The German Federal Ministry of Finance has recently published a draft bill implementing the Anti-Tax Avoidance Directive (ATAD) into German law (source: Mondaq, https://www.mondaq.com/germany/tax-authorities/884466/drastic-tightening-of-exit-tax-planned-draft-of-atad-implementation-act).
Under the current regime, a German resident taxpayer is subject to exit tax in case he moves to a non EU/EEA country. However, if he moves to a EU/EEA country and continues to hold his/her shares, he receives an unlimited, interest free and unsecured deferral of the exit tax payable.
According to the draft bill, moving to a EU/EEA country will not be a differentiation factor anymore and exit tax will be imposed.
The implementation of this draft bill is expected to have a major impact on businesses and entrepreneurs operating out of Germany and looking to move to another EU country, which may be faced with a hefty exit tax bill.
In case of departure from Germany, a shareholder is subject to taxation on his investment, as there is a deemed sale of his shares at the time of his departure.
An “exit tax” is contained in the German Foreign Tax Code and the shares are deemed to be sold at fair market value at the time of the shareholder’s departure.
Under the current law, when a German taxpayer moved to a EU/EEA country, s/he was automatically granted an unlimited, interest-free and unsecured deferral of the exit tax, in case s/he maintains his shares. This does not apply when there is a departure to a non EU/EEA country. Certain rules and exceptions applied in cases of temporary departures.
The Proposed Changes
According to the draft bill, a taxpayer will be subject to exit tax when his German unlimited tax liability is terminated. He must also have been subject to such liability for 7 years out of the last 12 years before he departs.
Moreover, according to the draft bill, the exit tax is immediately due and payable regardless of whether the taxpayer is moving to a EU/EEA or non EU/EEA country.
There is a possibility for the exit tax to be omitted retroactively and that’s if a taxpayer reestablishes unlimited German tax liability within 7 years of his departure. This period can be extended to 12 years if the taxpayer demonstrates a continued intention to return to Germany. In such a case, the installment payments will be omitted. This applies for taxpayers who depart both to EU/EEA and non EU/EEA countries.
Intending to eliminate the omission of the tax claim by reason of a possible return, the draft bill provides that any transfer of shares that is not made by reason of death, triggers the exit tax, even when the taxpayer intends to return to Germany.
The ATAD is expected to have a significant impact on businesses operating across the EU and will substantially affect business and entrepreneurial mobility.
According to commentary from German tax experts, the provision of the draft bill allowing the exit tax to be paid in 7 annual, non-interest installments is a positive development. Yet, as in the case of other countries with similar taxation rules, the requirement for collateral security can be an important obstacle, especially for taxpayers with few other valuable assets.
As the changes are expected to come into effect in Germany as of January 2021, many businesses are exploring alternative headquartering options (such as headquartering business operations out of Cyprus) in preparation of the implementation of this new tax regime.
German entrepreneurs and taxpayers with plans of leaving Germany should seek specialized advice on this matter as soon as possible.
This article is not intended to be a comprehensive analysis of the proposed amendments. Specialist advice should be sought about your specific circumstances.
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