Removal of the exit tax only if the intention to return is substantiated

Background: The so-called “exit tax” applies if taxpayers who have been subject to unlimited income tax liability for at least ten years and hold shares in domestic or foreign corporations with a minimum shareholding of 1% move their centre of life abroad. As a result, any hidden reserves contained in the shares are subject to the so-called exit tax in the amount of 60% of the notional capital gain, even without a sale. In the case of a temporary absence, the exit tax is waived retroactively, provided that the return is made within five years and the intention to return is substantiated at the time of withdrawal. In the event of a move to EU countries, the exit tax can be deferred interest-free until the actual sale, irrespective of the intention to return.

Facts: The plaintiff moved to Dubai, giving up his domestic residence. At the time of his departure, the plaintiff held interests in several corporations with a minimum stake of 1%. The plaintiff returned to Germany two years after his departure. The plaintiff did not report the abandonment of his residence to the tax office until about 2 years after the move, pointing out that this was only a temporary absence.

The tax office taxed the fictitious capital gains in the year of departure within the scope of the departure taxation. The plaintiff appealed against this with the argument that due to his return to Germany within five years the taxation should be retroactively revoked. The tax office objected to this on the grounds that the plaintiff had not substantiated his intention to return when he left.

Reasons: The Münster Regional Court dismissed the complaint directed against this, but allowed the appeal to the Federal Court of Finance (BFH) because of the fundamental significance of the case. The complainant had not substantiated that at the time of his departure he had the intention to return to Germany at a later date. The retroactive elimination of the withdrawal taxation presupposed that the taxpayer would not only become subject to unlimited tax liability again within five years, but would also have to prove that the termination of the unlimited tax liability was based on a merely temporary absence. This is a subjective element in the sense of an intention to return at the time of departure.

The FG was of the opinion that the retroactive abolition of the exit tax in the case of an only temporary absence does not apply to failed or “aborted” emigrations. The intention to re-establish unlimited tax liability does not have to be notified to the tax office at the time of departure, but can only be made credible upon return. In the event of a dispute, however, the plaintiff has not succeeded in establishing this credibility.

Note: In order to substantiate the intention to return, it should be documented within the framework of the provision of evidence that, if applicable

the relocation is due to a temporary employment relationship or project assignment abroad,
the real estate previously used is only transferred to a tenant for a limited period of time,
the domestic infrastructure (mobile phone contract, bank account or car) is maintained
maintaining membership of the association, or
the domestic assets are not sold.

Finally, it should also be noted that within the framework of the so-called ATAD Implementation Act with effect from 2021 (tightening up), it is planned to replace the previous interest-free deferral of the exit tax in EU cases by an interest-free deferral over 7 years – also applicable to third-country moves – which will only be granted in instalments over 7 years. In return, the previous proof of intention to return in the case of third country removals is to be dropped.