German international tax law
German exit tax under Section 6 AStG
Individuals leaving Germany can trigger German income tax on unrealized gains in substantial shareholdings even though no shares are sold. Section 6 of the German Foreign Tax Act (AStG) treats certain departures and cross-border transfers as a deemed sale at fair market value. Ownership percentage, prior German tax residence, company value, return plans and liquidity therefore require careful planning.
Section 6 AStG together with Section 17 EStG
Taxation without an actual sale
German exit taxation is intended to preserve Germany's taxing right over unrealized gains that accrued while a substantial shareholding was within the German tax net. In specified cross-border cases, the law therefore deems the shares to have been sold at fair market value.
Section 6 AStG applies to shares within Section 17(1) sentence 1 of the German Income Tax Act (EStG). In particular, this generally includes interests in corporations where the taxpayer held, directly or indirectly, at least 1 percent of the capital at any time during the preceding five years.
The tax is imposed on a deemed capital gain. No actual sales proceeds need to be received. This mismatch between tax liability and cash proceeds is one of the main practical challenges of German exit taxation.
Triggering events
When does German exit taxation apply?
The current version of Section 6 AStG contains three principal triggers: termination of unlimited German income tax liability due to giving up residence or habitual abode, a gratuitous transfer to a person who is not subject to unlimited German tax liability, and other cases in which Germany's right to tax a later capital gain is excluded or restricted.
Departure from Germany
The classic case is the termination of unlimited German income tax liability because the taxpayer gives up a German residence or habitual abode.
Gratuitous transfer abroad
Exit taxation can also arise without the owner's own move if the shares are transferred without consideration to a person who is not subject to unlimited German tax liability.
Loss or restriction of Germany's taxing right
The rule can also apply where Germany loses or has its taxing right restricted with respect to a later sale of the shares for another reason.
Individual taxpayer
Section 6 AStG in this context applies to individuals. Corporations are subject to different German exit and de-recognition rules.
At least seven years within the preceding twelve years
Under Section 6(2) AStG, the individual must generally have been subject to unlimited German income tax liability for an aggregate of at least seven years during the twelve years preceding the triggering event.
Shareholding within Section 17 EStG
The rule generally covers shareholdings where the taxpayer held at least 1 percent, directly or indirectly, at any time during the preceding five years.
Foreign corporations can also be covered
Section 6 AStG is not limited to shares in German GmbHs or AGs. Interests in foreign corporations can also fall within the rule if they qualify under Section 17 EStG.
Tax calculation
Fair market value instead of an actual sale price
Section 6 AStG deems the shares to be sold at fair market value. The starting point is therefore the value of the interest at the relevant time rather than an actual negotiated purchase price.
Fair market value of the shareholding
For privately held companies, valuation can become the central issue. Enterprise value, ownership percentage and special shareholder rights must be reflected appropriately.
Fair market value less tax basis
The mechanics follow Section 17 EStG. In simplified terms, fair market value is compared with the relevant tax basis to determine the deemed capital gain.
Tax can arise while the shares are still held
The taxpayer keeps the shareholding, but German tax can nevertheless arise even though no purchase price or other sale proceeds are received.
Section 6(4) AStG
Seven annual installments instead of immediate full payment
On application, the assessed tax on the deemed capital gain can be paid in seven equal annual installments. The installments are generally interest-free, although the tax office can normally require security.
Application required
Installment payment is not automatic. The taxpayer must request it.
Seven equal annual installments
The first installment is generally due within one month after the tax assessment is issued; later installments follow the statutory payment schedule.
Security
As a general rule, the tax authority may require security. Liquidity and financing should therefore be considered before the move.
Early acceleration is possible
Outstanding installments can become due early, including in cases of a sale or transfer of the shares, certain distributions or failures to comply with statutory notification duties.
Section 6(3) AStG
A return to Germany can eliminate the exit-tax claim
If the departure is intended to be temporary and the taxpayer again becomes subject to unlimited German tax liability within seven years, the German exit-tax claim can cease to apply under Section 6(3) AStG.
