Entrepreneurs who would like to permanently relocate from Germany to a more business-friendly jurisdiction should be aware of the complex German tax implications of such a move and carefully plan it. Below we answer the key questions that you should consider before moving from Germany.
- Are there any taxes when I leave Germany?
Departure abroad of individuals who hold shares in German or foreign corporations as part of their private assets may trigger the exit tax. Exit tax applies if the relocating individual:
- has been subject to unlimited tax liability in Germany for at least 7 years of the last 12 years; and
- has held at least 1% of the shares in a German or a foreign company in the 5 years preceding the departure; and
- permanently gives up the German tax residence.
Similar rules apply to intellectual property and business investments outside Germany.
The exit tax is calculated on the deemed capital gain from a deemed sale of the shares (calculated as the difference between the fair market value of the shares and their tax value which should usually equal their acquisition costs). The tax is due immediately upon the giving up of German residence. In certain cases, this could lead to problems with liquidity. Upon application, the tax could be paid in equal non-interest-bearing instalments over 7 years, provided the tax authorities receive a collateral.
The exit taxation could, in some cases, be mitigated by appropriate structuring The following four strategies are the most common ones.
- Contribution of shares into a partnership which is conducting commercial activities and has its central place of management in Germany;
- Donation of shares to a family trust;
- Donation of certain assets to charitable trust;
- Transfer of harmful assets to children and other family members having a tax residence in Germany.
There is no one-fits-it-all solution. The transfer of shares in real estate companies to a family trust may, for instance, trigger gift tax at as much as 30% of the market value. The contribution of business assets which are located outside of Germany into a partnership with central place of management in Germany would not prevent German exit tax. Thus, the combination of various strategies depending on the nature of underlying assets, residence of family members and other aspects is usually most efficient.
- May I still be subject to income tax in Germany when I reside in Switzerland?
Generally, individuals who become tax residents in Switzerland should be subject to tax in Switzerland and enjoy the protection from double taxation based on the double-tax treaties (DTTs) concluded by Switzerland with other countries.
However, a DTT between Switzerland and Germany contains certain provisions allowing the overriding taxation in Germany if:
- an individual once had a “permanent home” in Germany for a total of five years during a ten year period before relocating and
- The individual cannot prove that it is subject to “sufficient” income tax in Switzerland.
In this case, income from sources in Germany may continue to be taxed in Germany during the year of relocation to Switzerland and the five following years regardless of such income being exempt from German taxation under the Swiss-German DTT (this is known as extended limited income tax liability). Such extended income taxation captures, in particular, gains from the disposal of shares in companies which are tax resident in Germany.
- May my estate be subject to inheritance tax in Germany?
Many Swiss cantons do not levy inheritance taxes on transfers between close relatives, a fact that makes the relocation from Germany to Switzerland appealing for wealthy German residents. Switzerland has a separate DTT with Germany for estate and inheritance taxation to avoid double taxation in this area. However, here as well Germany has reserved certain provisions overriding the treaty protection. If the deceased had a permanent home in Germany for a total of five years during the decade before succession, German inheritance tax will apply on the entire estate regardless of the location of assets.
- What about gifts?
The DTT between Switzerland and Germany does not directly address taxes on gifts during lifetime. However, Switzerland and Germany have signed a Memorandum of Understanding (MOU) with respect to the gifting of business assets. According to the MOU, gifts of business assets should be taxed analogous to an inheritance as described above.
- What should I do before surrendering a German tax residence?
As could be seen, German tax considerations may be complex and should, therefore, be taken into account in any relocation planning. There may be options to wealth restructuring before your move or to plan your visits to Germany after the move to avoid or minimise tax exposure Germany. Potential solutions should be assessed on a case-by-case basis.
LINDEMANNLAW can help you assess your personal circumstances and needs and develop a plan for smooth and efficient relocation to Switzerland.
Please feel free to contact us for more information, we are happy to help.
