Focus of this article: This article deals with the case in which, in the course of a succession, the business as such, meaning its seat, management and operating activity, is moved abroad, whether by the senior entrepreneur before the handover, by the successor afterwards, or as a jointly planned step. It is distinct from the case in which only a person, the senior entrepreneur or the successor, moves their personal residence abroad while the company remains seated in Germany. In that case the interplay of Section 6 AStG (German Foreign Tax Act) and the inheritance tax relief rules is the central issue.
Anyone who wants to hand a company over to the next generation and at the same time move the business abroad faces a structuring task with several time-limit and valuation regimes running simultaneously: inheritance and gift tax relief under Sections 13a to 13c ErbStG (German Inheritance and Gift Tax Act) with their retention periods; corporation tax or income tax exit taxation of the company or the sole proprietorship; and, where shareholders emigrate personally as well, exit taxation under Section 6 AStG. These regimes are legally independent of one another but interact in practice and are frequently mixed up. This article sets them out for the situation in which the business itself crosses the border.
Two Different Questions: Who Emigrates, the Person or the Business?
For the tax classification, the first step is to separate who or what actually goes abroad. If only a shareholder moves their personal residence while the company remains seated and managed in Germany, Section 6 AStG applies in the first place at the shareholder’s level, as discussed in our article on business succession where a shareholder emigrates. If, by contrast, the business itself is relocated, meaning the seat and actual management in the case of a corporation, or the actual business activity in the case of a sole proprietorship or partnership, other provisions come to the fore: exit taxation of the hidden reserves in the business assets and, in the succession context, the question of whether the relocation jeopardises the inheritance tax relief already granted or just claimed. In practice both levels often occur together, for example where a successor already resident abroad wants to take the entire business with them. They must nevertheless be separated legally, because they connect to different triggering events and are subject to different provisions.
Three Typical Constellations in Cross-Border Succession
In advisory practice, essentially three starting positions can be distinguished, each suggesting a different order of transfer and relocation:
First, the senior entrepreneur relocates the business abroad themselves and transfers the shares or the business to the successor only afterwards. Second, the senior first transfers the business within Germany, claiming the relief under Sections 13a to 13c ErbStG, and the successor relocates the business abroad only after taking over. Third, the intended successor already lives abroad and is to take the business over there, so that transfer and relocation in practice coincide. Which order is more favourable for tax purposes depends largely on the legal form of the business and is explored further below in the section on the strategic key question.
Corporations: The Relief Depends on the Reference Date, Not on the Future of the Seat
The Entry Condition under Section 13b (1) No. 3 ErbStG
For shares in corporations, relief under Section 13b (1) No. 3 ErbStG requires that the company “at the time the tax arises (Section 9) has its seat or its place of management in Germany or in a Member State of the European Union or in a state of the European Economic Area”. A single reference date is therefore decisive: the time of the gift or the succession. Whether the company moved its seat before or after that date, or will do so, is irrelevant for this entry condition. It is not checked continuously during the retention period but once, at the time the tax arises.
The Exhaustive List in Section 13a (6) Sentence 1 No. 4 ErbStG
For the question of what counts as a harmful disposal during the subsequent retention period of five or seven years, the list in Section 13a (6) ErbStG is decisive. For shares in corporations, No. 4 names exhaustively: the sale of the shares in whole or in part, the hidden contribution of the shares to another corporation, the dissolution of the company, a reduction of its nominal capital with distribution to the shareholders, and the sale of essential operating assets of the company with distribution of the proceeds to the shareholders. A mere relocation of the seat or management of the company to a third country is not named in this list as a separate triggering event. A successor who has received shares with relief and then relocates the company abroad, without dissolution, capital reduction or distribution of essential assets, does not automatically lose the relief already granted, according to the wording of the provision. This narrow, exhaustive wording of the list also means that if the relocation is combined with a dissolution, a capital reduction or the sale of essential assets together with a distribution to the shareholders, for example because the successor wants to “clean up” the substance before the move, No. 4 does apply, and the relief lapses retroactively to that extent.
What Still Threatens: Exit Taxation at the Level of the Company
The fact that the successor’s inheritance tax relief is not directly jeopardised by a mere relocation of the seat does not mean that the relocation is without tax consequences. If the company moves its seat or its management abroad and German taxing rights over its hidden reserves are thereby excluded or restricted, exit taxation under Section 12 (1) KStG (German Corporation Tax Act) applies at the level of the company itself, irrespective of the ErbStG relief. This is an entirely separate tax level, which does not affect the successor as new shareholder in their relief, but does affect them economically through the value of their participation if the company has to bear the resulting tax burden. The details of this company-level tax, including the options for spreading it through the compensation item under Section 4g EStG (German Income Tax Act) in the case of a relocation within the EU or EEA, are set out at length in our article on the tax consequences of relocating a company’s seat abroad. For succession planning, it follows that anyone who wants to relocate the business after taking over should plan the company’s liquidity for the exit tax even where the inheritance tax relief as such is unaffected.
