The foreign tax law contains rules for the taxation of shareholders of corporations who want to move abroad. Because by moving abroad, for example, a GmbH shareholder could sell his shares without the Federal Republic of Germany the otherwise associated taxation of profit. This is why Germany preventively collects the exit tax. It is incurred to the extent that would be the case with a regular taxation on the sale of the shares at the time of the departure in Germany. But now a reform of the exit taxation is to take place in the near future. The aim is to change various aspects which, overall, lead to stricter application.

However, after an in-depth analysis of the speaker’s draft, we have found that with 5 designs the exit taxation can still be avoided. This is possible through a change of legal form of the corporation into a partnership, through the transfer of a partnership as a holding company, the establishment of a family foundation or a cooperative as well as through a sale for EUR 1 with a warrant to another own GmbH.

Since 2016, the European Union has been striving to strengthen its action against aggressive tax avoidance practices. For this purpose, the EU Directive 2016/1164 was adopted on 12 July 2016 and further adapted in 2017 by the so-called ATAD Directive (EU) 2017/952, which is to be implemented by all Member States. The abbreviation ATAD means “Anti Tax Avoidance Directive” and aptly describes the program according to which the legislator in this country also makes the legal adjustments in order to implement the EU directives.

For example, the future law on the implementation of the Anti-Tax Avoidance Directive (ATADUmsG) aims to reinforce the provisions on tax easing and additional taxation as well as hybrid practices in the Foreign Tax Act. But the exit taxation is also under scrutiny here.

In fact, as a tax law firm with expertise in international tax law, we receive many inquiries on this topic. Therefore, in this article we dedicate ourselves to the 5 designs that we have developed in order to be able to avoid the exit taxation also according to the future legal situation, if this should be based on the currently discussed draft referent with the processing status 24.03.2020.

2nd Reform of Exit Taxation: What Should Change

The reform of the exit taxation concerns in particular the conditions for collection and the previous possibility of deferral of the tax. At present, it is still the case that a shareholder of a corporation who moves to an EU/EEA country or a third country is only subject to exit taxation if he has previously been subject to unlimited taxation in Germany for at least 10 years. This period is now to be reduced to 7 years. In addition to the time shortening of the period of unlimited tax liability to 7 years, according to the speaker draft, the viewing span should also be reduced from 15 years to 12 years.

In addition, such a shareholder has so far been able to avoid the exit tax by a time unlimited and interest-free deferral basically completely. But this is precisely what is now being drastically tightened up. The tax is now to be paid in instalments over seven years. The rate model should be possible both in the EU/EEA case and in the case of third countries (a so-called “one-fits-all solution”). This point in particular has been improved on the new version of the speaker’s draft.

So we come to the interesting part of our contribution. Here we would like to introduce you to 5 ways with which you will be able to avoid the exit tax even after the reform of the exit taxation. In doing so, we also address the advantages and disadvantages associated with the respective prerequisites for implementing the design models.

In order to present the strategy for avoiding the exit tax in a comprehensible way, we want to refer to the general principle behind our models. Because it is the shareholder of a corporation that is the focus of the taxation rules. If you can avoid moving abroad as a shareholder of a corporation, you also avoid the associated exit taxation.

Speaking of a corporation: we want to take into account the fact that most shareholders of a corporation who have an interest in these models are GmbH shareholders. That is why we simplify our text by substituting corporation by GmbH.

Avoidance of Exit Taxation – Model 1: Conversion into a partnership

The transformation of a GmbH into a partnership is to a certain extent the classic for avoiding exit taxation. Many entrepreneurs have already taken this route before the reform of the exit taxation came on the agenda.

This is basically quite simple. By a simple change of form, the GmbH is usually converted into a GmbH & Co. KG. This ensures that you as the sole GmbH shareholder, as is very often the case, even after the conversion without further shareholders. However, if several shareholders hold shares in a GmbH, then of course another partnership can also serve as the goal of the change of form.

It should be noted here that due to the change of form, the former GmbH shareholder now moves abroad as a shareholder of a partnership instead of a corporation. This circumvented the main requirement of the External Tax Act. However, the company should remain in Germany, otherwise this could lead to a taxable relocation of functions.

However, this model can only fully develop its advantage if the change of form of the GmbH is tax neutral. Fortunately, this is usually the norm. However, if the GmbH is blessed with a considerable profit carry forward, then this is anything but that in the conversion. This is because § 7 UmwStG applies. This then leads to a statutory taxation of a fictitious distribution of all profits in the GmbH that are due to the shareholder. So if you want to avoid the associated capital gains tax in such a situation, consider one of the following alternatives instead.

Avoidance of Exit Taxation – Model 2: Intermediation of a GmbH & Co. KG as Holding

If you would like to continue to move abroad as a shareholder of a GmbH & Co. KG instead of a GmbH, then you can also create a holding company, in which the GmbH will now contribute to a GmbH & Co. KG founded by you. However, the interposition of a GmbH & Co. KG only works if it also carries out a commercial activity in Germany. The obvious option here is administration or management as a service for the GmbH.

Avoidance of Exit Taxation – Model 3: Establishment of a Family Foundation

As a third alternative, to exclude the tax even after the reform of the exit taxation, the establishment of a family foundation offers several other advantages. First, the shares in the GmbH are donated in order to establish the family foundation. Although the foundation is basically also a corporation, a foundation, unlike a GmbH, knows no shareholders. In fact, the foundation is characterized by the fact that in this respect it is only committed to the destinataries designated by the founder. Therefore, the former GmbH shareholder can now move abroad, because the foreign tax law does not see any shareholders in a foundation who could be involved in it.

3.4. Avoidance of Exit Taxation – Model 4: Establishment of a Cooperative Society

Instead of the foundation of the GmbH participation in the assets of a family foundation, the establishment of a cooperative can also contribute to avoiding this tax even after the reform of the train taxation. However, a registered cooperative can only be founded with a minimum number of 3 cooperatives. However, if you want to do this with trustworthy people, for example from your family circle, then a gift tax is also to be expected, because the transfer of your participation will probably take place in this way.

In addition, you are still to be regarded as a shareholder within the meaning of the Foreign Tax Act, albeit now as a member of the cooperative. However, the cooperative benefits from the fact that the value of your shares corresponds only to the nominal value of your capital contribution, but in addition does not experience any further increase in value. Since this is therefore also the market value of your share in the cooperative, the tax administration can gladly apply the exit tax. Because then the tax calculation looks simplified like this: