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The move to the neighboring country could be financially relevant, especially for medium-sized entrepreneurial families in Germany, whose holdings in family businesses have grown over generations to a market value of several million euros.

Background

The German tax authorities collect an "exit tax" on hidden reserves in shares in corporations when they move abroad. This is a legal fiction. The company shareholding is therefore deemed to have been sold, even if the ownership structure has not actually changed and the entrepreneur has not received any capital gains. There is therefore a risk of a high tax payment that is not covered by a corresponding inflow of liquidity. If, on the other hand, the entrepreneur remains in Germany, the tax is only levied at the time the hidden reserves in the shares are realized, i.e. when the company shareholding is sold.

26.02.2019: ECJ-ruling[1] on relocation to Switzerland

In its Wächtler ruling in February 2019, the European Court of Justice called for an unlimited deferral of the "exit tax" until the shares are actually sold. The ECJ considered the exit tax to be a violation of the right to freedom of establishment guaranteed by the Agreement on the Free Movement of Persons between Switzerland and the EU (AFMP).
Specifically, the case concerned a German IT consultant who had moved to Switzerland with a 50% stake in a Swiss corporation. According to the ECJ, he suffered a tax disadvantage compared to other German nationals who are self-employed in a company in which they hold shares but, unlike him, maintain their place of residence in Germany.

The unequal treatment is likely to deter the person interested in moving from exercising their right of establishment under the FMPA. Such unequal treatment may be justified from a legal perspective if there are compelling reasons in the public interest - such as the avoidance of reduced tax revenues. These in turn must comply with the principle of proportionality, i.e. be suitable for achieving these objectives, not go beyond what is necessary and also be appropriate. In this respect, the ECJ ruled that although the assessment of tax at the time of departure is generally permissible despite the lack of actual sale of the shares, the immediate confiscation of the same is not. The ECJ judges justified this by stating that, due to the bilateral exchange of tax information provided for in the double taxation agreement between Switzerland and Germany, it is possible to obtain all necessary information about the actual sale of the shares - if it takes place later - even after the departure of an entrepreneur. A tax loss for the tax authorities could also be prevented by the entrepreneur providing security.

Even back then, the Federal Ministry of Finance (BMF) maintained a pro rata and therefore limited deferral of exit tax in the event of an exit to Switzerland. It did not consider the ECJ ruling to be binding to the extent that a permanent deferral of exit tax should necessarily be enforced for all third countries.[2] The legislative reaction following the ECJ ruling has not changed much in this respect.

01.07.2021: Change in the law with the ATAD Implementation Act

With effect from 01.01.2022, the legislator abolished the repayment of exit tax in 5 equal interest-bearing annual installments when moving to a third country (so-called hardship clause pursuant to section 6 para. 4 AStG old version), but at the same time replaced this with a pro rata interest-free deferral with repayment in 7 non-interest-bearing annual installments (section 6 para. 4 AStG new version). A security deposit was still required.
It then extended this seven-year installment payment concept for relocations to Switzerland and third countries to EU/EEA relocation cases and thus - presumably contrary to European law - removed the interest-free and permanent deferral option without a security deposit that had previously applied to EU/EEA relocation cases from sec. 6 para. 5 AStG old version.

22.12.2023: Application decree of the BMF

On 22.12.2023, the BMF published a new version of the principles for the application of the Foreign Tax Act.[3] However, the application decree has not yet made any changes or adjustments to the application of the new Section 6 AStG in line with EU law. Rather, with regard to the due date of the tax, reference continues to be made to the possibility of payment in installments at the request of the taxpayer.

28.12.2023: Change in the law from 2024

Shortly before the beginning of the year, the legislator created an additional hardship for departures until 31.12.2021 and even put this into force retroactively from 17.08.2023:

The legal situation for EU/EEA expatriates has thus deteriorated again retroactively by retroactively extending the tax authorities' options for revoking the deferral of exit tax to existing EU/EEA cases.

Specifically, according to section 21 para. 3 sentence 2 no. 2 AStG (new version), the deferral for departures before 01.01.2022 must also be revoked if the company whose shares were subject to exit tax makes profit distributions or a return of capital contributions whose combined value exceeds 25% of the value of the company shares at the time the exit tax is triggered.

The regulation applies retroactively to all profit distributions or repayments of capital contributions made after August 16, 2023.

Those affected must notify the German tax office within one month each time the 25% threshold is exceeded, Section 21 para. 3 sentence 2 2nd half-sentence AStG (new version).

It was left open which event - the resolution on the appropriation of profits or the actual payment - should be decisive. If the date of the shareholder resolution on the profit distribution or the return of capital contributions were decisive, profit distributions resolved before 17.08.2023 would not be relevant. In this respect, the taxpayer would have protection of legitimate expectations.

