Since 2022, a number of changes have been made with regard to exit taxation. If a person with taxable residence in Germany decides to move abroad permanently and in doing so owns shares in a corporation, the capital gains of these shares are in principle no longer subject to German taxation. As a rule, the responsibility for taxing such gains is governed by the relevant double taxation treaties between Germany and the destination country. The main objective of exit taxation is to tax the hidden reserves accumulated up to the date of exit. This process takes place within the framework of the tax regulations between the two countries.
The tax regulations on exit taxation particularly affect medium-sized entrepreneurial families with numerous family members. If a family member decides to leave Germany permanently, for example to live and work in Vienna, he or she is confronted with the obligation to pay tax on the hidden reserves - i.e. the previously unrealized profits - of his or her company shares. This regulation also affects founders of start-ups who decide to relocate abroad after successful investor rounds. Previously, a permanent deferral of this tax claim could be made when moving to other EU or EEA countries, but this relief has been removed as of January 1, 2022.
What makes the exit taxation special is the taxation of unrealized gains. The tax office interprets this by assuming a fictitious sale of the shares in the company at normal market value and subjecting this fictitious gain to income tax. The resulting dispute with the tax office about the exact amount of the hidden reserves (valuation) is thus pre-programmed. The exit taxation affects private individuals regardless of whether the shares are part of the business assets or private assets.
Under what circumstances is the exit taxation due?
- If the taxpayer was a tax resident in Germany for at least 7 years in the previous 12 years (unlimited tax liability). This also applies if a second or vacation home is regularly visited.
- If the taxpayer held an interest of at least 1% in a corporation, regardless of whether this interest is held in Germany or abroad.
- If the taxpayer permanently gives up his German residence.
The sale of shares in a company before the move is a complex decision that must be weighed between the taxation of the move and an immediate sale. The proceeds from the sale of the shares before the move are also subject to taxation.
An alternative option is to maintain tax residence in Germany by keeping the principal residence in the country. This option is particularly attractive if the move away is limited to a maximum of 5 years. However, there are special cases where a double taxation treaty exists between Germany and the country of temporary departure.
Transferring the shares to a family member is another option. This family member must remain in Germany and is subject to unlimited tax liability. Gifts are subject to tax, although exceptions exist in connection with inheritance tax law.
Alternatively, the corporation can be dissolved, with all assets of the company being sold. Another option is to convert the corporation into a partnership. Since the exit tax is based on the ownership of shares in a corporation, the basis for exit taxation no longer exists if a corporation no longer exists.
An alternative conversion option is to convert the corporation into a limited partnership. The departing person establishes a partnership and contributes his shares, creating a GmbH & Co. KG is created. It should be noted, however, that the newly formed partnership must be actively operating in Germany.
It is important to emphasize that the avoidance of exit taxation always depends on the individual case and requires careful consideration.
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