A German shareholder who holds shares in a Delaware C-Corp and wishes to leave Germany usually has two questions: does German tax law treat the American company any differently from a GmbH, and does emigrating trigger tax on unrealised gains? The short answer: for German tax purposes, a C-Corp is a corporation, and exit taxation under Section 6 AStG (German Foreign Tax Act) is linked not to the company’s seat but to the shareholding. This article sets out the German side: the comparison of legal types, ongoing taxation, emigration, controlled foreign company (CFC) taxation and typical mistakes (legal position: September 2026). For the law of the United States and of the State of Delaware, an adviser on the ground should be brought in.
How Germany Classifies a Delaware C-Corp
Germany does not adopt the US tax classification. Whether a foreign company counts as a corporation or as a partnership is decided by the so-called comparison of legal types (Rechtstypenvergleich) according to German standards. A corporation is comparable to a German stock corporation (Aktiengesellschaft); the Federal Fiscal Court (Bundesfinanzhof, BFH) took this as its basis for shares in a Delaware corporation in the context of Section 17 EStG (German Income Tax Act) (BFH, judgment of 14.02.2023, IX R 23/21). For the C-Corp there is therefore generally no dispute: it is a corporation. The comparison with other US legal forms matters because their tax treatment in the United States and in Germany can diverge.
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| US legal form | Treatment under German tax law | Consequence for emigration |
|---|---|---|
| C-Corp (Corporation, Inc.) | Corporation | Section 6 AStG for a shareholding of 1 % or more |
| S-Corp | Corporation, even if it is treated as transparent in the United States (BFH, judgment of 11.10.2017, I R 42/15) | as for a C-Corp |
| LLC, single-member company | Case by case under the comparison of legal types (BMF guidance letter of 19.03.2004), corporation or non-independent branch of the member | depending on the result, Section 6 AStG or the deemed disposal rules (Entstrickung) |
| LLC, several members | Case by case, corporation or partnership | differs depending on the result |
In interim relief proceedings, the Federal Fiscal Court has stressed that the comparison of legal types applies without restriction to an LLC, even if the LLC is transparent in the United States (BFH, orders of 18.05.2021, case nos. I B 75/20 and I B 76/20). Anyone who concludes from “tax-transparent” in the United States that the company is “transparent in Germany” is therefore often mistaken.
Ongoing Taxation Before Emigration
As long as the shareholder is subject to unlimited tax liability in Germany, the separation principle (Trennungsprinzip) applies to the C-Corp: profits arise at the level of the company, and the shareholder is taxed only on distributions. If the shareholding is held as private assets, the dividend is generally subject to the flat-rate withholding tax (Abgeltungsteuer) of 25 % plus the solidarity surcharge (together 26.375 %, excluding church tax). For business assets, the partial income method (Teileinkünfteverfahren) applies. US withholding tax on dividends is limited under the double taxation treaty: Article 10 of the Germany-US treaty (DBA USA) provides for 15 %, 5 % for corporations holding at least 10 % of the voting rights, and 0 % under narrow conditions. US tax withheld can be credited in Germany up to the treaty rate (Section 32d (5) EStG). The basics are covered in our articles on double taxation treaties when emigrating and on withholding tax on investment income after emigration.
Place of Effective Management in Germany
A common misconception: incorporation in Delaware does not automatically make the company an American taxpayer without German consequences. If the C-Corp is in fact managed from Germany, its place of management (Geschäftsleitung) within the meaning of Section 10 AO (German Fiscal Code) is located in Germany, and it may be subject to unlimited corporation tax liability under Section 1 (1) KStG (German Corporation Tax Act). The consequence is dual residence. Article 4 (3) DBA USA does not provide a fixed outcome for this, but a mutual agreement procedure between the tax authorities; if they do not reach agreement, the company is not treated as resident in either state for the purposes of treaty benefits. What counts are the actual processes: where are contracts approved, payments instructed and day-to-day decisions taken? The address, the registered agent or the bank account are not decisive. On the connecting factors of home office and place of management, see permanent establishments and home offices abroad.