The new regulation once again raises the question of compatibility with EU law. There are specific doubts with regard to the freedom of establishment and the free movement of capital. The amendment is also causing confusion at national level. On the one hand, the distribution is effectively taxed twice if income tax is levied. Secondly, the revocation of the deferral is difficult for minority shareholders who have no influence on the distribution policy.

For all future profit distributions and the return of capital contributions, it must always be checked in advance whether the limit will be exceeded at the time of departure.

11.01.2024: BFH publishes its Wächtler view

Due to the appeal lodged, the Wächtler case was finally submitted to the Federal Fiscal Court for a decision. The BFH used its decision of 06.09.2023[4] to very clearly express its understanding of the ECJ's Wächtler decision.

According to the BFH, the issues associated with the deferral claim are not to be decided in the tax assessment procedure - as the Baden-Württemberg Fiscal Court still assumed in the previous instance[5] - but separately as part of the collection procedure.

According to the BFH, in the specific case of the departure to Switzerland, the departure tax is to be deferred permanently and without interest. The deferral may also be made dependent on the provision of security.

The requirements of the ECJ must be taken into account by "simply reading into" Section 6 AStG old version a permanent and interest-free deferral in exchange for any security and granting it ex officio by means of a reduction in the provisions of Section 6 AStG old version.

This interpretation of the BFH should apply accordingly to Section 6 AStG new version, which also continues to provide neither a permanent deferral option nor a deferral ex officio.

In its decision, the BFH thus further emphasizes the binding effect of the ECJ ruling and the necessity of interpreting the current German regulations on exit tax in accordance with European law. This interpretation of the Wächtler ruling had already been emphasized by the BFH in 2021 in its judgement v. 8.12.2021 - I R 30/19.

Even if it can be assumed that the Federal Ministry of Finance will nevertheless continue to take the position that the ECJ's Wächtler ruling has no influence on the admissibility of the seven-year installment payment concept[6], the BFH's decision gives hope for a change in the approach with regard to the levying or deferral of exit tax. It also marks the end of the Wächtler proceedings.

To Do's

Affected persons who have already received an income tax assessment notice in which the exit tax was assessed due to a move to an EU/EEA country or Switzerland should submit an application for a permanent and non-interest-bearing deferral. This also applies if the deferral is to be granted ex officio. In the event of a rejection, you should respond with an objection to the obligation and an application to the tax court for an interim order for a permanent, non-interest-bearing deferral.

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The procedure offers very good prospects of success due to the fact that the BFH has now also confirmed that such rejection notices are contrary to EU law.

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The BFH ruling only has direct legal significance for the individual case in question. However, its findings are likely to be transferable to parallel cases, provided that the Federal Ministry of Finance does not prevent this by issuing a so-called non-application decree, which has not yet happened.

Affected parties for whom the collection of exit tax was initially deferred permanently and without interest should have the extent to which they have to comply with the new notification obligations regarding profit distributions and the return of capital contributions from 17.08.2023 checked. If the deferral is revoked due to the new Section 21 para. 3 no. 2 AStG or for other reasons, they should also take action against this.

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In these cases too, the compatibility of the new German provisions in the AStG with EU law will be a matter for the tax courts. A renewed referral to the ECJ on the new version of section 21 para. 3 AStG and section 6 para. 4 AStG - in each case on relocation to a third country and relocation to another EU country - would be welcome.

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Those interested in relocating should consider the possible consequences before moving and whether these can be avoided by planning ahead.

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Our lawyers will be happy to advise you and show you that, with the right expertise, a pragmatic solution can be found for your tax concerns or your relocation.

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[1] Judgment of the ECJ of 26.02.2019 - C-581/17, so-called "Wächtler judgment".
[2] BMF of 13.11.2019 - IV B 5 - S 1325/18/10001 :001, DOK 2019/0995000, BStBl. I 2019, 1212, DStR 2019, 2423.
[3] BMF of 22.12.2023 - IV B 5 - S 1340/23/10001 :001, DOK 2023/1175923, BStBl S1 2023, 2.
[4] BFH, judgment of 06.09.2023 - IR 35/20.
[5] FG Baden-Württemberg, Aussensenate Freiburg of 31.8.2020 - 2 K 835/19, EFG 2021, 20, BeckRS 2020, 28700.
[6] In response to a small question from the FDP parliamentary group for more detailed justification of its assessment, the Federal Government stated: "The decision of the ECJ in the Wächtler case (C-581/17) is not to be understood by the Federal Ministry of Finance as meaning that a temporary deferral would not be sufficient to justify taxation when moving abroad. In particular, the ECJ ruling in the Wächtler case (C-581/17) does not indicate any more recent case law development with regard to the duration of the deferral in the case of exit taxation of natural persons", response of the Federal Government of 24.3.2020, BT-Drs. 19/18318, 2.

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