European Commission Orders Germany To Scrap 'Exit Tax' Rules

by Ulrika Lomas, Tax-News.com, Brussels

21 April 2004

The European Commission on Monday formally requested that Germany removes a so-called ‘exit tax’ on certain assets of individuals leaving the country, arguing that the provisions of the tax law run counter to the principle of freedom of establishment as laid down by the EC Treaty.

Under the current German tax law, individuals who decide to leave the country are taxed on unrealised capital gains if they have had unlimited income tax liability in Germany for at least ten years, and have held more than 1% of a limited company.

However, by contrast, the ‘exit tax’ rules state that capital gains are taxed for residents in Germany only if they are realised.

Agreeing with recent case law laid down by the European Court of Justice in the 'de Lasteyrie du Saillant' case in March 2004, the Commission ruled that the exit tax is incompatible with EC Treaty rules on people's right to reside, work and establish themselves in another Member State.

Therefore, according to the Commission, there is “no valid justification for such an obvious hindrance to the free movement of persons within the Internal Market.”

The Commission also revealed that it is examining similar tax rules that may exist in other member states “with a view to ensuring their compliance with the Treaty.”

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