Anyone who, as a freelancer or sole trader, wants to relocate their practice, chambers, or business abroad quickly encounters, in their research, the concept of the exit tax (Wegzugsteuer) under Section 6 of the German Foreign Tax Act (Außensteuergesetz, AStG). Contrary to a widespread assumption, however, this provision applies only to individuals holding shares in corporations within the meaning of Section 17 of the German Income Tax Act (Einkommensteuergesetz, EStG) – anyone who does not hold a shareholding in a GmbH (a German private limited company) but instead works as a sole trader or freelancer does not fall under Section 6 AStG at all, even in principle. The same applies to a partner’s interest in a partnership (Mitunternehmeranteil in a GbR, OHG, or KG): these too are not “shares” within the meaning of Section 17 EStG and are therefore not covered by Section 6 AStG. That does not mean, however, that relocating one’s activity abroad has no tax consequences whatsoever. What applies instead is a different regime: exit taxation on the disconnection of assets from German taxing rights (Entstrickungsbesteuerung) under Section 4(1) sentences 3 and 4 EStG, supplemented by the special rule on a deemed cessation of business under Section 16(3a) EStG. This article sets out when each provision applies, how a genuine cessation of business differs, for tax purposes, from a mere relocation of the business, and what relief is available for a relocation within the EU or the European Economic Area (EEA).
Why Section 6 AStG Does Not Apply Here
Section 6(1) AStG expressly covers only “shares within the meaning of Section 17(1) sentence 1” EStG, that is, shareholdings in domestic or foreign corporations. A sole proprietorship is not, legally, a share in a company but a bundle of individual assets (practice equipment, stock, a client or customer base, and, where applicable, goodwill) directly attributed to the business owner. A partnership interest too – legally a partner’s interest (Mitunternehmeranteil) under Section 15(1) sentence 1 no. 2 EStG – does not fall under Section 17 EStG and is therefore not covered by Section 6 AStG. This distinction matters because, in practice, it is frequently confused with the legally quite different case of relocating a GmbH’s registered seat or a GmbH shareholder’s emigration. For partnerships and sole proprietorships, the exit tax is replaced by exit taxation on the disconnection of assets (Entstrickungsbesteuerung), which attaches not to the person of the business owner but to the assets of the business itself.
Exit Taxation on the Disconnection of Assets Under Section 4(1) Sentences 3 and 4 EStG
The core provision is Section 4(1) sentence 3 EStG: “A withdrawal for purposes unrelated to the business shall be deemed to include the exclusion or restriction of the Federal Republic of Germany’s right to tax the profit from the disposal or use of an asset.” Sentence 4 specifies the practically most important case of application: “An exclusion or restriction of the right to tax the profit from the disposal of an asset exists, in particular, where an asset previously attributable to a domestic permanent establishment of the taxpayer becomes attributable to a foreign permanent establishment.” So, for example, if the equipment of a practice, a stock of goods, or even an intangible asset such as a client base is transferred from the previous domestic permanent establishment to a new foreign one, the law deems this to be a withdrawal – even though the asset continues to serve the same business of the same business owner and no sale takes place. This deemed withdrawal is valued, under Section 6(1) no. 4 EStG, not at partial value (Teilwert), as is otherwise usual for withdrawals, but expressly at fair market value (gemeiner Wert) – the legislature has therefore deliberately chosen the higher valuation standard for this case.
These principles apply irrespective of legal form: they cover commercial sole traders (Section 15 EStG) just as much as freelancers (Section 18 EStG), regardless of whether profit is determined by way of balance-sheet accounting or by a cash-basis income surplus calculation (Einnahmenüberschussrechnung) under Section 4(3) EStG. The Federal Fiscal Court (Bundesfinanzhof, BFH) confirmed this framework in its judgment of 26 March 2025 (I R 5/24) in a comparable case – the transfer of intangible assets (patent, trade mark, and utility model rights) from a domestic to a foreign permanent establishment within a partnership: the transfer constitutes a withdrawal for purposes unrelated to the business, the retroactive application of the version in force since the 2010 Annual Tax Act is constitutionally unobjectionable, and the provision does not breach EU law.
