Solutions For Germany's Exit Tax

18 min read Original article ↗

To learn more about German exit tax, check out the introduction here, and take a look at the list of all posts on Germany's exit tax here. Also, disclaimer: I'm not a tax advisor, consult a tax advisor for individual tax advice.In this post, I wrote up all the solutions I've discovered to Germany's exit tax over the course of many paid tax consultant calls for more than one year! I'm sharing them here for free so that you and your wallet hopefully don't have to go through similar pain.

So this post is about solutions. If you'r wondering what Germany's exit tax is, check out my introduction and overview here.

Tax "Optimization" Strategies For Exit Tax On Corporations

The interesting thing here is that you're not bound to the 13.75x valuation. Apparently, even the financial authorities assume here that this factor is not always realistic. Instead, in the real market, many businesses are valued by a factor of 4-6 or so. Here's the rough procedure:

  • Find someone who will assess the value of your business (tax advisor, auditor, etc.).
  • Arrive at a valuation which is lower than 13.75.
  • Pay the exit tax on that valuation.

There are like a million sub-aspects here which might be worth considering, e.g. how coupled is your business to you as a person? The fact that you're moving abroad might already reduce the value of your business. How much of a CEO salary are you paying yourself? If you're paying yourself a low salary, consider paying yourself a market rate instead and see whether your company is still profitable.

Another way to think of this would be "what would another company pay for your business" if you would try to get acquired. I would wager that in almost all cases it's lower than a multiple of 13.75.

Let's do another example calculation with out numbers above:

  • Your business has average earnings of €100k / yr for the past 3 years.
  • However, you haven't been paying yourself a salary!
  • If you'd pay yourself a CEO salary (market rate of €120k / yr?), your company would actually not be profitable.
  • Accordingly, it's valuation is zero / negative.

As always, I'm simplifying and exaggerating here, but you get the idea.

So that's the strategy. In my research, this seems to be by far the simplest one. I like simple strategies. All others further below will be more complex, so brace for impact (and high tax advisor invoices).

Due to popular demand, here's a more detailed write-up of this strategy.

Strategy #2: Convert GmbH to GmbH & Co. KG

This is a complex strategy and my research and knowledge here is very limited. Roughly speaking, here's how it works:

  • You convert your GmbH to a GmbH & Co. KG. Legally, a GmbH & Co. KG is a partnership and not a corporation, so it's not subject to exit tax.
  • However, this comes with prerequisites: You must prove that your GmbH & Co. KG continues to operate in Germany, e.g. by having a local Managing Director and renting local office space. Also it has to operate in a way of "Gewerbe", so it must be more than a holding company and actually sell services, products, etc.
  • Also, the earnings of the GmbH & Co. KG are now no longer taxed with the corporate tax rate of ~30%, but instead with your personal tax rate. And this will be your German personal tax rate, even if you've moved abroad. So you'll have to continue to file a German tax return and pay German taxes on your earnings from this company.

All in all, it's a complex setup and my gut feeling here is that it's only useful if your company would be worth millions and you have pretty huge earnings every year. I'd say this is mostly out of scope for most "small" GmbH owners.

By the way, there are all sorts of sub-aspects here:

  • What if your GmbH is in a holding company, as mentioned earlier? Converting the GmbH would be useless here as your holding company still is a GmbH. But.. can you convert your holding-GmbH into a holding - GmbH & Co. KG? The answer is yes, but the prerequisites will make this very hard.
    As mentioned further above, your holding - GmbH & Co. KG will need a local managing director, local office space and it has to sell products or services. All of that doesn't apply to "normal" holding companies, so this is only really viable for huge holding companies (think of family offices where the holding companies themselves have employees).
    It gets even more complex: If you're moving to a country which doesn't have a double-taxation agreement with Germany, this strategy would actually work! In other words, you could do the conversion here and the prerequisites wouldn't apply to the GmbH & Co. KG. What a mess. And this is where my knowledge ends.
  • What if your GmbH is in a holding company, and you want to move it out of the holding company so that you privately own it, and then convert it to a GmbH & Co. KG, then liquidate the (empty) holding company? In principle, this might work, because then you as an individual now only own a GmbH & Co. KG which most likely fulfills the prerequisites. The process of "moving out" your company from your holding would likely involve you "buying" it from your holding company, and your holding company would ultimately pay ~25% capital gains tax on that when paying out those "earnings" to you. It's complicated. I have no clue.

The idea here is to set up a German family trust and then transfer all your shares of corporations into the trust. Now you're no longer affected by exit tax, because a trust has no formal "owners" as it only owns itself.

From what I've read online, this seems to be worthwhile once your net worth has surpassed ~€500k. That being said, there's unfortunately not a whole lot of public information on the benefits and drawbacks of setting up German family trusts for the purpose of exit tax "optimization".

One of the biggest questions here is probably which German state to choose, as each of Germany's 16 states has its own (!) regulations about family trusts. So you need to go "regulation-shopping" for which state might be the most suitable one, and.. this sort of information seems very hard to come by.

Besides that, the main notes on German family trusts are:

  • They are useful for inheritance purposes, e.g. if you have children which should inherit your assets without paying inheritance tax; however, family trusts have to pay inheritance tax by themselves every 30 years (this is different for Liechtenstein trusts, see below);
  • When moving assets into a family trust, this is considered a "gift" for German tax purposes and is taxed pretty highly. What people apparently do instead is that they sell their assets to the trust and give a loan to the trust at the same time, which will subsequently be re-paid over the years. So this "loan-based sale" is the default method of moving assets into a trust.
  • A German trust still has to pay capital gains tax on dividends it receives from its assets. This is different for a Liechtenstein trust (see below).
  • The general overhead costs (admin, bookkeeping, etc.) of trusts seem to be slightly less than for a GmbH, because e.g. there's no requirement for double-entry bookkeeping.
  • A trust is considered very inflexible, e.g. you can't trivially wind it down or change its operating agreement (Satzung). So.. to some degree, you're losing control of your assets as the trust will own them in the future and, legally speaking, the trust is owned by no one and you're only its beneficiary.
  • People say a German trust becomes worthwhile once you reach a net worth of ~500k€, but I'm not sure how they arrive at that figure.

This is simply a variation of strategy #3. Instead of moving your shares into a German trust, you move your shares into a foreign trust which is set up e.g. in Liechtenstein. While I've also heard of Singapore, apparently Liechtenstein is more suitable because it's in the Schengen (?) area and therefore the German tax authorities accept this setup (or something along those lines).

So my notes here focus on Liechtenstein. The main differences to the German family trust are:

  • No inheritance tax every 30 years, so it has huge tax advantages for the purpose of inheritance.
  • No capital gains tax on dividends - so if the Liechtenstein trust holds shares in companies and receives dividends, it doesn't have to pay taxes on those. Once you pay out money to yourself as beneficiary, you yourself have to pay German capital gains tax, of course (assuming you're still living in Germany), or the relevant capital gains tax rate of the country you're living in (some countries have 0%).
  • Much higher overhead costs as you have to pay a trustee (Treuhänder); amounts are hard to come by, but I've often heard of €30k / year. Some websites quote €10k / year, but I'm not 100% sure whether those include the same trustee services.
  • I've read that this setup becomes worthwhile once you reach a net worth of ~€2m and, similar to the German family trust, I'm not sure where this number comes from. One simple explanation might be that €2m is a figure where assumed overhead costs of €30k / year represent "only" 1.5% of the capital and therefore become acceptable, relatively speaking. Not sure though.
  • The trust needs a bank and brokerage account, and it seems that Liechtenstein banks tend to charge a fee based on the relative value of your holdings. So the bank account ends up being (much) more expensive than e.g. comparable bank accounts and brokerages in Germany. That being said, your trust could also open a bank account in Switzerland which might be cheaper. Same here, hard numbers are hard to come by.

