According to § 4 (1) sentence 3 EStG, a taxable, but fictitious extraction occurs when an asset is transferred from a German to a foreign permanent establishment. However, this so-called taxation of derailment, which we also know from the exit tax, has certain limits. Thus, according to a current judgment of the FG Münster, it does not apply in cases of passive de-engagement, i.e. without the involvement of the respective entrepreneur.

1st principle: Active and passive untaking according to § 4 (1) sentence 3 EStG

German tax law knows various cases of so-called de-tricking taxation. Corresponding standards always apply when an entrepreneur or a private person transfers assets abroad, but at the same time hidden reserves (profit reserves) “snooze” in the respective asset. As part of active or passive de-engagement, the Treasury taxes these reserves “final” before it loses access to the respective economic asset.

One of these derailment standards is § 4 (1) sentence 3 EStG. If an asset is transferred from a German permanent establishment to a foreign permanent establishment, this operation – which is generally tax-neutral – is considered as removal within the meaning of sentence 2. The entrepreneur thus has to tax the hidden reserves.

Example: A German GmbH has two operating sites, one in Freilassing (German side of the border with Austria) and one in Salzburg, immediately behind the border. The GmbH transfers a property with EUR 200,000 in the balance sheet from the German to the Austrian establishment. The market value of the property is EUR 500,000. This means that EUR 300,000 of hidden reserves are in the property “Immobilie”. This amount is taxable as a result of the transfer in Germany. In the company’s premises in Austria, the building is now set at EUR 500,000.

It would, however, be contrary to the free movement of capital to impose the tax immediately (ECJ C-371/10 of 29.11.11, DStR 11, 2334). Therefore, according to § 4g paragraph 1 EStG, the taxpayer can create a balance in the amount of the difference (here EUR 300,000) and dissolve it over five years. This leads to a tax deferral effect, which, however, only occurs when the right to vote is exercised.

2nd exception: Passive dereliction of § 4 (1) sentence 3 EStG not covered

According to a decision of the Finanzgericht Münster of 10.08.2022 (13 K 559/19 GF) § 4 (1) sentence 3 EStG does not, however, cover cases of so-called passive de-engagement.

In the event of a dispute, the plaintiff, a domestic limited partnership, had identified around 59 % of immovable property (in particular real estate) in its operating assets. In addition to their limited partnership shares, the limited partnership members, one of whom lived in Switzerland, held shares in a Spanish S.L. After the double taxation agreement between Germany and Spain was amended in 2012, the German Treasury no longer had the right to tax the share of the limited partner living in Switzerland. The reason for this was that more than 50 % of the limited partnership’s assets were immovable assets.

The tax office saw a case of § 4 (1) sentence 3 EStG in the form of a “passive de-engagement”, because the change in the DTA also led to an exclusion of the taxation right. The standard does not contain any provision which precludes taxation in this particular case.

The tax court, however, followed the plaintiff and saw no passive de-engagement. Because § 4 (1) sentence 3 EStG brings about an equality with the withdrawal according to sentence 2, which presupposes a concrete withdrawal act and a withdrawal will (BFH of 07.10.1974, GrS 1/73). Therefore, a purely passive de-engagement is not sufficient; there must at least be the will to deprive the respective economic asset of German taxation sovereignty.