German Exit Tax: Legal Planning Before You Relocate

Who has to pay the German exit tax?

The exit tax does not affect every emigrant. It requires three conditions which, under Section 6(1) AStG in conjunction with Section 17 of the German Income Tax Act (Einkommensteuergesetz, EStG), must all be met at the same time.

First, there must be a substantial shareholding: within the last five years you held, directly or indirectly, at least one per cent of the capital of a domestic or foreign corporation, typically a GmbH or an AG. Second, there must be a sufficient history of German tax residence: in the twelve years before the move you were subject to unlimited income tax liability in Germany for at least seven years in total. Third, this tax residence must come to an end, in most cases by giving up your residence and habitual abode.

Anyone who does not reach these thresholds is outside the scope of the tax. A shareholding below one per cent does not trigger it, and neither does a move after only a few years of residence in Germany. Shares held as business assets are governed by their own rules; Section 6 AStG targets shares held as private assets within the meaning of Section 17 EStG.

Since 2025 a second category has been added. For units in investment funds held as private assets, the exit tax applies under Section 19(3) InvStG where the holding in the fund amounted to at least one per cent within the last five years, or where the acquisition costs of units in a single fund were at least EUR 500,000. Here too, the seven-year history of unlimited tax liability is a precondition.

When is the German exit tax triggered?

The classic trigger is a change of residence to another country. Section 6 AStG, however, contains further triggers that produce the same legal consequence and are easily overlooked in practice. The tax also arises if you transfer your shares without consideration to a person resident abroad, for example by gifting them to a child who has already emigrated, or on death to an heir living abroad. It applies equally where Germany's right to tax the capital gain is excluded or restricted for another reason, for instance by moving assets into a foreign permanent establishment.

The decisive point in time is the occurrence of the relevant event. The tax is assessed immediately, regardless of whether you ever actually sell the shares. This is precisely where the harshness of the rule lies: what is taxed is a gain that so far exists only on paper. Anyone planning a move abroad or a cross-border succession during their lifetime should therefore have the sequence of steps reviewed in advance, because even the transfer of shares can trigger the tax claim before the actual move takes place.

How high is the German exit tax? Valuation and calculation

The tax base is the notional capital gain: the fair market value of the shareholding at the triggering date less acquisition cost and other relevant tax basis items.

For a private company, valuation is often the central issue. The statutory objective is the price obtainable in an arm's-length sale. Recent third-party transactions and other reliable market evidence take priority. Where none exists, recognised valuation methods may be used. The simplified capitalised earnings method under the Valuation Act can be relevant, but it is not automatically the best economic measure in every case. Founder dependence, minority rights, liquidation preferences, financing rounds and non-operating assets may need separate consideration.

A gain on a qualifying substantial shareholding is generally subject to the partial-income method. Sixty per cent is taxable; the actual burden depends on the personal rate, solidarity surcharge, church tax, acquisition cost and deductible expenses.

A simplified illustration:

If the fair market value of the GmbH shares is EUR 3,000,000 and the original acquisition cost is EUR 25,000, the notional gain is EUR 2,975,000. Under the partial-income method, 60 per cent, or EUR 1,785,000, is taxable. At an income-tax rate of 45 per cent, the income tax is EUR 803,250, with solidarity surcharge of approximately EUR 44,179. The illustrative total burden is therefore about EUR 847,000. If payment in seven annual instalments is granted, this corresponds, before any further effects, to an annual amount of roughly EUR 121,000.

The individual tax is calculated from that base using the taxpayer's personal position. The illustration demonstrates the liquidity issue: tax arises without a sale or purchase-price receipt. Valuation, funding and possible instalments need to be planned together.

What changed with the ATAD reform in 2022?

Until the end of 2021, a move within the EU and the EEA was treated much more mildly for tax purposes: anyone moving to a member state could defer the assessed tax indefinitely and free of interest, as long as they remained taxable there. The ATAD Implementation Act abolished this preferential treatment without replacement, with effect from 1 January 2022. Since then a single rule applies, regardless of whether the move is to an EU state, to Switzerland or to the United States: the tax is assessed immediately and is, in principle, payable immediately.

By way of compensation, Section 6(4) AStG provides that the tax may, on application, be paid in seven equal annual instalments. The first instalment falls due within one month of notification of the tax assessment, the others follow annually. Unlike the old EU deferral, the instalment scheme is generally granted only against security, for example a bank guarantee, a pledge of the shares or a land charge. The distinction between the EU/EEA and third countries therefore no longer matters for the basic rule; it still has a bearing mainly on the question of security and in special situations shaped by European law.

