Anyone who moves out of Germany and has investment shares or transfers them outside of Germany will have to pay taxes – even if the shares are not sold.
Private investors in investment funds will have to pay taxes in the future if they leave Germany and have purchased investment shares priced at a minimum of EUR 500,000; this also includes the common ETFs. This was decided by the German Federal Parliament (Bundestag) and the German Federal Council (Bundesrat) with the Annual Tax Act 2024 (Jahressteuergesetz 2024). The new regulation will apply from January 1, 2025 (Sec. 57 para. 10 of the German Investment Tax Act (Investmentsteuergesetz) in its new version, "InvStG nF"). However, investors can ensure that – also after January 1, 2025 – the exit tax does not apply or is only payable in installments. Similar rules on exit tax are already applied to corporations and business investors (such as entrepreneurs). The new rule does not directly affect custodian banks and financial investment management companies.
In Depth
Holders of investment shares have to pay tax on capital gains when they leave.
1. Example
By way of introduction, the following example: A taxpayer has paid into an ETF savings plan with EUR 2,000 per month for 22 years. After 22 years, he has acquisition costs totaling EUR 528,000; the value of his ETF shares amounts to EUR 828,000 at this point. If he leaves Germany and moves abroad, the increase in value of EUR 300,000 is generally subject to the new taxation. In the usual case of an equity fund, income tax of over EUR 50,000 would become due, without being able to pay it out of an actual cash inflow ("dry income").
2. Investment shares affected
Affected are private individuals in Germany who have acquired investment shares with a purchase price of at least EUR 500,000, such as ETFs, equity funds or bond funds, or at least 1% of the shares of an investment fund (Sec. 19 para. 3 sentence 2 InvStG nF). Private investors who have invested in (the rarer) so-called special investment funds are also affected, regardless of the amount of their share (Sec. 49 para. 5 sentence 1 InvStG nF). Both shares held directly and those held through asset-managing partnerships are included.
3. Investors affected and triggers for taxation
In order to be subject to exit tax, the person leaving must have lived in Germany for at least seven years in the twelve 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 (Sec. 19 para. 3 sentence 1 no. 1, sentence 3 or Sec. 49 para. 5 sentence 1 no. 1, sentence 3 InvStG nF with reference to Sec. 6 para. 2 of the German Foreign Tax Act (Außensteuergesetz)).
The 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 (Sec. 19 para. 5 sentence 1 no. 2, Sec. 49 para. 5 sentence 1 no. 2 InvStG nF).
Furthermore, the tax must be paid, among others, by anyone who moves their center of vital interests abroad – even if they retain their residence in Germany (Sec. 19 para. 3 sentence 1 no. 3, Sec. 49 para. 5 sentence 1 no. 3 InvStG nF).
Similar rules are already applied to business investors (such as entrepreneurs) and corporations that hold their investments in business assets, independently of the new Annual Tax Act 2024 (Sec. 4 para. 1 sentences 3 et seq., Sec. 16 para. 3a of the German Income Tax Act, Sec. 12 of the German Corporate Income Tax Act). Nothing will change for them – and they must continue to consider any potential exit taxes.
4. Tax is 25% of the increase in value since the acquisition of the investment shares
The tax amounts to 25% in general (Sec. 32d para. 1 sentence 1 of the German Income Tax Act) 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 (§ 18 InvStG) and by the partial exemption of 30% for equity funds (§ 20 InvStG).
The taxpayer must declare the "exit gain" in their own tax return (Sec. 32d para. 3 sentence 1 of the German Income Tax Act). No (automatic) final withholding tax is levied (Sec. 19 para. 3 sentence 5 and Sec. 49 para. 5 sentence 7 InvStG nF).
5. Possible escapes
Investors can ensure that the exit tax does not apply or is only payable in installments: Ideally, investors spread their investment across various investment funds at an early stage so that the acquisition costs of a single investment are below EUR 500,000 and this does 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 German tax authority within seven years of moving away or transferring them abroad, for example by moving back to Germany and becoming subject to unlimited tax liability in Germany (Sec. 6 para. 3 sentence 1 of the German Foreign Tax Act (Außensteuergesetz)).
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 can at least be paid from the actual proceeds received. 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 (Sec. 19 para. 3 sentence 3, Sec. 49 para. 5 sentence 3 InvStG nF, Sec. 6 para. 4 German Foreign Tax Act (Außensteuergesetz)). 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.
6. Custodian banks, investment funds, 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 (Sec. 19 para. 3 sentence 5 and Sec. 49 para. 5 sentence 7 InvStG nF).
7. 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: 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 EUR 500,000 are not sufficient. This must be considered in strategic tax planning.
8. Background of 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, 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. If the taxpayer moved away, they did not have to pay tax on it – in contrast to the holder of the significant corporate shares. It is therefore incomprehensible why acquisition costs of at least EUR 500,000 also suffice for the new exit tax, because the amount of the acquisition costs is irrelevant for the previous regulation (Sec. 6 of the German Foreign Tax Act (Außensteuergesetz)).
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.
