Entrepreneurs and shareholders who plan to move their residence abroad almost inevitably come across the same suggestion in their research: set up a holding structure before emigrating in order to avoid, or at least soften, exit taxation under Section 6 AStG (German Foreign Tax Act). The idea sounds deceptively simple. The valuable GmbH shares are contributed to a holding company before the move takes place, and the problem is supposedly solved. In practice, however, the structure has far more prerequisites than many abbreviated accounts suggest. Anyone who fails to think through the blocking periods of reorganisation tax law, the substance requirements for a holding company and the interplay with controlled foreign company taxation risks ending up with a higher rather than a lower tax burden. This article sets out what a holding structure before emigration can actually achieve, which statutory periods must be observed without fail, and where the limits of such planning lie.
Why the Holding Company Comes into Play: The Basic Problem of Exit Taxation
If a natural person who has been subject to unlimited German income tax liability for at least seven of the last twelve years moves their residence or habitual abode abroad, and at that time holds an interest of at least 1 % in a corporation within the meaning of Section 17 EStG (German Income Tax Act), Section 6 AStG applies. For tax purposes, the departure is then treated as a disposal of the shares at fair market value, even though no sale takes place and the shareholder receives no money. What is taxed is the difference between the original acquisition cost and the current market value of the shares under the partial-income method, that is, 60 % of it at the personal income tax rate plus solidarity surcharge.
Since the ATAD Implementation Act (ATAD-Umsetzungsgesetz), the earlier deferral for moves within the EU/EEA, which was unlimited in time and interest-free, has ceased to exist. On application, the assessed tax does not fall due immediately in one sum but can in principle be paid in up to seven equal annual instalments under Section 6 (4) AStG, although regularly only against security. For moves to Switzerland, the CJEU judgment in Case C-581/17 (Wächtler) continues, under certain conditions, to allow a permanent, interest-free deferral, based on the Agreement on the Free Movement of Persons between the EU and Switzerland. For 2026, the Federal Ministry of Finance has also introduced an electronic notification form (“ASt – Mitteilung nach § 6 AStG”) with which the tax administration records exit cases more systematically and formalises the affected persons’ notification duties.
The real problem for many entrepreneurs is this: with operationally successful GmbHs that have grown over the years, the market value of the shares can be a multiple of the original share capital. An immediately payable, notional tax on an unrealised gain then represents a considerable liquidity burden, and this is exactly where the idea of contributing the shares to a holding structure before the move comes in.
What the Holding Actually Changes, and What It Does Not
A widespread misunderstanding is that the mere existence of a holding company automatically rules out exit taxation. That is not correct. Shares in a holding company are also shares in a corporation within the meaning of Section 17 EStG. If the departing shareholder holds at least 1 % of the holding, Section 6 AStG in principle applies exactly as it did before to the direct holding in the operating GmbH. Only the object of valuation shifts: what is taxed is then the fair market value of the holding shares, which, besides the value of the interest in the operating subsidiary, also includes all profits retained in the holding, reserves, real estate or securities portfolios. Anyone who has accumulated profits in the holding over the years can therefore even enlarge rather than reduce the tax connecting factor on emigration if the structure is not set up with care.
The real effect of a holding structure therefore lies not in preventing exit taxation as such, but in how the assets are treated for tax purposes up to and after the move, in particular through the corporation tax participation exemption in Section 8b KStG (German Corporation Tax Act). Whether, and to what extent, the structure brings relief on the actual departure depends decisively on how and when it was established.
The Myth of the Double Holding to Fall Below the 1 % Threshold
In forums and in some advisory offerings, the idea circulates that by interposing several holding levels the shareholder’s direct participation ratio can be formally pushed below 1 %, thereby circumventing Section 6 AStG. However, the tax authorities and the courts apply an economic approach to multi-tier holding structures. Participation ratios are calculated through the chain of holdings where the interposed companies have no economic substance of their own and evidently serve only to fall below the threshold. A purely formal interposition without economic justification may also be treated as an abuse of legal structures within the meaning of Section 42 AO (German Fiscal Code) and be disregarded for tax purposes. Anyone who believes that a formal cascade of several holding companies without their own staff, their own premises and their own decision-making authority will keep them under the radar of exit taxation takes a considerable risk of back taxation.
The Classic Route: Tax-Neutral Contribution under Sections 20 and 21 UmwStG
The legally secure route to a holding structure runs through a contribution of the existing GmbH shares to a newly formed or already existing holding GmbH. Two situations must be distinguished:
- Share-for-share exchange under Section 21 UmwStG (German Reorganisation Tax Act): The shareholder contributes their shares in the operating GmbH to the holding GmbH in return for new shares. In practice this is the most common case where an operating company already exists.
