Deferral of exit tax - in violation of EU law under old and current legislation?

If a tax­payer who is sub­ject to un­li­mited in­come tax lia­bi­lity in Ger­many gi­ves up his re­si­dence or ha­bitual abode in Ger­many and holds a stake of at least 1% in a cor­po­ra­tion (§ 17 (1) sen­tence 1 EStG) at that time, the in­crease in va­lue of these sha­res is sub­ject to in­come ta­xa­tion in Ger­many. The re­sul­ting so-cal­led exit tax is ge­ne­rally - like in­come tax as a whole - due for pay­ment fol­lo­wing the tax as­sess­ment for the year in which the re­lo­ca­tion took place.

Since the tax bur­den ari­ses wi­thout a real in­flow of funds, ex­ten­sive de­fer­ral re­gu­la­ti­ons have been pro­vi­ded for, which in­iti­ally ap­plied de­pen­ding on the state of re­lo­ca­tion and were si­gni­fi­cantly mo­di­fied for re­lo­ca­ti­ons since 01 Ja­nu­ary 2022. A de­ci­sion of the BFH (Fe­deral Fis­cal Court), fol­lo­wing a pre­ce­ding ECJ (Eu­ro­pean Court of Justice) judg­ment, now sug­gests, howe­ver, that a com­pre­hen­sive de­fer­ral of exit tax must al­ways be gran­ted for Eu­ro­pean le­gal re­asons.

The case before the BFH

A tax­payer with un­li­mited tax lia­bi­lity in Ger­many mo­ved to Swit­zer­land in 2011. At the time of re­lo­ca­tion, he held 50% of sha­res in a cor­po­ra­tion in Swit­zer­land.

The tax of­fice took into ac­count the in­crease in va­lue of the sha­res at the time of re­lo­ca­tion as a ta­xable no­tio­nal gain and sub­jec­ted it to Ger­man in­come tax af­ter § 6 (1) AStG for­mer ver­sion (so-cal­led exit tax). Alt­hough § 6 (5) AStG for­mer ver­sion pro­vi­ded for an in­te­rest-free de­fer­ral of exit tax un­til the ac­tual rea­liza­tion of the in­crease in va­lue for re­lo­ca­ti­ons to an EU or EEA mem­ber state, in ca­ses of re­lo­ca­tion to a third coun­try, § 6 (4) AStG for­mer ver­sion al­lo­wed only for an ap­pli­ca­tion-ba­sed de­fer­ral of the exit tax over a ma­xi­mum of five years, usually only against a se­cu­rity de­po­sit. The tax­payer did not ap­ply for de­fer­ral in the form of this ex­ten­ded due date, so the exit tax was fully ta­ken into ac­count in the in­come tax as­sess­ment for 2011.

The tax­payer fi­led a law­suit against this de­ci­sion at the FG Ba­den-Würt­tem­berg (Fis­cal Court of Ba­den-Würt­tem­berg) af­ter an un­suc­cess­ful ob­jec­tion, ar­guing that the ap­pli­ca­tion of the exit tax ac­cor­ding to § 6 AStG for­mer ver­sion vio­la­ted the Free Mo­ve­ment of Per­sons Agree­ment bet­ween the EU and Swit­zer­land. The ta­xa­tion of the hid­den re­ser­ves at the time of re­lo­ca­tion to Swit­zer­land was li­kely to de­ter a per­son from such a move to Swit­zer­land and thus vio­la­ted the right of es­ta­blish­ment. The­re­fore, the exit tax should not ap­ply.

Decision of the ECJ

The FG Ba­den-Würt­tem­berg tur­ned to the ECJ with a re­quest for a preli­mi­nary ru­ling on whe­ther the exit tax pro­vi­ded for in § 6 AStG for­mer ver­sion vio­la­ted the Free Mo­ve­ment of Per­sons Agree­ment with Swit­zer­land. In its judg­ment of 26 Fe­bru­ary 2019 (Case C-581/17, Wächt­ler), the ECJ af­fir­med such a vio­la­tion if - as in the case of the Ger­man re­gu­la­tion - the re­lo­ca­tion of a na­tio­nal of an EU mem­ber state to Swit­zer­land trig­ge­red an exit tax, whe­reas a move wi­thin the same mem­ber state would only lead to ta­xa­tion of an in­crease in va­lue in sha­res of a cor­po­ra­tion when they were rea­li­zed.

The FG Ba­den-Würt­tem­berg then ru­led in fa­vor of the law­suit with a judg­ment of 31 Au­gust 2020 (2 K 835/19). The tax ad­mi­nis­tra­tion tur­ned against this and fi­led an ap­peal.

Judgment of the BFH

The BFH con­clu­des with a judg­ment of 06 Sep­tem­ber 2023 (Ref. I R 35/20) that in the case of a move to Swit­zer­land be­fore 01 Ja­nu­ary 2022, con­trary to the de­fer­ral re­gu­la­tion pro­vi­ded for mo­ves to third coun­tries in § 6 (4) AStG for­mer ver­sion, the exit tax must be de­fer­red by the tax of­fice per­ma­nently and wi­thout in­te­rest. Howe­ver, the BFH con­tra­dic­ted the FG Ba­den-Würt­tem­berg in that the tax of­fice would thus be ge­ne­rally pre­ven­ted from as­ses­sing the in­come tax ari­sing from the exit ta­xa­tion.

