Introduction

Globalization and digitalization open up new perspectives for entrepreneurs worldwide. More and more successful entrepreneurs are considering emigration to benefit from tax advantages, access new markets, or enjoy a different lifestyle. Among the most popular destinations are Switzerland, Austria, Spain, Portugal, and France, as well as distant locations like Cyprus, the United Arab Emirates (Dubai), Mexico, Singapore, and Panama. However, moving abroad brings complex tax challenges that can lead to significant financial disadvantages without careful planning.

This article explains the main tax issues that entrepreneurs face when emigrating. It presents further solutions to minimize tax risks and develop an optimal international tax strategy.

Exit Tax - The Invisible Tax Trap When Leaving Germany

Entrepreneurs who hold at least 1% of shares in a domestic corporation and move their residence abroad are subject to the so-called exit tax under § 6 of the Foreign Tax Act (AStG). The tax office treats the move as a fictitious disposal of shares, thereby revealing and taxing hidden reserves, although no actual disposal has taken place.

In-Depth Analysis

The exit tax aims to prevent increases in value realized in Germany from escaping the German tax revenue. The tax liability arises at the time of the departure and relates to the increase in the value of the shares since their acquisition. The difference between the fair market value (traffic value) of the shares at the time of departure and the acquisition costs is determined and taxed.

Possible Solutions

There are several strategies to avoid or reduce the exit tax. The requirements have been tightened since the ATAD Implementation Act 2021.

Another option is to transfer the shares free of charge to close relatives before departure. This can help avoid the exit tax, though gift tax implications must be considered. Establishing a domestic holding company into which the shares are contributed can also help avoid the exit tax. However, careful planning is essential to avoid future tax disadvantages.

It is important to avoid dual residency in order not to remain unlimitedly liable for taxes in Germany. Professional advice from an expert in international tax law is essential to implement individual arrangements in a legally secure manner.

Doubly Taxation Treaties - Navigating the Tax Jungle

When emigrating, double taxation treaties (DBA) must be considered to avoid double taxation of income in Germany and abroad. The provisions of DBAs are complex and difficult for laypersons to comprehend.

In-Depth Analysis

Double taxation treaties regulate which state has the right to tax certain incomes. They define tax residency and specify how income from various sources is taxed. Their correct application is crucial to avoid tax conflicts between states.

Possible Solutions

The examination of tax residency based on the criteria of the respective DBA is the first step. It must be clarified whether residency has been moved abroad and thus the right to tax passes to the new country of residency. Entrepreneurs should design their business activities in such a way that no permanent establishment is created in Germany that leads to tax liability. It should be noted that even a fixed business establishment or a representative with signing authority can create a permanent establishment. By cleverly utilizing the advantages of DBAs, withholding taxes on dividends, interest, and royalties can be reduced or avoided.

Exit Taxation

The transfer of economic goods abroad can trigger exit taxation under § 4 Abs. 1 Sentence 3 EStG. In this case, hidden reserves are revealed and must be taxed, even though no actual disposal has taken place.

In-Depth Analysis

The exit taxation is intended to prevent capital gains realized domestically from escaping German tax jurisdiction. It applies when moving economic goods abroad.

Solutions

A detailed documentation is essential. It allows for a proper valuation of the transferred economic goods. Options for a tax-neutral transfer should be examined.

Taxation of Dividends and Capital Gains After Departure

Even after the departure, dividends and capital gains from German corporations may still be subject to German taxation. This can lead to unexpected tax burdens and affect financial planning.

In-Depth Analysis

According to § 50d EStG, certain incomes can also be taxed in Germany after departure.

Solutions

It is particularly important to review the DBA regulations. Some treaties provide that the right to tax capital gains passes to the country of residency. Establishing a foreign holding company may reduce tax burdens under certain circumstances. The structuring of distributions should be planned carefully. Depending on the tax situation in Germany and abroad, it may be beneficial to make or postpone dividend payments before departure.

Applying for exemption certificates can help avoid withholding tax. However, this requires timely application and fulfillment of certain conditions.

