Drastic Tightening Of Exit Tax Planned – Draft Of ATAD-Implementation Act

 
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On 10 December 2019, the Federal Ministry of Finance published a draft bill for a law to implement the Anti Tax Avoidance Directive (ATAD-Umsetzungsgesetz - ATADUmsG). This represents the first step in the implementation of the EU's ATAD-I Directive as part of the BEPS project (Base Erosion and Profit Shifting) of the OECD into national law.

In addition to the implementation of Art. 9 and 9b of the Directive (hybrid structures) and a reform of the controlled foreign corporation (CFC) rules, the draft bill provides for drastic tightening of the so-called exit tax (sec. 6 AStG - German Foreign Tax Act) in EU/EEA matters, although this is not affected by the ATAD I Directive. After the legislative procedure has been completed, the stricter requirements are to take effect with retroactive effect from 1 January 2020. However, the draft is still in the process of coordination within the government and a cabinet decision to start the official legislative procedure is still pending.

  1. General Information on German Exit Tax

    When a shareholder moves abroad, sec. 6 AStG subjects hidden reserves of an investment of at least 1% of a corporation's capital (sec. 17 EStG – German Income Tax Act) to German taxation, deeming a sale of the share. Thus, Germany secures the right to tax the hidden reserves in privately held shares generated in corporations while the taxpayer is resident in Germany at the moment he moves abroad. This is because under most double taxation treaties (DTT), the state of residence has the right of taxation on the capital gain from the sale of privately held shares in a corporation (Art. 13 para. 5 OECD-MC), so that Germany loses the right of taxation in principle, when the taxpayer moves abroad. However, the provisions of sec. 6 AStG go beyond the purpose of a final taxation of the hidden reserves generated in Germany and display an excessive taxation tendency.

  2. Personal Applicability of the Exit Tax

    Legacy System

    According to the current law, the taxpayer must have been subject to unlimited tax liability in Germany for at least 10 years – in the course of his entire life up to his exit – in order to be subject to the exit tax at all. The first time this 10-year period is exceeded, a "general" obligation to pay exit tax on any future departure is triggered.

    Future System according to the Draft Bill

    The draft bill provides for a reduction of the period of unlimited tax liability required before the exit from 10 to 7 years. This means...

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