German Exit Taxation (Entstrickung) 2026: Triggers, Instalments and Current Case Law for Companies
German exit taxation (Entstrickungsbesteuerung) applies when Germany loses or restricts its right to tax an asset. This happens, for example, when assets are transferred to a foreign permanent establishment, when management is moved abroad or when a double tax treaty changes. The hidden reserves are then taxed even though no money has changed hands. This guide reflects the 2026 position: legal basis, typical triggers, valuation, spreading over five years and the landmark Federal Fiscal Court ruling of March 2025.
- ✛Exit taxation means: if Germany loses its right to tax an asset, the asset is deemed withdrawn or sold at fair market value (section 4(1) sentence 3 EStG, section 12(1) KStG).
- ✛For transfers to a permanent establishment in the EU or EEA, a compensating item can be formed on application and released over five years (section 4g EStG). The application is irrevocable.
- ✛If a business is relocated or a company moves to the EU or EEA, the tax can be paid in five annual instalments on application (section 36(5) EStG). For third countries such as Switzerland it is generally due immediately.
- ✛On 26 March 2025 the Federal Fiscal Court (I R 5/24) ruled that a transfer to a foreign permanent establishment triggers exit taxation – even if Germany does not actually lose its taxing right.
- ✛Private shareholdings of 1% or more are subject to the separate exit tax under section 6 AStG with seven annual instalments.
What is German exit taxation?
The term 'Entstrickung' describes an asset leaving the German tax net. As long as an asset is 'tax-entangled' in Germany, the tax authorities can tax its hidden reserves on a later sale. When this entanglement ends, Germany brings taxation forward: the hidden reserves are treated as if the asset had been sold at fair market value.
Exit taxation is therefore a tax on a fictitious gain. No money flows, yet a tax liability arises. For internationally active companies it is one of the most important risks in expansion, restructuring and relocation.
The legal basis
- ✛Section 4(1) sentence 3 EStG: deemed withdrawal for sole traders and partnerships if Germany's taxing right is excluded or restricted
- ✛Section 4(1) sentence 4 EStG: exit taxation in particular when an asset is allocated from a domestic to a foreign permanent establishment
- ✛Section 12(1) KStG: deemed sale for corporations
- ✛Section 16(3a) EStG: cessation of business if an entire business is moved abroad
- ✛Section 6(1) nos. 4 and 5a EStG: valuation at fair market value
- ✛Sections 4g and 36(5) EStG: spreading or payment in instalments for EU and EEA cases
The Haufe overview of the statutory rules on exit taxation sets out the current law and its historical development in detail.
Exit taxation of business assets and the exit tax under section 6 AStG are two different rules. Section 6 AStG covers private shareholdings of 1% or more in corporations when an individual moves abroad. Entstrickung concerns the assets of a business.
EU framework: CJEU and ATAD
Exit taxation sits between the national right to tax and the EU freedom of establishment. The Court of Justice of the EU has set the guard rails in several rulings.
- ✛National Grid Indus (C-371/10, 2011): a state may assess hidden reserves when a company leaves. Immediate collection may, however, be disproportionate; the taxpayer must be able to choose deferral.
- ✛Verder LabTec (C-657/13, 2015): Germany's former spreading over ten years on transfers to an EU permanent establishment is compatible with the freedom of establishment. Deferral until actual sale is not required.
- ✛Wächtler (C-581/17, 2019): for individuals moving to Switzerland, immediate exit taxation breaches the EU–Switzerland Agreement on the Free Movement of Persons.
With the Anti-Tax Avoidance Directive (ATAD), the EU harmonised exit taxation in 2016. Article 5 ATAD requires all member states to levy exit taxes and grants payment in five annual instalments for EU and EEA cases. Germany implemented this with the ATAD Implementation Act (ATADUmsG) of 25 June 2021. Since then the reverse also applies: when assets enter the German tax net, the value taxed abroad is generally adopted.
Typical triggers of exit taxation
Exit taxation is triggered by different situations. Knowing these triggers allows relocations to be planned in time.
Transfer to a foreign permanent establishment
The classic case: an asset is transferred from a German business to a foreign permanent establishment of the same company. If the permanent establishment is in a treaty state using the exemption method, Germany loses its right to tax later capital gains.