In its re­aso­ning, the BFH li­ke­wise re­fer­red to a vio­la­tion of the right of es­ta­blish­ment to be gran­ted ac­cor­ding to the Free Mo­ve­ment of Per­sons Agree­ment. The tax­payer who mo­ved his re­si­dence to Swit­zer­land was ta­xed less fa­vor­ably than a tax­payer who mo­ved wi­thin Ger­many. In the case at hand of re­lo­ca­tion to Swit­zer­land, in­crea­ses in the va­lue of cor­po­rate sha­res were ta­xed im­me­dia­tely, wi­thout being able to re­ceive a de­fer­ral of pay­ment un­til the dis­po­sal of the sha­res. In the do­mestic case, ta­xa­tion only oc­cur­red upon the rea­liza­tion of va­lue in­crea­ses. No ju­sti­fi­ca­tion for this unequal tre­at­ment is ap­pa­rent.

To enable the tax­payer to ex­er­cise his right of es­ta­blish­ment in Swit­zer­land, the BFH con­ti­nued, an in­te­rest-free de­fer­ral of the ent­ire exit tax un­til the time of dis­po­sal is re­qui­red.

Ul­ti­mately, the BFH thus ap­plies the old re­gu­la­tion for the de­fer­ral of exit tax in EU/EEA ca­ses in a pre­ser­ving re­duc­tion of § 6 AStG for­mer ver­sion also in third-coun­try ca­ses.

Conclusions for the current regulation on exit taxation

For re­lo­ca­ti­ons since 01 Ja­nu­ary 2022, § 6 (4) AStG pro­vi­des for a uni­form de­fer­ral re­gu­la­tion. In the case of re­lo­ca­tion to ano­ther EU/EEA mem­ber state or a third coun­try, the exit tax can be paid in se­ven equal an­nual in­stall­ments upon ap­pli­ca­tion, whe­reby a se­cu­rity de­po­sit is usually re­qui­red. The ac­crual of an­nual in­stall­ments is wai­ved upon ap­pli­ca­tion only if the tax­payer claims un­der the so-cal­led re­turn rule that he will re­turn to Ger­many wi­thin se­ven years af­ter the re­lo­ca­tion.

Alt­hough this ex­clu­des a di­sad­van­tage for re­lo­ca­ti­ons to third coun­tries com­pa­red to re­lo­ca­ti­ons to EU/EEA sta­tes, the tax im­pli­ca­ti­ons of the case of re­lo­ca­tion ab­road must be com­pa­red with the move wi­thin Ger­many, ac­cor­ding to the ex­plana­ti­ons of the ECJ and BFH.

In the case of re­lo­ca­tion to Swit­zer­land, it, the­re­fore, seems ob­vious to de­mand at least eco­no­mic equa­lity by in­te­rest-free de­fer­ral un­til the rea­liza­tion of the in­crea­ses in va­lue to pre­serve the right of es­ta­blish­ment due to the Free Mo­ve­ment of Per­sons Agree­ment with Swit­zer­land. A cor­re­spon­ding ar­gu­ment could also ap­ply in ca­ses of re­lo­ca­tion to an EU mem­ber state, as other­wise there could be a vio­la­tion of the free­dom of es­ta­blish­ment gua­ran­teed by EU law. If the par­ti­ci­pa­tion held at the time of re­lo­ca­tion is not qua­li­fied as so-cal­led con­trol par­ti­ci­pa­tion, which is re­gu­larly as­su­med for par­ti­ci­pa­tion of less than 25%, there is also a th­reat of vio­la­tion of the free­dom of ca­pi­tal mo­ve­ment. Since the scope of pro­tec­tion of the free­dom of ca­pi­tal mo­ve­ment can also in­clude third-coun­try facts, an in­te­rest-free de­fer­ral of the exit tax un­til the ac­tual rea­liza­tion of va­lue in­crea­ses seems to be re­qui­red here as well.

Conclusion

The case law of the ECJ and the BFH cla­ri­fies that in old ca­ses (re­lo­ca­ti­ons be­fore 01 Ja­nu­ary 2022), an in­te­rest-free de­fer­ral of the exit tax un­til the rea­liza­tion of va­lue in­crea­ses must re­gu­larly be gran­ted in third-coun­try ca­ses.

Re­gar­ding the new re­gu­la­tion for the de­fer­ral of the exit tax for re­lo­ca­ti­ons since 01 Ja­nu­ary 2022, there are si­gni­fi­cant doubts as to whe­ther the op­tion to pay the exit tax over se­ven years, as pro­vi­ded for on ap­pli­ca­tion, is com­pli­ant with EU law. A re­view of the re­gu­la­tion of § 6 (4) AStG in the cur­rently va­lid ver­sion by the fis­cal courts is li­kely to be only a mat­ter of time. It may well be that the le­gis­la­tor will have to make im­pro­ve­ments here, pos­si­bly even re­troac­tively for ca­ses of re­lo­ca­tion since 01 Ja­nu­ary 2022.