date | theme

07. November 2018 | Exit taxation the valuation of GmbH shares

10. November 2018 | Exit tax according to § 6 AStG: Remission & deferral in special cases

12. November 2018 | Exit taxation (§ 6 AStG) at GmbH shareholders (this contribution)

20. May 2019 | Exit taxation: calculation – deferral – waiver – avoidance

Leaving approx. 1 million German citizens the Federal Republic. Here, GmbH shareholders are taxed by the exit tax according to § 6 AStG. This exit taxation triggers a fictitious capital gain in the GmbH shares of the departing shareholder. The decisive factor here is the common value of the shares.

In today’s world, when the progress of globalization and digitalization are taking on a high priority in everyday life and bringing about many changes, many people are considering whether moving abroad from Germany will bring advantages. According to a 2015 study by the Federal Institute for Population Research (BIB) and the University of Duisburg Essen, the financial aspect plays an important role in the reason for the departure from Germany, but merit is not the main role. Further decisive motives for emigration from Germany are new life and professional experiences and a persistent dissatisfaction with personal life in Germany. [] 1]

The number of emigrations from Germany is steadily increasing according to the statistics of the Federal Statistical Office. In 2012 there were still about 711 thousand emigrants, so in 2016 about 1.37 million people left Germany. [] 2]

Each country has its own tax system, so that a move from Germany to abroad can bring tax consequences and risks.

The following scientific work deals with the regulations of exit taxation and makes use of research based on current jurisprudence and literature.

2nd Tax Definition of Exit

A departure in the tax sense is if both the residence and the habitual residence of a taxpayer is transferred from home to abroad.

The residence in accordance with § 8 of the German Tax Code is deemed to be abandoned if all external facts indicate that the taxpayer will no longer maintain and use the apartment, e.g. when selling the property or terminating the rental contract. [] 3]

The transfer of the habitual residence abroad within the meaning of § 9 AO is if all circumstances give the impression that the taxpayer is only temporarily resident in Germany, i.e. no consecutive stay with a duration of more than six months. A longer stay in Germany due to visiting, recreational, spa or similar private purposes is harmless, as long as the stay does not exceed one year.

3rd General on Exit Taxation

With the provisions of § 6 Foreign Tax Act, the legislature wants to prevent tax easing by a change of residence abroad and to ensure the detection and taxation of hidden reserves in investments in corporations within the meaning of § 17 Income Tax Act. [4] The main focus here is on avoiding the tax-free transfer of tax substrate, since a departure of the taxpayer abroad basically ends the unlimited tax liability in Germany and as a result Germany loses its taxation right. [5] In order to counteract this tax easing, the rules on exit taxation provide that exit from the home country is treated as an actual disposal of the shares, so that a notional capital gain is used. [6] As a result, a fictitious capital gain is subject to domestic taxation, so that Germany receives a share of the previously generated hidden reserves at the time of departure and is subject to taxation.

The provisions of the exit taxation according to § 6 AStG are only subject to natural persons who have been subject to unlimited income tax for at least ten years within the meaning of § 1 (1) EStG. The ten-year period does not have to have been uninterrupted, but can also be composed of several periods. [7] Furthermore, the unlimited tax liability must end due to the departure abroad, i.e. after the departure the taxpayer has neither the residence nor the habitual residence in the country.

4.2 Objective requirements

The provisions of § 6 AStG only cover shares in corporations within the meaning of § 17 para. 1 EStG. This includes, in particular, participations in public limited liability companies and cooperatives which the taxpayer holds in private assets. It is irrelevant whether the corporation is a domestic or foreign corporation. [8] In the case of investments in foreign companies, the consideration and assessment from the German point of view is decisive, i.e. if the foreign company is classified as a capital company by the type comparison, this participation also falls under the provisions of § 6 AStG.[9]

Shares within the meaning of § 17 EStG are present if the taxpayer has directly or indirectly participated in at least one percent of the company’s capital within the last five years. Exit taxation thus covers only the major holdings in corporations, which are part of the income from business if there is an unlimited obligation to pay income tax.

4.3. Replacement realisation events

In addition to the basic fact of physical removal, the provisions of the Exit Taxation comprise four other situations in which the taxation right to an increase in the assets of shares within the meaning of § 17 EStG for Germany is endangered. [10] With the substitute facts, the legislature extends the scope of the basic facts beyond the task of residence and habitual residence and wants to prevent circumvention of the basic facts. [] 11]

On the one hand, the free or partial transfer of shares to a non-unlimited taxable person, for example in the context of a gift or inheritance, is treated as the termination of the unlimited tax liability. On the other hand, the establishment of a priority residence within the meaning of the DTA in another state also leads to exit taxation.

The rules of exit taxation also apply if the shares are transferred to a company or a permanent establishment abroad or if, for other reasons, the German taxation law for a future capital gain is excluded or restricted.

