Germany: German Exit Tax When Moving To Switzerland - The New "Wächtler" Decision Of The BFH

In its decision dated September 6, 2023 (I R 35/20), published on January 11, 2024, the First Senate of the German Federal Fiscal Court (BFH) dealt with the German exit taxation pursuant to Section 6 German Foreign Tax Act (AStG) in connection with relocations to Switzerland. In its decision the BFH comments on the much-discussed "Wächtler" decision of the European Court of Justice (ECJ).

SUMMARY

The First Senate of the BFH has ruled that in view of the existing Agreement on the Free Movement of Persons between the EU and Switzerland an interest-free deferral of the German exit tax until the actual disposal is required in the case of relocations to Switzerland. The ruling has direct effect for all relocations until December 31, 2021. However, the deferral may be made dependent on the provision of security deposit.

1. Background

The case bears its name "Wächtler" with regard to the plaintiff and now, after more than 10 years of proceedings and four court decisions has come to an end. Mr. Wächtler had moved to Switzerland in 2011. Due to his shareholding in a Swiss corporation the German revenue service assessed the German exit tax against him in accordance with Section 6 AStG. Mr. Wächtler appealed against the exit tax charge to the Baden-Württemberg.

Tax Court (FG BaWü) which referred the legal issue of the compatibility of the German exit tax with the freedom of establishment under the Agreement on the Free Movement of Persons dated June 21, 1999, between the EU and Switzerland to the ECJ for a preliminary decision.

In its decision dated February 26, 2019 (case no. C-581/17 - Wächtler), the ECJ clearly stated that the German exit tax in connection with a relocation to Switzerland leads to unjustifiable unequal treatment of the relocating taxpayer compared to domestic relocations. On this basis, in the subsequent decision dated August 31, 2020 (case no. 2 K 835/19), the FG BaWü declared the assessment of the German exit tax altogether unlawful as it would not be possible to assess the tax under the German statutory tax rules and, at the same time, in compliance with the requirements set out by the ECJ. Against this ruling, the German revenue service appealed on points of law to the BFH.

2. Decision of the BFH

In contrast to the lower court, the BFH dismissed Mr. Wächtler's claim. Nevertheless, at the same time the BFH has strengthened the rights of those moving to Switzerland fundamentally.

According to the ruling of the BFH, the ECJ's preliminary decision does not mean that the German exit tax cannot be assessed as the German foreign tax act can be interpreted in accordance with EU law, thereby reducing the scope of the law. In a first step, the assessment of the German exit tax is thus permissible. However, the First Senate of the BFH leaves no doubt that the German exit tax in the case of departures to Switzerland in a second step must be deferred permanently until the underlying shares are actually disposed of. Moreover, this deferral must be applied to the entire exit tax and it must be free of interest charges as the taxpayer moving to Switzerland otherwise suffers a liquidity disadvantage compared to the taxpayer relocating within Germany. This deferral may be applicable even if the underlying tax has already been paid.

With its decision dated September 6, 2023, the BFH moreover clearly overrules the BMF circular dated November 13, 2019, which did not offer a permanent deferral but viewed a tax paying in installments to be sufficient to meet the EuGH guidelines when moving to Switzerland. According to the BFH, only the requirement of a collateral from the taxpayer for the deferred exit tax should remain permissible in favor of the tax authorities against the background of potential enforcement difficulties.

3. Remaining questions and outlook

The BFH decision dated September 6, 2023, primarily affects only the individual case decided. It therefore remains open whether the German revenue service is going to abandon is to date much stricter interpretation of the tax law, or whether it possibly issues a non-application decree against the court decision.

Irrespective of this, we believe that the BFH decision is of fundamental importance for a multitude of relocation cases. On the one hand, the German exit tax for all taxpayers who have moved to Switzerland by December 31, 2021, and are covered by the Agreement on the Free Movement of Persons dated June 21, 1999, between the EU and Switzerland must now be permanently deferred without interest on the basis of the decision until the actual disposal of the shares at hand. In all affected open cases the competent German tax office thus should be contacted without delay. A corresponding application for unlimited and interest-free deferral of the exit tax can even still be submitted if the exit tax has already been settled, which should lead to a refund of the tax.

Besides this, the decision has a pivotal effect on the new statutory situation which has abolished the permanent deferral for all relocations from January 1, 2022. The new law on the one hand does not distinguish between relocations to other EU/EEA member states and relocations to Switzerland anymore, but on the other hand extends the unequal treatment of relocations abroad compared to domestic relocations that was rejected by the ECJ even to EU/EEA relocations. Therefore, it is to be expected that the BFH will, also under the new law, demand a permanent and interest-free deferral of the exit tax until the actual sale for all EU/EEA and Switzerland relocation cases. However, the possibility of demanding a collateral is likely to remain which, depending on the specific case, may remain a potentially significant obstacle for taxpayers moving to Switzerland in the future.

Finally, the legislator has provided for a revocation of the deferral of the exit tax both under the new law for exits from January 1, 2022 and - subsequently a few weeks ago as part of the so-called global minimum taxation law for exits until December 31, 2021, insofar as distributions of profits or contributions are made from the company whose shares are subject to the exit tax, if the amount exceeds 25% of the so-called fair market value of these shares at the time of the exit. This de facto ban on distributions is also at issue in view of the BFH ruling: This is because such an installment-based payment of exit tax also means a (discriminatory) liquidity disadvantage for the taxpayer moving abroad compared to a purely domestic move.

The reaction of the German tax authorities and tax legislators to the BFH decision dated September 6, 2023, is eagerly awaited. All taxpayers who have relocated to another EU/EEA member state or to Switzerland and who are affected by the German exit tax should now apply for permanent interest-free deferral of the tax and thereby demand the rights now recognized by the BFH.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.