- ✛machinery and equipment moved abroad
- ✛patents, trademarks, software and licences allocated to a foreign permanent establishment
- ✛customer bases and business relationships
- ✛shareholdings that will in future be attributable to a foreign permanent establishment
| Asset | Destination | Consequence | Note |
|---|---|---|---|
| Production plant | Permanent establishment in the EU | Exit taxation, compensating item on application | Released over five years (section 4g EStG) |
| Patent or software | Permanent establishment in the EU | Exit taxation at fair market value | Valuation often disputed, expert opinion recommended |
| Patent or software | Permanent establishment in a third country | Immediate taxation | No compensating item possible |
| German real estate | Allocation to foreign permanent establishment | Generally no exit taxation | Situs principle: Germany keeps the taxing right |
If functions including opportunities and risks are transferred to a foreign subsidiary, the rules on transfer of functions under section 1(3b) AStG and the Transfer of Functions Ordinance also apply. An entire transfer package is then valued at arm's length.
Relocation of registered office and management
If a corporation moves its place of management abroad, its unlimited tax liability in Germany may end. Under section 12(1) and (3) KStG its assets are then deemed sold to the extent Germany loses its taxing right. On a move to a third country, the company is deemed liquidated (section 12(3) KStG). Where the place of management actually lies is explained in our article on permanent representatives and CFC taxation.
The Rödl & Partner analysis of exit taxation explains the requirements for corporations in detail.
Relocation of sole traders and shareholders
If a sole trader moves abroad and the business is then run from there, this may constitute a cessation of business under section 16(3a) EStG. For GmbH shareholders, the exit tax under section 6 AStG also applies on departure. How a GmbH is taxed in principle is explained in our article on taxes for a GmbH. The personal side of relocation is covered in our article on flag theory.
Passive exit taxation through treaty changes
So-called passive exit taxation is particularly tricky. Here Germany's taxing right changes not through any action of the taxpayer but through external circumstances – typically a new or amended double tax treaty.
- ✛a new permanent establishment article in a treaty
- ✛changed allocation rules for assets
- ✛a switch from the credit to the exemption method
- ✛termination or renegotiation of a treaty
Whether such a change triggers exit taxation without any action by the taxpayer is disputed. The Federal Fiscal Court has addressed this for the first time in a new decision. The EY analysis of passive exit taxation shows the practical consequences for international groups.
Practical tip: companies with foreign permanent establishments should monitor treaty renegotiations of the states concerned and check before entry into force whether assets need to be reallocated.
Federal Fiscal Court ruling of 26 March 2025 (I R 5/24)
With its ruling of 26 March 2025, published on 31 July 2025, the Federal Fiscal Court (BFH) concluded a case that had run for more than ten years. It concerned the transfer of industrial property rights to a Dutch permanent establishment in 2005. The CJEU (Verder LabTec) and the Federal Constitutional Court had already ruled on it.
Key findings
- ✛Transferring an asset from a domestic to a foreign permanent establishment triggers exit taxation under section 4(1) sentence 4 EStG.
- ✛In the court's view, sentence 4 is not merely an example of sentence 3 but an independent rule. Exit taxation therefore applies even if Germany actually retains the right to tax the hidden reserves accrued up to that point.
- ✛Retroactive application of the rule to financial years before 2006 does not breach the constitutional protection of legitimate expectations.
- ✛The former administrative practice of a memo item and spreading over ten years was confirmed.
The consequences reach beyond the individual case. Practitioners are now asking whether German real estate could also be subject to exit taxation if it is allocated to a foreign permanent establishment – even though Germany may tax it under the situs principle. Until this is clarified, such allocations should be planned with caution.
Immediate taxation, compensating item or instalments
How quickly the tax must be paid depends on the destination and the transaction. The key question is whether the asset goes to the EU or EEA or to a third country.
| Transaction | Destination | Consequence | Legal basis |
|---|---|---|---|
| Transfer of an asset to own permanent establishment | EU/EEA | Compensating item on application, released one fifth per year over five years | Section 4g EStG |
| Relocation of a business or company | EU/EEA | Payment in five annual instalments on application, interest-free | Section 36(5) EStG, section 12 KStG |
| Transfer or relocation | Third country, including Switzerland | Immediate taxation | Section 4(1) sentence 3 EStG, section 12 KStG |
| Emigration with private shareholdings of 1%+ | All states | Payment in seven annual instalments on application, usually against security | Section 6 AStG |
Important: spreading applies only on application. The application under section 4g EStG is irrevocable. If the asset is sold, moved on to a third country or the taxpayer fails to meet notification duties, the remaining amount becomes due immediately. If the tax claim appears at risk, the tax office can demand security.
For exit taxation of business assets, Switzerland counts as a third country. Anyone transferring assets to a Swiss permanent establishment therefore generally pays immediately. Swiss taxes and the choice of canton are explained in our articles on taxes in Switzerland and Swiss taxes by canton.
Planning options
Exit taxation cannot be avoided. With careful planning, however, the burden can be reduced significantly.
