22 July 2021
The German Bundestag passed the Act on the Implementation of the European Anti-Tax Avoidance Directive (ATADUmsG) on 21 May 2021. The Bundesrat gave its consent on 25 June 2021. In particular, the Act stipulates a partly significant tightening of the provisions on exit taxation pursuant to Section 6 AStG for privately held shares in corporations.
The basic concept of exit taxation remains basically unchanged for the time being. So far, shareholders of domestic and foreign corporations with a shareholding of at least 1% (shares within the meaning of Section 17 EStG) are potentially subject to exit taxation upon departure from Germany pursuant to Section 6 AStG if they have been subject to unlimited tax liability in Germany for a total of at least ten years. The shares are then deemed to have been sold at fair market value at the time of departure, so that a taxable (fictitious) capital gain is potentially realised. The same applies in particular if the shares are transferred by gift or death to a purchaser resident abroad.
The new regulation provides a reduction of the period of unlimited tax liability required prior to departure from ten to seven years. Taxpayers will therefore be affected in future if they have been subject to unlimited tax liability for at least seven years in total within the last twelve years. In this respect, the focus will not be on the entire lifetime, as was previously the case, but only on the last twelve years. An incomer from abroad will therefore be affected by exit taxation earlier than on the basis of the current ten-year period. Another complicating factor is that Germany already does not grant any step-up of the acquisition costs of shares already held at the time of the arrival (exception: exit taxation in the other state at the time of arrival). In the case of exit taxation, the fictitious capital gain is therefore calculated on the basis of the historical acquisition costs, even in the case of new residents.
According to the current legal situation, the exit tax is generally deferred for an unlimited period of time, without interest and without the provision of security, until the actual sale of shares, if the exit taxpayer is a citizen of an EU/EEA state and becomes subject to unlimited tax liability in another EU/EEA state after the exit. The same applies in EU/EEA constellations in the case of a transfer of shares by inheritance or gift to persons resident abroad. In third-country cases, on the other hand, only in cases of hardship an interest-bearing deferral can be granted on application against the provision of security; the tax is then due in five annual rates.
In contrast, the Act that has now been passed provides for a drastic tightening. The previous differentiation of deferral concepts is to be abandoned. In the future, the exit tax, regardless of whether it is an EU/EEA or third-country case, will always be due immediately or paid in seven equal (non-interest-bearing) annual rates at the request of the taxpayer, in general only against the provision of security. A permanent deferral of the tax will no longer be possible. This means a definitive liquidity burden without an inflow of income. In many cases this will not be realisable without selling the shares; however, a corresponding sale will not always be realisable, especially in family owned companies.
According to the previous law, the tax assessed in third-country cases due to a departure ceases to apply retroactively if the taxpayer is only temporarily absent and again becomes liable to tax in Germany without restriction within five years after departure; this also applies in the case of the legal successor moving in. If job-related reasons for the absence and the continued intention to return are made credible, the tax office may extend the period by a maximum of five additional years. In the case of departures of EU/EEA citizens within the EU/EEA area, there is no time limitation with regard to the return regulation.
Due to the amendment to the law, the period in which the exit taxation can be subsequently waived by re-establishing unlimited tax liability in Germany is extended to seven years. However, this applies to EU/EEA migrants as well as to third-country cases; the previously unlimited returnee regulation for EU/EEA migrants no longer applies accordingly. Upon application, in cases of temporary absence, an interest-free deferral of the tax without payment in instalments shall be granted, generally against the provision of security.
According to the legislative explanatory memorandum, it will no longer be necessary to substantiate the intention to return. Rather, the mere intention to return and a sufficient probability are sufficient. In addition, the possibility of extending the withdrawal period to a total of twelve years in the future will only depend on whether the intention to return continues unchanged; the existence of job-related reasons will no longer be relevant. For reasons of precaution, however, an intention to return should also be documented in the future especially if a full deferral of the tax shall be applied for until return.
If the exit taxation cannot be avoided altogether by adjusting the corporate law structures, the return regu¬lation will be the only possibility in the future to ensure at least temporary international mobility of shareholders of corporations without tax disadvantages.
The new regulation (very questionable under Euro¬pean law) will come into force on 1 January 2022 and thus affects all departures from 1 January 2022 onwards. If there is an intention to use the comprehensive deferral options for departures to the EU/EEA territory still applicable until the end of the year 2021, a potential departure should therefore still take place by 31 December 2021. In individual cases, however, it may be advisable to postpone an intended departure to the next year: Since, according to the future legal situation, tax liability will only be considered if there has been unlimited tax liability in Germany for at least seven years within the last twelve years (earlier periods of unlimited tax liability will no longer be taken into account), the amendment to the law may even have a favourable effect in individual cases, especially in cases of a return to Germany within the last few years after a previous emigration. This should also be carefully examined when planning a possible relocation.
Whether the provision will stand up in court remains to be seen in any case. Restructuring and foundation solutions to avoid exit taxation are likely to continue to gain in importance.