The BFH has ruled in a recent case-law that the exit tax is illegal in some aspects. More specifically, the lack of a deferral mechanism constitutes a breach of Article 49 TFEU at EU level. However, via a free movement agreement (FZA) with the EU, this knowledge can also be transferred to Switzerland. Either way, if you receive a corresponding tax notice in such an exit case, this is first of all right, because the determination of the exit tax does not actually mean a material disadvantage for taxpayers. Only if the tax office also initiates the collection of the tax without deferral possibility, you can make an application for permanent deferral until the realization of an actual capital gain. And only if the tax office rejects this application and a subsequent objection against it, you can go to court on the basis of a ECJ judgment (Wächtler case) and the new BFH judgment with good chances of success.

1. Exit tax is illegal – Introduction

The exit tax is a hedge of the legislature to protect its tax revenue. As far as that is concerned, this is certainly entirely legitimate and understandable. Because what arises in Germany in terms of taxable substrate, should also be taxed in Germany.

Anyone who moves abroad as a shareholder of a GmbH, however, has the disadvantage. Because the exit taxation means in this case that at the time of the departure a tax on a fictitious company value arises. A tax is thus imposed on outgoing companions, although no real profit has yet been made. The exit tax is therefore always paid out of already taxed net assets, in advance. No wonder, then, that many of you are now arguing that the exit tax can only be illegal.

And yet, as noted at the beginning, the securing of German taxation media by Germany is in principle legal and logical. At the same time, the formulation of the External Tax Act on Exit Tax contains regulations, where even the BFH currently ruled that the Exit Tax is (partially) illegal. This is exactly what we are taking a critical look at in this article.

2. The previous rules on the exit tax

Previously, the exit tax was designed in such a way that it allowed the taxpayers concerned to defer when they moved to an EU or EEA member state. This is due to the fact that Article 49 TFEU stipulates that a move within the EU must not have adverse consequences compared to a move within the EU. However, if you have to pay taxes just because you are moving within the Union, you will certainly be penalised by the exit tax. After all, no taxes would be incurred when moving domestically. For this reason, the possibility of initially unlimited deferral was recognized and introduced as a means of eliminating the disadvantage.

However, the legislature was rather dissatisfied with this, because this was only understood as insufficient protection of its own control substrate. Because those who moved from abroad to a third country could only postpone the departure tax endlessly by deferral and then completely exclude. Indeed, taxation of the profit actually realised from a possible sale would then take place in the third country. However, Germany would no longer be entitled to this taxation. Furthermore, the exchange of information with the tax authorities in the third country could be excluded.

That is why the foreign tax law has been tightened in this regard with the entry into force in 2022. According to the current legal situation, instead of a deferral, the exit tax is to be divided into seven equal amounts in order to pay them off in just as many years.

3. What exactly is illegal about the exit tax?

3.1. Tax assessment and tax collection according to old legal situation were legally compliant

The old exit tax regulation, which still allowed a deferral of the tax, had been widely regarded as compliant with European law. For example, the ECJ ruled that an exit tax is a permissible means of safeguarding national tax sovereignty. This only concerns the setting of the exit tax. In addition, however, the tax collection must also be examined. And here the trenches open. First of all, the survey at national level is also legal in principle. However, this used to apply only as long as you could defer the tax by deferral interest-free. This is logical insofar as it does not put a taxable person at a disadvantage by a loss of liquidity when he moves to another EU country.

Now the ECJ also decided cases in which it considered the deportation-related taxation of companies by means of a division into five annual amounts as permissible. The German legislature was guided by this and adopted the regulation in a slightly lessened form for all taxpayers (distribution of the payment to seven instead of five years). Even then, doubts arose as to whether this was in line with EU law. But that's where it came in.

3.2. Court ruling on the exit tax since the introduction of the tightening

Until a case passes through the legal authorities and ultimately leads to legal certainty, it takes many years. Therefore, another, older case is decisive for our statement that the exit tax is illegal. This was about the question of whether the removal tax was allowed when moving to Switzerland. Although Switzerland is a third country in relation to the EU, there is a free movement agreement with the EU, which contains practically identical rules for moving out. Thus, no legal disadvantages are allowed in the context of a move to Switzerland (keyword freedom of establishment).

Exactly against this, however, a person concerned had sued and in 2019 before the Financial Court of Baden-Württemberg and the ECJ achieved a success (the so-called Wächtler case). Another similar case was decided by the BFH at the end of 2023. Since the tightening of § 6 (1) AStG occurred between the two court decisions and the transfer of the fundamental significance to removal cases to other EU and EEA states is given, the new BFH decision is of great importance.

3.3.

And in fact the BFH confirmed the previous legal opinion of the ECJ. For example, it does not see any infringement of the freedom of establishment of taxpayers if the State entitled to tax sets the exit tax at the time of departure. The collection itself also remains unobjectionable, because this also does not create a disadvantage for taxpayers. Only when the tax is actually payable and thus a loss of liquidity occurs, the exit tax is unlawful.

In doing so, the BFH confirms the fear of many shareholders of corporations that they may have to pay wrongful exit tax if they move abroad. But now there is also clarity that this action of the tax authorities can be stopped, even if the regulations in the foreign tax law actually exclude this.

4th Exit tax is illegal: what this means for taxpayers

Through the back door (of the BFH) the possibility to defer the exit tax is back. That is why we are now looking at how to claim it in order to at least postpone the exit tax.

If a natural person who, from a tax point of view, has a substantial shareholding in a corporation, moves to an EU or EEA country or to Switzerland and subsequently receives a tax assessment by the German tax office, this is initially permitted. Even if the tax authority subsequently declares to collect the tax, this is not yet a legal violation. But if the tax office actually demands a payment of the exit tax, even a ratierliche, one should take action against it. This is especially true if one can cite a hardship that would occur by paying the exit tax. However, the payment of the exit tax is an infringement of the freedom of establishment and thus unlawful.

In fact, you can already take proactive action after receiving the tax notice. With reference to the BFH decision, the tax office is informed that in the case of an actively operated tax collection, it intends to exhaust all appeals with reference to the BFH decision if no interest-free deferral should be granted. In this respect, the law is on the side of taxpayers.

5th Exit tax is illegal: our (again) conclusion

We have already pointed out earlier that we consider the current regulations on the exit tax to be illegal, which can be read here. Therefore, we find ourselves confirmed in parts of our views at that time by the new BFH jurisprudence. At the same time, we are pleased that the ruling clearly shows where the boundaries between permitted and unlawful legal regulations currently run and how one should deal with the exit tax in practice.

Once again, it turns out that the interest-free deferral of the exit tax until the actual disposal of the shareholdings, as provided for in the old regulation of § 6 AStG, is an appropriate means of avoiding discrimination against shareholders of limited liability companies who move abroad. The special feature of this judgment is that, under the tightened legal situation, it is now up to the tax offices whether they grant an application for interest-free, provisionally unlimited deferral of the exit tax, and thus comply with EU law, or still press ahead with the collection. In the latter case, the new judgment gives taxpayers very good prospects of opposing it.