The substitution of § 6 (1) sentence 2 no. 4 AStG is intended to prevent Germany from losing the right to tax on the profit from the sale due to other events. [12] This would include, for example, a taxpayer with a double residence and a center of life in the country, if the double taxation agreement currently in force grants the taxation right for the capital gains to the country of residence, but allocates the taxation right to the foreign state after a revision of the DTA. [] 13]

5. Legal consequences in case of basic facts

5.1. Fictional Gains

If the personal and factual requirements of § 6 para. 1 AStG and the requirements of § 17 EStG, the exit taxation according to § 6 AStG applies. In the context of exit taxation, the sale of shares in a limited liability company is fictitious at the time of departure, so that a fictitious capital gain is used as the basis for taxation. [] 14]

The capital gain is determined in accordance with the provisions of § 17 (2) EStG. Consequently, the amount by which the sale price less the costs incurred exceeds the acquisition costs constitutes the gain on sale. The sale price, the sale costs and the acquisition costs are to be set at 60 percent, since these are tax-free 40 percent due to the partial income procedure according to § 3 no. 40 sentence 1 letter c EStG i.V.m. § 3 c paragraph 2 EStG.

However, there was no actual sale in the strict sense of the wording at the time of the departure, so there is a lack of a sale price. [15] Instead of the sale price, the common value of the shareholding should be used. This is determined in the case of listed shares in corporations by the market price (§ 11 (1) Valuation Act) or in the case of unlisted shares from comparable sales transactions (§ 11 (2) BewG) or expert reports. [] 16]

The fictitious capital gain is intended to represent the value of any capital gains accumulated by the taxpayer at the time of the transfer of residence.[17] Each participation must be considered and evaluated individually. [18] No aggregation or offsetting of notional gains on sale with losses on sale shall be permitted. [] 19]

By using the fictitious capital gain in the context of exit taxation, the legislature is basically only a safeguarding instrument of the financial administration.[20]

5.2 Fictitious Losses

In cases where the acquisition costs exceed the common value of the shares, a fictitious loss arises. An impairment resulting from the participation within the meaning of § 17 EStG is not covered by the exit taxation of § 6 AStG. The rules on exit taxation cover only the capital gain from the shareholding, but not a capital loss.

From the point of view of the legislature, fictitious capital losses are not taken into account because no rules for the deferral of tax effectiveness, such as deferral in the event of capital gains, have been established for unrealised capital losses. [21] This would have the consequence that a fictitious loss on sale would already have a tax-reducing effect at the time of the departure and the provisions of § 6 AStG would be interpreted to the detriment of the Treasury. [] 22]

If the actual capital gain on a sale of the shares is below the common value at the time of the departure, the realised impairment will only be retroactively taken into account in the German income taxation if the incoming state does not take this into account. However, the taxpayer must prove that the impairment is due to operational reasons and not to company law measures, such as profit distributions. If the taxpayer can prove and prove this, the tax notice issued must be amended with regard to the taxation of capital gains within the meaning of § 17 EStG.

the consideration of the impairment is limited to the amount of the previously determined notional capital gain. This has the consequence that, on the basis of § 6(6) AStG in accordance with § 6(5) No. 1 AStG, an actual loss on sale will also be retroactively disregarded. If, on the other hand, the impairment is due to a distribution of profits, there is no retroactive change in the capital gain. Only the levied domestic capital gains tax is counted against the income tax owed, provided that the profit distribution is excluded from income taxation and the withholding tax is not subject to any reduction entitlement.

6. Possibilities of deferral of exit taxation

If there is a fictitious capital gain, it is possible that the income tax due on it may not be paid in one amount, but in installments. In order to benefit from the deferral within the meaning of § 6 (4) AStG, the immediate payment of the income tax owed must constitute a considerable hardship for the taxpayer. In this case, the taxable person may submit an application to the competent tax office, so that the income tax due against payment of a guarantee is payable in regular instalments, which may be spread over a maximum of five years.

If there are professional reasons for moving abroad (§ 6 (3) AStG), the deferral period depends on the length of absence. In such cases, the tax due shall be paid in full without a guarantee and without an installment agreement.

In the case of a move to another member state of the European Union, the tax owed is to be paid interest-free and without security if the taxpayer is subject to a tax liability comparable to the German unlimited tax liability in the country of arrival. Similarly, the Agreement on the European Economic Area must be applicable to the receiving State and mutual assistance and mutual assistance must be guaranteed. Thus, the income tax is only due on the actual sale of the shareholdings or in the presence of comparable facts.