- Contribution in kind under Section 20 UmwStG: Where not just a shareholding but an entire business, a part of a business or a co-entrepreneur’s interest is contributed, tax neutrality is governed by Section 20 UmwStG, for example where a sole proprietorship is first contributed to an operating GmbH and its shares are then contributed to a holding.
In both cases, the contribution can, on application, be made tax-neutrally at book value, so that no contribution gain arises at the time of contribution. One condition for the qualifying share-for-share exchange under Section 21 (1) sentence 2 UmwStG is, among other things, that after the contribution the acquiring holding company holds the majority of the voting rights in the operating company (a so-called majority-conferring share exchange). For shareholders who hold less than half of the shares, this route is therefore not readily available tax-neutrally. Alternative structures come into consideration here, such as interposing a partnership under Section 20 UmwStG, or a coordinated approach by several co-shareholders who each set up their own holding companies.
The Seven-Year Blocking Period under Section 22 UmwStG: The Most Important Pitfall
The tax neutrality of the contribution is subject to a seven-year blocking period under Section 22 UmwStG. If this period is breached within seven years of the contribution, retroactive taxation follows, relating to the year of the contribution and not the year of the breach. Two variants must be distinguished:
- Contribution gain I (Section 22 (1) UmwStG): If the contributor sells the holding shares received in the course of the contribution within the blocking period, the contribution gain is taxed retroactively.
- Contribution gain II (Section 22 (2) UmwStG): If instead the holding sells the contributed shares in the operating company within the blocking period, this also triggers retroactive taxation.
The amount subject to back taxation shrinks by one seventh with each full calendar year that has elapsed since the contribution. After three full years, 4/7 of the original contribution gain is therefore still taxable; after seven full years the blocking period has expired completely and a sale no longer triggers retroactive taxation. For emigration planning, this results in a clear chronological order: the contribution to the holding should take place as early as possible before the planned departure, and a subsequent sale of the holding shares or the operating shares, whether by the shareholder personally or by the holding, should wait until the blocking period has expired. A holding structure “thrown together” shortly before the move regularly not only fails to achieve the desired aim but also increases the risk that the tax authorities will treat the temporal and factual connection between the restructuring and the departure as an indication of an arrangement that cannot be recognised for tax purposes.
It is important to clarify that the departure itself does not automatically breach the blocking period. The blocking period is triggered by a sale of the shares, not by the mere change of residence. Departure and breach of the blocking period are legally two separate triggering events, but in practice they often overlap. Anyone who, shortly after leaving, has to sell the holding shares for financial reasons risks a double burden made up of the retroactive contribution gain and the exit taxation triggered at the same time on the same asset.
The Participation Exemption as the Real Economic Core of the Structure
The economic advantage of a holding structure lies above all in the corporation tax participation exemption in Section 8b KStG. If the operating subsidiary distributes profits to the holding, or the holding sells its interest, 95 % of the dividends or disposal gains, respectively, remain exempt from corporation tax under Section 8b (1) and (2) KStG. Only 5 % is deemed a non-deductible business expense as a flat rate and is taxed. With a combined corporation tax and trade tax burden of around 30 %, this results in an effective tax burden of about 1.5 % at holding level. That is a considerable retention advantage over receiving the proceeds privately, where a disposal gain would be taxed under the partial-income method at up to about 47.5 % (top rate plus solidarity surcharge).
Two restrictions must be noted here, which abbreviated accounts often overlook:
- Free-float clause for ongoing dividends (Section 8b (4) KStG): The 95 % exemption for profit distributions does not apply if the holding’s participation in the distributing company was less than 10 % at the beginning of the calendar year. In that case, the dividend is fully subject to corporation tax. For disposal gains under Section 8b (2) KStG, by contrast, this free-float threshold does not apply, and the 95 % exemption applies irrespective of the size of the holding.
- Trade tax reduction (Section 9 No. 2a GewStG, German Trade Tax Act): For trade tax exemption of dividends, a minimum participation of 15 % at the beginning of the assessment period is required. If the participation is below that, the dividends are fully subject to trade tax despite the 95 % corporation tax exemption.
It is also decisive that the participation exemption works only at the level of the holding. As soon as profits are distributed from the holding to the shareholder as a natural person, the regular flat-rate withholding tax (Abgeltungsteuer) of 25 % plus solidarity surcharge (effectively about 26.4 %) applies to that distribution, or, where the shareholder is resident abroad, withholding tax under the relevant double taxation treaty. The holding advantage is thus primarily a reinvestment and retention advantage: at holding level the capital can be used almost undiminished for further investment, for acquiring new participations or for building up assets, while a final withdrawal into private assets remains subject to full taxation.
