The German Exit Tax is an Issue Especially, But Not Only When Changing Residence.
Every fifth middle-class person in Germany is now toying with the idea of emigrating. This is the result of a survey published in July 2023 by the SME association BVMW. Spain, and Mallorca in particular, are seen by many as an attractive new place to live. However, in this case, the German state asks for payment in the form of exit taxation. It is precisely this tax burden that can have serious implications.
Contents
Anyone who moves from Germany to another country is generally affected by the exit tax as the owner of shares in corporations. In exceptional cases, this also applies to partners in partnerships or sole proprietors. The taxation is the same as for a profit from the sale of shares. Specifically, this means that the amount taxed is the amount that would have been realized in a sale under normal circumstances. In other words, the legislator takes the departure as an opportunity to levy taxes on the company’s hidden reserves, but without the emigrant receiving the funds necessary to offset the tax payment.
In addition to the emigration of a shareholder, the location of the management can also shift, whereby the corporation becomes resident abroad. In this case, “final taxation” takes place by assuming that the assets are sold at the current market value.
Even in the case of inheritance, the exit tax can lead to a considerable increase in the overall tax burden. An example: The children of an entrepreneur study in Spain and the father dies unexpectedly. If the shareholder’s heirs live abroad, the shares formally pass from a tax resident to a tax non-resident. This leads to Germany losing its right to tax the shares in the corporation, which in turn triggers exit taxation.
Sample calculations
These calculations show the magnitudes of the exit taxation:
| Designation | Assessment basis | Tax rate | Tax burden |
|---|---|---|---|
| Departure of the shareholder | |||
| Market value of the GmbH shares | 110.000.000 € | ||
| Acquisition or formation costs | -10.000.000 € | ||
| Taxable profit | 100.000.000 € | 26,375 % | Income tax incl. solidarity surcharge € 26,375,000 |
| Change of the place of management | |||
| Value of the company | 100.000.000 € | approx. 30 % | Corporate income tax incl. trade tax € 30,000,000 |
| Inheritance tax | |||
| Market value of the GmbH shares | 110.000.000 € | ||
| Income tax reducing enrichment | -26.375.000 € | ||
| 83.625.000 € | 30 % | Inheritance tax without possible allowances € 25,087,500 | |
| Possible total tax burden | |||
| approx. 81 % | 81.462.500 € |
Business partnerships can be affected
Business partnerships may also be subject to taxation when they leave the country if they are not originally engaged in commercial activities but are “commercially infected or influenced”, or if they own assets that are not related to their business operations. Affected are mainly partnerships that manage assets or are organized in the form of holding companies.
Moving away without exit tax – how does that work?
One way to avoid the exit taxation is to make targeted changes to the asset structure, which of course must be done in close cooperation with an experienced tax advisor. For example, one should avoid owning shares in corporations. One option is to convert the corporation into a partnership. When emigrating to Spain, the special tax regime “Lex Beckham” offers opportunities to muzzle the “beast” of exit tax, at least in the medium term.
Using case studies, the PlattesGroup will explain these and other topics relating to the problem area of “emigrating to Mallorca” on 2 October in Palma at a presentation event (in German) and show concrete solutions. Registration: https://link.plattes.net/event0210-8
This article was prepared by the tax and legal firm PlattesGroup based in Palma de Mallorca.