All in all, the Liechtenstein family trust does sound like one of the most elegant approaches here, assuming that simply paying the tax (Strategy #1) is not viable for you because it's e.g. too expensive. It sounds very "clean" in the sense that you are clearly not the owner of your shareholdings any more and you're free to move countries. The drawback is the high cost of €10-30k / year, and likely further associated high costs because the lawyers and tax advisors specializing in this area tend to charge very high (read: outrageous) fees. Check out my new detailed post on the Liechtenstein trust setup and its associated costs here.

Strategy #5: "Atypische Stille Beteiligung"

This is some sort of contorted construct where you purchase weird additional shares in your corporations, making exit tax not apply to your company as a whole. Probably as complicated as it sounds. At the very least, this will make the tax return situation of your company more complicated.

The most suitable translation of Genossenschaft is probably "cooperative". A cooperative in Germany is a separate legal entity which, legally, belongs to no one. It doesn't have shareholders in the normal company sense that each shareholder holds X shares based on Y capital they've paid in; instead, each shareholder exactly holds 1 "share". So you could describe this as a very democratic / socialist setup, depending on your beliefs, chuckle..

Anyway, there are some semi-shady people on YouTube and with websites which advocate for setting up a cooperative to avoid the German exit tax. I've done some extensive research on these setups and talked to a few people, here are my notes:

  • A cooperative has to have at least 3 members during founding - e.g. if you have family members or good friends, choose them.
  • After that, you move your shares into your cooperative. Not completely sure how that would work, but I think it would be similar to the trust (see above) where you sell it to your cooperative and give the cooperative a loan at the same time, which is repaid over time. I think I read of a limit of €2m in the past, but not sure.
  • Now you're theoretically already free to leave the country without paying exit tax, because a cooperative is not considered a limited liability company. However! Apparently some financial authorities still assume that you're essentially holding 33% of a cooperative which resembles a limited liability company (or they simply don't understand cooperatives), so you might still be screwed because they might still charge exit tax and you might have to go to court. So the "hack" here is that you do some shady tricks in which you reduce your shares / voting rights in the cooperative to <1%, so that the financial authorities no longer have any sort of "right" to charge exit tax as you're below the 1% threshold which would apply to limited liability companies. Again, rather shady because it's not really clear whether you can "screw" with the equal-share structure of cooperatives like that.
  • You create an even more shady construct which later either raises your "shares" in the cooperative again, so that you can pay out more money to yourself (and not pay any money to the other 2 people in the cooperative?!)
  • Optionally, with even more shady tricks (you get the idea by now) you later move your shares out of the cooperative again, i.e. once you've left the country.

All in all, this setup sounds similar to the Liechtenstein trust in spirit as there's a separate entity which owns your shares instead of you yourself. This setup also is cheaper. The huge drawback, in my opinion, is that the providers in this space all look super shady, and there's no real guarantee for "success" as defined in "the financial authorities will understand and accept this, and won't challenge it".

My gut feeling is that, assuming this works, it might mainly work because cooperatives are such a rare and exotic construct and most people at the tax office simply haven't come across them at all.

Update: I actually researched this a bit further. The main new findings are that there are probably only 2-3 people in Germany who have any experience setting this up, and there is no public evidence that this actually works. Additionally, the people promoting these solutions tend to be "tax coach" like people who are technically not tax advisors. Not that that's a problem, but there's a high degree of shadiness around this solution. I wouldn't do it.

Here's my separate write-up on why you shouldn't set up a Genossenschaft to solve your German exit tax.

Strategy #7: Verein (Club)

Verein can be translated to "club", so you'd essentially be founding your own club here (think of it like a tennis club, but for avoiding exit tax).

I've done very little research on this strategy and have only heard of it a few times on YouTube. In short, it's probably similar to the cooperative setup in that you probably need a minimum number of founding "club" members and that it's such an exotic construct that much of its success (if there's any) can probably be attributed to the fact that financial authorities don't fully understand it. And, just like the cooperative, there are probably only 2-3 people in Germany who have any experience setting this up, there's no public track record of this actually being successful, and the people advocating for this all tend to appear very shady. Proceed with caution. Don't do it.

