Exit taxes

30 May 2022, Munich. The families of business owners and all their members move around internationally – for training, in the course of their careers or for personal reasons. However, anyone who holds shares in family corporations is massively restricted in their freedom of movement. This is because a longer stay abroad or a move away usually leads to an immediate tax burden in Germany – and in many cases a prohibitively high one.

A new study by the Foundation for Family Businesses uses many concrete examples to show how radically the exit tax interferes with the fate of families. The study analyses the new version of the law, which has been in force since the beginning of 2022. The author of the study is Professor Gerhard Kraft, a tax expert from the University of Halle-Wittenberg.

Violation of higher-ranking law

The tax is levied on the difference between the acquisition costs and the market value of the shares in corporations, known as hidden reserves. In principle, it is understandable that the state wants to secure tax access and ensure enforceability. However, the reform violates higher-ranking EU law, as well as the rights to freedom and equality enshrined in Germany’s Basic Law. This is the conclusion of Professor Kraft’s comprehensive report.

“The current rules on exit taxation should be brought back into conformity with EU law and constitutionally sound conditions sooner rather than too late. A return to the old regulation would ensure that the tax burden becomes economically viable again for business owners”, says Kraft.

Perpetual deferral abolished

The researcher is convinced that a reform was not necessary at all. Circumventions could have been avoided with minimally invasive interventions in the law. But the reform was most likely primarily politically motivated and wanted to make a big splash.

Even when moving within the EU or to countries with double taxation agreements, owners of family businesses are no longer protected from the tax authorities. Yet the exchange of tax information in these cases would be guaranteed.

The previously applicable “perpetual deferral” was abolished. This had provided for taxation to be deferred until the shares were actually sold. The instalment payment concept with a security deposit that was developed instead is now proving to be extremely burdensome.

“You simply can’t leave.”

Professor Rainer Kirchdörfer, Chairman of the Foundation for Family Businesses, comments, “The reformed exit tax is not just some tax problem for specialists. It ensures that shareholders of all ages have to change their life plans. It is forcing companies to restructure their operational organisation at enormous expense. I know owners who have to tell their children: you’re simply not allowed to leave.”

Teaser picture: Students on campus © George Pak / pexels