AGN EMEA Tax Committee News
What hidden tax liabilities might follow you when you leave Germany—and how can you plan to avoid them?
Our clients frequently ask us about the the tax consequences of moving away from Germany. The effects can be complex and, in some cases, significant. Terminating tax ties with Germany requires careful planning and consideration. In most cases, this involves triggering taxation events that result in the taxation of increases in value within the taxpayer’s assets.
Exit Taxation
In the case of natural persons who hold at least 1% of the shares in a domestic or foreign corporation as part of their private assets, there is a fiction of the sale of these shares at market value, if the rights holder moves permanently abroad or gifts or bequeaths his/her shares to persons living abroad. The consequence of this so-called exit taxation is the taxation of any hidden reserves contained in the shares, even though no liquidity flows in as a result of the move, gift or inheritance (dry income). This instrument has various forms, with an exception for temporary absences of up to seven years and a deferral option.
Hidden Reserves
For economic assets, customer relationships, functions or even shareholdings in corporations that constitute business assets, so-called general unwinding of hidden reserves may be considered, if the aforementioned assets themselves are transferred abroad or if sole traders or co-owners of partnerships in whose business assets these assets are held choose to leave Germany, resulting in the exclusion or restriction of the Federal Republic of Germany’s right of taxation. As a result, this taxation instrument also leads to a fictitious withdrawal (sale) of assets at market value without any real inflow of liquidity. Unlike exit taxation, this type of taxation does not allow for any exceptions in the case of temporary absence or deferral options. Whether Germany’s right of taxation is excluded or restricted as a triggering factor in this sense depends on the specific circumstances and the interaction of national and international tax law (double taxation agreements) and must be considered on a case-by-case basis.
Inheritance and Gift Tax
Finally, when moving away from Germany, inheritance and gift tax aspects must also be taken into account, bearing in mind that the so-called unlimited inheritance and gift tax liability generally continues to apply for five years after the calendar year of departure.
The tax consequences of moving away from Germany can therefore be very complex and far-reaching. Careful planning and, if necessary, timely structuring of your circumstances can help to counteract unexpected and unwanted tax consequences.
Brought to you by the AGN EMEA Tax Committee
If you have any questions in relation to this article, please get in touch with Norbert.
Norbert Mevissen
Tax Partner I Specialist Advisor for International Tax Law
Schaffer & Partner Audit & Tax and Schaffer & Partner Legal
Web: www.schaffer-partner.de
Email: norbert.mevissen@schaffer-partner.de
Phone: (+49 911) 95 99 80