Sole Proprietorships and Partnership Interests: Ceasing the Business Is Expressly Harmful
For sole proprietorships, trades and co-entrepreneur interests in partnerships, the position differs from that for shares in corporations. Section 13a (6) sentence 1 No. 1 ErbStG expressly names here not only the sale of the business or part of a business but provides: “the cessation of the trade or business is also deemed a sale”. Unlike with shares in corporations, the cessation of the business is therefore an independent, expressly named trigger for back taxation. Whether a relocation of the business abroad is to be regarded as a harmful cessation or as a mere, harmless continuation at another location depends decisively on whether a domestic permanent establishment remains in place after the relocation, and on whether the business is actually continued as an economic unit or in fact has to be rebuilt. This distinction between cessation of the business and mere relocation is explained in detail in the income tax context, where it is decisive for exit taxation under Section 4 (1) sentences 3 and 4 EStG, in our article on relocating a business abroad for freelancers and sole proprietors. The criteria for distinguishing set out there can be applied by analogy to the question of whether a partnership interest taken over with inheritance tax relief is “given up” by the relocation. A successor who has taken over an inherited or gifted business with relief and moves it entirely abroad within the retention period without a domestic permanent establishment remaining takes a significantly higher risk of back taxation than the successor to a shareholding in a corporation. At the same time, they encounter income tax exit taxation of the hidden reserves under Section 4 (1) sentences 3 and 4 EStG. Both disadvantages can add up.
The Payroll Sum Rule with a Permanent Establishment Abroad
One aspect that is regularly overlooked in planning a relocation abroad in the succession context is the payroll sum rule (Lohnsummenregelung) under Section 13a (3) ErbStG. It applies only if the business has more than five employees on the valuation date, and it requires that the sum of the annual payroll amounts within the payroll period does not fall below the starting payroll sum, as a rule 400 percent, or 700 percent under the option for full relief. According to the Inheritance Tax Guidelines (R E 13a.7 ErbStR), wages and salaries paid by a permanent establishment in another EU or EEA state can in principle be included in determining the payroll sum, provided they follow from the profit determination prepared for tax purposes. For a relocation within the EU or EEA, this means that the payroll sum rule does not in principle stand in the way of such a relocation, as long as the jobs, albeit at the new location, are retained and the payroll sum overall does not fall below the relevant threshold. For a relocation to a third country outside the EU and EEA, by contrast, the inclusion of foreign wages must be examined in the individual case and is much less certain.
The Strategic Key Question: Succession First, Then Relocation, or the Other Way Round?
From the principles above, a central question of sequence arises for planning practice, one that the publicly available literature on this topic has so far rarely worked through in concrete terms. If the business is first transferred to the successor, while still under a German seat or German management, and only then relocated, the EU/EEA condition of Section 13b (1) No. 3 ErbStG is met on the relevant reference date for the tax to arise, and the relief is granted. The subsequent relocation by the successor then triggers exit taxation of its own, at the level of the company in the case of a corporation, and in the case of a sole proprietorship or partnership with the additional risk of a harmful cessation of the business. In principle, however, it does not retroactively affect the relief already granted as such, provided none of the events exhaustively named in Section 13a (6) ErbStG occurs.
If, on the other hand, the business is first relocated and only then transferred to the successor, the condition of Section 13b (1) No. 3 ErbStG is still met at the time of transfer only if the destination country lies within the EU or EEA. With a relocation to a third country, the relief for shares in corporations lapses completely from the outset, because the entry condition is no longer met on the relevant reference date. For sole proprietorships and partnerships, there is the further point that the domestic business assets may already have been subject to exit taxation through the prior relocation and thus may no longer exist in the form that could be the subject of a privileged transfer. In most constellations it is therefore, irrespective of the non-tax reasons for the sequence to be examined in each case, more advantageous for tax purposes to carry out the succession within Germany or within the EU/EEA and to leave the actual relocation abroad to the successor after taking over, rather than to take both steps in the reverse order. There is also a valuation aspect. Since exit tax under Section 6 AStG and exit taxation are based on the hidden reserves at the time of relocation, an earlier point of transfer and, where relevant, relocation, for example in a phase of weaker growth of the business, can lead to a lower tax base than a later relocation after further increases in value. This valuation aspect must, however, always be weighed together with the other time limits set out here and does not replace examining them.
Peripheral Topics to Bear in Mind in a Relocation
If not the entire business but initially only some of the business functions are relocated abroad, for example sales, production or parts of development, while the core structures remain in Germany, the further question arises of the transfer of functions under Section 1 (3a) AStG in conjunction with Section 1 (3) AStG and of transfer prices between the remaining German and the new foreign part of the enterprise. The decisive principle here is the arm’s length principle, combined with corresponding documentation duties. An existing double taxation treaty with the destination country can influence both the current taxation after the relocation and, through the question of the residence of the company or the managing director, the allocation of taxing rights, and should be examined before any relocation. For the transfer itself, finally, irrespective of the relief for business assets under Sections 13a to 13c ErbStG, the personal allowances under Section 16 ErbStG must be taken into account, currently EUR 500,000 for spouses and registered civil partners and EUR 400,000 per child. They are available alongside the business assets relief and must be included in the overall planning of a succession with a foreign connection.