When a Partnership Is the Better Choice Than a Corporation
Since Section 6 AStG connects exclusively to shares within the meaning of Section 17 EStG, that is, to interests in corporations held as private assets, the provision does not apply at all if the participation is instead held as business assets through a commercially active or commercially characterised partnership, for example a GmbH & Co. KG. This restructuring does not, however, make the problem disappear. It shifts it to a different area of regulation. If the entrepreneur moves their residence abroad and no domestic permanent establishment of the partnership remains, Germany loses the right to tax the hidden reserves in the GmbH participation, with the consequence of exit taxation under Section 4 (1) sentences 3 and 4 EStG. If, on the other hand, a genuine, economically active domestic permanent establishment with real substance remains, no immediate taxation occurs and the participation stays in German business assets, although it also remains within German reach for the current income. The tax and company-law decisions involved in relocating a business abroad, including the question of when a domestic permanent establishment actually continues to exist, are set out in detail in the article Relocating a Company’s Registered Office Abroad: The Tax Consequences Businesses Should Know.
The Foreign Holding: When the Choice of Location and the Move Coincide
If not only the personal residence but also the seat or management of the holding is moved abroad, further layers of regulation come into play. If the holding remains a German GmbH with its seat and management in Germany, it stays subject to unlimited German corporation tax liability irrespective of the shareholder’s residence. The relocation of personal residence alone therefore does not remove the holding from German taxation. If, however, the management of the holding is also moved abroad and Germany thereby loses the right to tax the holding’s hidden reserves, corporation tax exit taxation under Section 12 (1) KStG applies, following the principles that apply to partnerships. The particularities of company and tax law in a cross-border transfer of the GmbH’s seat itself, in particular the relationship between the real seat theory and the incorporation theory, are the subject of the separate article Relocating a GmbH Abroad: Legal and Tax Fundamentals.
When choosing a foreign holding location, alongside the nominal corporation tax rate, the following play a role above all: the existence of a double taxation treaty with Germany; the applicability of the EU Parent-Subsidiary Directive (which, with a minimum participation of 10 % and a holding period of one year, provides withholding tax exemption on dividends between EU corporations); and the realistic possibility of building up genuine economic substance at the chosen location. A low nominal tax rate is of little use if the structure is not recognised for tax purposes for lack of substance, or if a place-of-management permanent establishment in Germany is assumed because all essential decisions are in fact still taken from Germany.
The Second Trap: Controlled Foreign Company Taxation under Sections 7 to 14 AStG
If the holding is located in a state with a comparatively low income tax burden and mainly earns passive income, for example interest, certain licence fees or free-float dividends that do not fall under the activity exception of Section 8b (1) No. 7 AStG, controlled foreign company taxation (Hinzurechnungsbesteuerung) must additionally be examined. If persons subject to unlimited German tax liability control the foreign company to more than half, and its income tax burden is below the low-tax threshold of Section 8 (5) AStG, which was lowered from the former 25 % to 15 % with effect from 1 January 2024, the foreign holding’s passive income is attributed directly to the German shareholder as their own income, irrespective of any actual distribution. The intended retention advantage then disappears in whole or in part.
For holding companies within the EU or EEA there is an exception in the substance and motive test under Section 8 (2) AStG. Anyone who proves that the company carries on genuine economic activity escapes controlled foreign company taxation. The requirements follow the case law of the Court of Justice of the EU (EuGH) on freedom of establishment (fundamentally Case C-196/04, Cadbury Schweppes) and in essence demand the company’s own, adequately equipped premises, qualified staff with genuine decision-making authority, and management actually exercised on site, not merely a post-box address at a fiduciary. For holding locations outside the EU/EEA this safety net does not apply. Here, controlled foreign company taxation continues to apply in full where the other conditions are met. The basic functioning of controlled foreign company taxation and its interplay with exit taxation are also dealt with in the article Exit Tax on GmbH Shareholdings: Legal and Tax Fundamentals for Shareholders.
