Exit taxation unlawful - what the Wächtler judgement means.
A judgement from September 2023 states:
The tax is unlawful in its current form.
What does this mean for relocating entrepreneurs and private individuals?
There is a lot to consider from a tax perspective......
A particular risk in this context is the so-called exit taxation in accordance with Section 6 of the German Foreign Tax Act.
The shareholder must then pay tax on the appreciation in the value of his investment. This is despite the fact that he does not receive any capital gains from which he could pay the tax.
In practice, this often poses considerable liquidity problems for the entrepreneurs concerned.
What's more, exit taxation can apply even if the shareholder merely moves the centre of their life abroad.
To give an example:
If an entrepreneur moves from Munich to Zurich, this triggers the exit tax.
However, if the same entrepreneur moves from Munich to Berlin, this does not happen.
Exit taxation in special cases🇨ðŸ‡
A move to Switzerland was a special case.
Paragraph 6 of the German Foreign Tax Act did not grant a perpetual deferral for relocations to Switzerland before 1 January 2022.
A German taxpayer by the name of Wächtler, who had moved to Switzerland in 2011, contested this.
After a largely unsuccessful appeal, he took legal action before the Baden-Württemberg Fiscal Court against the fact that the exit tax was assessed in his income tax assessment - the case has since become known as the Wächtler proceedings.
The German exit tax violates the Agreement on the Free Movement of Persons of 21 June 1999 between the EU and Switzerland.
This agreement - similar to the European Treaties - grants freedom of establishment to self-employed natural persons, among others.
Within the scope of the Agreement on the Free Movement of Persons, these taxpayers must therefore not be prevented from moving to Switzerland.
The ECJ ruled in its judgement from February 2019:
Germany can indeed use the income tax assessment notice to determine the tax that would have been incurred if the departing taxpayer had sold his shareholding at the time of his departure.
However, according to the European Court of Justice (ECJ), a permanent and interest-free deferral of this tax must be granted for relocations to Switzerland.
Otherwise, the taxpayer will suffer an unjustified liquidity disadvantage as a result of their move.
However, Germany may demand a security deposit for the deferred tax.
Why could the special case of Switzerland bring perpetual deferral?
Following an appeal by the tax office, the Federal Fiscal Court has now overturned the decision of the Baden-Württemberg Fiscal Court in its ruling of 6 September 2023 (I R 35/20) on procedural grounds and dismissed the case.
It is correct to assess the exit tax with a tax assessment notice on the date of departure, but the tax assessed in this way must be deferred permanently and without interest - even without an explicit legal basis.
Facts:
Taxpayers who have moved to Switzerland and fall within the scope of the Agreement on the Free Movement of Persons are entitled to an interest-free and indefinite deferral of the exit tax.
Against the background of the freedom of movement rights contained in the European Treaties for people moving to EU or EEA states.
The administration would have to grant a permanent and interest-free deferral.
The deferral can also be granted retroactively, which may lead to a repayment of the tax.
Nevertheless, there is a high probability that the tax authorities will utilise the option opened up by the European Court of Justice (ECJ) to make the granting of the "perpetual deferral" dependent on the provision of security.
Conclusion:
In its judgement of September 2023, the Federal Fiscal Court clearly stated that the German exit tax in its current form violates European law.
In order to establish a legally compliant situation, the tax authorities must grant taxpayers moving away a permanent and interest-free deferral of the exit tax - if necessary against a security deposit.
This also means that if the tax has already been paid, it must be repaid. Affected taxpayers should submit a corresponding application to the tax office.
Disclaimer: The above article is based solely on my independent research and does not constitute legal advice.
I recommend close cooperation with trustees and lawyers specialising in international taxes.
I will be happy to assist you in finding the right contacts and people for your needs.
Manuela Olmesdahl
phone / whatsapp: +41 76 376 61 11
