Exit taxation under § 6 of the Foreign Tax Act (AStG) is probably the most important tax hurdle for entrepreneurs who leave Germany. Anyone who holds substantial shares in corporations risks the taxation of hidden reserves on departure – even without an actual sale. This article explains the conditions, calculation and structuring possibilities.
Exit taxation treats the departure of a shareholder as if they had sold their participation at the time of departure. The legislator thereby wishes to prevent value increases arising domestically from being withdrawn from German taxation through a relocation of residence abroad. For clients who wish to relocate their residence to Cyprus, exit taxation is therefore a central examination point of every planning.
When does exit taxation apply?
Exit taxation under § 6 AStG requires that a natural person holds shares in a corporation within the meaning of § 17 EStG – i.e. a participation of at least one percent – and was subject to unlimited tax liability in Germany for at least seven of the last twelve years. If this person relocates their residence abroad and the unlimited tax liability thus ends, the law deems a disposal of the shares at fair value.
- Legal basis§ 6 AStG in conjunction with § 17 EStG
- Participation thresholdat least 1% in a corporation
- Prior-holding period7 of the last 12 years subject to unlimited tax liability
- Triggerend of unlimited tax liability (departure)
- Assessmentnotional disposal gain at fair value
How is exit taxation calculated?
In exit taxation, the notional disposal gain is determined as the difference between the fair value of the shares at the time of departure and the original acquisition costs. This gain is subject to the partial-income method, in which 60 percent of the gain is subjected to the personal income-tax rate. The catch and at the same time the hardship: no actual sale proceeds flow with which the tax could be settled – the tax arises solely through the move.
Deferral and lapse of the tax
The legal position on exit taxation has tightened. While formerly, on a departure within the EU/EEA, an interest-free, unlimited deferral was granted, this generous rule has largely fallen away. Since the reform through the ATAD Implementation Act, the tax in principle becomes immediately due but can, on application, be paid in seven equal annual instalments, regularly against the provision of security. A complete intention to return within seven years (extendable to twelve) can lead to the lapse of the tax, provided the shares have not been disposed of in the meantime.
| Constellation | Consequence |
|---|---|
| Departure, permanent | tax payable in 7 annual instalments, usually against security |
| Return within 7 (max. 12) years | tax can lapse, provided no disposal occurs |
| Actual disposal abroad | deferral/instalments end, remaining amount due |
| Substantial profit distribution | can trigger a pro-rata revocation of the deferral |
The formerly usual permanent interest-free deferral on a departure within the EU does not continue to exist in this form. Anyone who includes exit taxation in their planning must not rely on outdated information. The current legal position in principle provides for instalment payment over seven years.
Structuring approaches with exit taxation
Exit taxation can be defused in many cases through forward-looking structuring. A widespread approach is the contribution of the shares into a suitable structure before the departure, such as through a share-for-share exchange under the reorganisation tax law. The establishment of a domestic permanent establishment to which the shares remain functionally allocated can also avoid the taxation, because the shares are then not withdrawn from the German taxation access. The choice of the right timing also plays a role, since the fair value of the shares fluctuates.
Exit taxation can be structured most effectively in the years before the planned departure, not at the last moment. Anyone who is considering a relocation of residence to Cyprus should have the participation structure checked early. Certain restructurings unfold their effect only after the expiry of blocking periods, which is why a lead time of several years is ideal.
Exit taxation and the double-taxation treaty
On departure to Cyprus, the question arises of how exit taxation interplays with the double-taxation treaty between Germany and Cyprus. The treaty in principle allocates the taxation right for disposal gains from shares to the state of residence. If the shareholder who has moved to Cyprus later sells their participation there, in many constellations the Cyprus tax exemption for gains from the sale of securities applies. German exit taxation, however, attaches to the departure itself and is independent of the later actual disposal – a circumstance that makes the careful prior planning all the more important.
