instead a time peri­od of ten years it is reduced to only sev­en years. The draft is no longer based on the time­frame in Ger­many at all, but in the future only the time peri­od of the last twelve years should be con­sid­ered.

Require­ment for this is now that at least sev­en years have been spent in Ger­many with­in this peri­od. It is also impor­tant that those years are time years and not cal­en­dar years. By this draft a tax­able per­son is already sub­ject to exit tax­a­tion three years ear­li­er than before.

Innovations are also made by the deferral of tax burden

In the cur­rent sit­u­a­tion the tax bur­den can be deferred if some­one is mov­ing to anoth­er coun­try with­in the EU/EEA. After all, the share­hold­er who moves abroad has not made a prof­it from sell­ing the hid­den reserves or some­thing else regard­ing the com­pa­ny.
The shares were not real­ly sold, so one could have tak­en a share of them to pay the tax deb­it. There was no sale at the exit tax­a­tion and even though a tax has to be paid.
This is why it is often very dif­fi­cult for an entre­pre­neur to pay this tax amount, so the author­i­ties were will­ing to accept a defer­ral.
As long as the tax­pay­er holds the shares in the cor­po­ra­tion, the amount of the exit tax could be deferred quite eas­i­ly for an unlim­it­ed peri­od of time and with­out any inter­est. The tax occurred in no way and also had no adverse effect on assets.

Now there is no longer a fictitious exit taxation

How­ev­er this should no longer be pos­si­ble regard­ing the new draft speak­er.
Actu­al­ly the exit tax has to be paid then, and this should be pos­si­ble in sev­en annu­al install­ments. So after a time peri­od of sev­en years the entire tax bur­den real­ly has to be paid to the Ger­man state.

A defer­ral is also no longer pos­si­ble, and install­ments must be also request­ed.
The only good news is that inter­est is not added to the install­ments on top. Also pos­i­tive­ly men­tioned should be that if some­one moves out­side the Euro­pean Union or EEA into a third coun­try, there is also the option of pay­ing the tax amount in sev­en equal annu­al install­ments. Install­ment pay­ment has to be request­ed in both ways.

But what happens if a shareholder is away only for a certain period of time?

If a per­son is only tem­porar­i­ly abroad, they can cur­rent­ly rely on the so-called return reg­u­la­tions. Accord­ing to this, the exit tax can be waived if there is a seri­ous inten­tion to return to Ger­many. The pre­req­ui­site for this is that unlim­it­ed tax lia­bil­i­ty in Ger­many is estab­lished again with­in five years after mov­ing.

In the case of an absence that is based on pro­fes­sion­al rea­sons and extends beyond five years, an exten­sion of up to ten years can be affect­ed. It is impor­tant that there is still a seri­ous inten­tion to return to Ger­many.

Changes also for returnees

In the present speak­er draft, the time in which a per­son can return can be extend­ed up to sev­en years. It is even pos­si­ble that the peri­od can be extend­ed to a total of twelve years. The only require­ment here is that there is seri­ous evi­dence or evi­dence that a return to Ger­many is planned. It does not mat­ter if the rea­son for exten­sion is pro­fes­sion­al or not. How­ev­er, it is still a big advan­tage to announce the inten­tion to return to Ger­many. Trea­sury might still require an inten­tion to return here.

The possibility of deferral could also be eliminated

In the actu­al sit­u­a­tion, no secu­ri­ty pay­ments had to be made if the tax­pay­er moved with­in the EU/EEA. So far it was only nec­es­sary if a per­son moved to a third coun­try, because it is quite more dif­fi­cult to find peo­ple in those coun­tries.

If it is up to the speak­er draft, secu­ri­ty pay­ments should then be made for all moves out­side from Ger­many, no mat­ter into which coun­try. How­ev­er, the shares in the cor­po­ra­tion itself can­not be used as secu­ri­ty pay­ment. Here oth­er invest­ments, real estate or fed­er­al trea­sury bills are required as secu­ri­ty.

The most important changes at a glance

In the fol­low­ing table the most impor­tant changes are shown at a glance. It shows the actu­al exit tax­a­tion in accor­dance with §6AStG and also how the legal sit­u­a­tion could change after the speak­er draft:

Exit taxation

Speaker draft is largely a disadvantage for entrepreneurs

In sum­ma­ry it is pos­i­tive to men­tion that the leg­is­la­ture extends the time peri­od for a tem­po­rary absence, because five years are not real­ly a long term, espe­cial­ly not for entre­pre­neurs who are abroad for pro­fes­sion­al rea­sons.

How­ev­er almost all of the oth­er changes are dis­ad­van­ta­geous for the tax­pay­er. Mov­ing even with­in the EU aris­es many prob­lems one has to face.
Even the elim­i­na­tion of the dis­tinc­tion between mov­ing to an EU / EEA coun­try or a third coun­try does not change much here because the oth­er dis­ad­van­tages pre­vail.

If the draft pre­vails and the cab­i­net decides to change this law, the new reg­u­la­tion will be applied ret­ro­spec­tive­ly as of the begin­ning of 2020, as already men­tioned at the begin­ning. Issues up to Decem­ber 31st , 2019 are not affect­ed by this and are exclud­ed from the new reg­u­la­tion accord­ing to the draft speak­er.
Any­one plan­ning to move abroad with­in the next two years is well served to go for qual­i­fied advice as soon as pos­si­ble.

About Philipp Sauerborn

In 2005, Philipp Sauer­born joined the firm of St. Matthew in Lon­don, one of the lead­ing Ger­man account­ing firms in Eng­land renowned for its exper­tise in cor­po­rate, com­mer­cial and tax law, as a depart­ment head. After three years, he was a part­ner and man­ag­ing direc­tor.
Towards the end of 2011, he decid­ed to move to Mal­ta, where he first worked at inter­na­tion­al law firms and con­sul­tan­cies in an employed and con­sult­ing capac­i­ty. Since the begin­ning of 2013, he has been a senior employ­ee at Dr. Wern­er & Part­ner. Mr. Sauer­born is cur­rent­ly com­plet­ing his ADIT ‑Advanced Diplo­ma in Inter­na­tion­al Tax.

View All Posts

Leave a Reply

Your email address will not be published.