S.O.S. Staying abroad
S.O.S. Staying abroad
Tax challenges regarding the internationalization of family businesses
German family businesses and their shareholders are increasingly globally successful - and internationally oriented. The shareholders often decide to relocate abroad because of a study abroad, economic advantages or the desire for a more pleasant climate. The destinations are as varied as the reasons behind that decision: Italy, Spain, Portugal or Switzerland are among the most popular destinations. The shareholders - usually younger - are often the first generation to venture abroad. The move often also offers tax benefits, but the first step into international mobility also leads to complex tax challenges. What exactly needs to be considered if you intend to relocate abroad, though? We provide helpful structuring tips and answers to tax-related questions.
One thing is certain: people who live in Germany and have a significant stake in a corporation must pay tax on the profit made in Germany when they sell their shares. However, if the place of residence or center of life is moved abroad before the sale, the tax authorities will in most cases lose their right to tax the profit from the subsequent sale of shares. In order to prevent a loss of the tax base in Germany, exit taxation stipulates that the hidden reserves in the shares are realized for tax purposes at the time of the transfer of residence abroad. The partial income method is applied, which provides for a maximum tax rate of around 30%.
Exit taxation in accordance with Section 6 AStG requires that a taxable person has been subject to unlimited income tax liability in Germany for at least seven of the last twelve years. In case of a gift or inheritance, the periods of residence of the legal predecessor are taken into account. In addition, a shareholding of at least 1% in the capital of a corporation in the last five years before the departure is pivotal. In the case of a gratuitous acquisition, the shareholding of the legal predecessor is taken into account.
When does exit taxation apply?
The exit tax becomes relevant when someone gives up their residence or habitual abode in Germany, regardless of any changes in the right of taxation. It also comes into force when shares in a company are transferred to a purchaser who is not liable to pay tax in Germany. It is therefore advisable for potential heirs abroad to take precautions to avoid a double burden of exit tax and inheritance or gift tax. In addition, exit tax is triggered if the center of life is transferred to a secondary residence abroad. Exit taxation is aimed at the taxation of a permanent move in order to take advantage of tax benefits within the scope of double taxation agreements. In the case of temporary absence, a seven-year “standard return period” applies, which can be extended to up to twelve years if a return to Germany is likely. Changes in status, such as sales or profit distributions, are not permitted during this period.
Until the end of 2021, an unlimited, interest-free deferral could be applied when moving to an EU or EEA country. Now, the assessed exit tax is due immediately and can be paid in seven annual installments upon application if sufficient security is provided.
Practical advice:
Due to the “fictitious” nature of the exit tax, it is a financial burden for taxpayers, as it is not offset by an inflow of liquidity in the form of a sale price. This is therefore a so-called “dry income”, which must be serviced from other assets or sources of income.Early action is essential
In view of the tax challenges, entrepreneurial families should make provisions well in advance of a transfer of domicile or residence and implement appropriate structuring considerations to mitigate the tax burden. Three options stand out.
1. Contribution of the shares in the company to taxable business assets in Germany
The generally income tax-neutral contribution to a partnership with a purely commercial character (GmbH & Co. KG, in which only a corporation acts as the general partner with unlimited liability and the limited partners are not authorized to manage the company) is no longer sufficient in the case of significant shareholdings following a change in the legal opinion of the tax authorities. Only a partnership that is originally commercially active shields the equity interest in such a way that the exit tax is expressly no longer applicable according to its wording. After moving abroad, the shareholder thus retains a permanent establishment recognized under tax treaty law from a German perspective. As a result, the taxation of the hidden reserves in the shares in the company will continue to be exclusively allocated to Germany in the event of a sale (no exit taxation in accordance with Section 4 (1) sentence 3 EStG).
This applies if there is a significant connection between the partnership and the incorporated company, for example in the case of operational connections or if the partnership acts as a management holding company and derives its commercial nature from, among other things, the provision of management services to - in the opinion of the tax authorities, probably at least two - subordi-nate portfolio companies.
Practical advice:
In order to avoid high implementation costs, the corporation can be converted into an original commercial partnership. In this case, open reserves in the corporation could be taxed.
2. Gift to a family foundation
The gift transfer of company shares to a family foundation before moving away allows entrepreneurial families maximum international mobility. In this case, ownership of the shares is permanently transferred to an independent legal entity, the foundation. It is recommended that the articles of association guarantee comprehensive financial security for the founder and his family members in return for the transfer of assets.Practical advice:
As an “assetless” acquirer, the foundation can make full use of the exemption provision in Section 28a ErbStG. In the case of preferential business assets, this can lead to an almost complete exemption from inheritance tax due to the preferential inheritance tax provisions of Sections 13 a to c ErbStG.The transfer of assets to a foreign family foundation, e.g. in Liechtenstein or Austria, could be considered in view of the substitute inheritance tax due every 30 years for German family foundations. With appropriate shielding against exit or withdrawal taxation, considerable tax advantages can arise, which are offered in particular by the usual organization in German family companies with a partnership as the head of the family group.
3. Transfer to family members with unlimited tax liability in Germany
If older family members are considering retirement abroad, early succession can be a solution. In this case, the shares are transferred to purchasers who remain in Germany. This option is suitable if it brings forward an imminent transfer of the family business. Possible gift tax consequences can be considerably mitigated by a reservation of usufruct to provide for the older generation abroad.Practical tip:
If the transferor of assets makes use of (temporary) preferential tax regimes abroad when moving away, such as in Italy, where all non-Italian income can be compensated for 15 years with a lump sum tax of EUR 100,000, there may be additional advantages, but also risks (extended limited tax liability pursuant to Section 2 AStG).