Some changes are planned for exit taxation with effect from 01.01.2020. Provisions are now to apply, according to which, on the return of a shareholder of a domestic corporation within seven years instead of five, the tax is refunded. In contrast to the previous regulation, no professional interest is necessary as a prerequisite for granting an extension of the deadline. Furthermore, the period was adjusted to seven years, in which an installment payment of the exit tax is possible. At the same time, the associated annual period for proof of continued ownership of the shares was extended from 31 May to 31 July. On the other hand, the option of deferral when moving to EU/EEA countries has disappeared.

The present contribution to the reform of the exit taxation arose in anticipation of the changes expected retroactively as of 01.01.2020. As of November 2020, however, no concrete legislative changes have yet occurred. We ask that this be taken into account.

Exit taxation serves the purpose of avoiding a flight from the taxation of capital gains of shares in a corporation by early departure of the shareholder abroad. Because the departure of the shareholder abroad is also associated with a relocation of taxation jurisdiction there. In order to ensure that Germany retains its tax jurisdiction even if the shareholder sells his shares in the corporation from his new place of residence abroad after his departure, the taxation of the departure is a prophylactic approach.

The legal bases for exit taxation are integrated in § 6 AStG.

Current Changes to Exit Taxation

2.1 Adjustment of the period during which a return to Germany remains tax-free

Until now, the exit taxation scheme stipulated that tax would be refunded if the shareholder returned within five years. This period could be extended upon request for a further five years if this was due to professional reasons.

The innovation in this aspect is that the first period has been extended to seven years. If this is too close, then it is still possible to request a deadline extension of five years. However, the argument of a work-related absence abroad is now irrelevant. The extension of the deadline is now also granted without professional reasons. Thus, the maximum length of stay abroad extends to a total of twelve years, without the right to a refund of taxes already paid expires.

2.2. Adjustment of the duration of instalments

Previously, the usually quite considerable tax burden that a shareholder owed to the German Treasury in the context of the exit taxation could be paid in instalments within five years.

Similar to the extension of the return period, the installment payment period has now been extended to seven years. However, it is now completely new that the installment payment is only granted if corresponding collateral is deposited. These can be, for example, guarantees or corresponding entries in the land register in connection with real estate. Of course, this must then be clarified in detail with the responsible tax office.

2.3. Amendment of the deadline for annual proof of ownership of the shares in the corporation

Until now, a secondary condition for obtaining the opportunity to pay in instalments has been that the shareholder annually until 31. It had to prove that his shares in the limited company were still owned by him.

This too has now been adapted. Since that year, the deadline of 31 July of each year has to be respected.

2.4 Elimination of the possibility of deferral when moving to EU/EEA countries

When moving to a member state of the EU or the EEA until 31.12.2019, it was possible to apply for an interest-free deferral of the tax. This meant that the tax had to be paid only if either the shares in the corporation were actually sold or a further move to a country outside the EU/EEA took place.

The updated legal text in the Foreign Tax Act now comes into effect without this option. So since 01.01.2020 it is largely irrelevant in which country the shareholder moves. A deferral is now almost completely excluded.

The new exit taxation regime, under which a deferral was dropped without alternative, was introduced because the European Court of Justice has now ruled in landmark decisions that the possibility of paying in instalments within five years is a sufficient concession. With the now extended seven-year period for payment in instalments, the legislator therefore represents the conviction to comply with EU law in this regard. However, it should be noted that the cases heard by the European Court of Justice were related to the departure of limited liability companies. In contrast, however, exit taxation also applies to natural persons. To what extent this may be regarded as congruent can be doubted from a legal perspective.