Cessation of Business or Mere Relocation? Two Different Sets of Facts
A distinction that is decisive in practice, and often overlooked, is this: Section 4(1) sentences 3 and 4 EStG covers only the transfer of individual assets, while the business as such continues to exist – for instance because a new permanent establishment is created in the destination country, in which the activity is essentially continued. If, on the other hand, Germany loses the right to tax all the assets of an entire business, part of a business, or a partner’s interest – for instance because no domestic permanent establishment remains – the more specific provision of Section 16(3a) EStG applies: “The exclusion or restriction of the Federal Republic of Germany’s right to tax the profit from the disposal of all the assets of the business or of a part of the business shall be deemed equivalent to a cessation of the trade or business.” A complete relocation of an entire business abroad is thus treated as equivalent to a genuine cessation of business (Betriebsaufgabe) within the meaning of Section 16(3) EStG.
This distinction is not a mere formality, because a cessation of business carries reliefs that are not available for the ongoing disconnection-of-assets taxation of individual assets under Section 4(1) sentence 3 EStG: the allowance under Section 16(4) EStG of 45,000 euros for taxpayers who have reached the age of 55 or are permanently unable to work (which tapers away progressively once the cessation profit exceeds 136,000 euros and is granted only once in a lifetime), and the reduced tax rate for extraordinary income under Section 34 EStG. Whether these reliefs also apply without restriction to the cessation profit merely deemed under Section 16(3a) EStG is not entirely uniformly assessed in tax literature and should be examined on a case-by-case basis with tax advice. The ongoing disconnection profit under Section 4(1) sentence 3 EStG, by contrast, is always ordinary profit with no access to these reliefs.
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| Scenario | Legal basis | Tax treatment |
|---|---|---|
| Individual assets move abroad, the business continues to exist in essence (even if only partly in Germany) | Section 4(1) sentences 3 and 4 EStG | Ordinary profit; deemed withdrawal at fair market value |
| The entire business, part of the business, or a partner’s interest completely loses German taxing rights | Section 16(3a) in conjunction with Section 4(1) sentence 4 EStG | Treated as a cessation of business; possible access to the allowance (Section 16(4) EStG) and the reduced tax rate (Section 34 EStG) |
| A domestic permanent establishment is retained in full | Neither provision applies | No disconnection taxation for the assets remaining in Germany |
Special Case: Where a Domestic Permanent Establishment Is Retained
In practice, it is rare for the entire business to be relocated without retaining any domestic connecting factor. More often, at least some remnant stays behind: an office that continues to be used, a stock of goods, or a single employee with authority to conclude contracts. Any of these connecting factors can establish a domestic permanent establishment within the meaning of Section 12 of the Fiscal Code (Abgabenordnung, AO), or of the relevant double taxation agreement. As long as such a permanent establishment exists, Germany retains its right to tax to that extent – for the assets attributed to it, there is then, as a matter of definition, no exclusion or restriction of the right to tax, so that neither Section 4(1) sentences 3 and 4 EStG nor Section 16(3a) EStG applies. In this case, the disconnection taxation affects only the assets that are actually attributed to the new foreign permanent establishment; a full cessation-of-business taxation is excluded as long as the domestic permanent establishment continues to exist.
Anyone choosing this intermediate route must, however, expect duplicate filing obligations: for the domestic permanent establishment, German profit determination and allocation under the relevant double taxation agreement continue to be required, while separate filing obligations arise abroad as well. Anyone deliberately using this arrangement as a transitional solution should carefully document the attribution of assets to the permanent establishment from the outset.
Continued Book Value and Instalment Payment for a Relocation Within the EU or the EEA
For relocations within the EU or the EEA, the law provides two different forms of relief, depending on which of the two sets of facts described above applies.
For the transfer of individual assets under Section 4(1) sentences 3 and 4 EStG, the taxpayer may, on application, form a compensating item (Ausgleichsposten) under Section 4g EStG, provided they remain subject to unlimited income tax liability and the asset is attributed to a permanent establishment in another EU or EEA member state. This compensating item is not released immediately but is “reversed, increasing profit, at one fifth each in the financial year in which it was formed and in the four following financial years” – meaning the tax burden is spread over five years rather than arising immediately in full. The application is irrevocable and must be made separately for each asset.
For the case of a deemed cessation of business under Section 16(3a) EStG, Section 36(5) EStG applies instead: the tax assessed on the cessation profit may, on application, “be paid in five equal annual instalments” if the assets concerned are attributed to business assets in another EU member state or EEA state. Unlike the compensating item under Section 4g EStG, which spreads the taxable profit itself over five years, Section 36(5) EStG merely defers the due date of the tax already assessed – the profit is therefore taxed immediately, and only the payment is made in instalments.
For relocations to a third country outside the EU and the EEA, neither the compensating item under Section 4g EStG nor the instalment payment under Section 36(5) EStG is available. There, the tax attributable to the disconnection becomes due in full in the year of the relocation – a factor that should be taken into account at an early stage when choosing the destination state and the timing of the relocation.
