Exit taxation and exit tax

Exit tax or exit taxation (Wegzugsbesteuerung) is a rule in German tax law. It applies when a taxpayer moves his or her residence or habitual abode abroad and holds at least 1 per cent shares in corporations. Gains on disposal are notionally calculated that are then subject to income tax in Germany. Additionally, since 01.01.2025 the new exit tax on shares in investment funds applies.

Exit taxation affects private persons who hold at least a 1 per cent share in a corporation in their personal assets and who move their residence or habitual abode abroad. The new rules include investments that are subject to the Investment Tax Act (Investmentsteuer-gesetz – InvStG) on which there is a profit (calculated according to the Investment Tax Act) and if the following conditions are met: 

• the investor holds a total of ≥ 1 percent of the subscribed/issued investment shares/units (within the last five years) or 
•  investments with a cost of EUR 500,000 (each investment fund is considered separately) as well as
• shares in special investment funds. 

Companies are affected by similar rules like taxable disjunction (Entstrickungsbesteuerung) if assets or functions are moved abroad. Starting from 01/01/2025, shares in investments are also subject to exit tax.  

Besides moving residence, the following also trigger exit tax: 

• Transfers at no cost to a person who is not a German tax resident
• Restriction of German right to tax gains on disposal of holdings or business assets  

The tax burden depends on the personal income tax rate which can be up to 45 per cent (plus solidarity surcharge). The taxable amount is the notional gains on disposal, that is, the difference between the fair market value of the shares on the date of exit and the acquisition costs. The partial income procedure (Teileinkünfteverfahren) applies. The tax on the fictional sale of investments funds is 25% flat plus solidarity surcharge (Abgeltungsteuer).

Notional gains on disposal arise because exit taxation assumes that the shares are sold as of the date of exit. This profit is calculated as the difference between the fair market value of the shares and the original acquisition costs. This means that tax is due even though no profit is actually made. 

Companies are not subject to exit tax in the form of Wegzugsteuer, but Entstrickungsbesteuerung. Hidden reserves are disclosed when assets are moved abroad. The difference is subject to corporate income tax (15 per cent) as well as solidarity surcharge (5.5 percent on the corporate income tax) as well as trade tax.

Exit taxation is triggered the moment a taxpayer moves their residence or habitual abode abroad and holds at least a 1 per cent share in a corporation or investmentfund.

Shares in corporations (domestic and foreign) are affected of which the taxpayer holds at least one per cent directly or indirectly, as are shares in investment funds (starting from 01/01/2025). 

Exit taxation is laid down in section 6 of the Foreign Tax Act [Außensteuergesetz – AStG]. It describes the conditions, assessment bases and exemptions in detail. Additionally, section 19 abs. 3 Investment Tax Act (InvStG) applies for the funds.

If you return to Germany within seven years (with a one-time option to extend by a further five years) and continue to hold the shares, the exit tax may be annulled under certain conditions.  

No, exit tax comes about in the last “legal second” before crossing the border so only German law applies.

However, it is also always necessary to check the DTA Double Tax Treaty (DTT) with the destination country to find out in advance how the new country of residence deals with the shares. 

We’ll be glad to advise you on it.