A tax on a sale that never happened
That is the sentence people get stuck on, and it is literally true.
Section 6 of the Foreign Tax Act treats the departure as though the shares had been sold at open market value at the moment of the event. There is no buyer, no price and no money. The tax arises anyway.
The thinking behind it is understandable. For as long as someone is subject to unlimited German tax liability, Germany can tax the growth in value of their shares when they eventually sell. Once they leave, it loses that grip. So the rule pulls the grip forward to the last day on which it still exists.
What remains for the person concerned is a bill for a gain they are not holding.
Who it hits
Two conditions have to come together.
The person. Under subsection 2 they must have been subject to unlimited tax liability for at least seven years within the last twelve. Anyone who only recently moved to Germany falls outside it.
The shares. They must be shares within the meaning of section 17(1) sentence 1 of the Income Tax Act, meaning a holding of at least 1 per cent in a company. It is enough that this holding existed at any point within the last five years. Whether the company is German or foreign makes no difference.
Three triggers, and moving is only one
Subsection 1 names three events:
- The end of unlimited tax liability, meaning giving up residence and habitual abode. This is the case everyone has in mind.
- A gratuitous transfer to a person not subject to unlimited liability. A gift to a child living abroad is enough.
- The exclusion or restriction of Germany’s right to tax for other reasons.
The second and third are routinely overlooked because nobody moves anywhere. The tax arises all the same.
Paying in seven instalments
Subsection 4 provides, on application, for seven equal annual instalments. They are interest-free but are granted as a rule only against security. The first instalment is due within one month of the assessment being issued.
Two things matter here. Instalments are not automatic, they have to be applied for. And the security is the hurdle that trips people up in practice: someone in the middle of emigrating rarely has anything spare to pledge.
The return rule
Under subsection 3 the claim falls away if unlimited tax liability resumes within seven years. The tax office may extend that window by no more than five years, so twelve in total.
Anyone leaving with the intention to return should document that from the outset. Remembering it in year seven is too late if the intention was never recorded anywhere.
The mistake that comes up most often about Cyprus
Up to and including 2021 there was an unlimited interest-free deferral for departures within the EU and the EEA. Because Cyprus is in the EU, moving there looked like something whose tax consequences could be postponed indefinitely.
That rule has gone. Since then the seven-year instalment plan applies to every destination alike, and whether the destination is in the EU changes nothing.
Older guides still list the old EU deferral. Anyone building a plan on it is counting on a postponement that no longer exists.
What this has to do with Cyprus, and what it does not
Exit taxation is not a Cyprus tax. It is not levied in Cyprus, not declared in Cyprus and appears in no Cyprus statute. It arises in the old country, and usually before the move.
That is why it goes missing from comparison calculations. Putting Cyprus and German rates side by side compares the ongoing burden. Exit taxation is not an ongoing burden but a one-off item at the start, and it can exceed the savings of several years.
What applies in Cyprus afterwards is in the overview of taxes in Cyprus, and the order of the steps is in the guide to relocating to Cyprus.
What we could not verify
- The amount in an individual case. It hangs on the open market value of the shares, and establishing that is a procedure of its own. There is no rule of thumb.
- Whether and when fund units are caught. Investment units are governed by separate rules outside the Foreign Tax Act. We have not examined them and therefore quote no figures.
- What security the tax offices require in practice. The statute says “as a rule”, not what suffices.
- The position outside Germany. Austria and Switzerland have rules of their own, which we do not reproduce here.
Who you need for this
This is German tax law, and we are a Cyprus software company. What we can do is put someone beside you who sees both sides, meaning the departure in the old country and what comes after it in Cyprus. Tell us in five questions where you stand: Cyprus setup from one place.