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

20. May 2019 | Exit taxation: calculation – deferral – waiver – avoidance (this contribution)

The departure of the GmbH shareholder abroad triggers the exit taxation. The exit tax is calculated according to the company value of the GmbH and thus causes a considerable tax burden. We therefore show how you first calculate the exit tax and how you avoid the exit taxation, get forgiven and refunded.

Exit taxation concerns shareholders of a corporation with a shareholding of at least 1% who were subject to unlimited taxation in Germany in the last ten years before moving abroad. It does not matter whether the corporation exists under German or foreign law. Furthermore, it is irrelevant whether the shareholder has German or another nationality. Partners of partnerships, on the other hand, are spared from the exit taxation.

2. Application of Exit Taxation

2.1. Calculation of the Exit Tax

2.1.1. The simplified income value method

Exit taxation is part of income tax. However, the legal connection to this is stipulated in §6 AStG. Further instructions from the BewG are also relevant.

The calculation of the exit tax takes place according to the so-called simplified income value method. The average tax profit of the corporation in the three years before the shareholder’s move forms the basis for calculating the tax. This baseline value multiplied by a factor of 13.75 is to be taxed 60% by the personal tax rate of the shareholder. An example:

A GmbH shareholder moves his residence abroad. In the previous three years, the GmbH generated an average tax profit of EUR 100,000. The personal tax rate of the shareholder is assumed here as an average between the initial tax rate of 14% and the top tax rate of 42%, i.e. 28%. Thus, the departure tax is calculated in this way: EUR 100,000 x 13.75 x 60% x 28% = EUR 231,000

For reasons of general comprehensibility, further details on the simplified income value method are not taken into account. Individual advice is certainly preferable at this point.

2.1.2 Reduction of Exit Tax

The simplified first-day method is based on the assumption that the shares have experienced an increase in value. It does not matter whether the shareholder (co-)founded or acquired the corporation (purchasable, hereditary, by donation). This fictitious increase in value is the subject of exit taxation. However, if there is an impairment instead of an increase in value, the simplified income-value method does not apply. However, the prerequisite is that the shareholder can prove that operational reasons are responsible for the loss of value that has occurred. However, an early impairment for other reasons (e.g. a capital reduction) is a ground for exclusion.

2.2 Deferral of Exit Tax

2.2.1. Shareholder transfer within the EU/EEA

The prophylactic character of the exit taxation is probably also recognizable by the fact that the legislature was prepared to grant a legally fixed deferral on request. The law does not require interest, a time limit or the provision of security as a condition. However, this only applies if the shareholder moves his residence within the EU or the EEA. Here he must be subject to a taxation comparable to the German income tax. In addition, it must be ensured that Germany can enforce its tax claim in the state of influx by administrative assistance.

2.2.2. Transfer of the shareholder to a third country

However, if the shareholder moves to another state, other conditions apply. In order to apply for a deferral in this case, the shareholder must justify in his application why the otherwise due payment of taxes is a considerable hardship for him. In addition, the tax office requires the provision of collateral.

2.2.3. Deferral rates

Suppose the responsible tax office approves the deferral. Instead of a sum, the shareholder can pay the exit tax in up to five equal annual installments. However, the condition is that the shares remain in the meantime in the ownership of the shareholder.

2.2.4. How the deferral could be eliminated

2.2.4.1. Relocation of the shareholder from an EU/EEA country to a third country

If the shareholder moves again, namely from an EU/EEA country to a third country, the deferral is omitted. Exit tax is due immediately.

2.2.4.2. No deferral due to transfer of shares

There is a further risk if the shareholder remains in the EU or the EEA but transfers his shares to someone who is himself resident in a third country.

2.2.4.3. Revocation of deferral by liquidation

A liquidation of the corporation also leads to a termination of the deferral. Therefore, it makes sense to discuss a possible future liquidation already when planning the move.

2.2.4.4. Obligations of the shareholder

Of course, in all the cases mentioned, the tax office must be informed about the processes. Failure to do so puts one in danger of fulfilling the offence of tax evasion.

2.3. Retroactive remission of exit tax

Under certain conditions, the shareholder can be retroactively waived the exit tax. If the shareholder returns to Germany within five years, the entitlement to the exit taxation ceases. The tax office can extend this period to up to ten years if the shareholder shows that his move has compelling professional reasons.

2.4 Refund of Exit Tax

According to the retroactive remission, the refund of an already paid exit tax is possible. The prerequisite is, of course, that the unlimited tax liability takes effect again and no shares were sold.

There are several options to circumvent an exit tax. In principle, two basic requirements can be distinguished: Possibilities with and without giving up ownership of the shares of the corporation.

3.1. Circumvention of exit taxation by giving up shares

3.1.1. Sale of shares before moving

The easiest way is to sell the shares in the corporation before the shareholder moves. However, the sale of the shares also triggers taxation, so this is only recommended if the sale is planned anyway. Even then, it must be examined whether this could possibly lead to a lower tax or whether the exit tax is the more favorable option for a subsequent sale from abroad.

3.1.2. Transfer of shares to a family member

Another fairly easy solution is the transfer of shares to a family member. However, this person must be and remain unrestrictedly taxable in Germany. Furthermore, such a transfer constitutes a gift. Thus, it is also subject to gift tax. However, whether gift tax actually applies depends on many other factors related to inheritance tax law. We are also happy to advise you specifically and personally.

Incidentally, a later transfer back to the original shareholder is again of tax importance. A double taxation that occurs should therefore be the subject of in-depth consultation in advance.

3.1.3. Liquidation of the limited liability company

Excluding the possibilities already mentioned, there is also the possibility to liquidate the corporation. However, liquidation is only of interest if there is no prospect of a renewed participation in the limited company.

3.2. Circumvention of exit taxation while retaining the shares

With the proposed solutions presented here, strictly speaking, no receipt of the shares takes place. Rather, these options are based on a change of form.

3.2.1. Change of legal form of a limited liability company into a partnership

Since the basic condition of exit taxation is participation in a corporation, you can circumvent the tax by circumventing the basic condition. One possibility is to convert the GmbH into a partnership. However, in order to ensure that this process is tax-neutral, certain criteria must be met. Thus, the partnership must continue to maintain its operational center in Germany. This is achieved by directing the business of the managing director from a branch located in Germany. This is therefore the parent company of the company. Furthermore, the company should be located in Germany.

In addition, before the conversion, it must be checked whether there are open reserves in the corporation. If this is the case, the change of shape would bring about the uncovering of the reserves. The conversion would result in a compulsory distribution of profits and the resulting profits would therefore be subject to compulsory taxation.

3.2.2. Intermediation of a partnership

If the latter point is also an obstacle, another alternative is possible. In this case, a partnership (for example a GmbH & Co. KG) is introduced between shareholder and corporation. The shares in the corporation are transferred from the original shareholder to the partnership. Although the partnership is to be founded for this purpose, it must nevertheless be actively active in Germany.

The interposition of the partnership thus has the effect that the shares in the limited company remain in full ownership of a shareholder taxable in Germany – only that this is now a partnership. The shares in the partnership do not lead to any exit taxation when the shareholder moves, because the question of a direct participation in a corporation must be answered negatively.

4th Summary

Exit taxation affects all shareholders of corporations with a shareholding of at least 1% who were subject to unlimited tax in Germany in the last ten years before moving abroad. The tax is calculated on the basis of a fictitious increase in value. Furthermore, a deferral of the tax is possible under certain conditions. Under certain circumstances, a refund of the tax is possible on a later return of the shareholder to Germany. However, there are also alternatives to circumvent the exit taxation in advance of the move.