Exit taxation is a term used in tax law to refer to the taxation of hidden reserves when individuals move abroad. Examples of exit taxation are the exit tax on investments in corporations and other corporations as well as on hidden reserves in privately held fund shares. Other use cases for exit taxation are accompanied by the tax easing of partnerships. But also the application of the extended limited tax liability can be regarded as part of the exit taxation.

1. Examples of Exit Taxation – Introduction

Exit taxation has a special position in German tax law. It concerns situations in which Germany is in danger of finally losing its right to tax and intervenes to prevent this, at least for the hidden reserves that had previously been created in Germany. Entrepreneurs of corporations in particular know one of the most important pillars of exit taxation, namely the exit tax. But what other examples are related to exit taxation? We would like to give a technical and easy-to-understand answer to this in this contribution.

2. Exit tax as an example of exit taxation

Of course, we start with the exit tax as a prime example of exit taxation. As already indicated, the exit tax is linked in particular to the departure of persons involved in corporations (§ 6 AStG). If, for example, a shareholder of a GmbH moves abroad, then the hidden reserves of her GmbH are subject to the exit tax in proportion to her participation rate.

The tax administration calculates the exit tax on the basis of the simplified income value method. It thus fabricates a company sale and calculates the tax on the profit then incurred. This is based on the average of the company’s profit over the last three years and multiplied by a capitalization factor of 13.75. Now each and every one of you can calculate for yourself that this approach can lead to a significant amount of an exit tax even under less favourable circumstances.

In addition, exit tax also applies if such company shares are transferred to a natural person abroad. It does not matter whether there is a gift or inheritance. It seems almost paradoxical that the inheritance or gift tax can be neutralized as far as possible by applying rule or option exemption, but the exit tax is nevertheless incurred.

To conclude the example of the exit tax, we would like to add that since 2025 the exit tax also applies to holding investment fund shares.

3. Example of Exit Taxation: Tax Untanglement & Functional Relocation

Let us now turn to tax relief. It concerns partnerships and their entrepreneurs. Thus, both sole proprietors and shareholders of partnerships are affected if they emigrate abroad and at the same time relocate assets or the management there. If, for example, a sole proprietor emigrate from Germany to Luxembourg and in the future at least partly manages the business from his new homeland, this affects the German exit taxation. However, if the sole proprietor travels to his company in Germany for management every time, then there is no tax. In this way, it can consequently be avoided.

Basically, the relocation of functions is a special form of tax easing. Even if neither a sole proprietor nor a partner of a partnership moves abroad, the relocation of corporate functions, for example from production locations or administrative units, abroad can lead to exit taxation.

4. Extended limited tax liability as an example of exit taxation

The third example with regard to exit taxation is to bring the extended limited tax liability into the focus of our considerations. On the one hand, tax law distinguishes the unlimited from the limited tax liability. The unlimited tax liability in Germany depends essentially on the residence or habitual residence in Germany. If one of them is present, then the global income is taxed. However, if one of these requirements is missing, income from German sources may still be taxable.

Between global income and income generated in Germany, however, there is still a third relevant income category. This is simply income that is neither domestic nor foreign income. An example of this is dividends from stock assets or interest on savings held in bank accounts. So if such income is incurred and you are neither unlimited nor limited tax, then according to the will of the legislature there should be a third form of tax liability in this country, namely the extended limited tax liability.

Prerequisites for the application of this exit taxation is first of all that it concerns only German nationals. Furthermore, it only applies if you have been unrestrictedly taxable in the country for at least five years before moving abroad. A final condition is met if the country to which you moved is low-taxed income. By this, § 2 (1) AStG means that the tax actually to be calculated there is more than a third lower for a fictitious income corresponding to EUR 77,000 than in Germany.

5. Overview of Exit Taxation – Conclusion

We have now briefly presented all the examples of exit taxation. What can we say about this? Well, first of all, moving abroad always involves a certain risk of taxation. On the one hand, we are talking about the taxation of hidden reserves which have formed in the company's assets until they leave. Apart from this, there may be an extended limited tax liability in certain cases. Compared to the exit tax, tax derailment and functional relocation, there is at least the advantage that one does not tax a fictitious profit, but real liquidity inflow. At best, a move abroad remains completely tax-free, but this only succeeds if you have certain assets that are not subject to exit taxation under any of the examples listed here. The conclusion is therefore that there is (almost) no departure abroad in which the exit tax remains without significance.