BDO: Tax Challenges for Family Businesses Relocating Abroad

German family businesses and their shareholders are increasingly successful globally. Many owners choose to relocate abroad for studies, economic advantages, or a better climate, with popular destinations including Italy, Spain, Portugal, and Switzerland.

While relocating abroad can offer significant tax benefits, it also introduces complex tax challenges. German tax law imposes an "exit tax" on unrealized gains in shares when a resident taxpayer moves their domicile abroad. This tax aims to capture potential capital gains that would otherwise escape German taxation. The exit tax is calculated based on the deemed market value of the shares at the time of departure, with a tax rate of approximately 30% applied to these hidden reserves.

To trigger the exit tax, an individual must have been subject to unlimited income tax liability in Germany for at least seven of the last twelve years. For gifts or inheritances, the residency periods of the predecessor are considered. Additionally, a shareholding of at least 1% in a corporation's capital within the last five years prior to departure is crucial. The exit tax becomes relevant not only upon giving up German residency but also when shares are transferred to a non-German tax resident buyer or when the center of life shifts to a secondary residence abroad.

Previously, individuals moving to EU or EEA countries could benefit from an unlimited, interest-free deferral of the exit tax. However, since the end of 2021, the assessed exit tax is immediately due. While deferral is still possible upon application with sufficient security, it can now be paid in seven annual installments. This "dry income" situation, where a tax liability arises without a corresponding cash inflow from a sale, requires careful financial planning.

BDO advises entrepreneurial families to proactively plan for these tax implications well in advance of any relocation. Potential strategies include contributing shares to a taxable business asset within Germany, which can maintain a permanent establishment for tax treaty purposes and thus keep taxation rights with Germany. Alternatively, gifting company shares to a family foundation before moving abroad can provide international flexibility, ensuring the founder and family are financially secured.