News on exit tax

The Minimum Tax Directive Transposition Act (MinBestRL-UmsG) was promulgated in the Federal Gazette on 27 December 2023. Among other things, the act includes a change to the scope of section 6 of the Foreign Tax Act (AStG) for taxpayers who moved away before 31 December 2021 (“previous cases”), which can result in the deferral of tax being revoked.  This affects taxpayers who held and continue to hold shares in corporations as defined by section 17 of the Income Tax Act (EStG) and who move abroad.

Under the old version of section 21(3) of the Foreign Tax Act, section 6 as amended on 30 June 2021 still applied to leaving up to 31 December 2021. This laid down that on moving to an EU/EEA state, tax was deferred at no interest, without security having to be provided (section 6(5) Foreign Tax Act [AStG], previous version), or on moving to a third country, tax was partially deferred in return for security and the tax liability was paid in a maximum of five instalments (section 6(4) Foreign Tax Act [AStG], previous version). Concerning moving to Switzerland by 31 December 2021, the Federal Fiscal Court (BFH) considers (judgment of 06/09/2023, I R 35/20) that a permanent, interest-free deferral of the entire exit tax until the shares are actually sold should also come into question alongside payment in instalments, based on the agreement on the free movement of persons (ECJ “Wächtler” case of 26/02/2019, see excursus below). 

The Minimum Tax Directive Implementation Act has revised section 21(3) of the Foreign Tax Act and expanded the scope of section 6(4) sentence 5 no. 5 to cover previous cases with the same wording (“revised version”). According to this, deferrals under the old version of section 6(4) or (5) should also be revoked under section 21(3) sentence 2 nos. 2 and section 6(4) sentence 5 no. 5 of the new version if distributions (distributions of profits, returns of contributions) are made after 16 August 2023 with a total fair market value of more than 25 percent of the fair market value of the shares on the date of leaving the country (“block on distribution/Ausschüttungssperre”).

Concerning the block on distribution, it should be noted that under section 6(3) no. 2, the exit tax that becomes due by infringing the block on distribution is not annulled if the taxpayer later returns to Germany within the returning period and becomes subject to resident taxation again.

The following changes should be noted: 

1. A block on distributions (“Ausschüttunssperre”) has been introduced for leaving by 31 December 2021, for which tax was deferred.
2. Deferral of tax is revoked for distributions made after 16 August 2023 that at the same time make up more than 25 percent of the value of the shares.
3. Tax due from exceeding the block on distribution is not annulled, even on returning to Germany within the time period.

Recommendation for action: check the threshold for block on distribution

Taxpayers whose personal assets include shares as defined by section 17 of the Income Tax Act [EStG] and who moved abroad with these shares before 1 January 2022 should check the distributions planned or made to see whether they exceed the thresholds of the block on distribution. This also applies to cases where taxpayers moved to Switzerland and either applied for a partial deferral or plan to apply for an interest-free deferral afterwards.

Federal Fiscal Court follow-up decision on “Wächtler”

In 2019, the ECJ confirmed that concerning moving to Switzerland (to which the agreement on the free movement of persons applies) immediately collecting the exit tax (including in instalments) infringes the right to establishment in Switzerland and is therefore to be deferred permanently and at no interest ex officio. In its judgment of 6 September 2023, the Federal Fiscal Court basically confirmed the ECJ judgment and dismissed Mr Wächtler’s claim against assessment of the exit tax. It justified its decision saying that it was not assessment of the tax that was unlawful, but immediate collection. At the same time, the Federal Fiscal Court also made clear that exit tax for moving to Switzerland, something that falls under the agreement on the free movement of persons, is to be deferred permanently and at no interest ex officio. It justified this clarification by referencing the unequal treatment caused by the disadvantage in liquidity suffered by taxpayers who move their residence to Switzerland compared to those who remain in Germany, thereby following the ECJ. 

How to act when moving to Switzerland

Regardless of whether the tax authorities intend to apply the Federal Fiscal Court judgment beyond this individual case or not, the court’s judgment means that at least the exit tax for moving to Switzerland by 31 December 2021, which falls under the agreement on the free movement of persons, is to be deferred without interest until the shares are actually sold.  You should therefore check in advance whether the agreement on the free movement of persons applies in your case. You should also check whether substantial distributions as defined by section 6 of the Foreign Tax Act have already been made and whether the taxpayer can afford to cover his living expenses in Switzerland long-term until the shares are sold so that he is not dependent on substantial distributions from his corporation (block on distribution with deferral).

Exit tax already paid should be refunded in all open cases if the taxpayer applies for it, unless the tax office retains it as part of the security to be provided. Taxpayers should therefore check the extent to which they can provide security for the interest-free permanent deferral and whether the provision of security in their case would result in a loss of cash flow compared to paying instalments. 

The Federal Fiscal Court judgment could in future also come to bear if leaving was after 31 December 2021 and comes under the scope of the amended new version of section 6 of the Foreign Tax Act. For leaving that is not merely temporary, both for a EU/EEA country or for a third country, the revised version of section 6 does not provide for any permanent, interest-free deferral of the exit tax until the shares are sold. Therefore, even under the revised version of section 6, moving abroad, where this is not merely temporary, could still be disadvantageous as compared to moving within Germany.   

What the Federal Fiscal Court will decide in future on cases where the agreement with Switzerland on the free movement of persons does not apply or to which the current version of section 6 applies remains to be seen.