Key facts at a glance
- In the future, the new, even stricter exit tax will apply not only to qualifying shareholdings in corporations, but also to significant shares in investment funds.
- According to the new provisions, such shareholdings are significant if the shareholding in the investment fund is at least 1% (either directly or indirectly within the last 5 years) or at least EUR 500,000 has been spent on the Acquisition of the investment fund shares.
- Special investment fund shares shall always be subject to exit taxation.
- As the exit tax may involve significant risks in individual cases, legal advice should be sought, particularly before a planned relocation to or from Germany or a gratuitous transfer of the shares.
Background and current status
Germany is internationally known for its restrictive exit tax regimes. As these regulations can, in individual cases, lead to serious cuts for the taxpayers concerned, they are repeatedly the focus of decisions by the highest courts. Especially, there is always a possible violation of the fundamental freedoms protected by EU law.
Probably the best-known provision in this context is Sec. 6 of the German Foreign Tax Act (Außensteuergesetz, “AStG”), which deems a taxable sale of shares in a corporation, particularly in the case of a relocation.
The deemed capital gain must be declared in the tax return for the year of relocation. As a result, hidden reserves are subject to tax, even though there is no actual cash inflow (dry income taxation). This regularly leads to significant difficulties for the taxpayer in obtaining liquidity to pay the tax.
In order for the scheme to apply, there must be a qualifying shareholding of at least 1% (at any point in time within the last five years) held privately and the relocating person must have been subject to unlimited income taxation in Germany (tax-resident under domestic rules) for seven out of the last twelve years.
However, the prevailing view is that Sec. 6 AStG does not apply to (special) investment funds. This is true even if the investment fund was established as a corporation (e.g. as a Luxembourg SARL or SA), because the Investment Fund Tax Act (Investmentsteuergesetz – “InvStG”), which applies to investment funds, constitutes a special tax regime with its own rules.
The German Bundestag has now, on 18 October 2024, decided to amend the InvStG and subject (special) investment funds to an exit tax, mainly based on the provision of Sec. 6 AStG. The legal regulation is based on a request of the German Bundesrat (the second federal legislative body alongside the German Bundestag, BR-Drs. 369/1/24 of 17 September 2024), which had already received the explicit approval of the German Government (Bundesregierung, BT-Drs. 20/13157 of 2 October 2024). The provision was then brought to life by recommendation of the Finance Committee (Finanzausschuss, BT-Drs. 20/13419 of 16 October 2024) and integrated into the further legislative process.
Subject to the formal approval of the Bundesrat, which is expected in December at the latest, the new provisions will be applicable for relocations as of 1 January 2025.
Details of the new regulation
The new, even stricter exit tax is essentially to be modelled on the provisions of Sec. 6 of the AStG. Now, shares in (special) investment funds held as private assets shall also be subject to exit taxation, irrespective of whether the fund is an investment fund in the form of a corporation or a separate pool of assets (Sondervermögen).
Generally, funds in the legal form of a partnership are not subject to the Investment Tax Act and therefore not subject to the new regulation (however, exit tax rules applicable to commercial partnerships may apply). It is irrelevant whether the investment funds are domestic or foreign and whether the shares are held via a domestic or foreign depository account.
Only significant shares in investment funds are caught by the new rules. This is the case if the shareholding in the investment fund is at least 1% (at any point in time within the last five years) or at least EUR 500,000 have been spent on the acquisition of the investment fund shares. The acquisition costs of several funds shall not be added together.
Special investment fund shares shall always be subject to exit taxation. In addition, the same conditions as in Sec. 6 AStG should apply, so that only taxpayers who have been subject to unlimited tax liability in Germany for at least seven out of the last twelve years prior to their relocation are covered.
In addition, there will be the familiar returnee provision and the current deferral option (payment in seven to currently a maximum of twelve annual instalments).
The new rules will apply to relocations, gratuitous transfers and exclusions and restrictions of the German taxation right as of 1 January 2025. The date of acquisition of the fund shares shall not be relevant.
Consequences for practice
The tightening of the rules is a cause for concern, as it shows that the legislator is now willing to make the exit tax solely dependent on the amount of the investment (in this case EUR 500,000). It is therefore to be feared that this will serve as a blueprint for a general exit tax on other shareholdings below 1% (e.g. individual shares) or even other securities like bonds etc.
It also remains to be seen how the current discussions on Sec. 6 AStG (e.g. the possibility of an indefinite deferral of the exit tax under EU requirements) will be transferred to the new arena.
If you are currently planning to relocate to or from Germany or considering a gratuitous transfer of shares, we strongly recommend that you seek legal advice in advance in order to avoid unnecessary risks.