If a GmbH shareholder wants to move abroad, this usually leads to an exit tax. Germany levies a tax on the profit of the assumed sale of the GmbH shareholding. In this way, Germany ensures that the departure of the GmbH shareholder will leave a future profit of the sale of the GmbH shares in Germany tax relevant. There are two important requirements for the collection of the exit tax. For one, it's the move itself. This means that no further residence in Germany remains after the move. On the other hand, Germany’s taxation right is excluded from the profit of future shares of GmbH sold on the basis of double taxation agreements with foreign countries. If a GmbH shareholder now moves to a country with which Germany has not concluded a double taxation agreement, then he can avoid the exit tax if he maintains a residence in Germany.

Moving abroad without double taxation agreement

1. Why is there an exit tax?

Exit tax is a tax levied in Germany when the shareholder of a corporation moves abroad. Since these are mostly GmbH shareholders, we use this common marking in the following on behalf of all other persons legally affected by the exit tax. Exit tax is a preventive taxation on a capital gain of shareholdings that would take place in Germany if the shareholder were to conclude the sale in this country. In other words, the Federal Republic of Germany is merely attempting to safeguard the right to leave without the taxable shareholder moving anyway.

For this purpose, it is assumed that the taxation takes place at the time of the departure of the shareholder, as if a sale of the GmbH would take place in Germany at that time. This fictitious sale is legally fixed in § 6 AStG.

2nd Exit Tax – Criteria for Taxation

In order to understand when an exit tax comes to GmbH shareholders who want to move abroad, three criteria in particular are decisive. On the one hand, the GmbH shareholder must have been subject to unlimited taxation in Germany for at least ten years before moving abroad. Secondly, the exit tax applies when he gives up all residence in the country. And thirdly, the departure of the shareholder Germany must lose tax sovereignty over the future profit from the sale of the shares. Since the tax jurisdiction is usually regulated by a bilateral double taxation agreement between Germany and the destination country of the departing GmbH shareholder, this is decisive.

Therefore, we now take a look at the regulation of corresponding double taxation agreements, which is mostly borrowed from the OECD Model Convention for the Prevention of Double Taxation. It states that, as a rule, the right of taxation lies with the country in which the taxpayer is resident. And in our considerations here, that is mostly abroad. Thus, after the departure of the GmbH shareholder, Germany loses control over the tax on the profit from the sale of its GmbH shares.

Equipped with the knowledge of the mechanisms that lead to the removal tax when a GmbH shareholder moves, we can now consider how to avoid this tax. After all, depending on the value of the GmbH shares, a high tax can arise without actually a profit.

3.1. Review of the duration of unlimited tax liability before departure

First of all, you should check whether you meet the requirement of the duration of the unlimited tax liability in Germany. Because only if the taxpayer was taxable in Germany for more than ten years, there is a need for an alternative solution to avoid the exit tax

3.2. moving to a country without double taxation agreement

However, if a moving GmbH shareholder has actually been taxable in Germany for more than ten years at a time, then you should plan the move in such a way that the destination country has not yet concluded a double taxation agreement with Germany. Because then you can avoid the exit tax by simply remaining taxable in Germany. The following approach is relevant.

Although you move from Germany to abroad, you should still maintain a residence in Germany. Because the residence in Germany then means that there is still a tax liability towards Germany. Residence means that you have the ability to gain access to a living space without being dependent on third parties. In other words, a key to a living space is sufficient to establish a residence in Germany. This can be, for example, a separate guest room at the relatives or acquaintance, which is available to one alone.

Avoiding Exit Tax – Further Consequences When Moving Abroad

4.1. Exit tax vs. double tax liability

So a departure from Germany does not mean a departure taxation as long as you move to a country with which the Federal Republic has not concluded a double taxation agreement and maintain a residence in this country. However, this also means that one is still tax-bound to Germany by the residence. Depending on which country you move to, this can lead to a double taxation of certain or even all income worldwide. If the new home country has a tax regime in which the world income principle also applies, then the taxation of the dividends of the German GmbH or the managing director salary, which the GmbH shareholder may receive, takes place there as well. In contrast, the income from Germany is tax irrelevant if the new homeland is taxed according to the territoriality principle. Although income generated there also accrues when assessing income tax in Germany and thus also means double taxation. However, this can be planned in advance.

However, you should make sure that the management of the company is then by no means from a foreign company affiliated with the GmbH. Because this would then be considered a relocation of functions. In this context, the taxation of a fictitious profit associated with the relocation of the management function also takes place here. Even if the management as a functional area of the company rather makes up a small share of the value of the GmbH, one should also consider the relocation of functions in order to take all tax aspects into account.

Avoid Exit Tax: For whom is this model worthwhile?

Basically, the model presented here is only about the possibility of avoiding the removal tax of a GmbH shareholder when he moves out of Germany. So neither an optimization of his own taxes nor that of his GmbH is in the foreground. Rather, with the help of this model, the prerequisite has been created that a GmbH shareholder can move abroad for purely private reasons without an exit tax being incurred. Of course, this only makes sense if the new homeland is taxed according to the territoriality principle. Because if the tax regime there instead taxes according to the world income principle, then this results in double taxation of all income in both countries.

Fortunately, there are still a number of countries with which Germany has not yet concluded a double taxation agreement. Among them are a number of countries which are considered to be tax havens, but our model is by no means concerned with tax savings in the case of current taxation through the departure, but with private aspects. Because among the tax havens there are also several countries that are generally known as South Sea paradises. Some of these countries even have a favourable tax regime, so that double taxation can be avoided even without double taxation agreements. Some examples are Barbados, Belize, Nicaragua, Vanuatu or Nauru.

Avoid the Exit Tax through expert advice

No matter whether tax or private reasons are of central importance in your decision to move out of Germany, it is in any case important that you as a GmbH shareholder inform yourself in advance and make your decisions based on sound expertise. Otherwise, you can expect surprises, which can be avoided with a professional advice by a tax consultant specialized in international tax law. Because one thing is certain: the tax law of the Federal Republic of Germany can be perceived as a person affected in terms of exit tax as a restriction of the free movement of persons.