Exit Tax: Conditions, Amount and Planning Options

What exit tax is and when it applies

Exit tax treats relocation as if the person had sold their shares on the day of departure and taxes the difference between acquisition cost and fair market value. In Germany this covers shareholdings in corporations from 1 percent upwards when unlimited tax liability ends. The personal condition is that the individual was subject to unlimited tax liability in at least 7 of the last 12 years.

The logic behind it is worth understanding before anyone starts talking about planning. While a person is subject to unlimited tax liability in Germany, Germany holds the right to tax a future sale of the shares. Once that person leaves, most double tax treaties hand that right to the new country of residence. To stop the appreciation built up until then from leaving the German tax net untaxed, it is settled at the moment of departure. That is precisely why the event is called a deemed disposal: no money moves, no owner changes, and a taxable gain arises anyway.

This construction also explains why exit tax feels so brutal in practice. It is not a penalty for leaving, it is an accelerated final invoice. To the person receiving the assessment the distinction is academic, because the tax bill is real while the liquidity behind it is fictional.

Three conditions that have to coincide

Exit tax only bites when three separate levels are met at the same time. Where one of them is missing the provision does not apply, although a different rule frequently steps into its place.

• Personal condition: the individual was subject to unlimited tax liability in Germany in at least 7 of the 12 years preceding departure. Someone who moved to Germany four years ago does not meet it.
• Substantive condition: a shareholding in a corporation of at least 1 percent, where it is enough that this threshold was met at any point during the previous five years.
• Triggering event: unlimited tax liability ends, or a legally equivalent event occurs, such as a gift of the shares to a person resident abroad.

The second point is the one people underestimate. A 1 percent threshold is low enough to capture minority shareholders, co-founders with small stakes and individuals holding shares from employee participation programmes. The assumption that only majority owners are exposed is simply wrong.

Who it actually hits

It mainly affects founders and shareholders of German GmbHs, but shares in foreign corporations fall under the rules as well. The charge is triggered not only by the move itself, but also by a gift to a person resident abroad or by a shift of treaty residence to another country. Since 2025 comparable rules have been extended to certain investment fund holdings with their own thresholds.

In practice the profiles vary widely. The textbook case is the agency owner or software founder who wants to keep the operating company and still move to Dubai, Cyprus or Portugal. Almost as common is the case nobody sees coming: a shareholder with 3 percent in a successful company who moves for private reasons and suddenly receives an assessment in six figures.

Typical constellations

• The operating shareholder: sole or controlling shareholder of a profitable company that is meant to keep running. Highest exposure, because both earning power and shareholding percentage are high.
• The minority shareholder: a stake between 1 and 10 percent, often from an early founding phase. Fully in scope, yet typically without influence over distributions and therefore without access to liquidity.
• The holding shareholder: the shares sit in a personal holding company. The operating entity is untouched, but the shares in the holding are themselves shares in a corporation and therefore captured.
• The donor or testator: transferring shares to a person living abroad triggers the charge without the transferor moving anywhere.
• The silent residence shift: keeping a German home while becoming treaty resident elsewhere can trigger the same consequence.

Who is not affected

The reverse side matters just as much, because plenty of people worry without cause. Holdings below the threshold, individuals without the required German history and pure sole traderships without corporate shares are outside the provision. For sole traders and partnerships a different rule can apply instead: where business assets are removed from the German taxing right, the rules on the removal of business assets produce an economically comparable charge. The consolation prize is often no consolation at all.

How the value is determined

What counts is the fair market value of the shares at the time of departure, not the book value and not the share capital. Without recent arm's length sales, the value is usually estimated with a capitalised earnings method, which is why profitable small companies reach surprisingly high valuations. The resulting deemed gain is taxed under the general rules for share disposals.

Valuation is where most people get their own numbers wrong. They look at the company bank account and conclude the shares cannot be worth much more than that. Valuation follows sustainable earning power, not cash on hand. A company with no meaningful reserves that reliably produces profit every year can be valued at a multiple of its equity.