Do Not Forget the Articles of Association and the Advance Discount
Irrespective of the question of relocation abroad, in any succession planning with an international connection the articles of association should be reviewed early for restrictions on transfer (Vinkulierung) and succession clauses, and for the conditions of the advance discount for family businesses under Section 13a (9) ErbStG. With corresponding restrictions in the articles, namely a limit on withdrawals, a restriction on disposals to the family circle and a limit on compensation on exit below the fair market value, this allows an additional discount of up to 30 percent. It does, however, presuppose a contractual commitment that has existed for at least two years before the transfer and is then maintained for twenty years. If the business is relocated later, the commitments in the articles of association should be designed so that they remain enforceable under the law of the new state of seat as well. In the case of a relocation to a third country with a different legal tradition, this must be examined separately. The legal options for the actual transfer of the seat of a GmbH, namely the dual-seat model, a cross-border change of legal form, or a new formation with subsequent liquidation, are set out in detail in our article on relocating a GmbH abroad and should already be considered in succession planning, since they involve different lead times and costs.
Practical Example: Succession First, Relocation Afterwards
The following example is entirely fictitious and serves solely for illustration. It describes no real case and no real person. An entrepreneur runs a medium-sized trading business with twelve employees in Germany and wants to hand the business over in three years to his daughter, who then wants to move with the entire business to another EU Member State in order to live there and continue the business. In this example, the transfer would first be completed within Germany while both father and daughter are still subject to unlimited tax liability. The relief conditions of Section 13b ErbStG would be met on that reference date. If the daughter then relocates the business to the EU Member State, retaining the jobs at the new location and not simply “giving up” the domestic structure but continuing it in a traceable way, the relief already granted would, under the principles set out, as a rule remain unaffected, provided none of the harmful disposals named in Section 13a (6) ErbStG occurs and the payroll sum rule is complied with by including the wages then paid in the EU abroad. The daughter would, however, have to plan for income tax exit taxation of the hidden reserves of the business at the time of relocation, where relevant using the options for spreading the tax on relocations within the EU. Had the family instead decided to relocate the business before the transfer by the father, the relief for the subsequent transfer to the daughter would have been at risk if the destination country had not belonged to the EU or EEA.
Checklist: Business Succession with a Planned Relocation Abroad
- Clarify whether in the specific case the person (shareholder or successor) or the business itself crosses the border, or both at the same time
- Take the legal form of the business into account: for shares in corporations the exhaustive list in Section 13a (6) No. 4 ErbStG is decisive; for sole proprietorships and partnerships, additionally the distinction between cessation of the business and mere relocation
- Check whether the EU/EEA condition of Section 13b (1) No. 3 ErbStG will be met on the intended transfer reference date
- Plan the order of transfer and relocation so that the transfer takes place, where possible, while the business still has its seat or management in Germany or in the EU/EEA
- Plan liquidity for a separate exit taxation at the level of the company or the sole proprietorship, irrespective of whether the inheritance tax relief continues
- Keep an eye on the development of the payroll sum after the relocation, in particular whether foreign wages can be included
- Have the articles of association reviewed in good time for succession clauses and the conditions of the advance discount under Section 13a (9) ErbStG, with a view to their enforceability in the destination country as well
- For partial relocations of individual functions, examine transfer prices and a possible transfer of functions under Section 1 AStG separately
- Include the double taxation treaty with the destination country and the personal allowances under Section 16 ErbStG in the overall planning
- Decide the legal form of the actual transfer of seat (dual seat, cross-border change of legal form, new formation with liquidation) early, since lead times vary considerably
Conclusion
Where, in the course of a business succession, not only a person but the business itself is relocated abroad, the inheritance tax relief under Sections 13a to 13c ErbStG meets the exit taxation of business assets, which is legally independent of it. For shares in corporations, the EU/EEA condition of Section 13b (1) No. 3 ErbStG has to be met only on the transfer reference date, and the list of harmful disposals under Section 13a (6) No. 4 ErbStG does not expressly name a later mere relocation of the seat. This differs for sole proprietorships and partnerships, where cessation of the business constitutes an independent trigger for back taxation. In both cases, exit taxation of the company or the sole proprietorship remains as a separate tax burden, regardless of whether the successor’s relief survives. Anyone planning succession and relocation abroad together should therefore, as a rule, complete the transfer while the business still meets the conditions for relief and leave the actual relocation to the successor, combined with timely review of the articles of association, the development of the payroll sum and liquidity planning for the company-level tax burden.
The Fiala law firm advises entrepreneurs and business families on planning a cross-border succession in which both the inheritance tax relief and a planned relocation of the business abroad have to be coordinated. Please get in touch without obligation to discuss your personal succession and relocation situation in an initial consultation.
