date | theme

30. October 2020 | Avoid travel tax: set up a family foundation and transfer GmbH shares

4. December 2020 | Avoid Exit Tax – Departure abroad without double taxation agreement

1. October 2021 | 2022 comes the new exit tax – what changes does it bring?

22. December 2021 | Legal Status of Exit Tax: Violation of EU Standards?

22. June 2022 | Moving abroad tax-free? Foundation in Liechtenstein! (this contribution)

Entrepreneurs in Germany who want to move abroad encounter a tax hurdle. Then a fictitious taxation of the value of their companies or their shares in them is envisaged. Finally, a company sale in Germany would also tax the resulting profit. With a tax structure, however, you can move abroad tax-free as an entrepreneur. You have to know that this only works through a participation in a partnership. An entrepreneur transfers the shares to a foundation in Liechtenstein by way of a donation. A gift tax can be avoided here because it is a tax-advantaged property. Although then the foundation in Liechtenstein as a limited taxable legal person in Germany must pay corporate and business taxes. But its founder is spared further taxation in Germany. In Liechtenstein, however, there is no withholding tax on the payment to the Destinatäre. Only the new home country could then levy taxes on this.

We grew up in a world where many borders have lost more and more importance. This even applies to your own physical location. Because in addition to the self-evidentness with which we spend our holidays in distant countries, or for a semester abroad, or for professional or business activities for a time away from home, many successful entrepreneurs are permanently attracted to where they feel happier, but at least more satisfied than in their own familiar environment. But unlike people who do not run a company and do not otherwise own a company share in a significant amount, entrepreneurs can usually hardly move abroad without encountering a tax barrier. In particular, GmbH shareholders know what is being talked about here: the exit tax.

So what could help these worldly entrepreneurs more than a tax model with which they can move abroad tax-free? It is precisely this know-how that we have. That is why we are happy to present it to you here in an easily understandable way.

Yes, the presentation of our tax design model should be simple, but the legal framework looks quite different. However, since they are also important, we will come to this briefly for the sake of completeness.

For this you have to mention several different tax norms. On the one hand, § 6 AStG is of course at the top of our list as a classic that regulates the exit tax. In addition, however, the Income Tax Act with its provisions on departure contained in § 4 (1) sentence 3 EStG is also important. Also with regard to the future tax liability, a look into the income tax law is recommended. Then we also need a few paragraphs from the inheritance and gift tax law. Do not worry, here the exemption possibilities in §§ 28a and 13a and 13b ErbStG are of primary interest to us. With a pinch of corporate tax and business tax law, we then reduce to the end. Voilà, it's done.

So let’s look directly at how we can enable entrepreneurs in Germany to move abroad tax-free. For this we need two things, a German partnership – a classic GmbH & Co. KG is recommended – and a foundation that the entrepreneur sets up in Liechtenstein. However, if there is a participation in a corporation, it can either be converted into a GmbH & Co. KG by a change of legal form, or one sets up such a partnership as a holding company and joins the corporation as a subsidiary. And it's ready to go.

The entrepreneur now transfers the participation in the partnership by way of a donation to a foundation in Liechtenstein that he has newly established. Apart from the many other advantages that such a foundation has to offer in Liechtenstein, it is especially important for our purposes that our entrepreneur is no longer an entrepreneur. And if you are not an entrepreneur, you do not have to pay an exit tax in Germany. This must also be clear to the tax office.

3.3.1. Requirements for tax advantage: beneficiary assets

But after this shock, the tax office still comes with a “Yes, but...” around the corner. And rightly so. Finally, the transfer of the property took place by way of a gift. And this in turn means that you have to pay gift tax on the gift of the company shares. However, since the transfer involves shares in a partnership, special relief provisions of the Inheritance and Gift Tax Act apply here, the so-called relief requirements test. Such investments in a company can be treated as beneficiary assets. Another prerequisite here is that the investment assets are less than EUR 26,000,000. However, if this involves a company with larger assets, then there is also a solution.

