Horst WickinghoffThe German exit tax (Wegzugsbesteuerung) under Section 6 of the Foreign Tax Act (AStG) has undergone significant changes recently due to legislative updates and a pivotal Federal Fiscal Court (BFH) ruling. Here is what taxpayers need to know.
In recent years, exit tax has become a hot topic in Germany. Through legislative tightening and a landmark judgment by the Federal Fiscal Court, the rules for individuals leaving Germany have become much stricter. But what does this actually mean for you? This article takes a detailed look at the latest developments and analyzes how the landscape has shifted for those planning to emigrate.
What Is German Exit Tax?
Exit tax under Section 6 AStG is designed to ensure Germany taxes the unrealized capital gains on shares in corporations when a taxpayer leaves the country. Essentially, the tax authorities treat your departure as if you had sold your company shares, taxing the theoretical profit.
Over the years, lawmakers have repeatedly refined and tightened these provisions. The changes specifically affect individuals who have moved—or plan to move—from Germany to other EU/EEA states. The current focus lies on recent legislative amendments, the introduction of a "de facto distribution ban," and a significant BFH ruling that clarifies the legal situation for certain moves.
Recent Legislative Changes and Their Impact
A revised version of Section 6 AStG came into force on 1 January 2022, broadening the scope of exit taxation. These changes were intended to close loopholes and ensure Germany secures its "fair share" of taxes on value increases generated while the taxpayer was subject to unlimited tax liability in Germany.
The most significant change was the abolition of the permanent, interest-free deferral of exit tax for moves within the EU and EEA. Until 31 December 2021, moving within the EU was handled relatively leniently. This has been replaced by a system of temporary payment relief, allowing taxpayers to pay the tax debt in seven annual installments. This creates a massive financial burden for many, particularly those who do not have immediate liquidity from an actual sale of their shares.
Retroactive Tightening and the "De Facto Distribution Ban"
Shortly before the start of 2024, the legislature introduced further restrictions that apply retroactively to moves occurring up to 31 December 2021. These changes expand the tax office's ability to revoke a tax deferral, specifically if profit distributions or repayments of capital exceed 25% of the value of the company shares.
This new regulation creates a "de facto distribution ban." It puts many taxpayers in a precarious financial position, as taking dividends from their own company could suddenly trigger an immediate demand for the full exit tax payment.
The Breakthrough in the "Wächtler" Case
In a decision that could reshape German tax law, the First Senate of the Federal Fiscal Court (BFH) delivered a judgment in the "Wächtler" case on 6 September 2023 (I R 35/20). This ruling has far-reaching implications for taxpayers moving to Switzerland.
Building on a previous European Court of Justice (ECJ) decision involving the same plaintiff, this judgment sheds new light on how German exit tax interacts with the Agreement on the Free Movement of Persons between the EU and Switzerland.
Key Points of the BFH Ruling
The BFH ruled that for a move to Switzerland, given the existing agreements between the EU and Switzerland, a permanent, interest-free deferral of German exit tax is required until the shares are actually sold. This decision applies primarily to moves that took place before 31 December 2021, although the tax authorities may still demand security (collateral).
The Background and European Dimension
The case began when Mr. Wächtler moved to Switzerland in 2011 and was assessed for exit tax by the German tax office. After a long legal battle, which included a preliminary ruling by the ECJ, the BFH has finally clarified the conditions for applying exit tax in this context.
What Does This Mean for Taxpayers?
For those who moved to Switzerland (or plan to, depending on how the law evolves), the ruling opens new doors. You may now be able to apply for a permanent, interest-free deferral of your exit tax until you actually sell your shares. This is a significant departure from recent practice and could provide substantial financial relief.
Security Deposits for Deferrals
One interesting aspect of the ruling is the requirement for security. The BFH allows for flexibility in granting the deferral but still wants to minimize risk for the tax authorities. The exact requirements and amount of security remain open questions, which may lead to uncertainty in practice. Taxpayers should carefully check under what conditions such security might be demanded and how this impacts their liquidity planning.
Interim Conclusion
This judgment challenges some of the recent tightening of exit tax rules and offers a glimmer of hope for those moving to Switzerland. The BFH decided that, under certain circumstances, exit tax must be permanently deferred until the sale of shares. While specifically addressing moves to Switzerland prior to the end of 2021, the ruling signals potential broader applicability and could become relevant for moves to other EU/EEA states as well.
Impact on Future Legislation
The "Wächtler" ruling sends a signal for future legislation and case law regarding exit taxation. It is a step toward fairer treatment of taxpayers covered by free movement agreements. The tax administration and legislature are now under pressure to rethink existing regulations to avoid discrimination and comply with ECJ and BFH requirements.
For anyone affected by German exit tax, understanding the current laws and potential relief options is more important than ever. The BFH ruling provides a leverage point to challenge excessive tax demands and push for fairer treatment.
Practical Steps for Those Affected
If you are facing exit tax issues, you need to be proactive. Beyond applying for a permanent, interest-free deferral, you should consider the possibility of having to provide security and seek legal advice to strengthen your position. Do not hesitate to appeal tax assessments based on these recent legislative changes if necessary. It is advisable to carefully collect and retain all documentation regarding your move and company shares.
Bottom Line
The developments surrounding German exit tax show just how dynamic and challenging the tax landscape is for internationally mobile individuals. While legislative changes and the BFH ruling introduce new complexities, they also offer opportunities for fairer tax treatment.
It remains to be seen how the tax authorities and courts will handle these questions moving forward. However, one thing is certain: this remains a critical area for taxpayers and advisors alike. If you are affected, keep a close eye on these developments and get professional advice to avoid unpleasant surprises and ensure you are exercising your full rights. Ultimately, it is not just about paying taxes—it is about ensuring those taxes are levied fairly and in accordance with European fundamental freedoms.
Disclaimer: The above article is based on independent research by Dr. Werner & Partners and does not constitute legal advice. If you would like to meet with one of our representatives for further information, please book an appointment with us.
