In our opinion, the exit tax represents a restriction on the free movement of persons in several respects. On the one hand, the fact remains of a fictitious taxation, which, despite deferral over seven years, entails a considerable financial expense and at the same time a lack of inflow. In addition, the payment of the exit tax entails the risk that the shareholders may not be able to realise such a high value and thus in practice pay a tax that is much higher than would actually be appropriate. Anyone who is clear about this risk could have doubts in the current tense economic situation whether a move abroad really makes sense.

1st Exit tax as a restriction of the free movement of persons – Introduction

Imagine if, as a shareholder or shareholder of a GmbH, you would pay a tax on the increase in the value of your company that occurred before then every time you move within Germany. How often would you be willing to move?

We can probably assume that the answer of the majority of our readers coincides here: almost never, or only if it is unavoidable. Such a decision has very far-reaching effects on our private lives, indeed on our lives as a whole. At some point, you look back on this decision and will call it a turning point, which you might even regret if, for example, a civil partnership or the development of your own children is related to it. It is therefore an extremely important decision. Should they be made dependent on taxes? In addition, taxes incurred on a purely fictitious profit? Because actually not a single cent finds its way to the private checking account!

And yet there is such a tax, if only if you move abroad as a shareholder of a corporation. That is why we are critical of the reasons behind this and why taxation, even then, is likely to violate an important EU legal principle, even though there are rules designed to mitigate these effects.

2. Restriction of the free movement of persons

The aforementioned legal principle is the free movement of persons. It means that all EU citizens have the right to move from one place to another within the legal area without restrictions. If, for example, a teacher from Tornio in Sweden wants to move to Mallorca in Spain or a pensioner from Idstein im Taunus to Milos in Greece, then none of the states involved should pose any obstacles to this project. Foreigners must therefore be treated in the same way as nationals. By the way, this principle of solidarity was one of the reasons why the British had decided to leave the EU when Brexit took place, because they did not want to see EU citizens as equals. This legal principle is firmly enshrined in EU law as the free movement of persons.

What is less related to EU law, because it still belongs to the legal sphere of the respective national law, is tax law. A sovereign state also has the right to levy taxes according to its own ideas. Only in the area of VAT are there EU requirements that all member states must adhere to. But even here it is left to the respective legislators to shape the tax laws for this purpose. Income tax law, on the other hand, is a domain of the nation states.

But if you want to move from one country to another within the EU without restricting the free movement of persons, you usually simply exchange one tax liability for the other. During the transitional period, there may in principle be double taxation in the case of income tax, but that is where the rules of the double taxation agreements agreed between all Member States apply, so that any double taxation is avoided. Even this does not therefore constitute a restriction on the free movement of persons, because this does not entail an exceptional obstacle – unlike the exit tax.

3. legitimacy of the exit tax

Yes, the exit tax is already a very special tax. Did you know that in Germany it is known in tax-savvy circles as “Lex Horten” and was named after a department store magnate? He had moved to Switzerland before the sale of his Hertie department store empire, before there was the exit tax in its current form in Germany. In Switzerland, the profit of the sale was subject to a much lower tax than in this country. Germany had lost out. In response, the legislature created the Foreign Tax Act in 1972, which regulated the taxation of cross-border issues. And this includes the exit tax as a central element.

The exit tax is thus intended to secure the national taxation right on the tax substrate created in Germany by corporations and other corporations. If, for example, shareholders of limited liability companies move abroad and only there carry out the taxable sale of their shares, then the tax on this is due to the state in which the person is taxable without restriction at the time. The exit tax is now to tax the profit that would be incurred if a sale of his participation in the corporation were to take place at the same time as the departure of the shareholder.

4. calculation of the exit tax

How to proceed? Since no real sale takes place, § 6 AStG sets a fiction. The company value is determined by assuming a flat percentage return. Furthermore, we know how high the company profit is. It is therefore easy to calculate which company value results from return and profit. In order to compensate for any fluctuations in profit that could potentially lead to a significant distortion of the result, the average profit of the last three financial years is taken as a reference. This is multiplied by a factor of 13.75 in this special valuation procedure, which reflects the flat-rate return. This then gives the assumed enterprise value. Only the acquisition costs have to be deducted in order to determine the fictitious profit, which is then subjected to the exit tax.

5. Restriction of Exit Tax

Perhaps remember Just remember our introduction: Would you move as an entrepreneur within Germany if you had to pay fictitious taxes every time? Hardly at all. But then why accept the exit tax if, thanks to the free movement of persons, you can in principle move within the EU without restrictions? Is the legitimacy of safeguarding national prerogatives with regard to the collection of taxes sufficient to undermine this so easily?

Since every EU member state has to observe the free movement of persons as an important legal element and the exit tax can represent a restriction in the light of these considerations, Germany has now also decided to find ways to reconcile both elements. German tax law continues to insist on the exit tax. At the same time, however, it also grants a deferral of the established tax in seven equal annual instalments. In this way, the aim is to mitigate the effect of the tax on the free movement of persons.

6. Restriction of the free movement of persons by the exit tax

Interestingly, the legislature refers to a ECJ ruling on a legal dispute involving the departure of a company. He simply extended this ruling, which called for a deferral of the exit tax, to natural persons. The fact that there are significant differences, namely that there are significant limitations on people's lives, has apparently simply been ignored.

But there is even more. Suppose we pay the exit tax when moving abroad. Let us now continue to assume that the company value subsequently collapses – for whatever reason. Then you actually made a lower profit on a later sale than you had to tax at the time of the move. In this case, then, you have the loss twice. On the one hand, an excessive exit tax has been paid, which subsequently proves to be unrealistic. On the other hand, you have to cope with the loss of value. And yes, in both cases, significant financial cuts are detectable.

And now let’s think: would we still use our free movement of persons with such a risk, even though we could be confronted with unrealistically high taxes? If there were a refund of the overpaid exit tax, this might be more acceptable. But this has never occurred to anyone. In any case, such a scenario is anything but absurd in the currently macroeconomically difficult situation in Germany.

In fact, there would still be a way out in such a case. However, this is only possible if you return to Germany within a period of seven years. If you are unrestrictedly taxable in Germany again, you can request the refund of the previously paid exit tax. But this would also provide the ultimate proof that the exit tax means a restriction on the free movement of persons. It would clearly be a forced return. One is really curious how the courts would react to this.

7. Restriction of the free movement of persons by exit tax – Conclusion

Anyone who was still looking for ammunition against the exit tax should be happy about this additional finding. In any case, the legislator should not be so sure of his cause. The fact that it actually respects the free movement of persons as it is actually required by EU law is something to be doubted. Earlier it was expected that the foreign tax law would be improved in this respect. Instead, there was a tightening in 2022.

So, since we know how eager the legislator is to secure his tax revenue (and quite rightly so, in fact), we have to realistically assume that he will make it a point that the injustice is only eliminated by way of legal proceedings to the highest court. Until then, he can continue to collect exit taxes. And he can rely on the fact that it is rare that someone can or wants to afford such a legal dispute mentally, time and financially. After all, you already have enough tasks to cope with when you move abroad. It may be called right, but it is simply unfair. Thus, such an approach contradicts all requirements and expectations of a fair legislator.