Relocation Taxation
Exit taxation is a key instrument of German tax law for securing domestic taxation rights.
It applies when a natural person with significant holdings in corporations – generally at least 1% of the shares – moves their domicile or habitual residence abroad.
The aim of the regulation is to tax hidden reserves that arose during the period of unlimited tax liability in Germany before Germany loses its right of taxation.
The legal basis for this is Section 6 of the Foreign Tax Act. Upon departure, the shares concerned are deemed to have been sold at their current market value. The difference between this value and the original acquisition cost is subject to income tax. No actual sale takes place, so this is a so-called fictitious sale. In order to avoid undue hardship, the law provides for various deferral and instalment payment options.
When moving to an EU or EEA country, the tax can be deferred without interest and for an unlimited period under certain conditions, as long as the shares are not actually sold.
When moving to third countries, however, immediate or instalment payments are generally required. Exit taxation is becoming increasingly important in a globalised economy as more and more entrepreneurs and investors are internationally mobile.