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Tax Return Emigration: Avoid Costly Mistakes!
Emigration is a big step that requires careful planning, especially from a tax perspective. Don’t miss any deadlines and make use of all planning options to avoid unnecessary tax payments. Need individual advice? [More information can be found on our contact page](/contact).
The topic short and concise
Emigration is a big step that requires careful planning, especially from a tax perspective. Don’t miss any deadlines and make use of all planning options to avoid unnecessary tax payments. Need individual advice? [More information can be found on our contact page](/contact).
Emigration is a big step that requires careful planning, especially from a tax perspective. Don’t miss any deadlines and make use of all planning options to avoid unnecessary tax payments. Need individual advice? [More information can be found on our contact page](/contact).
Emigration is a big step that requires careful planning, especially from a tax perspective. Don’t miss any deadlines and make use of all planning options to avoid unnecessary tax payments. Need individual advice? [More information can be found on our contact page](/contact).
Planning your emigration and want to avoid tax pitfalls? Learn how to correctly prepare your tax return and benefit from expert advice.
The Tax Challenges of Emigration
Emigrating from Germany is a significant step that requires careful planning. In addition to organisational matters, you should not overlook the tax aspects. The tax treatment when moving away from Germany is complex and fraught with pitfalls. A misjudgment can lead to considerable financial burdens. At GoMovin, we help you keep track and prepare your tax return correctly when emigrating.
One of the first questions that arises is about tax liability. In principle, a distinction is made between unlimited and limited tax liability. Until the time you move away, you are subject to unlimited tax liability in Germany. This means your entire worldwide income is taxed in Germany. After emigration, this may change, especially if you relocate your centre of vital interests abroad. This centre of vital interests is crucial for assessing your future tax liability.
Purpose of this Article
The aim of this article is to provide you with a comprehensive overview of the tax consequences of your emigration. We want to help you file your tax return correctly and avoid potential tax traps. We will cover key aspects such as exit taxation, extended limited tax liability, and the disentanglement tax. With this knowledge, you are well-equipped to optimise your emigration from a tax perspective. Further information on the tax consequences of moving away can be found here.
Exit Tax: How to Avoid the Exit Tax
What is the Exit Tax?
The Exit Tax, often referred to as the Wegzugsbesteuerung in German, is a tax that may be applicable when emigrating from Germany. It primarily affects individuals who hold shares in corporations, such as a GmbH. Specifically, the exit tax applies if you own at least 1% of the shares in a corporation and relocate your residence abroad. The exit tax results in a taxation of fictitious capital gains at the time of departure. This means it is as if you sold your shares in the corporation, even though this may not have actually occurred.
Calculation and Impact
The calculation of the exit tax is based on the difference between the market value of the shares and their acquisition costs. This fictitious gain is then taxed at your individual tax rate. Until 2022, there were special provisions for EU/EEA countries, allowing for a interest-free deferral of the tax. However, since 2022, the interpretation has tightened based on the ATAD (Anti Tax Avoidance Directive). This means deferral is no longer granted automatically and stricter conditions now apply. A detailed explanation of the exit tax can be found here.
Strategies to Avoid
There are various strategies to avoid or reduce the exit tax. One option is to transfer shares to an overseas holding before moving. This may allow you to shift the tax burden to another country. Another option is to gift shares to family members or other individuals. However, it is important to consider the gift tax in this case. It is advisable to consult with a tax advisor early on to develop the optimal strategy for your individual situation. Our planning experts are happy to assist you with this.
Extended limited tax liability: Up to 10 years of after-effect
Essentials of Extended Limited Tax Liability
The extended limited tax liability is a feature of German tax law that can still be relevant for certain individuals even after emigration. It is regulated in § 2 para. 7 EStG and applies in particular to German citizens who move to low-tax countries. A prerequisite for the application of the extended limited tax liability is that you have substantial economic interests in Germany. This can be the case, for example, if you continue to receive income from Germany or hold significant assets within the country. The tax implications should not be underestimated.
Extent of Tax Liability
The extent of the extended limited tax liability includes certain income that is not classified as foreign income. This includes, for example, rental income from movable assets in Germany. Even if you live abroad, you must tax this income in Germany. A special feature is that to determine the tax rate in Germany, you must disclose all worldwide income. This can lead to a higher tax burden, as the German tax rate is calculated based on your total income. The extended limited tax liability can apply for up to 10 years after your departure from Germany.
Strategies for Avoidance
There are some strategies for avoidance to circumvent the extended limited tax liability. One possibility is renouncing German citizenship, ideally at least 5 years before departure. This removes the basis for the extended limited tax liability. Another strategy is the minimisation of economic ties to Germany. This can be achieved, for example, by selling real estate or transferring business activities abroad. It's important to note that these strategies must be carefully planned and implemented to be truly effective. Our experts at GoMovin are happy to advise you on the various options. Comprehensive advice on this topic can be found here.