Does the German exit tax now also apply to ETFs and funds?

Until 2024, the exit tax concerned only entrepreneurial shareholdings. With the Annual Tax Act 2024 (Jahressteuergesetz 2024), the legislator extended the tax to investment fund units held as private assets. Since 1 January 2025, Section 19(3) InvStG has applied a notional disposal to ETFs and other funds as well, on a move abroad, on a transfer abroad without consideration, or on the exclusion of Germany's right to tax.

The rule only bites, however, above noticeable thresholds. It affects investors who held at least one per cent of a fund within the last five years, or whose acquisition costs for units in a single fund were at least EUR 500,000. This EUR 500,000 limit applies per fund, not to the portfolio as a whole.

Someone who has invested EUR 700,000 in a single ETF is caught; someone who spreads the same amount across three funds at around EUR 233,000 each stays below the threshold. For the typical small investor with a broadly diversified portfolio, nothing changes. For wealthy private individuals with concentrated fund positions, by contrast, the new rule is a separate point to check in any relocation planning.

How can the German exit tax be planned?

There is no universal structure that simply makes exit tax disappear. Planning first requires clarity on the trigger, value and liquidity impact. A holding company or family foundation does not automatically remove the charge. A contribution or transfer may itself create tax, trigger lock-up periods or merely replace the operating-company shares with a qualifying holding-company interest.

A robust process includes the following.

1. Map all relevant positions

Review direct and indirect interests in domestic and foreign corporations, historic percentages, tax basis, reorganisations and contributions, together with relevant investment and special-investment fund units from 2025.

2. Identify the precise trigger

The tax may arise not only on giving up residence and habitual abode, but also on a gratuitous transfer to a non-resident or another restriction of Germany's taxing right. The destination state and treaty need to be analysed before sequencing the steps.

3. Document fair market value

The valuation date, method and assumptions determine the tax base. Recent funding rounds, offers, shareholder rights and forecasts must be interpreted properly. An independent valuation may be appropriate for material latent gains or special share classes.

4. Plan liquidity and security

On application, the assessed tax can generally be paid in seven equal, interest-free annual instalments. The first is due within one month of assessment and the remaining instalments generally on 31 July of each following year. Security is normally required. A disposal, transfer, distribution or breach of reporting obligations may accelerate the balance. Funding should therefore cover adverse scenarios as well.

5. Consider the temporary-return rule

Where the move is genuinely temporary, Section 6(3) AStG may reverse the tax claim if the statutory conditions are met. The return deadline, continued ownership and intervening transactions must be monitored. Intention alone is insufficient.

6. Reorganise only with sufficient lead time

A holding company, share-for-share exchange, gift, foundation or reorganisation may be appropriate for succession, governance or financing reasons. None is a generic exit-tax solution. Immediate taxation, tax-neutral rollover, lock-up periods, gift tax, attribution, substance and future distributions need review. Any restructuring should have an independent commercial rationale and be implemented in time.

7. Model the destination state and later sale

The new state may grant a tax basis step-up, refuse to recognise Germany's notional value or tax the entire gain on a later sale. Inheritance, gifts and a future departure may add further layers. German and destination-state advice should therefore model the full lifecycle.

Legal structuring can influence burden, timing and liquidity. It does not replace the individual tax computation or full disclosure to the tax authorities.

Wächtler, the BFH and the open constitutional question

The exit tax has been under pressure from European law for years. In the Wächtler case (judgment of 26 February 2019, C-581/17), the European Court of Justice held that the immediate levying of the German exit tax on a move to Switzerland infringes the Agreement on the Free Movement of Persons between the EU and Switzerland. In its follow-up decision of 6 September 2023 (I R 35/20), the Federal Fiscal Court (Bundesfinanzhof, BFH) drew the conclusion that in such cases the tax must be deferred permanently and free of interest, and may at most be made dependent on the provision of security.

This case law was handed down on the old version of Section 6 AStG before the 2022 reform. Whether, and to what extent, the principles can be transferred to the law in force since 2022 has not yet been conclusively resolved. By a circular of 2 June 2025, the Federal Ministry of Finance (BMF) has regulated the treatment of the old Switzerland cases.

For the reformed legal position, a residual risk remains as long as the BFH has not ruled on its compatibility with EU law. A complete abolition of the exit tax is not on the horizon at present; the political debate is more about a possible reintroduction of deferral relief. For planning, this means: you structure on the basis of the law in force and keep the structure flexible enough to respond to a change in the case law.