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Tightening of exit taxation at the turn of the year 

On May 21, 2021, the German Bundestag passed the Anti-Tax Avoidance Directive Implementation Act (ATAD Implementation Act). The Bundesrat gave its approval on June 25, 2021.

The most significant tightening from a practical point of view arises in the area of exit taxation under Section 6 of the Foreign Tax Act (AStG), according to which, among other things, a move abroad with termination of unlimited tax liability leads to a fictitious disposal of significant shareholdings in corporations and to corresponding taxation. In particular, as of January 1, 2022, the previously granted, interest-free and unlimited deferral in the event of a move within the EU/EEA area will be abolished and replaced by the possibility of a seven-year installment payment.

1. Change of the consideration period

According to the current legal situation, individuals are affected by exit taxation if they have held at least 1 percent of the shares of a domestic or foreign corporation in the last five years (significant shareholding) and have been subject to unlimited tax liability in Germany for a total of at least ten years. The ten-year period does not have to be uninterrupted. Rather, periods of unlimited tax liability are to be added together in the event of any interim limited tax liability, and this also irrespective of how long ago these periods existed.

If these persons then move abroad permanently, the shares are deemed to have been sold at fair market value at the time of the move, with the result that there is potentially taxation of a (fictitious) capital gain.

The new regulation provides for a reduction in the period of unlimited tax liability required prior to the move from ten to seven years. According to this, a fictitious capital gain will only be taxed in the future if the individual was subject to unlimited tax liability for at least seven years within the last twelve years before leaving Germany. The provision is made easier to administer by shortening the relevant observation period of twelve years. However, in relocation situations in which the owners of the significant shareholding have not already been subject to unlimited tax liability in Germany for a long time (generally since childhood), the exit tax will apply much more rapidly in the future. In individual cases, however, this change in the period under consideration may also result in an untaxed moving.

2. Abolition of "perpetual deferral"

According to the current legal situation, in the case of a move within the EU/EEA, an unlimited deferral is granted ex officio without the provision of security pursuant to Sec. 6 (5) AStG. This means that the shareholder's move is initially not subject to tax until the shareholding is actually sold and thus at the time of an actual inflow of liquidity. In addition to the sale, the deferral also ends in the event of a hidden contribution of the shares to a corporation or in the event of a further move to a non-EU country (third country).

In the case of relocations to non-EU countries, there is no entitlement to the interest-free deferral for perpetuity; in these cases, only an interest-bearing deferral and payment of the tax in five installments against a security deposit is granted if the immediate collection would be associated with considerable hardship.

In contrast, the new rules on exit taxation provide for a serious tightening: The distinction between departures of EU/EEA citizens to other EU/EEA states on the one hand and departures of third-country nationals and departures to third countries on the other hand is abandoned (so-called "one-fits-all solution"), so that the tax is generally due immediately. Upon request, it is possible to pay the tax in seven equal annual installments (interest-free) if the taxpayer provides security to the tax office for this purpose. A permanent deferral of the tax will no longer be possible. This means a definitive cash burden without an inflow of income.

3. Adjustment of the return regulation

The current regulation provides that in the case of a merely temporary absence after termination of unlimited tax liability (the move), the tax claim will cease to apply retroactively, provided that the taxpayer again becomes subject to unlimited tax liability within five years of departure (return) and, among other things, the company shares should not have been sold in the meantime during his absence. The tax office previously responsible for the taxpayer's place of residence may extend this period by a maximum of another five years, i.e. to a maximum of ten years, if the taxpayer can credibly demonstrate that professional reasons are decisive for his absence and that his intention to return continues unchanged. In the case of departures of EU/EEA citizens within the EU/EEA area, the possibility of return with cessation of taxation previously existed for an unlimited period.

Sec. 6 (3) AStG (new version) expands the returnee provision in favor of the taxpayer. As before, the tax claim lapses upon return, but the return period has now been extended to seven years. The option to extend the period by a further five years - i.e. a maximum of twelve years - remains, and the increased obligation to provide evidence of the intention to return has been waived, meaning that the "credibility" of the intention to return, which was previously required, no longer applies. Professional reasons for absence are also no longer relevant. According to the explanatory memorandum, the mere intention to return and a "sufficient probability" will suffice. However, in view of the unchanged wording of the law and the contradictory explanatory memorandum, it is to be feared that the tax authorities will continue to demand that the intention to return already exists at the time of departure. It is therefore urgently recommended that people who move away continue to document such an intention promptly upon departure if they wish to benefit from the elimination of the tax upon their subsequent return.

4. Recommended action: Immediate relocation by the end of 2021 or strategies to limit the exit tax

The enacted ATAD Implementation Act significantly tightens the exit tax. If there is already the intention to move to an EU/EEA country, it would be advantageous to implement this plan by the end of the year, as the previous law - with the interest-free deferral of the tax without collateral in the event that an EU/EEA citizen moves away to an EU/EEA country - is still applicable to all removals implemented by December 31, 2021.

Even in the case of a move after the turn of the year, exit taxation can still be avoided through sensible preparation. This should be based on a concept carefully tailored to the specific case. We will be happy to advise you on this.

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