The valuation hierarchy in practice

1. Actual transactions: if shares changed hands at arm's length within a reasonable window before departure, the price paid is the strongest evidence. A financing round with an external investor produces a figure the tax office is happy to use.
2. Simplified capitalised earnings method: absent such transactions, the simplified capitalised earnings method under the German Valuation Act is the standard route. It multiplies an adjusted average of past years' earnings by a statutory capitalisation factor.
3. Independent valuation report: anyone who considers the standardised result excessive can submit an individual company valuation prepared under a recognised valuation standard. It costs money and time, but in many cases it is the only way to establish a realistic figure.

The real leverage sits in steps two and three. The simplified method is deliberately crude and does not ask whether the company would survive at all without the founder. For advisory, agency and coaching companies that question is the entire point: the value is attached to a person who is leaving with the shares. An independent valuation can reflect that dependency. The standardised method cannot.

On the tax side, shares held as private assets fall under the partial income system: a portion of the calculated gain is exempt and the remainder is taxed at the individual's personal income tax rate plus the usual surcharges. The effective burden therefore depends not only on company value but also on other income in the year of departure. How that adds up in a specific case belongs with licensed tax advisers.

Deferral, instalments and returning

The former unlimited and interest free deferral for moves inside the EU and EEA has been abolished. Instead the tax can be paid in seven equal annual instalments on application, generally only against security. If the person returns to Germany within seven years, the tax claim can lapse, and that period can be extended on application.

This is the single most important change of recent years and it still has not reached large parts of the expat community. Before the reform, moving inside the EU bought you an indefinite, interest free deferral without security. The tax only fell due on an actual sale. If you never sold, you never paid. That door is shut.

What instalments mean in practice

What replaced the deferral is payment in seven equal annual instalments. The first falls due shortly after assessment, the rest at yearly intervals. Three points get overlooked regularly.

• Instalments must be applied for. They are not granted automatically and the application has to be made in time within the assessment procedure.
• Security is the norm. The tax office generally requires meaningful security, such as a bank guarantee or a pledge over assets. This is exactly where founders whose wealth sits inside the company run into a wall.
• Instalments can be revoked. Selling or transferring the shares, or making substantial distributions, can accelerate the remaining balance. Ongoing notification duties have to be met as well.

The return rule

The second relief mechanism is the return rule. Someone who becomes subject to unlimited tax liability in Germany again within seven years can have the tax claim lapse retroactively. The period can be extended on application where a credible intention to return exists. In practice the rule comes with conditions: the shares must have been held essentially unchanged, and the intention to return has to exist from the outset and be documented.

That makes the return rule a double edged instrument. For someone planning a fixed term stay abroad it is a genuine safety net. For someone leaving permanently it is not a plan, it is a bet on their own life choices. Relying on the return rule and then not returning means the tax was deferred, not avoided.

EU move or third country: what still differs

The most common question in first conversations is whether moving to Cyprus or Portugal is somehow gentler than moving to Dubai or Paraguay. The honest answer: on the charge itself, no. On the administration around it, partly yes.

On the substantive side the distinction has largely disappeared. The deemed disposal applies to a move to Lisbon exactly as it applies to a move to Dubai. What differs today is procedure, above all the question of security and the enforceability of the claim. Inside the EU, mutual assistance and recovery mechanisms make it far easier for the tax authority to collect. Towards third countries those mechanisms are often absent, which is why the administration will in practice insist on meaningful security.

The practical consequence: choosing a destination country on the basis of exit tax is optimising the wrong variable. The destination decides ongoing taxation after the move, immigration status, substance requirements and treaty access. The exit charge itself lands in almost every configuration.

Where it hurts in practice

The core problem is liquidity: a tax arises on a gain nobody realised. On top comes the valuation dispute with the tax office, which costs time, expert reports and patience. And anyone seeking instalments has to provide security, which is difficult for founders whose wealth sits inside the company.

