Exit Taxation When Moving Abroad

Exit taxation under § 6 AStG: the short answer

Exit taxation under § 6 of the Foreign Tax Act (Außensteuergesetz, AStG) treats a shareholder who leaves Germany as if he or she had sold shares in corporations at fair market value. It applies to individuals who hold, or have held within the last five years, at least 1% of the capital of a corporation (§ 17(1) EStG) and who were subject to unlimited German tax liability for at least seven of the last twelve years. The deemed gain is taxed under the partial income method, so that 60% is subject to income tax.

Since the reform applicable to exits from 2022, the tax can be paid in seven annual instalments, generally only against security, and it lapses if the shareholder returns within seven years, extendable by up to five years, provided certain conditions are met.

For entrepreneurs, founders, executives with share packages and heirs of family companies, exit taxation can create a large tax liability without any cash proceeds. It can also be triggered by gifts or inheritances to non-residents and by changes in tax treaties. Planning before a move abroad is therefore essential, ideally at least a year before the intended departure date, so that valuations, security and family arrangements can be prepared without time pressure.

What triggers exit taxation

Under § 6(1) AStG, three events are treated as a sale of shares at fair market value:

• the end of unlimited tax liability because the person gives up his or her residence or habitual abode in Germany;
• a gratuitous transfer of shares, by gift or on death, to a person who is not subject to unlimited German tax liability;
• any other exclusion or restriction of Germany's right to tax a gain from the sale of the shares, for example where a person becomes resident in another country under a tax treaty while keeping a German residence.

The deemed sale takes place at the time unlimited tax liability ends, at the time of the transfer, or immediately before Germany's taxing right is excluded or restricted. The gain is the difference between the fair market value of the shares and their acquisition costs. Where the tax has been paid, the shares are treated as acquired at fair market value for future German purposes (§ 6(1) last sentence AStG).

Who is affected

The rule applies to individuals, not to companies. The 1% threshold is low: founders, managers with equity participation, family shareholders and private investors with larger stakes in non-listed companies are frequently affected. It applies to shares in German and foreign corporations alike. For the seven-year residence test, periods of unlimited liability of a predecessor who transferred the shares gratuitously are taken into account, so heirs and donees cannot avoid the rule by a short residence (§ 6(2) AStG).

The value at stake is often substantial. For a founder of a successful start-up or a family shareholder in a profitable Mittelstand company, the fair market value can be many times the acquisition costs. Under the partial income method, 60% of the gain is taxed at the personal income tax rate, which with solidarity surcharge can reach about 28.5% of the total gain at the top rate. Because no shares are actually sold, the taxpayer must finance the tax from other assets or from the instalment arrangement.

Instalments and security

Since the reform applying to exits from 2022, the earlier interest-free indefinite deferral for moves within the EU and EEA no longer exists. Instead, § 6(4) AStG allows the tax to be paid in seven equal annual instalments on application, regardless of the destination country. The application should generally be granted only against security. The first instalment is due within one month of the assessment, the others on 31 July of each following year, and the instalments do not bear interest.

The outstanding tax becomes due within one month if an instalment is not paid on time, if the taxpayer does not comply with reporting duties, if he or she files for insolvency, to the extent the shares are sold or transferred, or to the extent dividends or repayments of capital are made that exceed a certain level. The taxpayer must report such events electronically to the competent tax office within one month (§ 6(5) AStG). Providing security, for example by a bank guarantee or a pledge of the shares, can be challenging, especially for illiquid shareholdings, and should be discussed with the tax office early.

Temporary absence and return

If the departure is only temporary and the taxpayer becomes subject to unlimited German tax liability again within seven years, the tax lapses under § 6(3) AStG, provided that the shares have not been sold, transferred or contributed to a business in the meantime, that dividends or repayments of capital did not exceed a quarter of the value at departure, and that Germany's taxing right is restored at least to the extent it existed at departure. The tax office can extend the seven-year period on application by up to five years if the intention to return continues to exist. Transfers on death to an heir who then meets the conditions are disregarded.

The return rule is useful for secondments and temporary stays abroad, but it requires careful management of dividends during the absence. Families should agree with the company on distribution policies that keep within the permitted level, and keep documentation of the intention to return, such as a retained home, employment contracts or school registrations for children.

Related exit rules for businesses and companies

Section 6 AStG concerns shares in corporations held privately by individuals. Other exit taxation rules apply to business assets. Under § 4(1) sentence 3 of the Income Tax Act, the exclusion or restriction of Germany's right to tax a gain from the sale or use of a business asset is treated as a withdrawal at fair market value.

This can apply when an entrepreneur who runs a sole proprietorship or holds a partnership interest moves abroad, or when assets are transferred from a German business to a foreign permanent establishment. For transfers to permanent establishments within the EU, a compensating item can be formed on application under § 4g EStG, spreading the tax over several years. Corporations face a corresponding rule in § 12 of the Corporate Income Tax Act when assets or functions leave the German tax net.

For families, this means that the structure of holdings determines which rule applies. Shares in a GmbH held privately fall under § 6 AStG; the same shares held in the business assets of a German partnership may remain within German taxing rights if the partnership has a German permanent establishment to which they are attributed. Such structures must be established well in advance and with genuine substance, because the tax authorities examine them closely.

Procedure after departure

The deemed gain is declared in the income tax return for the year of departure, filed with the tax office that was competent before departure. Taxpayers who use the instalment option must keep the tax office informed of relevant events for the entire instalment period, electronically and within one month, and must maintain the agreed security. Changes of address abroad, changes in the shareholding and planned distributions should therefore be coordinated with German advisers. Where the destination country also taxes the gain on a later sale without recognising the German step-up, double taxation can arise; tax treaties and the destination country's rules on the starting value should be checked before departure.

Planning approaches

Several approaches can reduce or defer exit taxation, each with its own requirements and risks:

1. Timing and valuation: plan the move when values are lower and document the valuation carefully.
2. Structuring before departure: in some cases, holding shares through a commercial partnership or a business operating in Germany keeps the shares within German taxing rights, but such structures are complex and subject to anti-avoidance rules.
3. Use of the instalment and return rules: for temporary moves, plan the return and distribution policy from the outset.
4. Gifts before departure: transferring shares to German-resident family members before leaving can reduce the holding subject to exit taxation, with gift tax and business-asset relief to be considered.
5. Treaty analysis: check how the destination country treats the step-up in value and whether double taxation arises on a later sale.

Exit taxation is only one part of moving abroad. Inheritance and gift tax continue to apply for five years after departure for German nationals, and the EU Succession Regulation may change the succession law that applies; see our articles on cross-border estates and gift tax planning. Founders with venture-backed companies should also consider the effect on employee participation programmes and investor agreements.

Illustration: a founder holds 15% of a German software GmbH acquired for EUR 4,000 and now worth EUR 6 million. She plans to move to Portugal permanently. On departure, a deemed gain of almost EUR 6 million arises, of which 60% is taxable. She applies to pay the tax in seven annual instalments and offers a pledge over her shares as security. If the company is sold three years later, the outstanding instalments fall due within one month of the sale.

How TRW & Co helps with exit taxation

We advise entrepreneurs, executives and families on exit taxation before and after a move abroad: analysing whether § 6 AStG applies, organising valuations, preparing instalment applications and security arrangements, planning temporary absences and returns, and coordinating with gift, inheritance and succession planning. We represent clients in discussions with tax offices and in disputes about valuation and security before the finance courts. Our international tax team can be reached via our contact page. This article provides general information and is not tax or legal advice.