Exit taxation under Section 6 of the German Foreign Tax Act (AStG) and the treatment of past cases following the Federal Ministry of Finance (BMF) circular of 2 June 2025
If a natural person holds shares in a company and transfers their permanent residence or habitual abode to another country, this may, according to Section 6 of the Foreign Tax Act (AStG) trigger taxation. Section 6 of the AStG treats, for the purposes of the date of Waiver of unlimited tax liability Treats a move away as a disposal and thus subjects the reserves accrued up to that point to taxation, even though no actual disposal has taken place. This therefore results in the disclosure of hidden reserves. In this context, a notional proceeds from disposal based on the fair market value of the shares. This so-called ‘exit tax’ is not a separate tax, but rather a form of income tax designed to ensure that accumulated hidden reserves are not withheld from the tax authorities. Taxpayers who are required to relinquish their unlimited tax liability in this way must therefore pay tax on capital gains arising from their significant (>= 1%) shareholdings in domestic or foreign companies held as part of their private assets in accordance with the principles of Section 17 of the Income Tax Act (EStG).
All natural persons who have had their domicile or habitual residence in Germany for at least seven of the twelve years preceding their departure are subject to unlimited tax liability. Section 6(3) of the AStG further provides for a Return policy provides that the exit tax shall be waived retrospectively if the taxpayer or their legal successor returns to Germany within seven years (extendable to twelve years).
With regard to the exit taxation described above, Section 6(5) of the AStG, in the version applicable prior to 1 July 2021 („previous version“), provided for a significant Privileges which provides that this tax deferred indefinitely and interest-free was possible if the taxpayer moved within the EU or the EEA and was subject, in the country of destination, to a tax liability comparable to the German liability for unlimited income tax. However, no such deferral option was provided for in the case of moves to Switzerland.
In its judgment of 26 February 2019, the ECJ ruled in the case Wächtler – C 581/17 concluded that, under the Agreement on the Free Movement of Persons (AFMP) with Switzerland, this option for indefinite deferral until the shares are sold must also apply to persons moving to Switzerland. Consequently, the legislature took action and abolished the option of deferral. Instead, the only option now available is payment by instalments.
In the appeal proceedings following the case brought before the ECJ, the Federal Fiscal Court (BFH) addressed in detail the reasoning of the ECJ judges and stated that, without the possibility of an indefinite, interest-free deferral, a taxpayer might be deterred from exercising their right to freedom of establishment under the Agreement on the Free Movement of Persons (AFMP) due to a liquidity disadvantage. In this respect, there is a Unequal treatment of taxpayers who are resident within the country’s borders defer. The Federal Fiscal Court (BFH) further pointed out that a deferral must also be granted even if tax has already been paid. A claim for a refund therefore arises, meaning that the tax must be refunded to the taxpayer and subsequently deferred. In the judges’ view, the obligation to pay in instalments also creates a liquidity disadvantage compared with those who do not move abroad.
On 2 June 2025, the Federal Ministry of Finance published a new circular which addresses the two judgements and provides the tax authorities with guidance on how to deal with exit taxation in historical cases under the previous legal framework, i.e. those up to 31 December 2021 that are also covered by the Agreement on the Free Movement of Persons with Switzerland.
Deferral of the exit tax may be granted subject to the following conditions:
- The taxpayer is an EU or Swiss national.
- Prior to 1 January 2022, the conditions for a change of residence under section 6(1), first sentence or second sentence, no. 2 of the AStG (old version) were met.
- The move falls within the scope of the principle of equal treatment under the AFMP (e.g. taking up employment in Switzerland)
- Following their departure, the taxpayer remains subject to a tax liability in Switzerland comparable to that set out in Section 1(1) of the Income Tax Act (e.g. residence or place of business in Switzerland)
- Since the withdrawal, no grounds for revocation have arisen (e.g. no distribution of profits, no transfer of shares, etc.)
The deferral applies retrospectively and gives rise to a claim for a refund, on which interest is payable, against the tax office.
However, there are also a number of pitfalls to be aware of. If the individual returns to Germany and thus becomes subject to unlimited tax liability once again, the return provision under section 6(3) of the AStG (old version) applies. The tax liability may then be waived exclusively in accordance with Section 6(3), sentences 1 and 2, of the AStG (old version). Where, after 16 August 2023, profit distributions or a repayment of capital in excess of 25% of the fair market value of the share at that time take place, this will preclude tax remission.
Furthermore, the deferral may also be revoked if essential conditions cease to apply or certain events occur. For example, revocation is possible if the taxpayer gives up their EU or Swiss residence or the relevant citizenship. A revocation due to a move to another EU Member State may, under certain conditions and following the submission of a corresponding application, be without adverse consequences. In many cases, a transfer of shares may also lead to the revocation of the deferral.
Incidentally, Take care when fulfilling your reporting obligations required. If a ground for revocation arises in relation to the taxpayer, the taxpayer is obliged to notify the tax office of this fact within one month. Furthermore, the taxpayer is obliged to report annually to the tax office whether there are grounds for revocation, whether the conditions for the tax deferral continue to be met, and whether the shares remain unchanged.
If the taxpayer fails to comply with this reporting obligation, or does so only to an insufficient extent, then the Fabricating grounds for revocation. Particular caution is required in this regard, especially when fulfilling the reporting obligations and carrying out the associated assessment of the conditions for deferral.
As already explained, it is not apparent why the reasoning of the ECJ and the Federal Fiscal Court (BFH) should not also apply to the current legal situation. Unequal treatment compared with taxpayers who change their place of residence within Germany persists. It is up to the legislature, in order to ensure compliance with EU law, to reintroduce the permanent, interest-free deferral for those moving to EU/EEA countries and Switzerland. Until this happens, taxpayers have no choice but to pursue their claims through the courts.
Our Tax advisers and specialist solicitors for the Tax law We would be happy to advise you on how to enforce your claims and on tax-optimised structuring of your assets should you be planning to move abroad.