Trade Tax: Not Everyone Is Even Affected
On the question of trade tax (Gewerbesteuer), it is worth first looking at the legal classification of the activity. Freelancers within the meaning of Section 18 EStG do not, by definition, carry on a trade; under Section 2(1) of the Trade Tax Act (Gewerbesteuergesetz, GewStG), only “a commercial enterprise within the meaning of the Income Tax Act” under Section 15 EStG is subject to trade tax. A legal or tax-advisory practice, a medical practice, or an engineering office was accordingly not liable to trade tax even before relocation – relocating abroad changes nothing in this respect, because no trade tax liability existed in the first place that could lapse.
The position is different for commercial sole traders: here, trade tax liability is tied to the existence of a domestic permanent establishment. If this ceases to exist as a result of a complete relocation abroad, the trade tax liability for the business ends from the date of relocation; if, on the other hand, a domestic permanent establishment is retained, trade tax liability continues to that extent. If only part of the business is relocated, an apportionment of trade tax (Gewerbesteuerzerlegung) under Sections 28 et seq. GewStG may also arise.
Social Security Obligations as a Self-Employed Person Abroad
Entirely separate, as a legal matter, from the tax treatment of the business relocation is the question of whether, and for how long, the obligation to remain in the German statutory health, pension, and long-term care insurance schemes continues after moving abroad. Tax law and social security law follow different connecting factors, so that a person may be disconnected from German taxation while still being bound, for months or years, by social security law – or vice versa. This question is examined in detail in a separate article on the social security obligations of self-employed persons and digital nomads abroad and should be considered, alongside the disconnection taxation, as a distinct point to be checked when planning a business relocation.
Example
The following example is entirely fictional and serves illustrative purposes only; it does not describe any real case or real person. A self-employed graphic designer has so far run her sole proprietorship from a rented office in Germany. She plans to relocate both her residence and her office entirely to another EU member state, with no domestic connecting factor to remain. In this – entirely fictional – example, the complete relocation of all the assets of her business, including the client base she built up herself, would be treated as a cessation of business under Section 16(3a) EStG. Since no domestic permanent establishment remains, the entire cessation profit would in principle be taxable at fair market value; on application, however, she could make use of the instalment payment under Section 36(5) EStG over five years, because the assets are attributed to business assets in another EU state. If, instead, she relocated only her equipment while continuing to run a small office with a freelance assistant in Germany, only the disconnection taxation of the assets actually relocated under Section 4(1) sentences 3 and 4 EStG would come into play, rather than full cessation-of-business taxation – potentially spread out via the compensating item under Section 4g EStG.
When Advice Is Worthwhile
The tax treatment of relocating a business abroad depends significantly on decisions that can often no longer be reversed once the move has taken place. In particular, the following points should be clarified before relocating a business:
- whether a complete relocation of all assets is planned, or whether a domestic permanent establishment is deliberately to be retained,
- whether this satisfies the requirements for a deemed cessation of business under Section 16(3a) EStG, or whether only individual assets are disconnected under Section 4(1) sentences 3 and 4 EStG,
- a realistic valuation of the assets concerned at fair market value, especially for intangible assets such as a client or customer base,
- whether the destination country belongs to the EU or the EEA, so that Section 4g EStG or Section 36(5) EStG are available,
- the trade tax classification of the activity, together with a separate review of the social security consequences.
Conclusion
Freelancers and sole traders are not subject to the GmbH exit tax under Section 6 AStG when moving abroad – the legal risk lies instead in the disconnection-of-assets taxation under Section 4(1) sentences 3 and 4 EStG and, in the case of a complete business relocation with no domestic permanent establishment remaining, in the deemed cessation of business under Section 16(3a) EStG. Both sets of facts can trigger tax that falls due immediately on hidden reserves, even though no actual sale takes place. Anyone who thinks through, at an early stage, the distinction between a mere relocation of individual assets and a full cessation of business, and makes targeted use of the deferral options under Section 4g and Section 36(5) EStG, can make the tax burden of a business relocation considerably more predictable.
Fiala law firm has published extensively on international tax and corporate law and helps clients structure the relocation of their freelance practice or sole proprietorship abroad in a tax-efficient and legally sound way – from distinguishing between disconnection taxation and cessation of business through to making use of the deferral options available within the EU and the EEA. Feel free to contact the firm without obligation to discuss your plans in an initial consultation.
