Tightening of Germany’s exit tax since FY 2022 – experiences
Bernhard Schwechel
by Bernhard Schwechel
In 2022 Germany began implementing a stricter exit tax regulation. It has revised exit taxation for privately-held company shares. In particular, the interest-free, indefinite deferral in cases where European Union (EU) or European Economic Area (EEA) citizens relocated within the EU/EEA area was abolished and replaced by the option of a seven-year instalment plan.
When a shareholder moves abroad, Germany subjects the value increase of a shareholding of at least 1% of a corporation’s capital to income tax.
Germany has substantially tightened the taxation of relocations of EU/EEA citizens to other EU/EEA countries, since permanent deferral will be no longer possible and relocating citizens will generally be obliged to provide security even in purely EU/EEA cases.
Due to the legislator’s intention to put EU/EEA cases on an equal footing with third-country cases, there will be no longer a distinction between relocations to third countries and EU/EEA countries.
A decision of Germany’s federal fiscal court (BFH) following a preceding European Court of Justice (ECJ) judgment now suggests that a comprehensive deferral of exit tax must always be granted for European legal reasons.
The Baden-Württemberg fiscal court turned to the ECJ with a request for a preliminary ruling on whether the exit tax provided for in § 6 AStG former version violated the Free Movement of Persons Agreement with Switzerland. In its judgment of 26 February 2019 (Case C-581/17, Wächtler), the ECJ affirmed such a violation if (as in the case of the German regulation) the relocation of an EU member state national to Switzerland triggered an exit tax, whereas a move within the same member state would only lead to taxation of the increased value in shares of a corporation when they were realized.
The FG Baden-Württemberg then ruled in favour of the lawsuit with its judgment of 31 August 2020 (2 K 835/19). The tax administration rejected this and filed an appeal.
The BFH’s judgment of 06 September 2023 (Ref. I R 35/20) concluded that in the case of a move to Switzerland before 01 January 2022, contrary to the deferral regulation that provided for moves to third countries in § 6 (4) AStG former version, the exit tax must be deferred by the tax office permanently and without interest. However, the BFH contradicted the FG Baden-Württemberg in that the tax office would thus be generally prevented from assessing the income tax arising from an exit taxation.
The case law of the ECJ and the BFH clarifies that in old cases (relocations before 01 January 2022), an interest-free deferral of the exit tax until the realisation of value increases must regularly be granted in third-country cases.
Regarding the new regulation for the deferral of the exit tax for relocations since 01 January 2022, there are significant doubts as to whether the option to pay the exit tax over seven years (as provided for on application) is compliant with EU law. A review of the regulation of § 6 (4) AStG in the currently valid version by the fiscal courts is likely to be only a matter of time. It may well be that the legislator will have to make improvements here, possibly even retroactively, for cases of relocation since 01 January 2022.
FACT GmbH Wirtschaftsprüfungsgesellschaft is a tax consultancy, public auditing company, and law firm located in Kassel, known as the heart of Germany. FACT provides German and international accountancy and tax services to companies and individuals. The experienced team works on cross-border issues for German clients as well as for foreign clients. FACT works closely with its clients and responds rapidly to their needs.
GGI member firmFACT GmbH Wirtschaftsprüfungsgesell-schaftKassel, GermanyT: +49 561 316 6860Tax, Auditing & Accounting, Advisory, Corporate Finance, Fiduciary & Estate Planning
Bernhard Schwechel is a Managing Partner of FACT GmbH and is experienced in the field of International Taxation. His areas of expertise include tax and business advice for large multinational corporations and mid-size companies, as well as for internationally-oriented individual clients. He supports his clients in inbound and outbound M&A projects. Contact Bernhard.
