Leaving the country does not necessarily end your tax residence

Fewer than 183 days a year in Germany or Austria, so no more tax liability: that is the sentence we hear most often, and it is the reason why so many entrepreneurs face back taxes and criminal proceedings years after they left. This article explains what the tax office actually looks at, what the exit tax costs, how it can be avoided and what a departure that survives an audit looks like.

Two questions, not one.

Whether you are taxable in Germany on your worldwide income depends on two questions, and a yes to either one is enough. The first question everybody knows: do you spend more than six months of the year in Germany? That is the famous 183-day rule, which establishes what the law calls a habitual abode.

The second question is the one almost everyone overlooks: do you still have a dwelling in Germany that you could use at any time? The decisive point is not whether you live there but whether you could. The courts speak of having the keys. You hold a key, the flat is furnished, and you could move in tomorrow. How many days you actually spend there no longer matters.

In concrete terms that covers the owner-occupied flat you kept and left empty, the room at your parents' house that is yours whenever you want it, the family home in which your wife continues to live while you move abroad, and the holiday house used only by the family. In each of these cases there is a residence, and every residence means unlimited tax liability on everything you earn anywhere in the world.

Austria applies the same two questions, with one distinctive feature in the form of its second-home regulation. Anyone who keeps a dwelling in Austria but demonstrably uses it on no more than 70 days a year, and keeps a log to prove it, remains outside unlimited tax liability despite that dwelling. The 70 days must be documented, and the person's centre of vital interests must have been abroad for at least five years.

The ties that give you away.

How does the tax office establish whether you still have a residence and a centre of life in the country? It collects connecting factors. None of them is decisive on its own, but together they form a picture.

Limited tax liability: domestic income stays behind.

Assume that you have done everything correctly, that you have neither a residence nor a habitual abode and that you are out of unlimited tax liability. You may nonetheless remain subject to limited tax liability, which means that everything derived from German or Austrian sources continues to be taxed there. That applies to rental income from domestic property always and without exception, to income from a domestic permanent establishment, meaning an office, warehouse or workshop that your business keeps in the country, and, depending on the circumstances, to dividends from domestic corporations.

Exit tax: the bill on the way out.

Now to the most expensive item for most entrepreneurs. If you hold at least 1% of a corporation, be it a GmbH, an AG or a foreign company, and you give up your unlimited tax liability, the tax office proceeds as though you had sold those shares at market value on the day you left. On that notional gain you pay income tax under the partial income method, meaning that 60% of the gain is taxed at your personal rate. In Germany this affects anyone who was subject to unlimited tax liability for at least seven of the twelve years before departure.

How the tax office does the arithmetic

The basis is the market value of the shares at the time of departure less their acquisition cost. Where there is no recent purchase price, the tax office readily falls back on the simplified capitalised earnings method and multiplies the average annual profit by 13.75.

Selling the shares to a family member or business partner well below their value does not work, because the tax office reviews the price for arm's-length terms. Anyone who decides to accept the exit tax should at least have the real value determined by an independent expert, since the flat multiplier is frequently higher than what an actual buyer would pay.

Funds and ETFs since 2025

An extension that many people have not yet noticed: since 1 January 2025 units in investment funds and ETFs can also fall within the exit tax. If you have invested at least EUR 500,000 in a single fund, or hold at least 1% of it, that fund too is deemed sold on departure.

And Austria?

Austria also taxes shareholdings on departure. Where Austria loses its right to tax a participation as a result of the move, the hidden reserves are crystallised and taxed at the special rate for capital income. On a move to a third country such as the Emirates the tax generally falls due immediately; on a move within the EU or the EEA a deferral until actual disposal can be obtained on application.

Five ways to reduce or avoid the exit tax.

Anyone who holds a valuable GmbH and simply leaves triggers a six- or seven-figure tax bill. Anyone who structures beforehand can, in many cases, reduce that bill substantially, avoid it entirely or at least push it into the future. Which route is right always depends on the individual case.

1. 1

   Instalments and the returning-resident rule

   On application the exit tax can be paid in seven equal annual instalments, usually against security. Anyone who moves abroad only temporarily and returns within seven years can have the tax cancelled, and the period can be extended to twelve years on request. This does not solve the problem, but it buys time.

