Exit tax: legal arrangements when moving abroad

Who has to pay the exit tax?

The exit tax does not apply to every emigrant. It is subject to three conditions set out in Section 6(1) of the Foreign Tax Act (AStG) in conjunction with Section 17 of the Income Tax Act (EStG), all of which must be met simultaneously.

Firstly, there must be a significant shareholding: within the last five years, you must have held, either directly or indirectly, a stake of at least one per cent in the capital of a domestic or foreign company, typically a GmbH or AG. 

Secondly, there must be a sufficient history of tax residency: over the last twelve years prior to your departure, you were subject to unlimited income tax liability in Germany for a total of at least seven years. 

Thirdly, this status as a tax resident must come to an end, usually by giving up your domicile and habitual residence.

Anyone who does not meet these thresholds is excluded. A shareholding of less than one per cent does not trigger the tax, nor does moving away after only a few years’ residence in Germany. Separate rules apply to shares held as business assets. Section 6 of the Foreign Investment Tax Act (AStG) applies to shares held as private assets within the meaning of Section 17 of the Income Tax Act (EStG).

From 2025, a second category of cases will be added. For units in investment funds held as part of private assets, exit taxation under Section 19(3) of the Investment Fund Tax Act (InvStG) applies if the holding in the fund amounted to at least one per cent over the last five years or if the acquisition cost of units in a single fund was at least 500,000 euros. Here too, the seven-year history as a person with unlimited tax liability is a prerequisite.

When is exit tax payable?

The classic trigger is a change of residence abroad. However, Section 6 of the German Foreign Tax Act (AStG) recognises other circumstances that have the same legal consequence and are easily overlooked in practice. The tax also arises if you transfer your shares free of charge to a person resident abroad, for example by gifting them to a child who has already emigrated, or by inheritance to an heir living abroad. It also applies if German tax jurisdiction over the capital gain is excluded or restricted for another reason, for example through the transfer of assets to a foreign permanent establishment.

The relevant date is the date on which the respective event occurs. The tax is assessed immediately, regardless of whether you ever actually sell the shares. This is precisely where the harshness of the rule lies: a profit is taxed that, as yet, exists only on paper. Anyone planning to move abroad or to arrange an anticipated succession across borders should therefore have the sequence of steps checked in advance, as even the transfer of shares can trigger the tax liability before the actual move takes place.

How much is the exit tax? Valuation and calculation method

The basis of assessment is the notional capital gain, i.e. the fair market value of the shareholding at the relevant point in time, less acquisition costs and other items to be taken into account for tax purposes. In the case of unlisted companies, valuation is regularly the central point of contention. The decisive factor is the price that would be realised in the ordinary course of business upon a sale. Priority should be given to recent sales between unrelated third parties or other reliable market indicators. In the absence of such values, recognised valuation methods may be considered. The simplified income approach set out in the Valuation Act may be applied, but is not automatically the most economically accurate method in every case. Special circumstances such as dependence on the shareholder, minority rights, liquidation preferences, financing rounds and assets not essential to operations must be taken into account appropriately.

The partial income method generally applies to profits from a shareholding within the meaning of Section 17 of the Income Tax Act (EStG). 60 per cent is taxable. The actual tax liability depends, amongst other things, on the personal tax rate, the solidarity surcharge, church tax, acquisition costs and deductible expenses.

A simplified example: where the fair market value of the GmbH shares is 3,000,000 euros and the original acquisition cost is 25,000 euros, the notional capital gain amounts to 2,975,000 euros. Under the partial income method, 60 per cent of this amount – i.e. €1,785,000 – is taxable. At an income tax rate of 45 per cent, this results in income tax of €803,250. The solidarity surcharge of 5.5 per cent on this amount is approximately 44,179 euros. The illustrative total tax liability is therefore approximately 847,000 euros. If the statutory instalment plan over seven years is granted, this corresponds – assuming no other factors – to an annual instalment of around 121,000 euros.

The actual tax is calculated on this basis using the individual’s personal tax details. The example illustrates the liquidity problem: tax is due even though no sale has taken place and no proceeds from the sale have been received. Valuation, financing of the tax and the possibility of payment by instalments must therefore be carefully planned.

What has changed as a result of the ATAD reform since 2022?

Until the end of 2021, the tax treatment of moving within the EU and the EEA was significantly more favourable: anyone moving to a Member State could defer the assessed tax indefinitely and without interest, provided they remained liable for tax there. The ATAD Implementation Act abolished this preferential treatment with immediate effect from 1 January 2022. Since then, a uniform rule has applied, regardless of whether the move is to an EU country, Switzerland or the USA: the tax is assessed immediately and is, in principle, due straight away.

As a compensatory measure, Section 6(4) of the Foreign Tax Act (AStG) provides that, upon application, the tax may be paid in seven equal annual instalments. The first instalment is due within one month of the tax assessment notice being issued, with the remaining instalments following annually. Unlike under the old EU deferral scheme, payment by instalments is generally granted only against security, such as a bank guarantee, a pledge of shares or a land charge. The distinction between EU/EEA and third countries therefore no longer plays a role in the basic rule. It primarily still has an impact on the issue of security and in special circumstances governed by European law.

