ATAD Implementation Act - Changes in Exit Taxation

This blog post is the second part of the series on the ATAD Implementation Act. You can find the previous blog post regarding so-called hybrid mismatches at Link.

ATAD Implementation Act and the Exit Taxation according to Section 6 German Foreign Tax Act (Außensteuergesetz, AStG)

Due to the ATAD Implementation Act, the so-called exit taxation according to section 6 AStG has been subject to some significant changes.

The group of taxpayers who may be subject to exit tax has been modified. In the past, an unlimited tax liability in Germany of at least ten years was required. From now on, taxpayers who have been subject to unlimited tax liability in Germany for at least seven years within a period of twelve years are subject to the exit taxation.

As before, taxpayers are subject to exit taxation if they hold shares of at least 1% in domestic or foreign corporations. But caution is needed: In case a partnership has opted for the taxation of corporations through the German Act for Modernisation of the Income Tax Act (Körper-schaftsteuerrecht-Modernisierungsgesetz, KöMOG) the partnership would also be subject to exit taxation.

Even after the reform of section 6 AStG, the most frequent cause of the exit taxation is the exit/move of the individual to abroad. In addition, however, the transfer of a significant participation without a payment to persons not subject to unlimited tax liability leads exit taxation. Also, the exclusion or restriction of German tax law causes exit taxation.
The assessed tax can be deferred at the taxpayer's application so that the tax can be paid in seven equal annual instalments. Basically, the tax office will require a security deposit for this. Whereas in the old regulation a distinction was made between departures to an EU/EEA country and those to a third country, the deferral regulation (Stundungsregelung) now applies in any case. As a result, the regulation of indefinite deferral without security deposit for the exit to an EU/EEA country will not be applicable anymore.

Due to the ATAD Implementation Act the so-called return regulation was also adjusted. According to the return regulation, the tax claim generally lapses if the taxpayer re-establishes a residence in Germany within seven years and becomes subject to unlimited tax liability again. In the past, this time limit was only five years. The time limit can be extended to a maximum of twelve years if the "intention to return" persists. What at first glance appears to be a relief, however, turns out to be a disadvantage for those who have moved to an EU/EEA country: Under the previous regulation, these taxpayers could return without any time limit.

The new regulations will apply as of the 2022 assessment period.

Relevance in practice

The ATAD Implementation Act has also modified and restructured the rules on exit taxation. In contrast to exits to a third country, the new regulation entails disadvantages in case of an exit to an EU/EEA country. This should be considered when planning an exit out of Germany.

Dr Marion Frotscher
Maximilian Steffen