2. 2

   Gifting the shares

   The shares are gifted before departure to a person resident in the home country. That removes the exit tax, but gift tax may arise instead. To minimise it, a gift subject to a reserved usufruct can be considered: only the civil-law ownership is transferred, while the donor retains the right to distributions and sale proceeds, which reduces the value of the gift considerably. The personal allowances, which range from EUR 20,000 to EUR 500,000 depending on the relationship, apply in addition. For Austrian entrepreneurs a gift, with or without a usufruct, is a particularly straightforward route, because Austria has levied no gift tax since 2008.

3. 3

   Contributing the shares to a foundation

   A frequently overlooked but highly effective method is to establish a foundation. A domestic family foundation can, subject to conditions, receive assets at a substantially reduced rate of gift tax, and as long as it carries on no commercial activity it pays only 15% corporate tax. The sequence is critical: transferring shares to a foreign foundation without consideration itself triggers the exit tax, because the home country loses its right to tax. Our article on setting up a foundation explains the mechanics in detail.

4. 4

   Converting the GmbH into a GmbH & Co. KG

   Once the GmbH has been converted into a limited partnership, the former shareholder is a partner in a partnership and no longer within the exit tax. The business must remain in Germany in order to avoid a taxable transfer of functions. The conversion is generally tax-neutral, but where the GmbH has retained profits it can trigger a considerable tax charge.

5. 5

   Contributing the shares to business assets

   The shares are contributed to the business assets of a newly formed GmbH & Co. KG. Here too the business must remain in Germany, and the model works only where the partnership itself carries on a commercial activity, for instance administration and management services for the operating GmbH.

The simplest, though in the long run least favourable, option remains not leaving at all: if your residence stays in Germany, unlimited tax liability stays with it, and every distribution is taxed there.

Extended limited tax liability: ten years of after-effects.

Germany has a rule created specifically for moves to low-tax countries. It catches practically every destination in which you pay markedly less tax than in Germany, which is to say almost every country to which entrepreneurs emigrate.

It applies where four conditions coincide: you are a German national, you were subject to unlimited tax liability in Germany for at least five of the ten years before departure, you move to a low-tax country, and you retain substantial economic interests in Germany. Substantial economic interests exist, for example, where you are the owner or co-owner of a German business, hold at least 1% of a German corporation, derive more than 30% of your income from Germany or keep more than 30% of your assets, or assets exceeding EUR 154,000, in Germany.

Where that is the case, you remain taxable for ten years after departure on all income that is not clearly foreign income. This goes well beyond ordinary limited tax liability: even interest from German banks, which would normally be outside the net, is caught.

Austria has no equivalent rule, so anyone leaving Austria faces no ten-year tail on domestic income as a whole. Austria collects its money elsewhere: through exit taxation on shareholdings, through withholding tax on Austrian dividends and interest, which survives the departure, and through a very careful examination of whether the centre of vital interests has actually moved. The consequence is the same in both countries. Anyone who leaves and keeps a business, a shareholding or substantial assets behind should assume that the old home country will continue to take its share.

How a departure is done so that it holds.

The sequence is not incidental; it is essential.

1. 1

   Take stock

   Which shareholdings do you hold, which properties, which funds, which contracts, and what do your family circumstances look like? Which of these triggers exit tax, how might it be avoided, and what falls within extended limited tax liability? Only once all of this is on the table can a sensible plan be made.

2. 2

   Structure before you leave

   The optimal structure is designed and implemented before residence and business are relocated, not afterwards. After departure most arrangements are either impossible or considerably more expensive.

3. 3

   Build residence in the destination

   In parallel, the residence permit, a home, foreign companies, foundations where appropriate, bank accounts and finally the tax residency certificate are put in place.

4. 4

   Document everything

   Every step is recorded so that, years later, you can prove the whole picture cleanly if an audit comes. Only someone who does it this way has actually emigrated and escaped the old tax liability.

In summary, the 183-day rule is not a myth, but it is not the whole truth either. Residence, centre of vital interests, connecting factors, place of management and the exit tax are the points on which the matter is really decided.

Frequently asked questions.