The exit tax is an instrument of German tax law that has primarily affected shareholders of corporations who relocate their tax residence abroad or transfer assets abroad. Starting from January 1, 2025, this taxation will be significantly expanded: Private investors holding shares in certain investment funds who move away from Germany or transfer shares free of charge to persons abroad may then also be affected by the exit tax. This greatly expands the group of potentially affected individuals and poses new challenges, especially for wealthy private individuals.

The following sections explain the most important new regulations, their background, and possible courses of action. An example illustrates the new regulations in practice.

Background: What is the exit tax?

The exit tax according to § 6 of the Foreign Tax Act (AStG) serves to impose a fictitious capital gains tax on certain assets when German tax jurisdiction over these assets ends. This has primarily been relevant to shares in corporations. For example, if a shareholder moves abroad or bequeaths or gifts shares "cross-border," it is assumed that they have disposed of their interest. In this way, previously accrued capital gains in Germany should not remain untaxed just because the taxpayer relocates their center of life abroad or loses their German disposition rights through other transactions.

It is acknowledged that there often is not an actual disposal, and thus no liquidity inflow occurs. This leads to so-called "dry income," where taxes are incurred without a corresponding disposal profit or liquidity inflow.

Extension to investment funds from 2025

Starting from January 1, 2025, the exit tax will also be extended to shares in investment funds. This new regulation can affect not only individuals engaged in business activities but also private individuals with larger fund holdings. As a result, significantly more investors than before will fall within the scope of the exit tax.

Affected are:

Individuals who have been unlimited tax subjects in Germany for at least seven years within the last twelve years prior to their move or the disposal of shares.

Certain investment fund shares held in private assets, even through asset management partnerships.

Cases are considered "significant" where the investor has been at least one percent involved in the issued investment shares at any point within the last five years or where the acquisition costs of the shares at the time of the move or disposal amounted to at least 500,000 euros.

Special investment shares are generally considered "substantial," regardless of the amount of participation or acquisition costs.

Excluded are, among others, shares held as operating assets, as the so-called exit taxation applies here.

Triggering events

As before with shares in corporations, one of the following events triggers the exit tax for investment shares:

Move from Germany: Termination of the domestic residence or habitual abode.

Transfers without consideration to foreigners: For example, gifts or inheritances to individuals who are not unlimited tax subjects in Germany.

Restriction of German tax jurisdiction: When the German tax jurisdiction over the shares is restricted or excluded for other reasons.

Tax consequences

If the exit tax applies, the affected investment shares are considered fictitiously disposed of. The taxpayer must tax the capital gains, even though no disposal profit has been realized. The taxation may also refer to value increases that occurred before January 1, 2025.

The tax liability is determined as part of the income tax assessment and is generally due within one month. A deferment, e.g., in seven equal annual installments, is possible, but usually only against collateral and subject to certain cooperation obligations. If these obligations are violated or another revocation condition occurs, the tax becomes immediately due in full.

The returnee regulation remains: Those who return to Germany within seven years can retroactively cancel the exit tax. However, strict conditions apply, particularly that the investment shares must not be disposed of or transferred during this period, and no distributions may occur that exceed certain threshold values.

Example

Fact: A has invested in an ETF savings plan (MSCI World). The acquisition costs amount to a total of 600,000 euros. Meanwhile, the value of the portfolio has increased to around 1,600,000 euros. A moves to Dubai (United Arab Emirates) on January 1, 2025.

Consequence: By moving, A triggers the exit tax for their ETF shares. The hidden reserves amount to approximately 1,000,000 euros (1,600,000 value minus 600,000 euros acquisition costs). Tax will be levied on this amount, taking into account any partial exemptions. The tax is due without A actually having sold.

A may defer the tax burden under certain circumstances but must meet specific conditions and possibly provide collateral.

Possible courses of action

Affected investors should act in a timely manner to avoid or minimize the exit tax. This includes, for example,

Diversifying investments: By spreading assets across multiple funds, one can prevent relevant threshold values from being exceeded in a single fund.

Proactive planning: Those planning a move should seek professional advice early on to assess the tax implications.

Utilizing return regulations: Those intending to return to Germany within seven years may, under certain conditions, reverse the imposition of the exit tax.

As the regulations are complex and further tightening appears possible, individual and timely tax advice is essential.

Outlook and conclusion

The extension of the exit tax to investment fund shares starting January 1, 2025, clearly demonstrates that the German legislator is striving to further restrict tax planning options when moving abroad, gifting, and inheriting to foreign beneficiaries. Although these new regulations are suspected of violating EU law, until a possible judicial clarification, the affected individuals must come to terms with the new requirements.

For wealthy private individuals who wish to relocate their residence abroad or transfer foreign assets to relatives abroad, the situation has become significantly more challenging. Therefore, the advice is: Inform yourself in a timely manner, examine planning options, and, if necessary, seek well-founded tax advice before moving.

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