Exit tax in Germany
By Bernhard Schwechel, FACT GmbH
Effective 01 January 2022, Germany has revised the exit taxation rules for privately held company shares. In particular, interest-free, indefinite deferral – in the case of a relocation of EU/EEA citizens within the EU/EEA area – is abolished and replaced by the possibility of a seven-year instalment payment.
When a shareholder moves away from Germany, the value increase of a shareholding of at least 1% of a corporation’s capital is subjected to income tax. Germany secures the right to tax the hidden reserves in privately held shares generated in corporations. The new law provides for a reduction of the period of unlimited tax liability required before the exit from ten to seven years. The duration of the unlimited tax liability will no longer be determined on the basis of an entire lifetime, but only on the basis of the last twelve years.
The exit tax lapses with retroactive effect if the taxpayer is only temporarily absent; this period has been extended from five to seven years.
It will not be necessary in the future to substantiate the intention to return to Germany. However, considering the unchanged wording of the provision, and the partly contradictory explanatory statement, it is recommended that the taxpayer still carefully document such an intention.
If a deferral is applied for under the usage of the returnee provisions, no instalments are required for the entire deferral period. This combination is therefore recommended, as it is the only way to terminate the tax liability in Germany without incurring an immediate tax burden.
Due to the German government’s intention to put EU/EEA cases on an equal footing with third-country cases, to the detriment of taxpayers who wish to move within the EU/EEA, there is no longer a distinction between relocations to third countries and EU/EEA countries. Collateral security for the exit tax must be provided for all relocations. This might be a significant obstacle for many taxpayers even if applying for the seven-year instalment payment. This is because, according to the tax authorities of at least some federal states, the shares of the corporation subject to the exit tax themselves cannot be accepted as collateral security.
It is doubtful whether the new regulations are in accordance with European law. The European Court of Justice (ECJ) emphasised the requirement of equal treatment of domestic relocations with crossborder relocations within the EU/ EEA area (as well as Switzerland in specific cases). The explanatory memorandum to the law itself explicitly addresses this contradiction, but refers to other, older ECJ case law in connection with the tax disjunction (Entstrickung) of business assets. According to the German government, on the basis of this case law, the new regulation “should” (wording of the explanatory memorandum) be in conformity with European law.
The stricter regulations may be classified as excessively restrictive. They impose a direct and substantial restriction of intra-European mobility, particularly for shareholders of medium-sized businesses. The freedom of capital movements and the freedom of establishment within the EU and the EEA are significantly more restricted by the new regulations.
Bernhard SchwechelGGI member firm
FACT GmbH Wirtschaftsprüfungsgesellschaft
Tax, Auditing & Accounting, Advisory, Corporate Finance, Fiduciary & Estate Planning
T: +49 561 316 6860
FACT GmbH Wirtschaftsprüfungsgesellschaft is a tax consultancy, public auditing company, and law firm located in Kassel, known as the heart of Germany. FACT provides German and international accountancy and tax services to companies and individuals. The expe rienced team works on cross-border issues for German clients as well as for foreign clients. FACT works closely with its clients and responds rapidly to their needs.
Bernhard Schwechel is a Managing Partner of FACT GmbH and is experienced in the field of international taxation. His areas of expertise include tax and business advice for large multinational corporations and mid-size companies, as well as for internationally oriented individual clients. He supports his clients in inbound and outbound M&A projects.
Published: International Taxation Newsletter, No. 16, Spring 2022 l Photo: Benjamin ['O°] Zweig - stock.adobe.com