Moving from Germany: New tax rules for emigrants revealed!

Moving from Germany: New tax rules for emigrants revealed!

In Germany, moving abroad represents a complex challenge for many taxpayers, which has both tax and inheritance law implications. The exit tax, which has been in force for several years, aims to ensure the taxation of hidden reserves in assets. These hidden reserves are revealed and taxed when moving away, which means that after moving away the taxpayer is no longer subject to unlimited tax liability in Germany, but there is limited tax liability for certain income. This is a central issue that can significantly influence private life, but also economic decisions. Loud Private Banking Magazine Limited tax liability is maintained for income from certain domestic sources, which is regulated in Section 49 of the Income Tax Act (EStG).

The income that is subject to limited tax liability includes, among others, income from commercial operations with a domestic permanent establishment, income from self-employment in Germany, income from the rental and leasing of domestic real estate and dividends from German corporations. However, these provisions are not easily set in stone. The limited tax liability can be excluded through existing double taxation agreements (DTAs), so that taxpayers can take advantage of possible advantages to optimize their tax burden.

Extended limited tax liability

A particularly critical aspect concerns German citizens who become residents of a low-tax country. If they have been subject to unlimited tax liability for at least five years in the last ten years, they will be subject to extended limited tax liability for the next ten years, such as this Private Banking Magazine explained. A low-tax country is defined as a country in which the income tax is more than a third lower than the German tax rate or in which significant preferential taxation exists. These include, for example, special benefits such as income tax exemption for newcomers.

An important aspect of exit taxation also affects shares in corporations. The tax consequences are significant: hidden reserves in shares in corporations are taxed when you move away, so that a fictitious capital gain is treated even without an actual sale. The regulation applies to at least 1% shares and a change of residence abroad. One advantage is that the tax burden can be spread over up to seven annual installments. If there is a temporary absence, it is also possible to waive payment of the installments upon request.

Investment funds and tax disentanglement

The exit tax also applies to shares in regular investment funds. Taxpayers must expect taxation to occur if they hold at least 1% of the fund or the acquisition costs exceed 500,000 euros. Interestingly, asset-managing partnerships can also lead to exit taxation in certain cases, even if these thresholds are not reached. Income from distributions and capital gains also does not remain tax-free after moving away and continues to be subject to capital gains tax, although the tax treatment depends on the new country of residence and the existing DTA.

Another key term that comes up in this context is tax disentanglement. This applies to cases where there are hidden reserves that should be protected from taxation, especially in cross-border taxation cases, according to information from Haufe. The regulations on tax disentanglement are not purely national, but are subject to the EU Directive (EU) 2016/1164, which obliges member states to adapt their national regulations.

In summary, it can be seen that moving from Germany has significant tax consequences that must be carefully considered. The legal framework requires a thorough examination of the individual circumstances in order to avoid negative tax consequences and to make optimal use of all options.