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Exit taxation is a sensitive issue for many entrepreneurs who hold shares in corporations and are planning to relocate their place of residence and centre of life abroad. As soon as they relocate their place of residence, they may be faced with considerable tax claims, which in many cases exceed their liquidity. In this blog article, we show what entrepreneurs should look out for when relocating and what options are available to minimise or avoid exit tax.
Who is affected by the exit tax?
In principle, all entrepreneurs who hold shares in corporations and who have held shares in the last 12 years more than 7 years were subject to unlimited tax liability in Germany in the event of a change of residence.
As soon as an entrepreneur gives up their residence and loses their tax liability in Germany, Germany no longer has the right to tax them. This means that the increase in value of the shares and participations is taxed at the time of departure.
Calculation of exit tax
Even if the shares are not sold, the exit tax is due. The basis for calculating the exit tax is the current market value of the shares at the time of departure, less the acquisition costs for the shares.
The tax office likes to use the simplified capitalised earnings value method when calculating the exit tax. The average annual profit (assumed to be EUR 100,000) is multiplied by 13,75 multiplied. For a GmbH with an annual profit of EUR 100,000, this results in an enterprise value of EUR 1,375,000.
This notional profit must be taxed at the personal income tax rate. However, due to the partial income method, „only“ 60% of the profit is taxed, while 40% remains tax-free. Nevertheless, this results in a tax burden of over EUR 350,000.
Selling the shares to a family member or business partner for significantly less than their value will not work, as the tax authorities can scrutinise the sale price for arm's length and appropriateness. Anyone who agrees to pay the exit tax should have the actual value determined by an independent expert.
Options for avoidance
1
Maintain tax liability
The simplest but least favourable option from a long-term tax perspective is to maintain residence in Germany. In this case, unlimited tax liability remains in place, which means that profit distributions are taxable in Germany.
2
Gift of shares
Another option is to make a gift of the company shares to a person resident in Germany before moving away. This eliminates the exit tax, but gift tax may play a role. In order to minimise gift tax, a gift subject to reserved usufruct can be considered.
In this case, only the ownership of the shares under civil law is given away, while the donor retains the right to profit distributions and sales gains, which is why the value of the gift is minimised. In addition, the tax-free allowances for gifts can be utilised. These are between EUR 20,000 and EUR 500,000, depending on the degree of kinship or relationship between the donor and the donee.
For Austrian entrepreneurs, gifting, both with and without a reserved usufruct, can be an easy way to avoid exit tax, as there has been no gift tax in Austria since 1 August 2008.
3
Establish a foundation
A frequently overlooked but very effective method of avoiding exit tax is the establishment of a foundation. A foundation can be set up both in Germany and abroad.
Under certain conditions, a German foundation can receive up to EUR 400,000 without the transfer triggering gift tax. Provided the foundation does not carry out any commercial activities, a foundation in Germany only pays 15% corporation tax.
The tax burden is often lower for foreign foundations, although gift tax is payable when transferring assets from Germany to a foundation abroad. If assets are transferred from Austria, a foundation entrance tax is payable.
4
Conversion into a partnership
The conversion of a GmbH into a GmbH & Co. KG means that the former GmbH shareholder is now a partner in a partnership and is therefore no longer subject to exit taxation. It is important to note that the company's operations remain in Germany in order to avoid a taxable transfer of functions.
As a rule, the conversion of a GmbH into a GmbH & Co. KG is usually tax-neutral. However, if the GmbH has profit carryforwards, the conversion can lead to a considerable tax burden.
5
Transfer to business assets
Another very interesting option is to transfer the shares to the business assets of a (newly founded) GmbH & Co. KG. Here, too, it is important that the company's operations remain in Germany.
Furthermore, this model only works if the GmbH & Co. KG, which holds the shares in the GmbH, carries out a commercial activity in Germany. An obvious business activity in this case would be administration and management as a service for the operating GmbH.
We are here for you!
If you hold shares in corporations and are thinking about or have already decided to relocate abroad, then you should definitely look into exit taxation and ways of avoiding exit tax.
The best option for avoiding exit tax always depends on the individual case. In a free initial consultation, we will analyse your current situation and find out which options are best suited to you. We can then support you with the entire implementation process if required.
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As an unbeatable collective of established entrepreneurs, renowned lawyers and experienced tax advisors, we are a reliable partner at your side - for tax optimisation, foreign companies, global expansion banking, emigration or asset protection.