Moving abroad as a deemed sale: who is caught, what triggers it and how the gain arises

Jonas Reuter founded a software GmbH in 2014 with 25,000 € of share capital and still owns every share. An investor has just offered him 2,400,000 € for the whole company. This summer Jonas plans to move to Lisbon with his family, and he has no intention of selling. His tax adviser stops him anyway: the move makes the tax office treat his shares as if he had sold them on the day he left.

A sale nobody agreed to

Section 6 of the Foreign Tax Act (AStG) reaches a gain the shareholder never held in hand. The law treats certain events as if the shares had been sold, and it prices that notional sale at fair market value. The section's heading calls this an increase in wealth: hidden growth built up during the years in Germany.

The reasoning is straightforward. As long as a shareholder has unlimited tax liability here, Germany can tax a later sale. Leaving the country can remove or restrict that right. Section 6 AStG therefore captures the value that has grown so far at the very moment Germany is about to lose its grip on it.

This is awkward, because tax arises without any cash. There is no purchase price out of which the tax could be paid. That is why the section comes with an instalment scheme, a return rule and ongoing reporting duties, all covered in the second module. This first module settles who is caught and what exactly is taxed.

The provision was rewritten from the ground up. Under § 21(1) no. 1 AStG the current version applies for income tax for the first time to the 2022 assessment year. Everything this course describes refers to that version in force. Older departures follow transitional rules, which the last section of this module places in context.

Who is caught: seven out of twelve years

Section 6 AStG applies only to individuals with unlimited tax liability. Under § 1(1) of the Income Tax Act (EStG) that means anyone with a residence or habitual abode in Germany. Nationality does not decide it: a French citizen living in Cologne is caught, while a German who has lived in Chile for decades usually is not.

Under § 8 of the Fiscal Code (AO), a person has a residence where they hold a home in circumstances suggesting they will keep and use it. Ending the lease on the Cologne flat or letting it out for good gives it up. Keeping it furnished and staying there regularly risks keeping a German residence, and so unlimited liability.

Habitual abode is defined in § 9 AO. An uninterrupted stay in Germany of more than six months always counts as habitual abode from the first day, and short breaks are ignored. Purely private stays for visits, holidays or health cures that last no longer than a year are the exception.

A minimum duration is added on top. Under § 6(2) sentence 1 AStG the person must have had unlimited tax liability for at least seven years in total during the twelve years before the triggering event. The words in total matter: the seven years may be interrupted, and what counts is the sum inside that window.

Someone who came here at thirty and left after six years is outside the rule. Someone who lived here for eight of the last twelve years, even with a year abroad in between, is caught. The window is counted backwards from the actual event, meaning the move, the gift or any other loss of the German taxing right.

For shares received as a gift or inheritance, sentence 2 extends the count. On a transfer without consideration the predecessor's unlimited tax liability counts too, and after several such transfers in a row, that of every predecessor. Years in which the recipient and the predecessor were both fully liable at the same time are counted only once under sentence 3.

Sentence 4 closes a gap for returnees. If the tax claim has lapsed under the return rule of subsection 3, the person and their successors count as caught without a new calculation of years. Someone who has come back once cannot argue on a second departure that they have not yet spent seven years in the country since returning.

Which shares are meant

For its subject matter § 6 AStG refers to § 17(1) sentence 1 EStG. It covers shares in corporations in which the person held the minimum stake set there at some point in the last five years. The course on selling shares explains that threshold; anyone below it is outside § 6.

What counts as a share is listed in § 17(1) sentence 3 EStG: stock, GmbH shares, profit participation certificates, similar holdings and rights to acquire them. Subsection 7 adds shares in cooperatives. Section 17 is not limited to companies with a German seat, and § 6 takes over this notion of shares unchanged.

The typical person affected is therefore not the small investor with a share portfolio but the founder of a GmbH, the shareholder-managing director, the start-up employee with a larger stake or the heir to a family business. Young companies in particular often grow fast in value while paying out little, leaving scant cash in the owner's private account.

The section also carries a proviso. It applies only in so far as the Income Tax Act, the Corporation Tax Act and the Reorganisation Tax Act do not provide otherwise. This course therefore deals exclusively with shares held as private assets. Anyone holding shares as business assets needs to check the rules that govern them separately.