The Shareholder Emigrates: Section 6 AStG
If the shareholder moves their residence and habitual abode abroad, Section 6 AStG treats this like a sale of the shares. The unrealised increase in value is taxed, even though no money flows. The provision applies where three conditions are met together:
- Unlimited tax liability ends, for example because the residence is given up. Anyone who keeps a home in Germany for their own use generally also keeps their residence (Section 8 AO); see habitual abode in German tax law.
- The shareholder was subject to unlimited tax liability for at least seven of the last twelve years.
- They hold shares within the meaning of Section 17 EStG, that is, at any time within the last five years they held an interest of at least 1 % in the corporation. Under the comparison of legal types, this also applies to foreign corporations.
For a US corporation, the percentage threshold is determined not by the authorised capital in the articles, but by the shares actually issued (issued and outstanding shares). The Federal Fiscal Court decided this for a Delaware corporation (case no. IX R 23/21). Founders with many authorised but unissued shares therefore often miscalculate.
How the Amount Is Calculated
The difference between the fair market value (gemeiner Wert) of the shares at the time of emigration and the acquisition costs is taxed. The fair market value of unlisted shares is derived under Section 11 (2) BewG (German Valuation Act) from recent sales between unrelated third parties, and failing that from a business valuation. For a C-Corp with financing rounds, these valuations are a point of dispute with the tax office. The partial income method is applied to the gain, so that 60 % is included in income tax.
Example (fictitious figures): Jonas holds 40 % of the issued shares in a Delaware C-Corp. The acquisition costs are EUR 25,000, and the fair market value at the time of emigration is EUR 1,025,000. The deemed gain is EUR 1,000,000, of which EUR 600,000 is taxable. At a top tax rate of 45 % plus the solidarity surcharge, this would result, in simplified terms, in tax of around EUR 285,000, excluding church tax and without taking account of progression in the individual case.
What the Germany-US Treaty Does and Does Not Do
It is often assumed that the treaty with the United States protects against German exit tax. That is not the case. For the earlier version of Section 6 AStG, the Federal Fiscal Court decided that taxation on a gift of GmbH shares to a son resident abroad with US citizenship does not require that Germany’s right to tax be excluded, and does not infringe the non-discrimination clause of the DBA USA (BFH, judgment of 08.12.2021, I R 30/19). Today, Section 6 (1) sentence 1 no. 2 AStG governs this case of a gratuitous transfer. At the same time, Article 13 (6) DBA USA contains a rule under which a person who, on emigrating, is taxed in one contracting state as if on a sale may be treated in the other contracting state as if they had sold and reacquired the assets at market value immediately before emigrating. How this plays out in the United States is a question of US law and should be clarified with an adviser there. For Germany it changes nothing: the tax is assessed first.
Instalments, Return and Reporting Obligations
Since the reform by the ATAD Implementation Act (ATAD-Umsetzungsgesetz) with effect from 01.01.2022, there is no longer an unlimited interest-free deferral, even for moves to EU and EEA states. For all destination countries, including the United States, instalment payment applies uniformly. The rules at a glance:
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| Point | Rule | Provision |
|---|---|---|
| Instalments | On application, seven equal annual instalments, generally only against the provision of security | Section 6 (4) AStG |
| Early maturity | in particular on a sale or transfer of the shares | Section 6 (4) AStG |
| Return | In the case of a merely temporary absence, the tax lapses if unlimited tax liability is re-established within seven years and further conditions are met; on application, extension by up to five years if the intention to return continues | Section 6 (3) AStG |
| Notifications | electronic reporting of certain events, confirmation of the current address every year by 31 July | Section 6 (5) AStG |
Anyone who uses instalment payment must take the reporting obligations seriously. A failure can cost the relief. For accompanying company law questions for managing directors, see relocating abroad and the managing director’s liability. Whether the emigration has actually taken place and residence exists in the destination country can be evidenced with a certificate of tax residence.
