Many successful entrepreneurs from Germany are currently considering emigration to Dubai. However, it more or less necessarily requires the “taking along” of the existing company, no matter in which legal form it is operated. However, if the entire company or even individual assets are to be transferred to a foreign business asset, some tax peculiarities must be considered in this export.

1.Taxation of hidden reserves when taken abroad

According to § 6 (5) sentence 1 EStG, entrepreneurs can transfer assets back and forth at book values between business assets. This does not result in the uncovering of hidden reserves, because the objects remain tax-encumbered by their belonging to an operating asset.

However, the standard only applies if the German taxation law is not excluded or limited by the transfer. If this is the case because the entrepreneur transfers assets, for example, into foreign business assets, § 4 (1) sentence 3 EStG applies. The standard is worded as follows:

A withdrawal for non-business purposes is equivalent to the exclusion or restriction of the taxation right of the Federal Republic of Germany with regard to the profit from the sale or use of an economic good.

Example: An entrepreneur maintains a business in Germany, but also runs a sole proprietorship abroad (Dubai). He now wants to take economic goods to Dubai, so take them out of the German business assets and bring them into the foreign company. This process is equivalent to a withdrawal from the common value, so that a transfer to book values is eliminated.

2. removal abroad: formation of an offset according to § 4g EStG

When withdrawing abroad, a considerable tax burden can arise, because the hidden reserves are usually “concentrated” when withdrawing taxation. In order to mitigate these consequences, the entrepreneur can form a compensation item according to § 4g EStG. The compensation item is to be dissolved in the marketing year of education and the following four marketing years in each case one-fifth profit-increasing (§ 4g paragraph 2 sentence 1 EStG).

Example: Max had to uncover EUR 200,000 of hidden reserves when transferring his operational fleet to Dubai. However, due to the compensation item according to § 4g EStG, which is formed in the amount of EUR 200,000, he only has to tax EUR 40,000. The remaining EUR 160,000 will be spread over the following four marketing years.

A “fictitious” offset is also possible in the case of profit determination by EÜR. Here, it first constitutes an operating expense and then one-fifth of an operating income (§ 4g (4) sentence 1 EStG).

Pay no taxes in Germany for 15 years: clever use of § 4 EStG!

What applies to withdrawals abroad also applies to deposits. According to § 4 (1) sentence 9 EStG, the first establishment of the BRD’s right to tax an asset is equivalent to the contribution of this asset to the common value. An economic good can also be a goodwill formed abroad (R 5.5 paragraph 3 sentence 1 EStR).

A goodwill is always written off over 15 years in accordance with § 7 (1) sentence 3 EStG. As we have described in detail in our article “Paying no taxes in Germany for 15 years”, entrepreneurs can use these regulations to their advantage: