Shares in Investment Funds May Be Subject to Taxation When Moving Abroad
When relocating one’s residence from Germany to another country, the so-called exit taxation may apply. With the adoption of the 2024 Annual Tax Act, the exit taxation has been tightened. Starting in 2025, it will also cover income from certain investment funds if the taxpayer intends to move their residence or primary place of living abroad.
After the Federal Council approved the 2024 Annual Tax Act on November 22, 2024, and its publication in the Federal Gazette in early December 2024, the provisions and changes can take effect. One significant change concerns the so-called exit taxation. Until now, exit taxation applied only to shares in corporations or cooperative shares held as private assets if the shareholding reached at least 1%. When relocating abroad, a tax is levied on the fictitious capital gain of the shares, according to MTR Legal Rechtsanwälte, a law firm advising on tax law.
Fictitious Capital Gains Are Taxed
In the case of relocation or the transfer of the primary place of living abroad, the state treats the shares as if they had been sold and taxes the fictitious capital gain. Exit taxation is legally regulated under § 6 of the Foreign Tax Act (AStG).
While shares in investment funds, ETFs, or special investment funds held as private assets were previously exempt from this taxation, this is set to change. Taxation will be triggered if the taxable investor held at least 1% of the issued shares in the last five years or if the acquisition cost of the shares amounted to at least €500,000. The tax liability is triggered by the termination of unlimited tax liability in Germany, such as through relocation or transferring one’s primary residence abroad. For the tax to apply, the investor must have been subject to unlimited tax liability in Germany for at least seven of the last twelve years and held the shares as private assets.
For shares in special investment funds, a “significant” shareholding is always presumed. Thresholds such as 1% ownership or acquisition costs are not considered in these cases.
Burden for Investors
When moving out of Germany, investors are treated as if they had sold their shares. The fictitious gain must be taxed, even though there is no actual inflow of liquidity. This can pose a financial burden when planning to relocate abroad. Provisions for deferring the exit tax or return options are applicable analogously to § 6 AStG.
Due to the potential tax burden, relocation should be carefully planned, and one’s investment portfolio should be reviewed and, if necessary, restructured concerning potential exit taxation.
Removal of Loss Offset Restrictions
The 2024 Annual Tax Act also brings relief for investors: the restriction on the offset of losses from derivative transactions has been removed. Losses from risky derivative transactions can now be fully offset against gains from other capital investments. Previously, this was limited to €20,000 per year, and gains and losses had to arise from the same type of transactions. This restriction applied not only to highly speculative derivatives such as CFDs or futures but also to worthless shares or corporate interests.
The loss offset restriction led to taxes being paid on gains that, overall, did not materialize. In a case before the Federal Fiscal Court (BFH), the plaintiff had made gains from derivative transactions amounting to €250,000. However, these were offset by losses of €227,000. The tax office, however, only offset losses up to the statutory limit of €20,000. As a result, the investor had to pay approximately €60,000 in taxes in the disputed year, despite an actual gain of only €23,000. The BFH raised constitutional concerns about the loss offset restriction, which the legislature has now repealed.
Annual Tax Act 2024 Brings Important Changes
With the tightening of exit taxation and the elimination of the loss offset restriction, the 2024 Annual Tax Act introduces two significant changes for investors that need to be considered accordingly.
MTR Legal Rechtsanwälte advises on tax law.
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