The liquidity gap

The standard case looks like this. A well run consulting company with stable profits and little cash on the balance sheet, because profits were distributed as they arose. The shareholder moves. The tax office values the company on earning power and arrives at a figure far above anything ever paid in as capital. The tax is real and due. The money to pay it does not exist. The only ways to raise it would be a distribution, which triggers tax of its own, or a share sale nobody wanted.

The valuation dispute

The second pressure point is the procedure. Years can pass between departure, filing, assessment and any appeal. Throughout that period the actual size of the liability is unknown. Anyone building a new structure abroad in parallel is planning around an open position of unknown magnitude. Commercially that is the worst version, because it freezes every investment decision.

Value falling after departure

A third point that only becomes visible afterwards: the valuation freezes value at the departure date. If the company loses value later, because a major client leaves or the business model comes under pressure, the tax on the earlier, higher value remains in place as a rule. Narrow correction mechanisms exist, but they are conditional and never automatic. Leaving at a moment of peak valuation carries that risk.

Which structures defuse the effect

The levers are the timing of the move, the legal form of the participation and how the shares are held, since not every form falls under the same rules. Sequence matters too: restructuring before relocating opens different options than doing it the other way round. Each variant has side effects such as lock up periods or taxation elsewhere and must be reviewed by licensed advisers in advance.

Set expectations correctly here. There is no switch that turns exit tax off. What exists are levers that, applied in the right window and the right order, can change the size of the charge. All of them have side effects, most of them need lead time, and none of them work retroactively.

Levers that get reviewed in practice

• Timing: value is measured at the departure date. Leaving early in the company's development produces a lower figure than leaving after five record years. This is the strongest lever and also the most uncomfortable, because it touches commercial decisions rather than purely tax ones.
• Legal form of the participation: the provision targets shares in corporations. Participations in other legal forms fall under different rules, though the rules on removal of business assets can apply there instead. A change of legal form is therefore not avoidance, it is a move into a different rule set with its own deadlines.
• Sequence of restructuring and departure: reorganisations and contributions come with lock up periods. Restructuring first and leaving afterwards means those periods must be observed, otherwise the relief is clawed back. Lead times of several years are normal here.
• The return rule as deliberate planning: for a genuinely fixed term stay abroad, the return rule can be a workable route, provided the intention is documented from day one and the shareholding is left unchanged.
• Liquidity planning instead of avoidance: in many cases the realistic answer is not avoidance but preparation: build security, time distributions and file the instalment application properly.

What does not work

Equally important is the list of routes that circulate online and collapse in practice. They cost money, create risk and do not solve the problem.

• Deregistering at the local registration office without genuinely moving your centre of life. Unlimited tax liability does not end because of a form.
• Not declaring the shareholding. Ownership is traceable through registers, prior filings and international information exchange.
• Transferring shares to family members abroad shortly before leaving. That transfer is itself a triggering event.
• Trustee or nominee arrangements designed to obscure beneficial ownership. That is not planning, it is criminal exposure.
• Dropping the holding below 1 percent just before departure. The sale itself triggers tax, and the five year look back keeps running.
• Setting up an offshore holding and contributing the shares without checking the consequences. The contribution is itself a taxable event and can pull the charge forward instead of removing it.

Apatridus develops the strategy and coordinates execution. The tax assessment and the filings are handled by licensed partners. We do not recommend any arrangement that has not been reviewed and signed off by a tax adviser first. On this topic that is not a formality, it is the difference between a plan that holds and an expensive experiment.

Case studies from practice

The following cases are anonymised and simplified in their figures. They illustrate patterns, not transferable outcomes.

CASE STUDY 1 CASE STUDY 2

Common mistakes

The most expensive mistake is moving first and adjusting the structure afterwards. The second is assuming a move within the EU is harmless, which stopped being true with the reform. The third is underestimating company value, because valuation follows sustainable earnings, not the balance on the bank account.

MISTAKE 1

Moving first, structuring later

Almost every planning option only works before departure. Reorganisations need lock up periods, valuation dates cannot be moved retroactively, and unlimited tax liability once ended cannot be repaired after the fact. Leaving first and asking afterwards means you are administering an outcome rather than shaping one.

