When entrepreneurs move abroad, taxes are often incurred, which can be avoided by tax design. Here, the avoidance of the exit tax according to § 6 AStG is in the foreground. This is why you often convert a GmbH into a GmbH & Co. KG. Nevertheless, there are still tax risks. So you have to distinguish whether you emigrate to a foreign country with which Germany has concluded a double taxation agreement (DTA). If you have chosen a country with which there is no DTA, the departure remains tax-free. In the opposite case, however, if GmbH & Co. KG is a holding company, it must ensure that it performs a series of services for its operating companies. In this way, the participation in Holding-GmbH & Co. KG is functionally linked to the participations in its subsidiaries, whereby the taxation law under the DTA remains in Germany and thus the departure neither in this country nor abroad causes tax consequences.

Avoid taxes when moving abroad – Introduction

GmbH shareholders who want to move abroad face the tax hurdle called exit tax. It arises if Germany threatens to lose the right to tax the hidden reserves of a corporation (usually a GmbH). If a GmbH shareholder moves abroad and then sells the share in his or her GmbH, the taxation right lies solely with the foreign state; Germany would then go empty.

For this reason, the German legislator has considered how to secure the tax on the increase in the value of the corporation at the time of the move. This led to the exit tax, which is enshrined in the External Tax Act. The fact that you have to pay a tax on a purely fictitious, arbitrarily calculated capital gain without actually having money flowed for it, has been accepted. No wonder that GmbH shareholders are very critical of the exit tax.

For our considerations in this article, the question is decisive as to how the taxation of a holding GmbH takes place if it is converted into a GmbH & Co. KG for the purpose of neutralizing the exit tax. Against this background, the following explanations are to be understood. Alternatively, but to be treated equally, is the case that an individual GmbH is transferred to a holding structure in which the parent company is a GmbH & Co. KG. Because also in this way you can avoid the removal tax actually incurred due to the GmbH participation when moving abroad.

Avoiding Taxes When Moving Abroad: Tax Untangling

Let us therefore take the option of converting the GmbH into a GmbH & Co. KG before moving away. After all, the exit tax only applies to corporations. In the case of a partnership, however, there is no exit tax. Nevertheless, there are also tax hurdles here. In this case, one speaks of a tax unencumberment at the time of the departure of a shareholder abroad. It is similar to the exit tax, but you have to distinguish two cases: the departure to a country with DTA and to one without DTA.

Avoid taxes when moving abroad without a DTA

First of all, let us consider the simple case, the move to a foreign country with which Germany has not concluded a DTA. Since the departure abroad for the destination country does not open a taxation right at a German GmbH & Co. KG, but at the same time Germany retains its taxation right, the former sale of the partnership remains taxable in Germany alone. This is due to the fact that GmbH & Co. KG remains as a commercial enterprise in Germany. Because unlike GmbH shares, this is independent of the departure of their shareholders and their newly established tax status there. Thus, the taxation right of the partnership remains in Germany.

Avoid taxes when moving abroad with DBA

If the starting point is that a shareholder of a GmbH & Co. KG emigrates to a country with which Germany has ratified a DTA, the foreign state often looks at the legal form with a little surprise. This is because GmbH & Co. KG combines elements of a partnership, such as the personal liability of a general partner, with those of a corporation. For the foreign Treasury, this means that it has to decide whether it should assess the GmbH & Co. KG as a partnership or as a corporation.

As a rule, the choice is in favor of an assessment as a corporation. This is due to the fact that a GmbH & Co. KG as a holding company does not normally carry out its own business activities. It is usually of a purely asset-management nature. An empty partnership which does not develop any commercial activity is unknown abroad. This generally requires a corporation. Thus, foreign tax authorities decide to treat GmbH & Co. KG as a corporation. This means, however, that the foreign Treasury will then receive a taxation right agreed under the DTA, while at the same time it will lose Germany. After all, the shareholder to whom the participation in the German company is assigned is from now on taxable abroad without restriction.

It is clear that Germany is trying to counter this. That is precisely why we have the unbundling tax. It is thus the counterpart to the exit tax.

Anyone who converts his or her holding GmbH into a GmbH & Co. KG in Germany as a GmbH shareholder before moving abroad in order to save taxes must pay attention to whether the state to which you want to emigrate has signed a DTA with Germany. If this is indeed the case, further measures must be taken to avoid early taxation at the time of departure.

5. measures to avoid taxes when moving to DTA abroad

Fortunately, there is scope for design in this case as well. In this way, it must be ensured that Holding-GmbH & Co. KG loses the status of an empty capital company from the point of view of the foreign state. This is achieved by transforming them into an operational partnership according to the actual circumstances. What do you have to do?

In principle, it is relatively simple. The GmbH & Co. KG is set up in such a way that it acts like a real management company. It does not matter whether it provides this service only to its own subsidiaries or whether external customers also benefit from it. Services which can be considered are, for example, the provision of management, personnel management, accounting and controlling as well as other management tasks, for example for raising capital. In any case, this requires a suitably equipped staff who can perform these tasks. This gives GmbH & Co. KG the substance that can be associated with an active partnership abroad.

But it is also important that the turnover from this activity reaches a certain size compared to the turnover generated by its subsidiaries. Thus, the turnover that flows from administrative activities into GmbH & Co. KG should represent at least 5% of the turnover of its subsidiaries. In any case, dividend income should be of secondary importance. At the same time, the costs that the subsidiaries provide for the services of GmbH & Co. KG lead to tax-reducing operating expenses. They also help minimize dividends relative to service costs.

Furthermore, it is advantageous if more than one subsidiary is positioned under Holding-GmbH & Co. KG. This also reinforces what is known in jargon as the functional assignment of the subsidiaries to the operating site of the GmbH & Co. KG. Of course, this establishment should be located in Germany in order to establish this connection in order to avoid tax easing.

Avoid taxes when moving abroad – Conclusion

It turns out that the conversion of a Holding GmbH into a GmbH & Co. KG alone is not a guarantee to avoid taxes when moving abroad completely. You have to pay attention to some further details and, if necessary, take further proactive steps to achieve the goal. Fortunately, this is possible without major complications and also legally feasible. Nevertheless, the participation of tax consultants who are familiar with international tax law is highly recommended. After all, there are sometimes clear differences between the various double taxation agreements that Germany has now concluded with more than 100 countries, even if most are based on the OECD model agreement.