The Federal Fiscal Court (Bundesfinanzhof, BFH) has issued a significant judgement on German Exit Taxation, which holds substantial importance for taxpayers, especially those relocating to Switzerland or an EU or EEA state. In the so-called Wächtler proceedings (BFH of 6 September 2023, case reference I R 35/20), it was ruled that the exit tax under Section 6 of the Foreign Transaction Tax Act (Außensteuergesetz, AStG) must be deferred indefinitely and without interest when moving to Switzerland. A deferral can only be conditional upon the provision of security. This decision also influences relocations to other countries and is particularly beneficial for taxpayers looking to relocate within the EU.
Exit tax on corporate shareholdings
Taxpayers who own at least 1 per cent of shares in (domestic or foreign) corporations, such as GmbHs or limited companies, are generally subject to the so-called exit tax under Section 6 AStG. Essentially, this means that if the shareholder emigrates, the tax authorities presume that the shareholding has been sold – even though this isn’t the case. The taxpayer is usually required to pay approximately 25% income tax on the value of their shareholding.
Taxation of migrants infringes freedom of establishment
The BFH’s judgement has challenged this principle. While it primarily focuses on the effects of relocating to Switzerland, it also addresses the so-called freedom of establishment within Europe and a ruling by the European Court of Justice (ECJ).
In the case it adjudicated, the BFH believes that there is an infringement of the freedom of establishment, as a taxpayer relocating to Switzerland is treated differently from a taxpayer remaining in Germany. This is because a taxpayer moving to Switzerland must pay tax on deferred capital gains on company shares immediately upon departure, while the taxpayer staying in Germany only has to do so when the capital gains are realized.
Indeed, those emigrating have the opportunity to pay their tax debt in installments. However, this doesn’t adequately offset the ensuing liquidity disadvantage.
Interest-free deferral of exit tax
The BFH logically concludes that the exit tax on relocations to Switzerland must be deferred indefinitely until the actual sale of the shares, without interest, to avoid penalizing the emigrant compared to domestic relocators.
Security deposits when relocating to Switzerland
The only downside is that the tax authorities may still require a security deposit, as there is no mutual assistance mechanism for the recovery of tax claims concerning Switzerland.
In practice, this often results in a planned relocation not being executed because the mere raising of the security deposit is too great an obstacle for many. However, in these instances, corporate reorganizations that can be implemented before an exit often help. Typically, they allow the exit tax to be entirely avoided. Solutions using GmbH & Co KGs or foundation solutions are possible, for example.
No security deposit when relocating to another EU country
Taxpayers looking to relocate to an EU or EEA country can, in our view, do so without the need for security. This is due to the guaranteed recovery of tax claims within the EU. Consequently, the exit tax isn’t immediately due upon departure, and the taxpayer will only be required to pay it at a later date, specifically when they have actually liquidated their investment (thereby generating a purchase price from which they can settle the tax).
Taxpayers who have already paid the exit tax may even be entitled to a reimbursement of the paid tax.
WINHELLER provides advice and verification on exit tax in Germany and potential tax reimbursements.
Taxpayers who are considering moving abroad or have already done so should thoroughly assess the impact of the BFH judgment on their unique tax situation. The judgment overturns the previous taxation system. Taxpayers, especially those relocating to Switzerland or to an EU or EEA member state, could now enjoy more advantageous conditions.
However, it remains uncertain how the tax authorities will respond to the judgment and whether further legislative action will be taken. It’s entirely possible that the administration will not easily acknowledge the beneficial legal situation, and that taxpayers will need to assert their legal rights.
Our seasoned tax law and relocation issue attorneys are ready to assist you in optimizing your relocation. Don’t hesitate to contact us with your inquiries!
Read more:
German Exit Taxation: Requirements, Amount, Advice
Optimizing Taxation in Germany with Investment GmbH/Asset Management GmbH