MISTAKE 2

Treating the EU as a safe harbour

This misconception is widespread enough to deserve its own entry. Before the reform, an EU move genuinely was privileged. Today it is not, at least not on the charge itself. Anyone relying on articles and forum posts predating the reform is planning against a legal position that no longer exists.

MISTAKE 3

Measuring company value by the bank balance

The sentence that comes up most often in first conversations runs roughly: the company is not worth that much, there is barely any money in it. Valuation follows earning power. A company with reliable profits and an empty account can be worth considerably more than one with large reserves and weak earnings.

MISTAKE 4

Forgetting about security

Many people plan for the tax but not for the collateral. If instalments are only granted against a guarantee or a pledge, and all of the wealth sits inside the company, the instalment application exists on paper while the full amount lands at once in reality. The question of what will serve as security belongs at the start of the planning, not at the end.

MISTAKE 5

Overlooking the other triggers

Relocation is only one of several triggers. A gift to a child studying abroad, an inheritance passing to heirs abroad, or a shift of treaty residence without any formal move can produce the same result. Focusing only on the move covers one flank and leaves the other open.

A look at Austria and Switzerland

Austria has its own exit taxation regime under which the tax can be paid in instalments on application. Switzerland does not levy a comparable general exit tax on privately held participations of individuals. The details differ substantially, so the rules of the specific country of departure always have to be checked individually.

For Austria, in simplified terms: the system distinguishes between business assets and privately held capital assets and provides different mechanisms depending on the constellation and the destination, ranging from instalment payment to a deferred assessment in certain EU and EEA cases. That makes an Austrian departure less harsh than a German one in some configurations, but never neutral. The review follows the same logic: inventory, valuation, timing.

For Switzerland: there is no general exit tax on privately held participations of individuals. That does not make leaving Switzerland tax neutral. Depending on canton, asset type and structure, other topics can become relevant, for instance in relation to real estate, pension capital or participations held as business assets.

One rule holds for all three countries: what matters is the state you are leaving, not the one you are entering. Someone resident in Germany moving to Austria is dealing with German rules. In the other direction, Austrian rules govern.

Next steps

Start with an inventory of every participation, including percentage, acquisition cost and estimated value, then plan the timing of the move. Only on that basis can options be assessed and aligned with the destination country. The binding assessment is made case by case by licensed tax advisers before departure.

In the order we set it up with clients, that looks like this.

Frequently asked questions

When does German exit tax apply?

It applies when unlimited tax liability ends while the individual holds at least 1 percent in a corporation. In addition, the person must have been subject to unlimited tax liability in at least 7 of the previous 12 years.

How high is exit tax?

The taxable amount is the difference between acquisition cost and fair market value of the shares, taxed under the ordinary rules for share disposals. The actual figure depends on company value and personal circumstances and cannot be stated in general terms.

Does exit tax apply when moving inside the EU?

Yes. The former permanent and interest free deferral for EU and EEA cases has been abolished. Since then only payment in seven annual instalments is available, generally against security.

Can exit tax be avoided?

Not by omission, but the sequence of restructuring and relocation and the chosen form of participation make a real difference. Every option has side effects and must be reviewed individually in advance.

What happens if I move back to Germany?

If you return within seven years the tax claim can lapse retroactively. The period can be extended on application where a genuine intention to return exists.

Does exit tax apply to a US LLC?

That depends on how the entity is classified under German entity classification rules. If it is treated as a partnership, different rules apply, but rules on the removal of business assets from German taxation can become relevant instead.

How is company value calculated for exit tax?

The relevant figure is fair market value at the time of departure. Without recent arm's length transactions it is usually estimated with a capitalised earnings method, which produces high values for profitable companies.

Does exit tax affect sole traders?

The rule targets shares in corporations. For sole traders and partnerships, however, rules on removing business assets from the German tax net can lead to comparable taxation.