Strategy #8: Return within 1-2 years (link to in-depth post)
This is an interesting strategy - it's essentially free and it might be very useful for a large numer of people who plan on coming back to Germany within 1-2 years. The gist of it is this: You leave Germany, but you come back within 1-2 years and don't pay any exit tax. That works, at least in theory, because you only declare your exit tax in your income tax return, and that only has to be filed 1-2 years after the actual year of your departure. Additionally, you get the exit tax back if you return to Germany within 12 years. So the idea here is that you come back within 1-2 years, file your income tax return stating that you'd need to pay exit tax in theory, but also noting that you're back in Germany already and technically get the exit tax back. You'd explain this to the tax office and, best case, don't pay exit tax. No public data points on whether this works. But the worst-case scenario is simply having to pay to get your holdings valued and paying interest in the "virtual exit tax" you had to pay 1-2 years ago. Here's the link to the more detailed write-up.

Strategy #9: Return and then leave again in 6 years (link to in-depth post)
This is a bit of a variation on the strategy above. The idea is that, yes, you pay the exit tax here, and then you come back 6 years later, get your exit tax back (minutes the value you lost to inflation, of course), and then leave Germany shortly after again and not pay exit tax. Wait, what? So this is essentially a loophole in the German exit tax law, because the exit tax only applies to you if you were taxable in Germany for at least seven years in the last 12 years - and by temporarily leaving the country for 6 years, you've no longer been taxable for at least 7 years within the last 12 years (get it?). Here's the detailed write-up.

Strategy #10: Deferral (link do in-depth post)
Theoretically, you can request a deferral of the exit tax payment at the tax office if you plan to come back within the next 12 years (initially 7 years, plus an extension of 5 years). This means that, yes, you have to assess the value of your companies and calculate the sum of your exit tax, but you don't actually have to pay it as long as you return within the next 12 years. However, the tax office will likely want that you leave behind some sort of security deposit, preferably property, and they'll charge you high yearly (monthly, even) interest rates on your exit tax sum which you essentially haven't paid yet. More details here.

Conclusion: Germany's Exit Tax Sucks

And those are all my notes. I hope they're helpful for you! And, as mentioned like a hundred times already, this is not tax advice and should only serve as a starting point for your own research and seeking out professional advice. So, in that spirit, I hope I saved you some time.

A few personal words, if I may: I think Germany's exit tax sucks. I do understand the motivations - sure, it might sound reasonable to tax people who leave the country because they'll essentially no longer be paying taxes in Germany. But my bigger point is about the second-order effects it has, the "chilling effects":

  • German founders will become very hesitant before taking on VC funding, because it will lock them into Germany for an indefinite time. Want to move to the US to expand your business? Good luck.
  • German would-be-founders will become very hesitant to found a business at all if they're considering the possibility of moving to another country in a few years (e.g. for family reasons). So they'll stay employees forever and don't go on to found a business at all.

Both of these effects are terrible for the German economy, which is in dire need of new, innovative companies and hasn't seen a success like the US FAANG companies in decades. And this is on top of the already significant drawbacks of founding a German GmbH: The high corporate tax rate of 30% only buys you non-existent digital infrastructure where you have to fill out paper forms and send them via snail mail, and you are faced with lots of overhead, including detailed bookkeeping requirements.

Compare this to:

  • Founding a US LLC: Essentially no bookkeeping requirements, 0% tax rate if the founder is non-American and resides abroad (crazy!).
  • Founding a Pte Ltd in Singapore: Huge tax exemptions for startups and flat tax rate of 17% afterwards, good digital infrastructure.
  • Founding an Estonian OÜ: Tax rate of 0% if you keep money in the company, and only pay 22% on dividends, world-leading digital infrastructure.

So.. building "tax walls" around German companies is probably the wrong way to prop up the economy. With many companies nowadays being remote-first tech companies, they can now go "shopping" in the global marketplace of jurisdictions on where to set up shop. And Germany doesn't score well there.

That's it! Leave a comment below if you have any questions! :)