Emigration and Taxes
- preparation and time frame
- What tax considerations do you need to take into account when moving away?
- definition and legal background
- What is the crucial difference between strangulation tax and exit tax?
- Way out and strategies to avoid the exit tax
- The exit tax in comparison
- The disentanglement tax in comparison
- Key Features and Benefits of the Disentanglement Tax
- Conclusion Exit VS Disentanglement Tax
- Currently countries without addition rules in 2024
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Other important considerations you should make in good time
How long is the preparation and time frame?
9 months before emigration or departure:
As a rule, there are no reporting obligations 9 months before emigrating. However, there may be cases where you want to set up a company abroad.
Establishing a foreign company:
If you set up a foreign company before giving up your place of residence, it may not establish a permanent establishment in Germany. Otherwise, you must register it, which triggers the corresponding declaration obligations (fine of up to €5,000).
3 months before to 2 months after emigration:
De-registration at the residents' registration office:
Report your move out of your apartment to the residents' registration office (fine up to €1,000).
Reporting cross-border tax arrangements: If you relocate your German company abroad, you must report this to the Federal Central Tax Office (BZSt) within 30 days (fine of up to €25,000) (BDO)(Western Union Money Transfer).
Notification of cessation of operations:
Report the closure of your sole proprietorship or partnership to the tax office as soon as possible. A GmbH/UG liquidation must be carried out by a notary (BDO) (Western Union Money Transfer).
After emigration until the end of the current year:
No further reporting obligations need to be observed during this phase, provided that the obligations already mentioned have been fulfilled.
In the year after emigration (following year) the following is important:
Notification of the date of termination of unlimited tax liability: Inform the tax office of the exact date of your emigration.
Reporting emigration to a low-tax country: Inform the tax office whether you have emigrated to a low-tax country.
Notification of exit tax:
Inform the tax office whether and to what extent exit tax applies to you. There are no fines for these reports, but providing false or incomplete information could result in tax evasion (BDO) (BAFA).
Recommendation:
Prepare for your emigration in good time to ensure that you complete all reporting obligations on time and do not risk unnecessary fines. Find out exactly about the advantages and disadvantages of each report as well as the possible penalties and communicate correctly with the tax authorities in an emergency.
For detailed information and specific advice on preparing for your move abroad, please feel free to contact us directly .
What tax considerations do you need to take into account when moving away?
Before you put your plans into action, you should know German tax law in detail.
Not getting information in advance can be expensive due to exit tax and disentanglement tax.
In this article you will learn what lies behind these two tax terms and what options there are to avoid the tax burden.
Definition and legal background:
Exit tax legal regulation:
The legal regulation can be found in Section 6 AStG.
Definition of exit tax:
Exit tax is the taxation of assets resulting from the relocation of one’s place of residence or habitual abode abroad.
Disentanglement tax legal regulation:
The legal provisions apply (e.g. Section 4 Paragraph 1 Sentence 3 EStG).
Definition of disentanglement tax:
When you move your residence abroad, you transfer assets there as part of the move, and the exit tax is then payable.
Which tax office is responsible if you move away from Germany?
If you do not earn any income in Germany after you move away, the tax office of your last place of residence remains responsible.
What is the crucial difference between strangulation tax and exit tax?
The crucial difference between the disentanglement tax and the exit tax lies in the tax regulations and the types of companies affected.
What is the exit tax?
The exit tax is levied when a taxpayer who holds at least 1 percent of the shares in a corporation moves his residence abroad. The German tax authorities then lose their right to tax, which is why they immediately tax the fictitious capital gains on the shares. The fictitious sales price is the currently achievable sales price of the shares, less the acquisition costs. The difference, i.e. the fictitious capital gains, is subject to tax.
When do I have to pay exit tax?
Specifically, a person is subject to exit tax if he or she has been subject to unlimited tax liability in Germany for at least seven of the twelve years prior to moving away.
How is the exit tax calculated?
In order to reduce the tax burden, the legislature allows the partial income method. This means that you only have to pay tax on 60 percent of the calculated fictitious capital gains at your personal tax rate (e.g. 30 percent). The exit tax is therefore calculated as follows:
Exit tax = (fictitious sale price minus acquisition costs) x 0.6 x personal tax rate (e.g. 30 percent)
Practical example of exit tax:
Let's assume you have shares worth 500,000 euros with acquisition costs of 200,000 euros. The fictitious capital gain is 300,000 euros. With a personal tax rate of 30 percent, you therefore pay:
Exit tax = 300,000 x 0.6 x 0.3 = 54,000 euros
What happens to stocks when you emigrate?
The tax authorities levy a tax on any increase in value of shares in the emigrant's capital companies - such as stocks - that occurred before the emigrant's departure. However, the tax is deferred without interest until the shares are sold if the owner moves to another EU country.