Exit Tax: Avoid the Tax Trap for Self-Employed Individuals
What is the Exit Tax?
The Exit Tax is a tax that may become payable when business assets are transferred abroad. It primarily affects self-employed individuals, sole traders, and freelancers who relocate their business or parts of it to another country. The Exit Tax leads to a taxation of hidden reserves contained within the business assets. Hidden reserves are the difference between the market value and the book value of the economic assets. The Exit Tax is intended to prevent these hidden reserves from being moved abroad without taxation. The significance of the Exit Tax should not be underestimated, as it can result in significant financial burdens.
Options for Avoidance
There are various options to avoid the Exit Tax. One possibility is the conversion of the company into a partnership, which allows hidden reserves to be introduced into the partnership tax-neutrally. Another option is the leasing of the business to an overseas company. This ensures the business assets remain taxable in Germany. A third option is the allocation of the economic assets to a domestic permanent establishment. Here too, the business assets remain taxable in Germany. The choice of the optimal strategy depends on your individual situation.
Special Provisions for EU/EEA
If you move to an EU/EEA country, there are special provisions. In this case, the tax burden can potentially be spread over five years, which may reduce the financial impact at the time of departure. However, it is important to note that this regulation does not automatically apply and must be requested. Additionally, certain conditions must be met to achieve the distribution of the tax burden. GoMovin supports you with the correct application process and provides comprehensive advice on the possibilities of the Exit Tax. Detailed information on the Exit Tax can be found here.
Tax return in the year of departure: How to do it right
Unlimited Tax Liability in the Year of Departure
Even in the year of your departure from Germany, you are generally subject to unlimited tax liability. This means that your entire global income up to the point of departure is taxable in Germany. Section 2, Paragraph 7 of the Income Tax Act (EStG) stipulates that tax liability exists for the entire calendar year of departure. This applies regardless of when exactly during the year you move your residence abroad. An important detail to note is that in certain cases, you must include the WA-ESt form with your tax return. This is particularly necessary if you are moving to a low-tax country or hold interests in corporations.
The Progression Provision
An important aspect to consider in your tax return for the year of departure is the progression provision. This implies that foreign income can affect the tax rate in Germany. Even if your foreign income is not taxed in Germany, it may cause your tax rate on income taxable in Germany to rise. To avoid the progression provision, it might be advisable to defer foreign income to the following year. However, this is not always possible and depends on your individual circumstances.
Local Tax Office
For your final tax return in Germany, the local tax office is usually responsible. This is the tax office in the district where you had your residence before your departure. It is important to submit your tax return on time to this tax office. GoMovin assists you in preparing your tax return and helps you gather all relevant documents. Deregistering with the tax office is an important step. Further information regarding tax aspects in the year of departure can be found here.
Gift and inheritance tax: Still relevant after emigration
Principle of Tax Liability
Even after you emigrate, gift and inheritance tax can be relevant for you. It is generally the case that a gift and inheritance tax liability exists if there is a domestic connection. This applies if the donor, the deceased, or the acquirer are residents in Germany for tax purposes. Even if you no longer live in Germany, a tax liability can arise if, for example, you inherit something from a relative in Germany. In addition, domestic assets can still be subject to gift and inheritance tax even if all parties involved live abroad.
Timing Aspects
An important aspect is the time of the gift or inheritance event. German inheritance tax can be levied up to ten years after moving to a low-tax country. This is particularly the case if you maintain close economic ties to Germany. It is therefore advisable to inform yourself early about the tax consequences of gifts and inheritances and to take structuring measures where necessary.
Structuring Measures
To optimise gift and inheritance tax, there are various structuring measures. One option is the transfer of assets during a lifetime to reduce inheritance tax. Another option is the establishment of a foundation to secure assets in the long term and minimise the tax burden. It is important to note that these structuring measures are complex and need to be carefully planned. GoMovin supports you in developing an individual strategy to optimise your gift and inheritance tax. You can find a detailed discussion on the subject here.
Timing is everything: How to choose the best time for emigration
Tax Considerations at the Time of Relocation
The timing of your emigration within a calendar year can have tax implications. Generally, an emigration at the end of the year simplifies tax matters. This avoids interim settlements and complex calculations. An important aspect is the avoidance of the progression proviso. As already mentioned, this can lead to your tax rate on income taxable in Germany increasing if you receive foreign income.
Establishing Foreign Businesses
If you plan to establish a business abroad, there are several tax aspects to consider. It is advisable to ideally establish the business after emigration, preferably in the following year. This prevents unnecessary reporting obligations and complex tax issues. In particular, reporting obligations pursuant to § 138 (2) of the Fiscal Code can be avoided if the business is established only after relocation.
The 183-Day Rule
The 183-day rule is particularly relevant in assessing tax liability in an international context. It states that a person becomes taxable in a particular country if they reside there for more than 183 days in the calendar year. However, this rule is complex and depends on various factors, such as double taxation agreements. It is therefore advisable to seek individual advice to assess the impact of the 183-day rule on your personal situation. Further information on the best time for emigration can be found here.