CFC Taxation: When It Is Relevant for a C-Corp
CFC taxation (Hinzurechnungsbesteuerung, Sections 7 et seq. AStG) is intended to prevent low-taxed income from being parked in foreign companies. At its core it requires three things: a person subject to unlimited tax liability controls the company, meaning that, alone or together with related persons, they hold more than half of the voting rights, the shares or the entitlement to profits (Section 7 (2) AStG). The company earns passive income that is not listed in the catalogue of active activities in Section 8 (1) AStG. And the income tax burden is below 15 % (Section 8 (5) AStG).
For the typical C-Corp with operating business and American corporate income tax, the 15 % threshold is generally not a problem, so CFC taxation is rare. It can be different if the company earns predominantly passive income, such as interest or royalties, and the actual tax burden under the rules of Section 10 AStG falls below the threshold. The calculation of the burden is based on US tax data and should be carried out together with a US adviser. Two points are often overlooked:
- For the emigrant, CFC taxation under Section 7 AStG generally ceases for financial years of the company at the end of which they are no longer subject to unlimited tax liability. This does not apply if they are subject to extended limited tax liability (Section 5 AStG) or the shareholding is attributable to a domestic commercial permanent establishment. In addition, CFC taxation can continue for co-shareholders, spouses or other related persons who remain in Germany.
- German nationals who were subject to unlimited tax liability for at least five of the last ten years, move to a low-tax jurisdiction and retain substantial economic interests in Germany can be subject to extended limited tax liability (erweiterte beschränkte Steuerpflicht) under Section 2 AStG. It applies until the end of ten years after the end of the year of emigration if the income concerned exceeds EUR 16,500 per year.
Planning Before Emigration and Its Limits
Various structures are considered before emigrating. Three models should be examined critically.
Contribution to a partnership with a deemed commercial character. Section 6 AStG covers shares in corporations, not interests in partnerships. Anyone who contributes the shares to a GmbH & Co. KG (gewerblich geprägte Personengesellschaft) before emigrating then holds them as business assets. This does not, however, simply eliminate the tax burden: the contribution itself, the allocation of the shares to a domestic permanent establishment, trade tax, and later questions of deemed disposal and distributions must each be examined separately. A purely asset-managing structure will generally not support this construction. Related questions are covered in our article on business succession when a shareholder emigrates.
Share exchange into a Delaware C-Corp (“flip”). If a German founder contributes their GmbH shares in exchange for shares in a new US holding company, this counts for tax purposes as an exchange and therefore as a sale at fair market value (Section 17 EStG). The tax-neutral continuation of book values under Section 21 UmwStG (German Reorganisation Tax Act) is not available, because for a share exchange the Reorganisation Tax Act requires an acquiring company with its seat and place of management in the EU or the EEA (Section 1 (4) sentence 1 no. 1 UmwStG). Such a flip therefore generally triggers immediate German tax on the hidden reserves in the GmbH shares, without any money being received. It should be fully calculated for tax purposes before implementation.
Relocating the GmbH’s seat by merger with a US corporation. It is occasionally considered to merge a GmbH that is no longer needed into an American corporation within a few weeks, in order to avoid liquidation and the one-year blocking period (Sperrjahr). The cross-border merger regulated by statute (Sections 305 et seq. UmwG, German Reorganisation Act) is limited to corporations from the EU and the EEA. Whether a merger with a company from a third country is recognised is disputed and depends on the commercial register court. In addition, there are tax consequences such as the realisation of hidden reserves, and if creditors are disadvantaged, there is a risk of liability. Such models should not be used without prior legal review; more on relocating a GmbH abroad and on the tax consequences of moving a company’s registered office.
Unclear legal position: obtain a binding ruling. Where the German tax treatment is not settled or may foreseeably change, an application to the tax office for a binding ruling (verbindliche Auskunft, Section 89(2) of the German Fiscal Code, AO) should come before implementation. For a precisely defined transaction that has not yet been carried out, the ruling binds the tax office to the assessment given, and it is subject to a fee. In our view, a tax adviser who does not recommend this in such a situation is acting irresponsibly: the client risks having to litigate over the outcome years later, which costs time and money.