Two Frequently Overlooked Side Issues
The Inheritance Tax Extended Liability Period
Anyone planning a holding structure with a view to emigration should keep in mind not only the income tax consequences but also the inheritance and gift tax side. Under Section 2 (1) No. 1 sentence 2 lit. b ErbStG (German Inheritance and Gift Tax Act), German nationals remain subject to unlimited inheritance and gift tax for up to five years after giving up their domestic residence (“extended unlimited tax liability”). If the holding participation is transferred without consideration during this period, or passes in an inheritance, the entire transfer of assets remains subject to German inheritance tax, irrespective of the new residence. This period must be borne in mind when timing a generational change within the holding structure, and it must not be confused with the seven-year blocking period of Section 22 UmwStG or the seven-of-twelve-years rule of Section 6 AStG. These are three different periods, each with its own scope of application.
Reporting Duty for Cross-Border Tax Arrangements (DAC6)
A restructuring into a holding in temporal connection with a planned emigration may, in some circumstances, also trigger the reporting duty for cross-border tax arrangements under Sections 138d et seq. AO. If the arrangement meets one of the hallmarks listed there and, where required for the particular hallmark, the tax advantage is one of the main benefits of the structure (the so-called main benefit test), there is a duty to notify the Federal Central Tax Office. This duty regularly falls on the intermediary (tax advisor, lawyer) but may alternatively also fall on the user themselves. Whether a reportable arrangement exists in an individual case always requires a specific examination of the actual structure and motives. It is a point that is regularly missing entirely from freely available overviews of the holding structure before emigration, but which must be checked as part of practical implementation.
Checklist: Holding Structure Before Emigration – Timetable
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| Step | Content | Typical timing |
|---|---|---|
| 1. Initial analysis | Holding structure, size of participation, valuation of the operating company | As early as possible, at least 2 years before departure |
| 2. Choice of contribution route | Share-for-share exchange (Section 21 UmwStG) or contribution in kind (Section 20 UmwStG), check majority requirement | Before forming the holding |
| 3. Tax-neutral contribution | Application for book-value continuation, notarial implementation | Well before the planned departure |
| 4. Building substance in the holding | Own premises, staff, documented decision-making | From formation, ongoing |
| 5. Observing the blocking period | No sale of the holding or operating shares within 7 years of the contribution (Section 22 UmwStG) | 7 years from contribution |
| 6. Check controlled foreign company taxation | Substance and motive test for a foreign holding, note the 15 % low-tax threshold | Before choosing the holding location |
| 7. DAC6 check | Clarify the reporting duty under Sections 138d et seq. AO | Before implementing the structure |
| 8. Exit taxation of the holding shares | Valuation, application for instalments under Section 6 (4) AStG, prepare the ASt notification | Before the change of residence |
| 9. Inheritance tax extended liability period | Plan for the 5-year period under Section 2 (1) No. 1 ErbStG for transfers | Up to 5 years after departure |
| 10. Ongoing documentation | Evidence of management, days of presence, resolutions | Continuous, retain for at least 10 years |
Hypothetical Example
Purely by way of illustration and without reference to any real mandate: a shareholder holds 100 % of an operating GmbH with an estimated market value of EUR 3 million and plans to emigrate permanently to a non-EU country in three years. If he now contributes his shares tax-neutrally by way of a share-for-share exchange under Section 21 UmwStG to a newly formed holding GmbH, that holding will, on his departure in three years, in principle still be subject to exit taxation under Section 6 AStG. Because the seven-year blocking period of Section 22 UmwStG will not yet have expired at that point, a later sale of the holding shares by him, or of the operating shares by the holding, would additionally trigger a retroactive contribution gain. Without a planned sale, the position initially remains a single exit taxation on the value of the holding shares, which he can settle in instalments under Section 6 (4) AStG. An immediate sale of the operating company from abroad within the blocking period, by contrast, would lead to a double burden of contribution gain II and exit taxation, a result that could have been avoided by an earlier contribution, well before the three-year plan.
Conclusion
Setting up a holding structure before emigrating can be an effective planning instrument. However, it does not replace a blanket exemption from exit taxation under Section 6 AStG. It shifts and changes the tax base, while the participation exemption of Section 8b KStG opens up a considerable retention advantage for the period up to departure. Anyone who fails to plan from the outset for the seven-year blocking period of Section 22 UmwStG, the substance requirements for avoiding controlled foreign company taxation, the inheritance tax extended liability period and the possible DAC6 reporting duty risks turning an apparent tax saving into an additional, avoidable burden. What matters is not the complexity of the chosen structure but planning that is carried out in good time, with sufficient lead time, and documented without gaps.
Attorney Johannes Fiala and the law firm, with a focus on international tax and company law in Munich, accompany entrepreneurs and shareholders in planning a holding structure ahead of an emigration, from the choice of contribution route and the substance requirements to coordination with exit taxation. Please get in touch without obligation to discuss your plans in an initial consultation.