End of unlimited tax liability:
Unlimited tax liability ends when you move your residence and habitual abode abroad. This means that from the time you move away, you are only liable to pay tax in Germany if you earn income in Germany.
What does tax entanglement mean?
An entanglement is said to exist when Germany's right to tax is established on the profit from the sale of an economic asset.
Way out and strategies to avoid the exit tax
In some cases, you can avoid the exit tax through structures such as a GmbH & Co. KG or donations of shares. Establishing an international holding company can also be a possible strategy. Please feel free to contact us about this.
What is the disentanglement tax and when does it apply?
It is not just shareholders of corporations who are affected: If you are self-employed, a sole proprietor or freelancer and are considering working abroad, the so-called disentanglement tax applies. This has the same tax consequences as the exit tax. This taxes the transfer of assets, such as operating equipment, company cars, patents, software, long-term contracts, etc., abroad. The disentanglement tax is calculated as follows:
Disentanglement tax = market value (fictitious sale price) minus book value
A practical example:
If the market value of your business equipment is 100,000 euros and the book value is 40,000 euros, then the taxable amount is 60,000 euros.
Way out and strategies to avoid the disentanglement tax:
The disentanglement tax can usually be avoided through clever structuring, such as transferring the business to a partnership, leasing the business or allocating the assets to a permanent establishment that remains in Germany. If you move to another EU/EEA country, you may be able to spread the tax over five years.
The exit tax in comparison:
Who is affected by the exit tax?
The exit tax primarily affects shareholders of corporations, such as GmbH shareholders, who move abroad.
Legal basis: The legal regulation can be found in Section 6 AStG (Foreign Tax Act).
Trigger for the exit tax:
The exit tax is triggered when the shareholder moves his residence abroad and Germany loses its right to tax the profits from the sale of the shares . The free transfer of the shares to a person abroad can also trigger the exit tax.
Calculation : A fictitious sale of the shares takes place, with the current market value of the shares less the acquisition costs being used as the taxable profit.
Tax deferral of exit tax:
If you move to an EU/EEA country, the tax can, under certain conditions, be deferred without interest until the shares are actually sold .
The disentanglement tax in comparison:
Who is affected by the disentanglement tax:
The disentanglement tax affects entrepreneurs of personal enterprises, such as sole proprietorships or partnerships, that relocate assets abroad.
Legal basis of the disentanglement tax:
The regulation is laid down in Section 4 EStG (Income Tax Act).
Trigger for the disentanglement tax:
The disentanglement tax is due when assets of a partnership are relocated abroad, for example when the company owner moves or opens a new permanent establishment abroad.
Calculation of the disentanglement tax:
The market value of the assets relocated abroad minus the book value results in the taxable profit.
Fewer restrictions are a feature:
Compared to the exit tax, the conditions for the disentanglement tax to be levied are less strict, since the mere transfer of assets abroad can trigger taxation.
Key features and benefits of the disentanglement tax:
A tax-free departure is generally possible:
A simple move of the entrepreneur abroad does not trigger immediate taxation for a personal company as long as no assets are relocated.
Tax exemption applies when:
However, when assets are relocated abroad, the divestment tax is due, which uncovers and taxes the hidden reserves of these assets.
Conclusion Exit VS Disentanglement Tax in 2024:
The exit tax and the disentanglement tax affect different types of companies and situations. While the exit tax taxes shareholders of corporations when they move abroad and lose the right to tax their shares in Germany, the disentanglement tax affects the transfer of assets from partnerships abroad.
In both cases, entrepreneurs should seek thorough tax advice in order to minimize possible tax burdens and avoid legal pitfalls.
Further details can be found here:
https://www.juhn.com/fachwissen/internationales-steuerrecht/entstrickungssteuer/
Currently countries without addition rules in 2024
(means: without foreign currency translation tax)
- Andorra
- Aruba
- Bahamas
- Bahrain
- Brunei
- Chile
- Costa Rica
- Curacao
- Dominica
- Ecuador
- French Polynesia
- Grenada
- Guatemala
- guernsey
- Hong Kong
- Jamaica
- Jersey
- Colombia
- Kuwait
- Liechtenstein
- Malaysia
- Marshall Islands
- Mauritius
- Monaco
- Philippines
- Saudi Arabia
- San Marino
- Switzerland
- Singapore
- Sint Maarten
- Thailand
- Taiwan (no CFC regime for natural persons)
- Ukraine
- Vietnam
>> Please note that this list is subject to change. (As of June 2024)
Other important considerations you should make in advance:
- Reporting obligations: You must report the departure and relocation of assets to the German tax authorities.
- Documentation and Evidence: Make sure you have all relevant documents and evidence to support the notional disposal price and book value.
- Long-term planning: Develop a long-term tax and financial strategy to minimize the impact of exit tax and disentanglement tax.
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Expert advice: Consult specialized tax advisors and lawyers who have experience with international tax issues.
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