Typical Mistakes in Practice
- Reporting obligation overlooked. Anyone who acquires or disposes of shareholdings in foreign corporations of at least 10 %, or where the acquisition costs of all shareholdings exceed EUR 150,000, must report this to the tax office under Section 138 (2) AO, together with the tax return and no later than 14 months after the end of the assessment period. The first-time ability to exercise, alone or with related persons, a controlling influence over a third-country company such as a US corporation must also be reported (Section 138 (2) sentence 1 no. 4 AO).
- Wrong percentage threshold. The 1 % threshold is determined on the basis of issued shares, not authorised shares.
- Management remains in Germany. Despite its Delaware seat, the company is then subject to corporation tax in Germany.
- Home kept. Anyone who keeps a home in Germany that can be used at any time may not have emigrated in the tax sense and remains subject to unlimited tax liability.
- Valuation too late. The fair market value is needed as at the time of emigration, not years later.
- Notifications under Section 6 (5) AStG forgotten. This can jeopardise instalment payment.
Checklist Before Emigrating
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| Step | Check |
|---|---|
| 1 | Determine the shareholding percentage on the basis of issued shares (at least 1 % at any time in the last five years) |
| 2 | Check the prior holding period (seven out of twelve years) |
| 3 | Document the fair market value of the shares as at the date of emigration |
| 4 | Management of the C-Corp: where is it actually exercised? |
| 5 | Plan instalments, security and the intention to return |
| 6 | Schedule the notifications under Section 138 AO and Section 6 (5) AStG |
| 7 | Coordinate the tax consequences in the destination country and in the United States with foreign advisers |
Conclusion
For the German shareholder, the Delaware C-Corp is a corporation for tax purposes. Emigrating can therefore trigger exit taxation under Section 6 AStG, regardless of the company’s seat and generally without protection from the DBA USA. The decisive factors are the shareholding percentage based on issued shares, the fair market value on the reference date, the actual place of management of the company, and the deadlines for instalments and return. CFC taxation is rare for operating C-Corps, but can become relevant where there is passive income. Structures should be planned and legally reviewed before emigrating.
Frequently Asked Questions
Do I have to pay exit tax on a C-Corp if I hold less than 1 %?
Not necessarily. Section 6 AStG covers shares in which the shareholder held an interest of at least 1 % at any time within the last five years (Section 17 EStG). Anyone who has been diluted below 1 % through financing rounds may therefore still be affected. For a US corporation, the issued shares are decisive.
Does the double taxation treaty with the United States protect me from exit tax?
No. The treaty generally allocates the right to tax future capital gains from such shares to the state of residence (Article 13 (5) DBA USA), but it does not prevent German exit taxation. Article 13 (6) DBA USA concerns the treatment in the other contracting state after exit taxation. Its effect should be clarified with a US adviser.
Can I pay the exit tax in instalments?
Yes, on application in seven equal annual instalments, generally against the provision of security. On a sale of the shares and on breaches of reporting obligations, the remaining tax can become due.
Does the tax lapse if I return?
On a return within seven years the tax can lapse, and on application an extension by up to five years is possible if the intention to return continues. The statutory requirements, for example regarding a sale of the shares in the meantime, should be examined in advance.
What applies if I manage the C-Corp from Germany?
The company may then be subject to unlimited corporation tax liability because of its domestic place of management. The dual residence can give rise to conflicts between the states; the treaty provides for a mutual agreement procedure.
Attorney Dr. Johannes Fiala has published extensively on international tax law and advises clients on the German tax and company law questions of exit taxation for shareholdings in German and foreign corporations, so that emigration can be planned in good time; for the law of the United States and of the destination country, a foreign adviser should be brought in. Please get in touch with the firm without obligation to discuss your specific case in an initial consultation.
