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In times of economic and political uncertainty, as well as high taxes and the introduction of the Asset registers in the EU, more and more people from Germany are moving abroad.
Some even search Tax havens to enjoy security, anonymity, and low to no taxes.
Even before moving abroad, one should consider the exit taxation in Germany. How this is calculated, what areas of application it covers, and what legal measures apply to avoid it are comprehensively explained in this article.
Important in advance: Every relocation should always be planned individually and discussed with a tax expert, otherwise high additional payments or penalties may occur.
Explanation
The Exit taxation is a special tax regulation in Germany that applies when a person with tax residency in Germany relocates their domicile or habitual residence abroad. The purpose of the exit tax is to ensure the taxation of value increases on certain assets before a person leaves the German tax system.
Height
Expatriation tax in Germany is not a specific tax with a fixed percentage, but a regulation that falls under income tax. The amount of the tax therefore depends on the taxpayer's individual income tax rate.
Determination of the amount of exit tax
determination of the imputed capital gain:
- If a person with significant holdings in corporations (at least 1 % over the five years preceding departure) moves abroad, the holdings are treated as if they had been sold on the date of departure. The resulting gain (the difference between the actual market value of the shares and their cost basis) is treated as a „notional capital gain.“.
Taxation according to the individual income tax rate:
- This notional capital gain is then taxed at the individual’s applicable income tax rate. Income tax rates in Germany range from 0 % (for very low incomes) to 45 % (the top tax rate for high incomes). In addition, there is the solidarity surcharge (5.5 % of the income tax) and, if applicable, church tax.
Example calculation
Suppose a person owns stocks with an original purchase price of 100,000 euros that are now worth 500,000 euros. Upon moving abroad, a notional capital gain of 400,000 euros (500,000 euros minus 100,000 euros) is recognized. This gain is then taxed at the person’s individual tax rate—let’s say, for example, 42 %:
- Tax on notional profit: 400,000 euros * 42 % = 168,000 euros.
- In addition, there would be the solidarity surcharge and, if applicable, the church tax.
Special features
Option for payment deferralUnder certain conditions, in particular when moving within the EU or the European Economic Area (EEA), the tax can be deferred. This means that the tax is not due immediately, but only when the shares are actually sold or certain other conditions occur.
Return policyIf the person returns to Germany within seven years of moving away, the tax will be waived.
Summary
The amount of exit taxation is not fixed; rather, it depends on the notional capital gain and the individual’s personal tax rate. This can be as high as 45 %, plus the solidarity surcharge and, if applicable, church tax.
Applications
The exit taxation in Germany primarily affects Shares in corporations. This concerns in particular the following asset classes:
Shares in capital companies (e.g., LLC, corporation):
- Exit taxation applies primarily to shares in corporations if the taxpayer held, directly or indirectly, at least an 1% interest in a corporation within the five years prior to departure.
- The hidden reserves of these shares are taxed, meaning the increase in value that has accrued up to the time of relocation.
Participations in foreign corporations:
- Shares in foreign corporations are also subject to exit taxation if the aforementioned holding thresholds are exceeded and the taxpayer was resident in Germany.
Assets in corporations (such as shares):
- This also includes shares and other equity interests in corporations that the taxpayer holds directly or indirectly.
Assets acquired through contribution to a corporation:
- When assets have been contributed to a corporation, and these shares in the company are held by the taxpayer, these are also affected by the exit tax.
Generally not affected by the expatriation tax are:
- Sole proprietorship: Sole proprietorships are partnerships and are therefore not subject to exit taxation in Germany. However, function relocation or the uncoupling of tax jurisdiction (Entstrickung) may occur here.
- Real estateDirectly held real estate does not fall under exit taxation. However, real estate held by LLCs does fall under it.
- Other assetsSavings balances, direct investments in partnerships, or private business assets are not subject to expatriation tax.
- Cryptocurrencies: Cryptocurrencies are not subject to exit taxation, as cryptocurrencies are treated for tax purposes in Germany as private sale transactions, not as holdings in corporations.
It is also important to emphasize that the exit tax primarily captures the unrealized gains contained in the affected assets, rather than the entire wealth of the taxpayer.
Attention: No exit tax, but tax entrapment!
Another risk is the exit tax on business assets, which can potentially apply even when emigrating as a sole proprietor. For example, if you planned early and run your business as a sole proprietorship or a GmbH & Co. KG, de facto no exit tax applies, since these legal forms are treated as natural persons for tax purposes.
However, anyone who believes they can emigrate and run their consulting business in a Dubai Free Zone or in the USA as Form a new US LLC and thinks they can just keep working without any issues is mistaken. Because this still constitutes a relocation of the company's registered office, which must in fact be reported.
In this context, the relocation of a company's assets must be taxed in the same way, even if that company is a KG, a GmbH & Co. KG, or a sole proprietorship.
Intangible assets such as websites, brands, email lists, contracts, and much more are also frequently overlooked in this context. These should definitely be proactively evaluated and reported. For many online businesses, especially if they are heavily dependent on a single person and would not have a realistic resale value, the valuation is quite flexible. Examples of this are personal brands and influencers, as they are so dependent on one person that they cannot be sold.
Avoiding exit tax – The best options
The expatriation tax can be completely avoided under certain circumstances. Naturally, this always depends on one's personal situation and should be evaluated and planned on an individual basis. Below is an overview of the most common methods to legally avoid the expatriation tax.
Variant 1 – Foundation
Anyone who establishes a foundation, whether in Germany or a Foreign Foundation in Liechtenstein, has the option of transferring the assets to be taxed (e.g., GmbH shares) to a foundation in advance. However, this usually only pays off starting from a high six- to seven-figure total wealth, since foundations incur costs both in their establishment and in their maintenance.
Foundations are separate legal entities, and anyone who transfers GmbH shares or similar assets to the foundation before moving away can avoid exit taxation.
Variant 2 – GmbH & Co KG
Anyone planning to emigrate can also set up a GmbH & Co. KG or contribute to one beforehand. If the GmbH shares are held by a GmbH & Co. KG holding company, they continue to be protected from a liability perspective by a GmbH (general partner of the KG), but for tax purposes it is then classified as a partnership, which is why the exit tax no longer applies.
However, it is important that the GmbH & Co. KG retains a de facto managing director in Germany as well as a registered office in Germany.
Option 3 – Donation
Those who have trusted individuals in their circle can also transfer taxable hidden reserves to friends or family. In doing so, one must naturally keep gift tax in mind so as not to trigger it. In addition, there is the risk here that the asset shares will be misappropriated or abused.
The most important points to emigrate successfully and free yourself from the system.
Optimize taxes, gain freedom and increase quality of life.
Summary
In summary, exit taxation is an important aspect of emigration and should be carefully planned for many people. It primarily applies to capital assets and becomes due at the time of emigration in the form of a sale (part of income tax). In practice, this is usually 27 %.
Through clever planning and structuring using foundations or quite simply KG holdings, however, this can be drastically reduced, eliminated, or deferred. Nevertheless, emigration and how to deal with the exit tax should be evaluated, planned, and implemented by a professional advisor. The penalties from the tax office for (unintentional) tax evasion are horrendous.
