If an entrepreneur wants to realize a special business idea with great potential for success abroad, this can be tax-advantageous. But if he wants to return to Germany later with his company, then he can even lay the foundation stone to hardly pay taxes for up to 15 years. The return from abroad is relevant because the transfer of a sole proprietorship or partnership operating abroad takes place under the law as a tax-neutral contribution. This leads to a valuation of the intangible assets according to the Valuation Act, with a factor of 13.75 on the average company profit of the last 3 years of the company abroad. This contribution to the German company can then be written off in the following years and thus reduce taxes or even avoid them altogether.

15 years no tax pay – Special design after returning from abroad

1st Return from abroad as an option for entrepreneurs

Many entrepreneurs in Germany are considering moving abroad to save taxes. This is often both about setting up a company there and about reducing your own taxes. In addition, the foreign environment can sometimes contribute the development and marketing of a new product to the success of a special business idea, but at least be more financially advantageous than in Germany. Nevertheless, some of these entrepreneurs who emigrated abroad often consider returning to Germany for various reasons.

In this article we would like to explain that this consideration can also be quite appealing from a tax point of view. Because if returning from abroad means that you may have to pay almost no taxes in Germany for up to 15 years, then this is certainly a positive aspect that you would then also want to use. For this purpose, we provide both a practical calculation example and the legal bases that apply here.

2nd Legal Basis for a Return to Germany

The legal tools we need to explain the tax benefits that an entrepreneur can use when he returns from abroad to Germany are quite extensive. Based on this, we also justify the conditions that must be observed in order to claim the tax benefits.

First of all, we refer to § 4 (1) sentence 8 EStG and there in particular to the second half sentence. It stipulates that the transfer of assets of a foreign company to a company existing in Germany entails the same tax consequences as a contribution.

The fact that such a contribution is tax-neutral is due to § 24 UmwStG.

In addition, the guidelines for the valuation of the foreign company, whose values should enter the German company after returning from abroad, must be observed. These are in the Valuation Act, namely in §§ 6, 11 and 203 BewG. In particular, § 6 BewG is relevant here because it regulates the valuation of assets covered by § 4 (1) EStG and § 5 EStG, i.e. the transfer of a foreign company to Germany. In fact, § 6(1)(5a) BewG refers precisely to the second half-sentence of § 4(1)(8) EStG, which is relevant for the assessment of the value of the company in the present case. This completely excludes misuse of design, because the legislature has explicitly provided for this tax assessment.

Finally, we need to look at Directive 5.5(3), third sentence, EStR, which in this case grants us the exemption to activate intangible assets when they are deposited. Because without this exception one would have to observe the otherwise applicable under § 5 paragraph 2 EStG activation ban for intangible assets.

Before we go into the details of our example, we want to appreciate the prerequisites that should be kept in mind. First of all, there is the fact that the fake entrepreneur Luigi Ludwigs, who appears in our example, should be taxable in Germany, but has not yet developed any entrepreneurial activity. But this should now change, because he comes up with a brilliant business idea, which he now wants to realize. Since he has heard that this is particularly attractive for entrepreneurs abroad, he obtains comprehensive information that completely convinces him of a move abroad and the subsequent establishment of a company in his new home country. In doing so, he wisely considers the option of a later return to Germany. Therefore, only a sole proprietorship or partnership can be considered as a form of enterprise. A corporation, on the other hand, is excluded.

Now Luigi Ludwigs is actually succeeding in achieving the economic success he predicted abroad. His company generates an average profit of EUR 1,000,000 every year. Now that the company has established its economic success, Luigi Ludwigs is considering returning to Germany.

3.2. Exemplars after returning to Germany

3.2.1. Evaluation of the company after returning from abroad

Now, of course, Luigi Ludwigs would like to continue his company in Germany after returning from abroad. For this purpose, he receives the support of a tax consultant experienced in corporate taxation. This clarifies that the creation of the new company in Germany takes place by transferring the assets from the foreign company as a contribution, if this is a sole proprietorship or partnership. And so it should be in our case.

For this purpose, he carries out the valuation of economic goods, with the intangible economic goods being the focus of particular attention. In particular, it is patents as well as customer base and company value that are important in the evaluation in this regard. The average profit of the company in the last three years is multiplied by the factor of 13.75 specified in § 203 BewG in order to determine the value of the company. Ergo is expected to have an enterprise value of EUR 13.75 million in the balance sheet of the newly founded company in Germany.

3.2.2 Taxation of the German company

So now that the new entrepreneur has been founded in Germany, we can now take a look at taxation. We want to assume that the German company will maintain the same economic success that its foreign predecessor already had. So now let’s look at how much tax accrues on the profit of EUR 1,000,000.

In doing so, we want to simplify the fact that in the case of the intangible assets that were transferred from the foreign company to the German company, we basically only use the company value. This gives us a company value of EUR 13.75 million, which we can write off when taxing. In the case of the 15-year depreciation period, we arrive at an annual depreciation of EUR 916.666,67. This amount thus massively reduces the taxable profit. Only EUR 83.333,33 is eligible as a taxable amount. With a flat-rate and very conservatively estimated tax rate of 50%, only 4.167 % of the total profit is taxed, i.e. EUR 41.666,67. And this, with the same framework conditions, even over a period of 15 years! Therefore, after his return from abroad, Luigi Ludwigs can enjoy his economic success practically tax-free.

In all these considerations, the tax treatment of the departure of the entrepreneur and his foreign company abroad remained out of the question. This is also negligible because only in a number of countries does an exit taxation similar to that in Germany actually exist. In any case, in principle, this aspect must also be taken into account in such an approach, as we described in this contribution.