The Exit Taxation for GmbH Shareholders

When relocating their residence or usual place of stay abroad, shareholders of corporations often face unexpected tax challenges. In particular, exit taxation becomes a focus, as the legislator aims to ensure the tax capture of hidden reserves in GmbH shares, even if the shareholder leaves Germany.

Natural persons holding shares in corporations privately must plan for the potential financial consequences of emigration. This includes calculating the taxes due and discussing methods to possibly minimize, defer, or entirely avoid the tax burden. The Federal Finance Court (BFH), as the highest German financial court, and the European Economic Area (EEA) provide the legal framework in this context.

Definition: Exit Tax and Its Criteria

When a shareholder of a corporation relocates their residence abroad, German law prescribes taxation under certain circumstances. The tax event, known as "exit tax," is based on § 6 of the Foreign Tax Act (AStG). It requires that the shareholder holds at least one percent of the shares – regardless of the legal form of the company or the nationality of the owner.

Key Elements of the Exit Tax:

• Legal Basis: § 6 AStG

• Relevant Share Ownership: From 1% stake

• Trigger: Relocation of residence abroad

• Form of Participation: Corporation under German or foreign law

It is assumed that a fictitious sale of the shares occurs. Although no actual sale happens – thus no cash flow is generated – the increase in value of the participation must be taxed as income. This leads to the taxation of income that has not arisen from actual cash flow.

Tax Consequences of Relocating Residence Abroad

Determining the Tax Burden When Moving Abroad

Individuals intending to relocate their residence from Germany to another country, holding at least one percent stake in a corporation, face the taxation of this event. Since 2022, a natural person must have been subject to unlimited tax liability in Germany for at least seven out of the last twelve years to be affected by this regulation – an adjustment from the earlier regulation.

Calculating the Tax Burden through Fictitious Disposal

The tax burden is determined by simulating a hypothetical sale of the company shares. The basis for this is the value of the corporation. This procedure is particularly relevant for entrepreneurs and shareholders holding a significant stake in the company.

Simplified Procedure for Estimating the Company's Value

The general principle for calculation according to the simplified earnings value method suggests using the average profit of the corporation from the last three years before the shareholder's relocation. This average profit is then multiplied by a factor – currently 13.75.

Example Calculation

For determining the tax burden according to this scheme, the following data must be considered:

Year 1: e.g., €150,000 profit
Year 2: e.g., €200,000 profit
Year 3: e.g., €250,000 profit

The average profit amounts to €200,000. After multiplication with the factor, a value of €2,600,000 is obtained. Sixty percent of this value is then subject to income tax, based on the individual tax rate of the shareholder. For example, at a personal tax rate of 30 percent, this would result in a tax burden of €468,000.

Strategies to Avoid Exit Taxation for GmbH Shareholders

Preventing or Limiting the Duration of Emigration

To avoid the exit tax, it is advisable to reconsider moving abroad or to limit it to a maximum of seven years. Returning to Germany within this period could result in the waiver of the exit tax. Through careful planning of residence and domicile, you can maintain unlimited tax liability in Germany. Thus, for tax purposes, no departure is recognized, which eliminates the exit tax. However, note that your entire global income remains subject to German tax.

Selling Shares Before Leaving

Selling the company shares before leaving prevents the imposition of the exit tax. However, it should be noted that taxes are also due on the sale. Here, a balance and consultation are necessary to make the most tax-efficient decision.

Transferring Shares to Family Members

Gifting the shares to a family member subject to tax in Germany can also be an alternative. This option might incur gift tax, whose advantages and disadvantages compared to the exit tax should be discussed with a tax advisor.

Dissolving the Company

Dissolving the company can potentially circumvent the exit tax, though the consent of the shareholders and the economic viability must be critically examined.

Restructuring into a GmbH & Co. KG

Converting a corporation into a partnership, such as a GmbH & Co. KG, can avoid exit taxation. Furthermore, contributing the shares to the business assets of an existing partnership is an option. In both cases, the administrative seat of the partnership should remain in Germany to avoid the exit tax.

The Necessity of Professional Advice

There is no doubt that avoiding unfavorable exit taxation is complex and requires strategic planning. To avoid tax pitfalls and develop an optimized solution for your situation, consulting a tax advisor is essential.

As a client of "The Arabian Dream," you benefit from our experience and our premier network of experts on the topic of exit taxation. Get in touch with us and let us advise you.