[Roritharr]

What most people do not understand about muhaaa's comment is the dry-income problem.

How to bankrupt yourself in 3 easy steps:

1. Incorporate a UG (small limited liablity entity, sometimes called baby GmbH) with 100€ capital base and you owning 100% of stock.

2. Raise Venture Capital, let's say 1M€ for 10%, making your company worth 10M€.

3. Move out of Germany.

4. Receive a letter from the Tax Authority that you are liable for Exit Tax (Wegzugsbesteuerung) and irregardless of your lack of revenues because of your recent capital raise your company is estimated at 10M€, making your personal holdings in the company 9M€ worth, of which the Tax Authority wants 60% of your personal income tax on, which varies but to be optimistic let's say you get taxed 30%, which is among the lower bound.

Now you owe the German Tax Authority 2,7M€ without having made a single € and your company only having 1M€ in liquid cash.

It's literally the reason why I will never incorporate a company in Germany again.

[heipei]

Yes, the recently introduction of a stricter exit tax bit me too, before that I would have entertained the idea of moving across the border to Belgium or Netherlands (both literally less than 5km away). My tax accountant was of the opinion that the recently passed German exit tax will eventually be overturned by EU courts since it contradicts freedom of movement within the EU, but that will likely take years...

For what it's worth, the exit tax applies to all corporate ownership above 1%, foreign or domestic.

[wjnc]

Tax accountants are very unlikely to be better at predicting EU court decision than the layman. In other words… there are very many laws that hinder EU freedom of movement in an economic sense without being struck down. Member states get a lot of leeway in designing local tax laws.

[jkaplowitz]

How would that be different if you did all steps 1-2 with a foreign corporate entity while being personally tax resident in Germany? Step 4 would be the same except if you were hiding the existence of the foreign corporate entity from the German tax authorities - but my understanding is that reporting steps 1 and 2 to the German tax authorities is legally mandatory for any German tax resident.

[Roritharr]

Correct, there is no way to escape this if you have made this mistake of being either born as a german tax resident (your tax number is the first document you receive from the government) or having made the weird choice of choosing to become a german tax resident.

Personally this specific situation is in the top 3 reasons for me to leave Germany as soon as possible.

[jkaplowitz]

Most people don’t choose where to live based on taxes, including me. Healthcare, lifestyle, family, political climate, job opportunities, overall affordability, safety, the rule of law, and other similar factors matter far more to me. But you do you.

But moving countries often won’t solve your problem, unless you pick one country before starting your business and reside there indefinitely thereafter.

Why? Because the big picture of the tax regime you describe isn’t unique to Germany, though of course the precise details are unique in each country. It’s broadly common for countries with residency-based taxation for individuals, so basically everywhere but the US and Eritrea, to have some form of exit tax for individuals who relocate abroad that includes the value of corporate shares held at the time of the move.

Even the US has such an exit tax for many cases (not all) of renouncing citizenship or abandoning long-term permanent residence.

[Roritharr]

The problem is, once again, not with being taxed in general, but with being forced to choose between staying in a country or being bankrupted by taxes.

Yes, other countries do have Exit Taxes, but Germany is pretty unique in the way it calculates how much and when you should be taxed for your private holdings, basically trapping you, mostly without your knowledge, in the country.

[jkaplowitz]

How would other countries calculate exit tax on private holdings like you describe? If you accept the general principle of exit taxation in a residence-based taxation system, then the only alternative methods I can think of either leave the tax authority vulnerable to not getting their fair share at a subsequent liquidity event or require putting up some kind of acceptable security or continuing limited German tax jurisdiction over those assets to prevent that outcome.

[Roritharr]

It's only my opinion, but a fair tax scheme only collects taxes at the time where you have actually made gains to pay the taxes from, not any theoretical on-paper gains.

To ensure the "fair" tax is levied i'd propose a limited continued tax jurisdiction over the shares until the time they get liquidated, with the optional alternative of prematurely ending that jurisdiction by settling it at the time of the shareholders convenience, with the ensuing valuation being kicked off then. The limited continued tax should assume a linear value growth over time and armed with that calculate back what the tax would have been at the point the share holder left the tax system.

Since the valuation is largely out of the hands of the founder, the abuse potential is limited to knowing of upcoming changes in the valuation, but since they would be future changes in the valuation, i don't see a legitimate reason why the state you leave should tax you for it.

[djoletina]

Or don’t move out because you operate a business out of Germany and none of this is relevant. How many businesses do you think ever reach a phase where this is a problem, let alone actually reach it *and* want to move elsewhere.

[Roritharr]

I've just described a very simple case, it could be much more nuanced and just as problematic.

Let's say you were one of the founding members of a startup in your 20s, you join and get 20%. After 3 years of not seeing much success you leave, hungry for cash in your pocket. The remaining two founders continue and grow the business substantially over the subsequent 5 years. Your 20% stake never meant much because the company didn't look into VC and was just bootstrapped. Now the company is making 5M ARR with an average of 500k profit over the last three years. Great Success but not unusual or enormous, but totally unrelated to you, you aren't even aware of these numbers.

Now you decide to move to the US, or even another State in Europe, for the love of your life. Suddenly your holdings get evaluated, the 500k profit now get multiplied by 13,75 (Ertragswertverfahren) for a company evaluation at 6.875M€, putting your holdings at 1.375M, leading you to owe 412.500€ to the Tax Authority.

Now you could try to sell your shares to the other two founders before trying to move, which doesn't exactly simplify your life at this point. The founders most likely will not have the cash on hand, and might even not be interested since they do not plan on either raising VC, selling the company in it's entirety or IPO.

The only entity interested in your shares is the german tax authority.

[mbrain]

> Now you could try to sell your shares to the other two founders before trying to move, which doesn't exactly simplify your life at this point.

Just curious, could you just give it away for free or do they also have some value that will be taxed even though you didn't get any money?

[Roritharr]

IANAL nor am I a Tax Advisor, but from my understanding transferring the shares for a value for obviously less than the fair market value would come under scrutiny because the tax authority could interpret this as a way of evading income taxes for the founders.

We've had a similar situation happening and it took quite some legal fees to ensure we had all answers ready and in writing before the tax authority would start to ask their questions. It's a complex situation.

[mbrain]

Fun stuff <3

Another sad thing is, you can easily get buried in the costs of Legal/Tax advisor costs even for some simple stuff.

That is why sometimes its better not to 'entreprendre' anything while living in Germany. The system is setup in a way to make you work full-time for corps.