Update on Exit Tax for Investment Shares

The New Rules: An In-Depth Review

Below, we outline the key aspects of the new regulation for holders of investment shares who leave or transfer their shares outside of Germany.

Introductory Example

A taxpayer has paid into an ETF savings plan with €2,000 per month for 22 years. After 22 years, they have acquisition costs totaling €528,000. The value of his ETF shares now amounts to €828,000. If they leave Germany and move abroad, the increase in value of €300,000 is generally subject to the new taxation. In the usual case of an equity fund, income tax of more than €50,000 would become due – without being able to pay it out of an actual cash inflow (dry income).

Affected Investment Shares

The affected investors are private individuals in Germany who have acquired investment shares with a purchase price of at least €500,000, such as ETFs, equity funds or bond funds, or at least 1% of the shares of an investment fund (Section 19, paragraph 3, sentence 2 of the German Investment Tax Act (Investmentsteuergesetz) in its new version, InvStG nF). Private investors who have invested in (rarer) so-called special investment funds are also affected, regardless of the amount of their share (Section 49, paragraph 5, sentence 1, InvStG nF). Both shares held directly and those held through asset-managing partnerships are included.

Affected Investors and Taxation Triggers

To be subject to the exit tax, the person leaving must have lived in Germany for at least seven years in the 12 years prior to leaving or must have had a residence in Germany. A move abroad is often deemed to have occurred when the last residence in Germany is given up.

The exit tax is also due if investment shares are given away or inherited and the recipient does not live in Germany. According to the new regulation, tax is also due on gratuitous transfers to persons who are not subject to unlimited tax liability.

Additionally, the tax must be paid, among others, by individuals who move their center of vital interests abroad – even if they retain their residence in Germany.

Similar rules already apply to business investors, such as entrepreneurs, and corporations that hold their investments in business assets, independently of the new Annual Tax Act 2024. For these investors, nothing will change – and they must continue to consider any potential exit taxes.

The Exit Tax Is 25% of the Increase in Value Since the Acquisition of Shares

The exit tax amounts to 25% in general of the capital gain since the acquisition. The person leaving must therefore pay the taxes from their own funds if necessary. The taxable capital gain is reduced both by advance lump sums taxed in previous years and by the partial exemption of 30% for equity funds.

The taxpayer must declare the “exit gain” in their own tax return. No (automatic) final withholding tax is levied.

Possible Exclusions

Investors can ensure that the exit tax does not apply or is only payable in installments. Ideally, investors spread their investments across various investment funds at an early stage so the acquisition costs of a single investment are below €500,000 and do not exceed 1% of the investment shares issued. If this is not or no longer possible, investors may consider transferring their investment shares into domestic business assets or transferring them to a foundation. Another possibility is that the investor “retrieves” the investment shares back to the tax authority in Germany within seven years of moving away or transferring them abroad, for example by moving back to Germany and becoming subject to unlimited tax liability.

If none of these approaches leads to a viable solution, delaying the exit or even the actual sale of the investment shares can be considered. In this case, the tax could at least be paid from the proceeds of sale. In case the tax is not due because of an actual sale, an application can also be filed to defer the tax and to pay it in seven equal annual installments. However, according to the current version of this statute – the legality of which is highly controversial – the application for deferral is usually only granted in return for the provision of security.

Applicability to Custodian Banks, Investment Funds, and Capital Management Companies

The new regulation does not affect custodian banks, investment funds, or financial investment management companies. Custodian banks do not have to consider additional withholding taxes.

Effects on Tax-Optimized Asset Structuring

The new exit tax puts investments in investment funds at a tax disadvantage compared to direct investments in shares. This is because shares (e.g., in a limited liability company) are only subject to an exit tax if the investor holds at least 1% of the company’s capital – acquisition costs of €500,000 alone are not sufficient. This must be considered in strategic tax planning.

Reasons for the Change: Equal Treatment With Shareholders

With the new regulation, the legislator wants to treat holders of investment shares equally with holders of shares in corporations. According to the explanatory memorandum (Bundestag),  a taxpayer could transfer significant corporate shares of at least 1% of the corporation’s equity interest (e.g., shares in a limited liability company) to an investment fund and then acquire all of the investment shares. This taxpayer would not have to pay tax if they moved away – in contrast to the holder of the significant corporate shares. In this context, it is incomprehensible that acquisition costs of at least €500,000 also suffice for the new exit tax, because the amount of the acquisition costs is irrelevant for the previous regulation.