3.3.2 Requirements for tax relief: retention period, payroll and payroll period

For example, for beneficiary assets up to a value of EUR 26,000,000, it is possible to pay taxes only on 15% of the asset recognised at the time of investment. However, the foundation as a new shareholder must meet some conditions for this.

On the one hand, it must retain the shares in the company for at least five years (retention period). On the other hand, in the course of the next five years (wages period), the company must hold the wage sum at a level of at least 400 % of the wage sum paid before the date of the donation. In this case, the average initial wage sum to be derived for the comparative purpose shall be calculated from the sum of wages paid cumulatively in the five financial years preceding the donation. For example, if a company has paid EUR 200,000 annually in wages during the five financial years prior to the gift, it must pay a salary of at least EUR 800,000 after the gift over a period of five years in order to preserve the tax benefit. Otherwise there will be retroactive taxation.

In addition, it should be noted that, in addition to this principled procedure, lower wage amounts come to the fore if a company has a maximum of 15 employees or, in a further easing of the rule, 10 employees. However, if a maximum of five employees are employed in a company or the payroll is EUR 0, then the regulation on payroll and payroll period does not apply entirely.

But do we really want to deal with this 15%, when alternatively 0% of taxes wave? Thus, the complete tax exemption can be achieved by a simple extension of the payroll period from five to seven years. Although the retention period increases to seven years and the relevant percentage to 700 %, this should always be worthwhile in most cases.

Well, we made it: our entrepreneur moved abroad tax-free. Taxes on corporate profits still apply. The only question is which taxes apply where.

First, we look at what taxes will be attributable to the profit of the company remaining in Germany in the future. We remember that we are dealing with a partnership in which the Liechtenstein Foundation is involved. This in turn is to be regarded as a corporation. Since a German partnership now transfers profits to a foreign company, the foundation is subject to limited taxation in Germany due to the tax transparency of the partnership. This applies both to the resulting corporation tax and to the business tax levied in this country. The tax is therefore in the order of about 30%.

Thanks to the double taxation agreement with Liechtenstein, there is no further tax on the profit from the company. Only the minimum tax of CHF 1,800 must be taken into account. Another tax effect that must be cited here in favour of the foundation in Liechtenstein is that no substitute inheritance tax, as we know it in Germany, comes to the foundation.

The question remains how the founder, who is now in the country of his choice, will be taxed from now on. Of course, this depends largely on the tax laws of this country. Thus, under certain circumstances, taxation could be eliminated altogether. Because if the founder and former entrepreneur moves to Dubai, for example, in the United Arab Emirates, the tax rate there is 0 %. However, this aspect should remain rather secondary in our present considerations, which deal more with the topic of how to move abroad tax-free.

As nice as everything here may fit into a coherent picture, the concrete intention to move abroad tax-free can only be achieved with some effort. For example, one must also take into account the circumstances that determine taxation in the new home country. In addition, one can consider whether such a foundation holding can be combined with other advantages. In addition, in most cases there should also be a GmbH, because this is the most common form of company in Germany. So you have to consider which option you choose to turn it into a partnership, because our model only works in this way.

Of course, we also have to decide on the design of the foundation in Liechtenstein. In particular, asset management should be set up with foresight. Because the possibilities of the influence of the founder on the fate of the foundation after its establishment are excluded in principle. And what also has to be considered as essential is that the entrepreneur completely abandons his company and the associated assets through the foundation. In fact, this step is an essential one that must first be mentally processed. In the end, however, it is easy for many to realize that the foundation basically lasts forever. Alfred Nobel sends greetings.

In any case, as one of the tax law firms renowned in the field of international tax law in Germany, we are happy to provide you with advice and assistance. Of course, we check all the framework conditions defined by you if you wish to move abroad tax-free. Based on this, we create the appropriate model and lead the project to a successful conclusion in accordance with your wishes and expectations. So dream about where it should move you soon. We are preparing the basis for their implementation.