Among other conditions, the shares must not be disposed of, transferred or contributed to business assets in a disqualifying manner during the absence. Certain distributions or repayments of capital above the statutory threshold can also jeopardize the relief.
On application, the tax office can extend the seven-year period by an aggregate of up to five additional years if the intention to return continues. The current return rule can therefore cover a total period of up to twelve years.
Section 6(5) AStG
Notification duties after departure
Taxpayers relying on installment payment or return relief must comply carefully with the statutory notification requirements. Certain events must be reported electronically within one month; in addition, the current address and continued ownership of the shares generally must be confirmed annually by 31 July.
One month
Events relevant to the acceleration of unpaid exit tax generally must be reported within one month.
By 31 July
The taxpayer generally must confirm the current address and continued attribution of the relevant shares each year.
Early payment can become due
Non-compliance with the statutory notification duties can cause the remaining unpaid exit tax to become due early.
Federal Fiscal Court case law
Important BFH decisions on German exit taxation
BFH case law has clarified the scope, timing and return mechanics of German exit taxation. Many leading decisions concern the version of Section 6 AStG in force before the 2022 reform and therefore must be read in that historical context.
Timing of the deemed gain
In a case involving an older substitute-trigger provision, the BFH held that the deemed capital gain is recognized immediately before the point at which Germany's taxing right is excluded or restricted. The current wording of Section 6(1) AStG now addresses the timing expressly.
Move to Switzerland: assessment despite required deferral
For a 2011 move to Switzerland, the BFH held after the CJEU's “Wächtler” decision that the exit tax could be assessed even though EU law required a permanent interest-free deferral under the law then in force. The decision concerns prior law and should not be applied mechanically to post-2021 cases.
Return rule and intention to return
Under the former wording of Section 6(3) AStG, the BFH held that an actual return within the statutory five-year period was sufficient; a separately proven intention to return at the time of departure was not additionally required. Current law uses a seven-year period with a possible extension of up to five years.
Gratuitous transfer abroad
Under the law then in force, the BFH clarified that a gratuitous transfer of shares to a person subject only to limited German tax liability did not also require an unwritten additional condition that Germany's taxing right be actually excluded or restricted. The case illustrates that the statutory substitute triggers must be read independently.
No deemed recognition of losses
The BFH held that Section 6 AStG does not create deemed realization of losses merely because the shareholding has declined in value. Exit taxation is relevant where fair market value exceeds the relevant tax basis.
Securities lending and timing
The BFH did not have to decide the broader question whether a securities loan could prevent exit taxation because, based on the contractual interpretation, the transfer of the shares occurred only after the taxpayer had already moved. The case shows how critical the exact sequence of cross-border steps can be.
Pre-move planning
What should be reviewed before leaving Germany?
Which shareholdings fall within Section 17 EStG?
Ownership percentages, indirect interests and gratuitously acquired shares should be reviewed for the relevant five-year period.
Is the seven-out-of-twelve-year test met?
The duration of prior unlimited German tax liability is a separate statutory requirement and should be documented using the actual residence history.
What is the fair market value?
Privately held companies should be valued on a defensible basis before departure. Large unrealized gains can create substantial exit-tax exposure.
Is a return to Germany realistic?
For a temporary stay abroad, the return rule may be decisive. Its conditions must then also be observed throughout the period abroad.
How will the tax be financed?
Installment payments, security and the risk of early acceleration should be included in the liquidity plan.
How does the destination country treat the shares?
Future double-taxation exposure can depend on whether and at what value the destination country recognizes the shareholding for tax purposes. German exit taxation should therefore be planned bilaterally.
Important distinction
Section 6 AStG is not Germany's only exit-tax rule
The classic Section 6 AStG regime concerns substantial shareholdings within Section 17 EStG. Following amendments to the German Investment Tax Act, certain investment fund and special investment fund interests can also be subject to separate exit-tax rules.
Individuals with substantial private investment portfolios should therefore not review only whether they own at least 1 percent of a corporation. Significant fund positions may require a separate exit-tax analysis.
Further reading
Related German tax topics
Some detailed German-law pages are currently available only in German. Those links are clearly identified below.
International tax advice
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