Value Added Tax Challenges in Cross-Border Transactions

Cross-border deliveries and services can lead to VAT registration obligations abroad. Errors in the application of VAT regulations can result in significant back payments and fines.

In-Depth Analysis

Determining the place of performance according to §§ 3 to 3g UStG is crucial for the correct VAT treatment. Depending on the type of service and the status of the recipient, the place of performance may be in Germany or abroad.

Possible Solutions

Entrepreneurs should carefully determine the place of performance to ensure accurate taxation. The reverse charge procedure can often be used to shift the tax liability to the service recipient, thereby avoiding VAT registration obligations abroad. For deliveries to end consumers within the EU, the One-Stop-Shop (OSS) scheme can be utilized to simplify VAT obligations. It is important to verify whether VAT registration in other countries is required and to take appropriate measures.

Securing Loss Carryforwards and Tax Benefits

Emigration can lead to the loss or restriction of existing loss carryforwards and tax benefits. This can increase future tax burdens and impact financial planning.

In-Depth Analysis

Loss carryforwards are tied to the taxpayer and their unlimited tax liability in Germany. They can be lost if the unlimited tax liability ceases. Regulations such as § 8c KStG (loss of the ability to carry forward losses in cases of harmful share acquisitions) should also be considered.

Possible Solutions

It is advisable to utilize existing loss carryforwards before emigration through targeted profit realization. The earnings structure should be planned so that losses can be optimally utilized. Careful coordination with tax regulations is necessary.

Social Security Implications of Emigration

Emigration also affects social security obligations. Coverage gaps may arise, or contribution obligations may exist in several countries, leading to additional costs.

In-Depth Analysis

Social security obligations are regulated by national laws and international agreements. When moving, insurance obligations in Germany may end, while new obligations arise abroad.

Possible Solutions

It is important to examine existing social security agreements between Germany and the destination country to avoid double insurance. If necessary, a voluntary continued insurance in the German pension insurance may be advisable. Private retirement solutions abroad should also be considered to ensure adequate protection.

Avoiding Abuse of Arrangement and Compliance Risks

The tax authorities meticulously examine entrepreneurs' emigrations for possible abuse of arrangements. Fake residences or mailbox companies can have significant criminal and tax consequences.

In-Depth Analysis

The German tax authorities place increasing emphasis on the actual relocation of the center of life and economic substance abroad. In case of suspicion of abusive arrangements, tax back payments and criminal charges may arise.

Possible Solutions

It is crucial to establish real economic substance abroad, e.g., by having own offices, staff, and active business operations. The personal center of life should actually be moved abroad, which can be evidenced by residence and stay certificates. Comprehensive documentation of business activities and living circumstances is essential. All tax obligations in Germany and abroad must be fulfilled correctly to ensure tax transparency.

Succession Planning and Inheritance Tax in an International Context

The relocation of the center of life abroad can have significant implications for succession planning and inheritance tax. Different national regulations can lead to unexpected tax burdens.

In-Depth Analysis

The unlimited inheritance and gift tax liability is determined by the residence of the deceased or donor. When moving abroad, tax liability in Germany may cease, but other countries can access the assets.

Possible Solutions

It is advisable to strategically utilize inheritance tax exemptions and plan gifts or transfers accordingly. To avoid legal uncertainties, it is important to create internationally valid wills that meet the requirements of the respective countries. Checking whether double taxation treaties exist in the area of inheritance tax can help avoid double tax burdens. Comprehensive advice is essential to optimally structure wealth succession.

Conclusion

Emigrating as a successful entrepreneur requires thorough tax planning and well-founded knowledge of international tax law. The tax challenges presented can pose significant financial risks if not addressed professionally. Through timely and thorough preparation as well as cooperation with specialized advisors, tax risks can be minimized, and legal pitfalls avoided.

Do you want to optimally structure your emigration from a tax perspective and minimize risks?

As experienced tax consultants specializing in international tax law and emigration, we support you with all questions regarding your international tax planning. Contact us for individual advice and tailored solutions. Schedule an appointment now for a non-binding initial consultation!