Three triggers and their timing

The most common trigger, under subsection 1 sentence 1 no. 1, is the end of unlimited tax liability because the residence or habitual abode is given up. Under sentence 2 no. 1 the deemed sale occurs at the moment that liability ends. Keeping a German home next to the new one abroad ends it only once that home goes too.

The second trigger needs no move at all. If a shareholder transfers shares without consideration to a person who does not have unlimited tax liability, that too counts as a sale, taking effect when the transfer happens. It covers a gift to a child studying abroad as much as shares passing to an heir who lives outside Germany.

Succession planning can stumble here. Besides the gift tax question, which follows its own rules, the donor incurs income tax on the increase in value. Under subsection 1 sentence 3 the recipient is treated as having acquired at fair market value in so far as that tax has been paid, and otherwise takes over the original acquisition costs.

The third trigger is a catch-all. Under no. 3 it is enough that Germany's right to tax the gain from a sale of the shares is excluded or restricted, unless no. 1 or no. 2 already applies. The deemed sale then takes place immediately before the moment at which that exclusion or restriction takes effect.

All three triggers lead to the same result: the shares are treated as sold at fair market value. According to the wording, the destination country makes no difference. The version in force draws no line between a move to Austria, to Switzerland or to Canada, and it has no special rule for member states of the European Union.

How the deemed gain is computed

Because § 6 assumes a sale under § 17, the computation follows § 17(2) EStG. There the gain is the amount by which the sale price, after deducting selling costs, exceeds the acquisition costs. On an exit the fair market value of the shares at the relevant moment takes the place of the price.

Under § 17(2a) EStG acquisition costs include incidental costs and subsequent acquisition costs. The law names open or hidden capital contributions and losses on loans and guarantee recourse claims caused by the shareholder relationship. Anyone who topped up the company over the years should be able to document each payment, because every proven euro lowers the deemed gain.

Fair market value is the tricky part. For stock traded on the regulated market of a German exchange, § 11(1) BewG takes the lowest price quoted on the valuation date. GmbH shares have no quoted price. For them § 11(2) BewG applies, and this valuation is where disputes arise most often in practice.

Under § 11(2) BewG fair market value is first derived from sales between unrelated parties that took place less than a year earlier. A funding round shortly before the move can therefore fix the value. Without such a sale it is determined on the basis of expected earnings or another recognised method that is also customary outside tax law.

The partial income method then applies: § 3 no. 40 sentence 1 letter c EStG expressly names the fair market value under § 17(2) too. As a result, sixty percent remains taxable. How the method and the allowance of § 17(3) work in detail is shown with figures in the course on selling shares.

The taxable part enters the taxable income of the year in which the triggering event occurs, which for a move is the year of departure. It is taxed at the personal income tax rates, not at the separate flat rate for investment income. With gains of this size, much of it falls into the top rate band.

Moving to Germany: the value brought along

The mirror image for people moving in is set out in § 17(2) sentence 3 EStG. If the shares already belonged to a person when their unlimited liability in Germany began, and the state they came from taxed the growth up to then with a tax comparable to § 6 AStG, a later sale uses the value that state applied.

That foreign value replaces the acquisition costs, but only up to fair market value. The burden of proof lies with the person selling. Anyone moving to Germany from a state with its own exit tax should therefore keep that state's assessment notice safe. Without it, only the original acquisition costs count on a later sale.

For people whose German exit tax lapses under the return rule of § 6(3) AStG, § 17(2) sentence 4 EStG expressly rules out this approach. Someone who comes back after a temporary absence cannot rely on a value that the interim state of residence applied when levying its own exit tax.

Moving out before 2022: the old version

If a trigger under § 6(1) in a version valid up to 30 June 2021 occurred before 1 January 2022, § 21(3) sentence 1 AStG keeps the version in force on 30 June 2021, even beyond the end of 2021. Someone who left in 2020 is therefore still handled under the old law.

Legacy cases are not left untouched. Under sentence 2, old deferrals are also revoked to the extent that dividends or repayments of capital add up to more than a quarter of the fair market value at departure, and the old return rule loses its effect to that extent. Sentence 3 applies this to payments made after 16 August 2023.

This course explains only the version now in force. Anyone who left before 2022 and still has a deferral or an open return period under the old law needs to read that earlier text, which is not presented here. The transitional rule does show, however, that lawmakers tied legacy cases to the new quarter limit as well.