− An overview! −
In Germany, the Exit Tax (also known as “Wegzugsbesteuerung”) applies when a company, or a shareholder owning a substantial interest in a company, leaves Germany for another jurisdiction. The tax is designed to capture potential capital gains on the company’s assets that might arise due to the move.
The key aspects of the Exit Tax for companies in Germany are shown below:
A. Who is Affected?
- Corporate Exit: If a corporation (e.g., “GmbH”, “AG”) transfers its tax residency or place of effective management abroad, the company may be subject to Exit Tax on the unrealized gains of its assets.
- II. Shareholder Exit: If an individual who holds a substantial shareholding in a company (typically ≥ 1% of shares) leaves Germany, they may also be liable for Exit Tax on their shares.
B. Taxable Event:
The Exit Tax is initiated when:
- A German company transfers its tax residence abroad (e.g., through a merger, demerger, or simply relocating).
- A shareholder with a significant shareholding (≥ 1%) leaves Germany and takes their shares abroad.
The company or the individual must report the departure and pay the tax on the appreciation of assets up to the date of the exit.
C. How is the Exit Tax Calculated?
- For Companies: The tax is generally calculated on the unrealized gains of the company’s assets, which have accumulated up until the point of exit. This means that if the company has appreciated assets (such as intellectual property, real estate, etc.), the increase in value is taxed.
- For Shareholders: If an individual leaves Germany, the capital gains are calculated on the value of the shares at the time of exit, with any unrealized appreciation potentially subject to tax.
D. Tax Deferral:
In many cases, the Exit Tax may not be due immediately, especially for companies or shareholders that meet certain conditions. For example:
- Deferred Payment: The tax can often be deferred if the move is to another EU/EEA country. This means that the tax payment can be postponed until the assets are sold or otherwise realized.
- Interest on Deferred Tax: If the tax is deferred, interest might apply from the date of departure until the tax is paid
E. Exemptions and Reductions:
- EU/EEA Exemption: If the company or shareholder is moving to another EU or EEA state, the Exit Tax can be deferred or even waived, depending on specific conditions. This is designed to facilitate the free movement of capital within the EU.
- Long-Term Shareholding: In certain cases, long-term shareholders (e.g., individuals who have held their shares for many years) may benefit from reduced tax rates or exemptions.
F. Special Considerations:
- Valuation of Assets: When calculating Exit Tax, it is important to determine the “fair market value” of the company’s assets, which may require detailed valuations
- Tax Treaties: If the company or shareholder is relocating to a country with which Germany has a double taxation treaty, the provisions of that treaty may affect the exit tax or provide relief from double taxation.
G. Timing and Reporting:
- Reporting: The company or shareholder must notify the German tax authorities about the relocation within a specific time frame, typically within one month of the move. Failure to report may result in penalties.
- Filing Deadline: The Exit Tax needs to be paid according to the regular tax filing deadlines, unless a deferral has been granted.
H. Conclusion:
The Exit Tax in Germany is a mechanism to prevent tax avoidance by relocating assets or entities to low-tax jurisdictions. It applies both to companies and individuals who transfer their tax residence abroad, though various exemptions, deferrals, and reductions are available, particularly in the context of EU/EEA relocations. Tax planning and timely reporting are essential to avoid penalties and manage potential tax liabilities effectively.
We are currently offering an initial consultation on corporate tax at a reduced price of AED 1,100 excl. 5% VAT until the end of the year (31 December 2024). Please contact us directly for an appointment
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