Our readers certainly know the exit tax all too well, because it is a long-running topic in our blog posts. Therefore, you probably already know that the exit tax is usually incurred if you, as a shareholder of a corporation, file the German unlimited tax liability by moving abroad or as a Perpetual Traveler. But there is another, lesser-known connection that leads to an exit taxation. If a transfer of shares in a German corporation to a person taxable solely abroad takes place by way of an inheritance, then exit tax also applies.

1st Exit tax on inheritance – Introduction

German tax law impresses with its high complexity. This is because legislators make every effort to eliminate loopholes that are contrary to their legislative intentions, at best from the outset. Nevertheless, he repeatedly circumvents cases in which legal loopholes remain. Often, however, these are only recognized in the context of a legal dispute before the tax courts and only subsequently closed. Nevertheless, the ability of the legislature to consider as far as possible all eventualities in the first draft laws is considered quite robust.

2. Since when is the exit tax also linked to inheritance?

A good example of this is probably the exit tax. Even when the Foreign Tax Act 1972 was introduced in Germany, a paragraph of § 6 AStG was devoted to the eventuality of a free transfer of company shares in a limited company to a person taxable solely abroad. In addition to the transfer by way of a donation as well as generally in the case of a death, this includes, among other things, the very ordinary inheritance. Because the legislature had already recognized at that time that in the event of an inheritance, the taxation right of the Federal Republic would be lost. More precisely, it would then belong solely to the state in which the heir or heiress is taxable without restriction. In any event, Germany would not then receive any income tax participation in the company’s increase in value in the meantime. And this had already drastically moved into the consciousness of the general public in a prominent case at that time, and this was felt to be unfair.

We are talking about the so-called department store king Helmut Horten, who sold his department store empire only after his departure from Germany to Switzerland and thus avoided that the profits in Germany were taxed at a very high tax rate. In Switzerland this was much cheaper. Since the foreign tax law was drafted in response to this resourceful tax arrangement, it also received the unofficial nickname “Lex Horten”.

Exit tax on inheritance – is that fair?

Now one may well understand the intention of the legislator in the design of the foreign tax law. After all, no one should be advocating that some taxpayers can simply drop their tax liability while the rest of the population pays taxes politely. If this were to take over, it would very quickly be over with the principle of solidarity, to which the Basic Law has also committed itself since it defined the Federal Republic as a welfare state. Public order would then be very quickly threatened. No one would understand such unequal treatment. Nevertheless, it must be allowed to question this extension of the exit tax to inheritances.

3.1. Child inherits business while studying abroad

Imagine an entrepreneurial couple in Germany whose daughter or son is studying abroad. Due to an accident, the couple dies at the same time, so that their GmbH automatically passes on to their child by way of succession. Apart from the fact that during the mourning period and the organization of the funeral, the child now has to report the transfer of the shares to the tax office within a month, he must also live with the worry that the inheritance will now be subject to an exit tax.

What if the exit tax is particularly high because the GmbH achieved very high profits in the last three years? Finally, the exit tax is calculated on the basis of the average profit of the last three years. Do we further imagine that the parents reinvested as much of these profits as possible in their company and thus hardly any of it arrived at their private level? Thus, any part of this profit is missing in order to lift the exit tax from the inheritance of the parents' private assets. But even if the parents had distributed the entire profit to themselves in all three years, this would at best be enough to pay a small part of the first deferral of the exit tax.

The only way the child has to avoid the exit tax is for him to go back to Germany. Because then the child would have been only temporarily abroad, so that he can be remitted or refunded the removal tax. However, this is only possible if the duration of his stay abroad at that time was a maximum of seven years.

3.2. Child lives permanently abroad and inherits the parental enterprise

This brings us to the next hypothetical dilemma. Imagine that the child is already older and has found a job and a life partner abroad after studying abroad, maybe also founded a family there. And now he should either pay an exit tax because of the inheritance, although he has actually realized no profit from the hidden reserves stuck in the company, or leave his new homeland to return to Germany, if the seven-year period still runs? How would you decide in this situation? This is neither fair nor compatible in any way with the legal interest of the free movement of persons established in the EU.

4th Exit tax by inheritance? Predictive action!

Perhaps we have alarmed one or the other of our readers who have found themselves in our examples. If this is the case, we have successfully pointed out that in such or similar situations, where the exit tax is imposed suddenly, significant problems can arise. The fact that the inheritance tax, which the child would actually have to pay (possibly even both at home and abroad), can be defused at least in Germany via the spare property according to §§ 13a and 13b ErbStG, is only a small consolation. The exit tax is definitely the bigger threat in the case of an inheritance.