Avoiding Pitfalls: How to Achieve a Tax-Optimised Emigration
Misjudgment of Tax Liability
One of the biggest pitfalls of emigration is the misjudgment of the tax implications. Many people underestimate the complexity of German tax law and the impact of emigration on their tax liabilities. This can lead to unpleasant surprises and significant financial burdens. To avoid this, careful planning and advice is essential. We at GoMovin recommend consulting a tax advisor or another expert at an early stage.
Failures in Tax Declaration
Failures in the tax declaration can also cause problems. In particular, incorrect or incomplete information on your tax return can lead to back payments and penalties. Make sure to accurately declare all relevant income and assets. Especially do not forget the WA-ESt form if you are moving to a low-tax country or hold shares in corporations.
Inadequate Documentation
An inadequate documentation is another common mistake during emigration. It is important to carefully maintain all relevant documents for your tax return. These include, for example, proofs of income, assets, expenses, and debts. A careful documentation of all relevant documents is essential to substantiate your tax return and avoid queries from the tax office.
Key Benefits of Planning Your Tax Strategy
Here are some of the key benefits you'll gain:
Reduced Tax Burden: Strategic planning can minimize your tax obligations during and after emigration.
Compliance Assurance: Proper documentation and adherence to tax laws prevent penalties and legal issues.
Financial Clarity: Understanding the tax implications of emigration allows for better financial decision-making and stability.
Tax Planning: Your Key to a Successful Fresh Start Abroad
The Importance of Early Planning
Tax planning is a crucial factor for a successful new start abroad. Early and comprehensive planning helps you avoid unwanted tax consequences and optimise your financial situation. Make sure to consider all relevant aspects, such as exit taxation, extended limited tax liability, disengagement tax, and gift and inheritance tax. Early planning and advice are essential to avoid undesirable tax consequences.
Outlook
The constantly changing tax legislation requires continuous adjustment and consultation. Stay informed about current changes and seek regular advice from an expert. This is the only way to ensure that you optimise your tax situation and take full advantage of all benefits.
Are you planning your emigration and want to avoid tax pitfalls? We at GoMovin are here to support you with our expertise. We simplify the relocation process and make international relocation stress-free, efficient, and personalised. Contact us today for personal advice and let us work together to optimise your emigration tax situation. Learn more about our relocation assistance and how we can help you. Schedule a non-binding consultation now at /contact.
Further useful links
Bundesfinanzministerium provides information on tax laws and regulations in Germany.
Einkommensteuergesetz (EStG) – Here you will find the legal text of the German Income Tax Act.
Außensteuergesetz (AStG) – Information on the German Foreign Tax Act.
Statistisches Bundesamt Deutschland (Destatis) provides statistical data on Germany that may be relevant for tax assessments.
Steuerberatung ECOVIS RTS offers information and advice on various tax topics, including exit taxation and disentanglement tax.
ROSE & PARTNER Steuerberatung offers advice on tax aspects of emigration and exit taxation.
FAQ
What happens to my tax liability when I emigrate from Germany?
Basically, you are unlimitedly liable for tax in Germany until the time of your departure. After that, your tax liability may change, depending on whether you move your centre of vital interests abroad and what income you continue to receive from Germany.
What is the Exit Tax and when does it apply?
The Exit Tax applies to individuals who own at least 1% of the shares in a corporation (e.g. GmbH) and move their residence abroad. It results in a taxation of fictitious capital gains at the time of departure.
What is the extended limited tax liability and how can I avoid it?
The extended limited tax liability applies to German citizens who move to low-tax countries and continue to have substantial economic interests in Germany. You can avoid this by renouncing German citizenship (at least 5 years before emigration) or by minimising your economic ties to Germany.
What is the disengagement tax and who is affected?
The disengagement tax affects self-employed individuals, sole proprietors, and freelancers who relocate their business or parts of it abroad. It leads to a taxation of hidden reserves contained in business assets.
What should I consider in my tax return in the year of emigration?
Even in the year of your emigration, you are generally unlimitedly liable for tax. You must declare your entire worldwide income up to the time of departure in Germany. In certain cases, the WA-ESt form may be required.
How does the progression proviso affect my tax return in the year of emigration?
The progression proviso states that foreign income can affect the tax rate in Germany. Even if your foreign income is not taxable in Germany, it can cause your tax rate on the income taxable in Germany to increase.
Does gift and inheritance tax remain relevant after my emigration?
Even after your emigration, gift and inheritance tax may still be relevant for you if the donor, the deceased, or the beneficiary are still liable to tax in Germany or if domestic assets are involved.
When is the best time to emigrate from a tax perspective?
Emigrating at the end of the year simplifies tax matters. It is advisable to establish foreign businesses after emigration to avoid unnecessary reporting obligations.