Timing
- ✛Use of losses: schedule transfers in years with losses or loss carryforwards
- ✛Spreading: stretch relocations over several financial years
- ✛Coordination: align with other extraordinary income and restructurings
Structural approaches
- ✛expand through a newly formed foreign company rather than transferring existing assets
- ✛develop new IP directly abroad rather than transferring existing IP
- ✛use licensing models instead of transfers if Germany is to keep ownership
- ✛choose the destination with a view to EU/EEA status, treaty and permanent establishment definition
Anyone planning to expand internationally should analyse the consequences early. With company formation in England or in other countries, exit taxation becomes relevant as soon as existing German business units are moved abroad. Our article UK LLP vs Hong Kong vs EU compares common foreign structures. How a German GmbH can be used as a holding company is described in our article on GmbH taxes.
Planning expansion or relocation? We review exit tax risks and build your foreign structure in an OECD-compliant way.
Tax optimisation →Documentation and checklist
Clean documentation decides whether valuation and instalment payments stand up in a tax audit.
Before the transfer
- 1identify all affected assets
- 2determine book values and hidden reserves
- 3review the treaty and permanent establishment allocation
- 4obtain valuation reports
- 5plan liquidity for the tax payment
- 6prepare the application for a compensating item or instalments
After the transfer
- 1report the exit in the tax return and file the application
- 2keep a register of assets with compensating items (section 4g(4) EStG)
- 3report sales and onward transfers without delay (section 4g(5) EStG)
- 4keep transfer pricing documentation under section 90(3) AO up to date
- 5monitor treaty changes in the states concerned
The NWB database offers specialised commentary on handling documentation duties. SWICOR handles ongoing accounting and tax filings for international companies under accounting and tax.
International developments: BEPS, Pillar Two and BEFIT
The OECD initiative against base erosion and profit shifting (BEPS) also affects exit taxation. Action 7 broadens the permanent establishment definition; Actions 8 to 10 tighten transfer pricing rules for intangibles.
- ✛broader permanent establishment definition in Article 5 of the OECD Model Convention
- ✛country-by-country reporting for groups with revenue of EUR 750m or more
- ✛stricter requirements for transfers of functions
- ✛global minimum tax of 15% for large groups (Pillar Two)
At EU level, the Commission withdrew the earlier idea of a common consolidated corporate tax base (CCCTB) in 2023. Its successor is the BEFIT proposal (Business in Europe: Framework for Income Taxation) for large groups. For small and medium-sized companies, national exit taxation remains decisive.
Transparency is also increasing: under DAC6, advisers report cross-border arrangements, and tax audits increasingly exchange information internationally. Undeclared relocations are therefore discovered more and more often.
Conclusion
Exit taxation is one of the biggest tax hurdles for internationally active companies when expanding or relocating. Since the BFH ruling of March 2025 it is clear that allocating an asset to a foreign permanent establishment is enough. Planning early, choosing the destination deliberately and filing the applications under section 4g or 36(5) EStG in time allows the burden to be spread significantly or avoided through a different structure.
SWICOR . SWISS CORPORATE SOLUTIONS supports you with international tax optimisation, company formation in suitable jurisdictions and building compliant structures – fully remote and at transparent fixed prices.
Frequently asked questions
What is German exit taxation?
The taxation of hidden reserves when Germany loses or restricts its right to tax an asset. The asset is then deemed withdrawn or sold at fair market value.
When does exit taxation apply?
Typically when assets are transferred to a foreign permanent establishment, when management or a business is moved abroad and, in some cases, when a double tax treaty changes.
Can the tax be spread over several years?
Yes, for EU and EEA cases on application: through a compensating item under section 4g EStG or in five annual instalments under section 36(5) EStG. For third countries the tax is generally due immediately.
Does Switzerland count as an EU state for exit taxation?
No. For exit taxation of business assets, Switzerland is a third country. For private shareholdings, instalment payment under section 6 AStG has applied to all destination states since 2022.
What is the difference from the exit tax on emigration?
Entstrickung concerns business assets. The exit tax under section 6 AStG concerns private shareholdings of 1% or more in corporations when a person moves abroad.
What did the Federal Fiscal Court decide in March 2025?
The BFH (I R 5/24) confirmed that allocating an asset to a foreign permanent establishment triggers exit taxation – even if Germany keeps the right to tax the hidden reserves accrued so far.
Review exit tax risks before expanding?
We analyse your planned relocation, calculate the tax consequences together with your tax adviser and build the right foreign structure – remotely and at fixed prices.
This article is a general analysis and does not replace individual tax or legal advice. Regulations change; the information reflects the status at the date of publication.