Exit taxation under section 6 of the German Foreign Tax Act (Außensteuergesetz, AStG) is a key tax risk for entrepreneurs and private shareholders who permanently leave Germany. It is intended to ensure that value increases generated in Germany on shareholdings are taxed before Germany’s taxing rights cease. This regime is often underestimated, especially in cases of relocation to low-tax jurisdictions such as Dubai.

Principle

When an individual who is subject to unlimited tax liability in Germany relocates abroad, a deemed disposal is assumed for certain substantial shareholdings in corporations and certain investment units if these assets are removed from German taxing rights. A notional capital gain is taxed, which is generally calculated as the difference between the acquisition (and subsequent) costs and the fair market value of the shares at the time of departure and qualifies as “dry income”, as tax becomes due without any actual inflow of liquidity; the gain is typically subject to the partial-income system, so that 60 percent of the gain is taxable at the individual income tax rate.

Affected assets

• Shares in corporations (e.g. GmbH, AG, UG, foreign corporations) held as private assets, where a shareholding of at least 1% existed at any time during the last five years.
• Cooperative shares and similar corporation-like equity interests, provided they fall within the scope of the participation rules in section 17 of the German Income Tax Act (EStG).

Extension as of 2025: investment assets

• “Significant” interests in investment funds (e.g. retail funds, ETFs) held as private assets, where at least 1% of the units issued by the fund are held or the acquisition costs of the units amount to at least EUR 500,000.
• Units in special investment funds held as private assets are generally treated as significant interests and are therefore also subject to exit taxation.

Not affected

Pure private assets without such qualifying participations (e.g. ordinary bank deposits, a standard ETF portfolio with small, widely spread positions below the thresholds, real estate held as private assets) are not subject to exit taxation as such, although they may still be subject to other German tax rules.

Specifics of relocation to Dubai

Dubai is attractive from a personal tax perspective because there is generally no personal income tax levied on individuals there; however, these advantages only fully apply once unlimited tax liability in Germany has been terminated and tax residency has effectively been established in the UAE. Since the double tax treaty between Germany and the United Arab Emirates expired on 1 January 2022, the UAE is treated by Germany as a non-treaty state, so that Germany may tax the hidden reserves in substantial shareholdings at the time of departure under section 6 AStG and, in addition, a limited German tax liability will typically continue to apply to any remaining German-source income.

Key risk: liquidity

Exit taxation generally arises at the time of departure, even though no actual sale proceeds are generated and therefore no additional liquidity is available to settle the tax. In practice, this “dry income” often forces taxpayers to sell or leverage shareholdings in whole or in part – frequently under unfavourable conditions – in order to finance the immediately due tax burden.

Planning and conclusion

Depending on the specific situation, there are limited but important options for tax structuring, such as preparatory reorganisations, the use of holding or foundation structures, the application of return (re-entry) rules, or requests for deferral or instalment arrangements. These measures are legally and practically complex, often subject to strict conditions and must be analysed and implemented before the exit event occurs, as part of tailored professional advice.

A move from Germany – particularly to low-tax countries such as Dubai – should therefore be prepared from a tax perspective with the same care as a business or share sale (an “exit”). Without early and professional planning, substantial exit taxes and follow-on burdens may arise that can quickly erode or even completely offset the expected tax benefits of living abroad.