Exit Tax: Leave Germany before your business gets big

Here’s an interesting take on Germany’s exit tax, which I have written about before:

Leave Germany before your business gets big.

What do I mean by that?

I mean that once you’re a business owner in Germany and your business has reached a certain size, you are essentially barred from ever moving out of the country again.

Crazy, right? I think it’s also pretty crazy that no one really talks about this. This is, quite literally, erecting a “Berlin Wall” around German entrepreneurs, forcing them to stay in the country.

Germany’s Exit Tax

But first things first. What is Germany’s exit tax?

In simple terms, you’re hit by Germany’s exit tax once you hold more than 1% in any limited liability company (foreign companies included!). So if you own 100% of a German GmbH, you’re hit by exit tax. But also if you e.g. own 2% of a US company.

And then your exit tax is calculated by taking the average of the past 3 years of earnings of that company, multiplied by 13.75 (which is crazy), and then taking 60% of that which is taxed at your personal income tax rate (likely 42%; Teileinkünfteverfahren). So:

• (Average earnings of past 3 years) * 13.75 * 0.6 * 0.42
• Simplified: (Average earnings of past 3 years) * ~3.5

I’ve simplified the formula for you a bit: It boils down to multiplying the average earnings with ~3.5.

With this calculation in hand, we can do surprisingly interesting things.

We can segment German people into four distinct groups, with greatly varying barriers of ever leaving the country:

Some People Can Leave Germany, Others Can’t

1. Employees: The simplest case – no shares in any companies. They can just leave the country and are not hit by any exit tax. People say Germany is a good country for being an employee, and this is also true for exit tax.
2. Business owners of unprofitable companies: Still a reasonably simple case – these people have shares in a business, but its value is calculated as zero, so while they are hit by exit tax, the sum might be zero (caveat: see notes on startups below)
3. Business owners of profitable companies: The ugliest case – people who own shares in a business which is profitable. Its value, in the eyes of the financial authorities, is likely high, given the factor of 13.75. These people will be hit by significant exit tax; they usually don’t have a crazy amount of savings, and don’t have the resources to engage fancy tax advisors.
4. Business owners of huge companies: You might think this is worse, but it’s actually not. As soon as your net worth goes beyond ~€2m, you can afford fancy tax advisors which set up a trust in Liechtenstein for you (yes seriously) which allow you to dodge the exit tax. So this group is simpler, for exit tax purposes.

(Note on startups (group 2): If your startup raised investment, the financial authorities might take that last investment-round valuation as actual valuation, even if your company is not profitable. So that puts you into group 3 instead as you will be hit by significant exit tax.)

So, what I’d like to talk about is group 3: Business owners of profitable companies. And let’s zoom in even further, because all businesses start out small.

Let’s look at scenario 3a: You’re a business owner of a profitable business, but it’s not hugely profitable. It might have, say, 50k€ earnings per year (nice job), but you haven’t been paying yourself a salary yet. Instead of taking the 13.75 multiple of the financial authorities you could now task someone with assessing the value of your business (which is a viable strategy, by the way), and they would come up with a result that your “real” business earnings are zero or negative, because the market rate for a CEO would be €100k – €120k / year, and if you’d be paying that to yourself, your business earnings would go below zero.

So, you can realistically assume that your business valuation, in the eyes of the financial authorities, is actually zero, and your exit tax amount will be zero, too.

Okay. But let’s fast-forward a few years and look at the same business again. Maybe it’s still a small business, but now it’s doing slightly better:

Scenario 3b: You’re a business owner of a profitable business which is decently profitable. It has €200k earnings per year and you’re paying yourself a market-rate salary of €120k / year. This now hits you with a brutal exit tax burden because there’s no trivial way of arguing that the value of your business is low. Using our formula above, the exit tax you’re looking at is ~€700k (€200k * 3.5). Crazy!

Here’s a handy table:

	Scenario 3a	Scenario 3b
Earnings / year	€50k	€200k
Your CEO salary / year	€0	€120k
Potential exit tax	€0	€700k

And this is crazy! How crazy? People might point at the business owner of scenario 3b and say “but yeah, €700k exit tax is fine, he owns a hugely profitable business”. But no, it’s not fine, because the same person was working for a salary of €0 just a few years ago and likely has nowhere close to €700k of random savings stashed away for paying some taxes.

And it’s not like these people are crazy criminals fleeing to Dubai to evade taxes – most of them, presumably, have very legitimate reasons of moving to another country, e.g. moving together with their partner, moving back to family, or simply moving to expand their business (the irony, I know).

Instead, Germany erects something of a “Berlin Wall of exit tax” around any entrepreneur who builds a business in this country, prohibiting them from ever leaving. When thinking of “countries which prohibit their citizens from leaving”, certain countries come to mind, but hardly anyone thinks of Germany.

So yeah. That’s what this post is about. The moral of the story is: If you find yourself in scenario 3a, where you own a decent business which is not super-profitable yet but has a certain chance of growing, and if you think the probability of you ever moving countries is more than zero, then it might be a good idea to leave – now.

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There are, of course, a bunch of notes here:

• Scenario 3b assumes the worst-case scenario that you take the high valuation of the financial authorities (factor 13.75) as base valuation for your exit tax. Instead, you could also find someone to assess the real value of your company, which is likely lower, like we did in scenario 3a. However, your exit tax would probably still be in the six figures.
• If you’re in scenario 3b, you could, of course, just “stick it out” and grow your business and net worth by so much that you move up into scenario 4, i.e. that you have enough money to pay fancy tax advisors to set up a Liechtenstein trust for you, which would enable you to leave the country without paying exit tax again. But this feels both shady and wrong. Besides, are you happy to be locked into the country you might no longer want to live in while you’re building your business?
• The message of this article also applies to startup founders: Leave Germany before your startup raises investment, because the financial authorities will likely take your (bloated) investment valuation as base amount when calculating your exit tax.
• You could, of course, sell or wind down your company, which would solve all problems outlined here. But this is not an option for most entrepreneurs.
• Theoretically, if you plan to come back within 11 (I think) years, Germany can opt to not collect the exit tax from you. But this doesn’t change the fact that your exit tax gets levied and you’re, in theory, liable to pay it.