Significance for the location choice Cyprus
Despite the exit taxation, Cyprus remains an attractive destination. Once the departure hurdle has been overcome, entrepreneurs benefit from the tax exemption of future disposal gains from securities, the favourable dividend taxation via the Non-Dom status and the lapse of inheritance tax. Exit taxation is thus a one-off entry hurdle behind which lies a permanently advantageous tax environment. Decisive is to take this hurdle with the right structure and the right timing, instead of ignoring it and later standing before unexpected claims.
In advisory practice, exit taxation is therefore always considered an integral part of the overall strategy. The isolated question "how high is the tax?" falls short – decisive is how the departure, the participation structure and the Cyprus tax environment fit into a coherent whole that lasts long-term.
Valuation of the shares on departure
A central and often-underestimated aspect of exit taxation is the valuation of the shares. Decisive is the fair value at the time of departure, which for non-listed companies must regularly be determined by a valuation procedure. Frequently the simplified earnings-value method is applied, which capitalises the sustainable annual earnings with a factor. Since the value so determined determines the assessment base and thus the tax burden, the valuation is of considerable significance. A well-founded, well-justified company valuation can noticeably influence the notional tax burden and should therefore not be left to chance but carefully prepared professionally.
If the company value fluctuates over time, the time of departure can also play a role. Anyone who completes the relocation in a phase of lower valuation reduces the notional assessment base. Such considerations must, however, always be brought into harmony with the entrepreneurial and personal goals and must not be driven by tax alone.
Exit taxation in the overall strategy
Anyone who classifies exit taxation correctly considers it not as an obstacle but as a calculable part of a long-term strategy. The one-off burden on departure stands against the lasting advantage of the Cyprus tax environment – tax-free disposal gains from securities, favourable dividend taxation and absent inheritance tax. In many cases, the initial tax burden amortises over the years through the ongoing savings. Decisive is that exit taxation is included in the planning early, accompanied professionally and connected with the choice of the right timing and the appropriate structure. Thus a seemingly off-putting hurdle becomes a manageable step on the way to a permanently advantageous tax positioning.
Exit taxation under § 6 AStG in detail
German exit taxation under § 6 of the Foreign Tax Act secures the German taxation right to hidden reserves before it is lost through the departure. It applies if a person who was subject to unlimited tax liability for at least seven of the last twelve years holds a participation of at least 1 percent in a corporation in their private assets and relocates their residence abroad. A notional disposal gain is taxed, as if the shares had been sold at fair value – although in fact not a single euro has flowed.
The liquidity problem
Precisely because no real sale takes place, exit taxation can lead to a liquidity problem: a tax arises on a merely arithmetical gain. With valuable participations, six-figure amounts can quickly become due without corresponding means being available. A forward-looking planning is therefore indispensable.
- Triggerparticipation ≥ 1% in a corporation
- Prior holding7 of the last 12 years subject to unlimited tax liability
- Assessmentnotional disposal at fair value
- Payment7-year instalment payment (§ 6 para. 4 AStG)
- Returnretroactive lapse on return within 7 years
Instalment payment and the returnee rule
Since the ATAD Implementation Act 2022, the formerly possible interest-free, unlimited deferral for departures to EU and EEA states has fallen away. In its place comes an instalment payment over seven years. Particularly significant is the returnee rule of § 6 para. 3 AStG: if the person becomes subject to unlimited tax liability in Germany again within seven years and has not disposed of the shares in the meantime, exit taxation lapses retroactively; instalments already paid are refunded. With a departure intended from the outset as only temporary, the period can be extended to up to twelve years.
New from 2026: investment-fund units
An essential innovation concerns units in investment funds. Via an addition in the Investment Tax Act (§ 19 para. 3 InvStG), exit taxation is extended to certain investment-fund units: here too, the departure counts in future as a notional disposal. The reliefs – returnee rule and instalment payment – are to apply accordingly. Anyone who holds larger fund holdings should include this extension in their planning.