In return, the deferral must in principle be revoked as soon as the taxpayer sells the shares in the limited company to a third party or deposits them in a hidden manner into a company. In addition, the deferral pursuant to § 6 (5) AStG expires if the shares are transferred to a third party who lives in a member state of the European Union but is not subject to a tax liability comparable to the German tax liability. Similarly, the deferral of the granted deferral takes place if the shares are transferred to a third party who lives in a third country and thus in no EU member state, since the deferral regulations of § 6 (5) AStG exclusively include taxpayers and their legal successors of the European Union. In conclusion, the deferral is mainly to be revoked if there is an actual sale process or the common value or the partial value of the shares is to be recognised under other domestic rules.

§ 6 paragraph 7 AStG lays down all necessary administrative provisions for the taxpayer or his universal successor. The taxpayer is obliged to inform the competent residence tax office at the time of departure if there are reasons for the revocation of the deferral in accordance with § 6 (5) sentence 4 AStG. This notification must be signed by the taxable person himself and submitted according to an officially required form within one month of the reportable event. In the case of a share sale or share transfer, the written purchase or transfer contract must also be submitted to the tax office as proof.

In addition, the taxpayer must pay annually until 31. On 1 January, notify the competent tax office of residence abroad of the address of residence valid on 31 December of the previous calendar year and confirm that the taxpayer is still the shareholder. In the event of a breach of these rules, the deferral of the tax due on the notional capital gains may be revoked, resulting in an immediate payment of tax on the notional capital gains.

8. design options for the exit taxation

In order to avoid the exit taxation according to § 6 AStG, you can already make precautions in advance so that a transfer of residence does not entail any tax disadvantages.

8.1. Conversion into a partnership

The provisions of § 6 of the AStG only cover the major investments in a corporation. For this reason, the exit taxation can be avoided, in which the participation no longer in a limited company but in a co-entrepreneurship. [23] If the limited company is converted into a partnership before leaving, there is no participation within the meaning of § 17 EStG, so that no exit taxation takes place. [] 24]

However, it should be noted that such a change of form entails other tax consequences, such as the accrual of capital gains tax by the taxation of the fictitious profit distribution. [] 25]

8.2. no significant participation within the meaning of § 17 EStG

Another aspect of avoiding exit taxation is holding non-significant holdings. As long as the participation in a corporation is at least 1 percent, the participation is to be regarded as a significant participation within the meaning of § 17 EStG. If the taxpayer reduces the participation before the departure, so that he is less than 1 percent involved at the time of the departure, the change of residence does not trigger an exit taxation.

However, the sale of the share in Germany leads to taxable income from business operations pursuant to § 15 EStG i.V.m § 17 EStG, so that the resulting capital gain due to the partial income procedure pursuant to § 3 No. 40 letter c EStG i.V.m. § 3 c paragraph 2 EStG is subject to 60 percent taxation.

8.3. Temporary absence

The tax liability expires in accordance with § 6 (3) AStG if the taxpayer returns to Germany within five years of leaving and is liable for unlimited taxation. This period may be extended to a maximum of 10 years if there are professional reasons for the longer absence and the intention to return has already existed at the time of departure.

The extension to a further five years is at the discretion of the tax office and must be requested by the taxpayer. For better planning, it is recommended to submit the application early at least before the expiry of the first five years in order to avoid the exit tax if the application is rejected.

9th Conclusion on Exit Taxation

The author is of the opinion that the use of a fictitious capital gain is justified, since the hidden reserves from the participation in a limited company, which were generated up to the time of the departure, represent a domestic increase in assets. Without leaving Germany, the sale of a significant shareholding within the meaning of § 17 EStG would be subject to German income tax. By virtue of the provisions of § 6 AStG, the legislature merely wishes to prevent Germany from having any taxation option for the hidden reserves generated in the period up to the departure in the event of a final departure.

Furthermore, the legislator has found a compromise for hardship cases and for taxpayers who move to the rest of the EU abroad. If the established income tax on the fictitious capital gain is a significant financial burden, the legislator grants the possibility of installment payment. For taxpayers who move into a new residence within the European Union, the tax is actually due only at the time of the actual sale. In these cases, neither the taxpayer nor the German Treasury is disadvantaged, since Germany retains a taxation option and the taxpayer has no financial consequences at the time of emigration.

To summarise, the rules of exit taxation should not be disregarded in the context of the freedom of establishment and when planning a change of residence, since these statutory rules have tax implications for shareholders. It is advisable to deal comprehensively with the regulations and aspects of the exit taxation before a possible departure from Germany in order to be able to make early changes within the framework of the participation. However, it should also be noted that the departure of the shareholder and possible restructurings can have consequences at the company level, e.g. transfer of the management abroad.

Finally, the author is of the opinion that the rules of exit taxation have been strictly defined by the legislation with regard to the use of fictitious profits and the exclusion of losses. However, considerable tax consequences can be reduced or excluded in advance by deferral grants and social and personal design possibilities.