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

Until 2024, the exit tax applied only to business shareholdings. With the Annual Tax Act 2024, the legislature has extended the tax to investment units held as part of private assets. Since 1 January 2025, under Section 19(3) of the Investment Fund Tax Act (InvStG), a notional disposal also applies to ETFs and other funds in the event of emigration, a transfer abroad free of charge, or the exclusion of German tax jurisdiction.

However, the rule only applies above certain thresholds. It affects investors who have held at least one per cent of a fund over the last five years or whose acquisition costs for units in a single fund amounted to at least 500,000 euros. It is important to note that this €500,000 threshold applies on a fund-by-fund basis and not to the portfolio as a whole. Anyone who has invested €700,000 in a single ETF will be covered by the rule. Anyone who spreads the same amount across three funds, at around €233,000 each, remains below the threshold.

For the typical retail investor with a broadly diversified portfolio, nothing changes as a result. For high-net-worth individuals with concentrated fund holdings, however, the new regulation is a separate point to consider in any emigration planning.

How can one prepare for exit tax from a legal perspective?

Exit tax cannot be ‘avoided’ by means of a general, standard model. Planning involves, first and foremost, clarifying the facts, value and liquidity implications in good time. A holding company or family trust does not automatically eliminate exit taxation. The contribution or transfer of the shareholding may itself be subject to tax, trigger lock-up periods, or simply result in the shares in the holding company, rather than the operating company, falling under Section 6 of the German Foreign Tax Act (AStG) in future.

Robust planning involves several steps.

1. Comprehensively identify taxable positions

Direct and indirect shareholdings in domestic and foreign companies, ownership percentages over the last five years, acquisition costs, conversions, contributions and, from 2025, relevant investment or special investment units must all be examined.

2. Determine the triggering event

It is not only the relinquishment of residence and habitual abode that is relevant. A transfer free of charge to a person resident abroad or any other restriction on Germany’s right to tax may also trigger taxation. The specific destination country and the double taxation agreement must therefore be checked before planning the sequence of events.

3. Document the fair market value in a verifiable manner

The valuation date, method and assumptions determine the tax base. Recent financing rounds, offers, shareholders’ rights and plans must be taken into account. An independent valuation may be advisable, particularly in the case of high hidden reserves or special share classes.

4. Plan for liquidity and security

Upon application, the assessed tax may, in principle, be paid in seven equal, interest-free annual instalments. The first instalment is due within one month of the tax assessment notice being issued; the subsequent instalments are generally due on 31 July of each following year. Payment by instalments is generally only granted against provision of security. Disposal, transfer, distributions or breach of cooperation obligations may render the remaining tax due ahead of schedule. The financing must therefore also cover stress scenarios.

5. Check for temporary absence

In the case of a merely temporary absence, the return provision under Section 6(3) of the German Foreign Tax Act (AStG) may, subject to statutory conditions, retroactively waive the tax liability. To this end, particular attention must be paid to the return deadline, the continued holding of shares and any events occurring in the meantime. Mere intention is not sufficient. The actual return and the other conditions are decisive.

6. Reorganisation only with sufficient lead time

Contributions to a holding company, share swaps, gifts, endowments or conversions may be appropriate for succession, governance or financing reasons. However, they are not blanket solutions to exit tax issues. In particular, immediate taxation, the carry-forward of book value, lock-up periods, gift tax, attribution, net asset value and subsequent distributions must be examined. The restructuring should serve an independent economic purpose and be implemented in good time before the departure.

7. Consider the destination country and subsequent disposal

The country of destination may grant its own step-up, may not recognise the German notional value, or may later tax the entire capital gain. Inheritance, gifts and departure from the destination country may also be relevant. German and foreign advisers must therefore draw up a joint model covering the entire life cycle.

Legal structuring can influence the tax burden, timing and liquidity risk. However, it is no substitute for an individual tax calculation or for providing full documentation to the tax authorities.

Wächtler, the Federal Fiscal Court (BFH) and the unresolved constitutional issue

Exit taxation has been under pressure from European law for years. In the Wächtler case (judgement of 26 February 2019, C-581/17), the European Court of Justice ruled that the immediate levying of the German exit tax upon relocation to Switzerland infringes the Agreement on the Free Movement of Persons between the EU and Switzerland. In its subsequent ruling of 6 September 2023 (I R 35/20), the Federal Fiscal Court concluded that, in such cases, the tax must be deferred permanently and without interest, and may, at most, be made conditional upon the provision of security. 

This case law relates to the old version of Section 6 of the Foreign Tax Act (AStG) prior to the 2022 reform. Whether and to what extent the principles can be applied to the law in force since 2022 has not yet been conclusively clarified. In a letter dated 2 June 2025, the Federal Ministry of Finance set out the treatment of outstanding cases involving Switzerland. Under the reformed legal framework, a residual risk remains until the Federal Finance Court has ruled on its compatibility with EU law.

A complete abolition of the exit tax is not currently foreseeable. The political debate centres more on the possible reintroduction of deferral relief. For planning purposes, this means: planning should be based on the current law, whilst keeping the structure flexible enough to adapt to any changes in case law.