date | theme

10.07.2020 | Perpetual Traveler: center of life and habitual residence as a criterion in taxation

13.07.2020 | Limited and unlimited tax liability in Germany

22.07.2020 | Functional relocation and functional doubling in International Tax Law

02.10.2020 | Founding a company abroad: tax and other implications

30.10.2020 | Avoid travel tax: set up a family foundation and transfer GmbH shares (this contribution)

In order to avoid an exit tax, a GmbH shareholder can transfer his shares to a family foundation founded by him by donation. This has two advantages: On the one hand, the former GmbH shareholder can move abroad without being subject to tax easing within the scope of the exit tax, because he is then no longer a GmbH shareholder. On the other hand, he has control over the family foundation, which now holds the shares in the GmbH in his place. As a result, he will continue to secure his participation in the financial success of the GmbH, albeit indirectly.

The exit tax is a taxation of shareholders of corporations who move abroad. The background to this is that they give up unlimited tax liability in Germany by moving abroad. Since they continue to be shareholders in the corporation after moving abroad, they are free to sell their shares from abroad. However, in this case Germany would not be entitled to tax the profit from the sale of the shares, since this would be due to the State in which the shareholder is now taxable.

Since the legislature recognized the possibility of tax evasion early on, it has legally stipulated that taxation must be carried out before such a shareholder moves. This is based on the assumption that the shares will be sold at the time of departure. The fictitious profit calculated from this is then subject to taxation. Hence the appropriate name of the tax: Exit tax.

2. legal framework on the exit tax

The legal basis for the exit tax can be found in § 6 AStG. Here, the task of the unlimited tax liability of a shareholder of a limited liability company is legally anchored as an element of taxation. In this regard, the paragraph refers to the method to be used for the sale of such shares in the domestic market.

This taxation provision is contained in § 17 EStG and provides that the sales price minus the acquisition costs and the offsetting of any associated sales costs results in the taxable profit. However, since the shareholder does not actually sell his shares at the time of his departure abroad, taxation is simply based on the acceptance of a sale in Germany.

For this purpose, the value of the shares is to be determined. Here, too, one assumes an assumption, because one sets in the valuation of the shares a fictitious selling price, which a third party would be willing to pay for the shares. Together with the other known indicators, one calculates in this way the fictitious profit that the assumed sale of the shares would yield in a real context.

As with many legal attempts to avoid taxation, it is also possible to examine how to circumvent the associated legal requirements. In this case, you can avoid the exit tax by leaving one of the two main criteria unfulfilled. This involves either avoiding the status of shareholder of a limited liability company or changing the form of company of the limited liability company.

In our article, we take up the possibility of changing the status of shareholder of a corporation before its departure in such a way that, although he is no longer a shareholder, he can still maintain an economic connection to the corporation. The question now is which instrument, on the one hand, will legally give up participation in society, but will ultimately remain bound by it?

Establishment of a Family Foundation

In this regard, the establishment of a family foundation is appropriate. On the one hand, a family foundation has the advantage that it can take over the shares of the corporation. On the other hand, however, it is also guaranteed that the former shareholder of the corporation will continue to benefit from the company’s income.

Since this corporation is in the vast majority of cases a GmbH, we will now cite this form of company as an example for all corporations.

4.1. Nature of a Family Foundation

Before we turn specifically to the establishment of a family foundation, we provide a brief explanation of its characteristics. First of all, this includes the fact that the family foundation is not a charitable foundation. This also affects the taxation of the profits it receives. A foundation is a legal entity with legal capacity. Thus, it is also assessed as a tax entity under corporate tax. Furthermore, there is a striking difference to a society or an association. This is because a foundation has no partners or members. Instead, the assets with which the foundation is equipped are in the foreground.

4.2 Avoiding Exit Tax: Benefit of Family Foundation

Now let’s talk about the actual advantage of the family foundation, which helps us avoid the exit tax. Because the family foundation can be founded before the departure of the GmbH shareholder with the shares in the GmbH as foundation assets. As a new shareholder of the GmbH, the foundation is now entitled to all profits of the company. By determining a purpose in the establishment of the foundation, however, the founder can determine who should be among the beneficiaries of the foundation. In a family foundation, of course, these are the family members. Thus, the former GmbH shareholder and founder is able to participate indirectly in the success of the GmbH via the foundation. This also applies to the other beneficiaries. At the same time, however, the founder also lacks the status of shareholder in a corporation. So he can now move abroad without being subject to exit taxation.

4.3. Establishment of a Family Foundation

Finally, a few comments on the establishment of a family foundation. First of all, the recognition of the foundation by the federal state in which the foundation has its headquarters should be mentioned. This requires a so-called foundation business by the founder. This includes providing the Foundation with a statute. Among other things, it must determine the purpose of the Foundation, which has already been highlighted previously. But the Board of the Foundation is also important in this context. An essential part of the establishment of a foundation is of course also the transfer of assets by the founder; In our case, this is the transfer of the GmbH shares.

4.4. Transfer of Foundation assets to the Foundation

However, the transfer of shares in a corporation in principle constitutes a donation. It is therefore necessary to examine whether a gift tax is applicable in this case. If he counts in addition to himself also other family members to the circle of beneficiaries, the gift tax can be reduced in the amount of the allowance that each beneficiary could have set in the case of a gift. Since the allowance for children is very high (EUR 400,000 per child), depending on the value of the GmbH shares, the transfer of the foundation assets can actually be tax-free.