Exit taxation can be structured best with three to five years' lead time. Anyone who plans only when the move is already fixed risks an immediately due, high tax burden without corresponding liquidity. The tax analysis should stand at the beginning, not at the end of the moving process.
Structuring approaches
For exit taxation, various structuring approaches exist that are each to be carefully examined. The returnee rule is suitable for temporary stays abroad. For permanent departures, the contribution of the shares into a structure, the transfer by way of gift to relatives remaining in Germany or the use of a family foundation come into consideration. For departures to Switzerland, the Federal Fiscal Court recognised in the Wächtler case a permanent, interest-free deferral. Which route fits depends on the individual case and belongs in a well-founded planning.
The extended limited tax liability
Alongside exit taxation under § 6 AStG, the extended limited tax liability under § 2 AStG is to be observed. It can make German nationals who move to a low-tax area and retain substantial economic interests in Germany continue to be subject to extended tax liability for a period after the departure. The legislator thereby wishes to prevent German income from being withdrawn from taxation through the mere departure.
For the planning this means: not only the hidden reserves in participations but also continuing economic interests in Germany should be considered. Anyone who consistently reduces these reduces the connecting factors and thus the risk of a trailing tax liability.
| Provision | Subject |
|---|---|
| § 6 AStG | notional disposal of participations ≥ 1% |
| § 2 AStG | extended limited tax liability after departure |
Gift and usufruct
A widespread structuring approach is the transfer of shares before the departure. If shares are gifted to relatives remaining in Germany, one's own participation may fall under the 1-percent threshold, so that exit taxation does not apply. The gift itself triggers no income tax on hidden reserves but can trigger gift tax – for close relatives, however, high allowances exist. Via a usufruct reservation, future income can be secured while the ownership passes. Each of these arrangements needs to be carefully examined.
The family foundation as a structuring instrument
An effective instrument in dealing with exit taxation can be the family foundation. If participations are contributed into a foundation in good time and under the applicable conditions, the attribution of the shares changes, which can influence the triggering of exit taxation on the later departure of the natural person. The structuring is demanding and must take into account the tax consequences of the contribution itself as well as the recognition of the foundation.
Important is that the foundation has genuine substance and the assets are withdrawn from access; otherwise the attribution under § 15 AStG threatens. The family foundation is therefore not a panacea but a building block that must be carefully and forward-lookingly planned.
Contribution, any blocking periods and the time of departure must be precisely coordinated. A structuring implemented in the wrong order can trigger unwanted tax consequences. The planning belongs laid out early and as a whole.
Worked example: the notional disposal gain
The effect of exit taxation is shown by an example. A person holds 100 percent in a GmbH whose fair value is €2,000,000, at acquisition costs of €500,000. On departure, a notional disposal gain of €1,500,000 arises, which is subject to taxation under the partial-income method – without a real sale having taken place. The resulting tax can be paid in instalments over seven years; on return within the period it lapses retroactively.
The example illustrates the liquidity problem: a high tax becomes due on a merely arithmetical gain. Precisely for this reason, the forward-looking structuring – such as via the returnee rule, a transfer or a foundation – is so important.
The level of the exit taxation depends on the fair value of the shares. A well-founded company valuation should take place early, since it determines the assessment base and avoids dispute with the tax office.
Conclusion
Exit taxation under § 6 AStG is the central hurdle on the departure of entrepreneurs from Germany. It taxes hidden reserves in substantial participations without an actual sale taking place. Anyone who plans the move to Cyprus should check the structure of their participations early and carefully weigh the structuring possibilities – from the contribution via the permanent establishment to the return rule. With forward-looking planning, the hurdle can be mastered.
This article serves general information only and does not constitute individual tax, legal or investment advice. All tax information refers to the 2026 legal footing in Cyprus and may change. Florian Wilk is a Director and not a tax adviser; technical tax and structural work is carried out by the CMC team and cooperating law firms.