Exit tax when emigrating to Dubai – what entrepreneurs need to know

Dubai is considered an attractive tax haven for many German entrepreneurs, which is why more and more entrepreneurs are emigrating to the United Arab Emirates (UAE). Relocating one’s place of residence and business to an almost tax-free country can bring both personal and professional benefits, but at the same time poses a number of tax and legal challenges.

The exit tax is particularly relevant. This is levied by the German tax office on certain assets as soon as you move your place of residence abroad. In this article, you will learn how the exit tax works, which company holdings are affected and what legal structuring options are available when relocating your residence and business activities to Dubai.

The exit tax under Section 6 AStG applies as soon as a person with unlimited tax liability in Germany with a significant shareholding in a corporation (generally at least 1% within the last five years) moves their place of residence or habitual abode abroad. In this case, the tax office assumes a fictitious sale of the shares at the time of departure and taxes the assumed capital gain in accordance with the Income Tax Act.

The aim of this regulation is to ensure that hidden reserves created during the German tax liability do not remain untaxed. The tax therefore does not arise from an actual sale, but solely from the departure. Deferral or payment in installments is possible, but is subject to strict conditions, especially when moving to countries outside the EU/EEA, such as Dubai.

Primarily affected are participations in corporations, such as GmbHs, AGs or comparable foreign companies in which the taxpayer holds a significant participation. This includes both shares held as private assets and indirect shareholdings, for example via holding structures.

However, other assets such as real estate, bank balances or securities without a significant shareholding are not subject to exit tax. Therefore, it is not the entire assets that are relevant, but only company shares with a hidden increase in value under German tax law.

If you move to Dubai, the exit tax is calculated as if you had sold your major shareholdings in corporations at the time of your departure. The tax office will apply the fair market value of your shares and deduct the original acquisition costs. The difference is deemed to be a notional capital gain, which is taxed in accordance with Section 17 of the German Income Tax Act (EStG), usually as part of the partial income procedure.

As Dubai is located outside the EU/EEA, there is generally no provision for an interest-free and unlimited deferral of the tax. The tax is therefore usually due immediately or paid in installments under strict conditions. The current market value of your investments at the time of departure is therefore decisive for the amount of tax.

Gifts or inheritances can affect the exit tax, especially if they involve significant shareholdings in corporations. If, for example, shares are transferred free of charge before the departure, this can trigger an early tax liability, as the legislator equates such a transfer with a sale. If, on the other hand, the transfer takes place after the departure, the departure tax remains in force and the donee or heir takes over the acquisition data of the predecessor.

Careful tax planning is therefore necessary in order to avoid unpleasant tax consequences in the case of gifts or inheritances.

There are several legal strategies to avoid the exit tax or at least reduce the liquidity burden, such as through:

• Restructuring of investments
• Reduction of the participation rate below 1%
• Sale of shares before departure
• Use of statutory deferral and installment payment regulations

The time of departure and the valuation treatment of the shares also play an important role in the amount of tax. In addition to these factors, however, there are also structural arrangements that can be used to avoid or at least significantly mitigate exit tax. One option that is particularly relevant in practice is the conversion of a corporation into a partnership.

In order to avoid exit tax, it is possible to convert a corporation into a partnership under certain conditions, as participations in partnerships are generally not subject to exit tax. In practice, for example, an existing GmbH can be converted into a GmbH & Co. KG, which can also be founded without other partners and also enables integration into a holding structure into which the GmbH shareholding is incorporated.

This structure means that the right of taxation generally remains in Germany, even if the operating company does not develop any economic activities. In this way, the move to Dubai can take place without triggering the notional capital gain.

As of January 1, 2022, there is no longer a valid double taxation agreement (DTA) between Germany and the United Arab Emirates. The previous agreement expired on December 31, 2021 and was not extended.

Without such a DTA, tax matters are assessed according to the national laws of both countries. This is particularly relevant for people moving to Dubai, as Germany applies the world income principle: All income, both from Germany and from abroad, must continue to be taxed in Germany. This can lead to double taxation in both countries.

Under strict conditions, it may be possible to emigrate to Dubai without giving up the German tax residence and thus not triggering the exit tax in the first place. The central approach is to retain a tax residence in Germany so that the German right to tax a subsequent capital gain is not lost. To do this, it is sufficient to have accommodation in Germany that can be used at any time, such as your own home, a rented apartment or a permanently available room with relatives or acquaintances.

The only decisive factor is the so-called key authority, i.e. access to this accommodation at all times. This key power establishes a residence for tax purposes, which means that there is still unlimited tax liability in Germany.

Emigrating to Dubai can offer considerable tax advantages for German entrepreneurs, but requires careful planning. In particular, exit taxation for significant shareholdings in corporations can lead to unexpected tax burdens, as the tax office applies a fictitious capital gain to a change of residence abroad. This particularly affects shares, GmbH or AG shares and indirect shareholdings via holding structures.

Under certain conditions, the exit tax can be legally minimized through targeted structuring options such as reducing the shareholding, selling shares before moving away, using deferral and instalment payment arrangements or converting the company form. Maintaining a tax domicile in Germany can also be a solution, subject to strict compliance with the regulations.

In order to understand the tax consequences, correctly calculate the notional profit and avoid legal risks, early and individual advice from experienced tax consultants and lawyers is essential. In this way, emigration to Dubai can be optimally planned without unpleasant tax traps arising.