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I'd argue that, for software companies, not very much; at least if you contrast it with a hardware company. If you're, say, forging steel, you're using roads, trains, a lot of electricity, you've got an industrial plant, worker unions, public accident insurance, etc., etc. - a significant chunk of state-associated infrastructure is a part of your business, and was a part of your business when you built it.
But for software companies? I mean, you need a stable internet connection, good mobile phone coverage (tricky in Germany sometimes), rule of law, efficient bureaucracy (e.g. when hiring people), good banks which don't lose your money, electricity, etc. - none of these "infrastructure factors" feel as big as the ones for a hardware business.
On the contrary, for a software business, one could argue that Germany is actively hostile to you: Founding a company takes weeks / months and is expensive (notary), most processes are still paper-based, hiring people (especially internationally) is a huge pain, mobile internet is spotty, residential internet has outages. Charging customer credit cards via Stripe exposes you to a rabbit hole of VAT bureaucracy - all companies I've met so far rolled their own, broken software stack to somehow match up their Stripe + VAT charges with their internal bookkeeping software (e.g. Datev). A huge mess. It doesn't end there.
But I may be wrong.
Someone growing up in a society is strongly an outcome of that society.
If you build any successful business, including a software business, in a lawless and corrupt country you will have local mafias try to extort you for money the moment they hear about it. In especially corrupt countries, corrupt cops/prosecutors etc will be in on it so there will be nothing to protect you. Blackouts will be common due to a poor power grid. Likewise, internet access will be unreliable, slow and expensive due to poor infrastructure.
A country like Germany is absolute godsend compared to, say, Nigeria or Cambodia.
Precisely how is this different from mixed economies, like the US or Germany?
While minimal infrastructure investments would need to be made to entice software companies, their is a political price to pay by allowing young business people into your country who likely will out-earn the average resident (many historical examples of this). This makes the majority of people unhappy, but brings in educated-non-criminal customers and tax dollars. Lets say Germany does (1) great, they attract 1000 smart europeans to found companies, and 10 years later 1 of those companies becomes a megacorp.
2. Keep software companies happy
10 years has passed, new politicians are in charge. Pursuing #1 is a separate strategy to #2. I would hope i live in a country that wants to (1) attract young talent and (2) keep talent happy, but of course thats not necessarily true. The new politicians in charge need to appease the majority of people again as its election season!
I think Germany / USA can't really have an honest conversation about this as Germany + USA already have highly progressive tax systems. A significant % of USA and Germany residents don't pay any reasonable amount of tax, and are drains on the tax system. I assume these %s are likely projected to grow in the future rather than decline.
If the price of bread happens to rise? Then our politicians and voters will support squeezing more tax out of productive sects of society for the short term gains. Then those productive and mobile members of society will slowly move elsewhere.
In other words, it's not an additional claim. It's simply an enforcement mechanism for the money you already hypothetically owe.
In theory, the exit tax should ensure that Germany gets the taxes of the sale of your company. So, if you ever sold your company once you're no longer in Germany, Germany wouldn't get those taxes, so it charges you immediately once you leave Germany in a sort-of "virtual" sale.
This, of course, sucks tremendously because you actually haven't sold your company, and "normal" people don't have this sort of cash on hand.
Other countries have "smarter" exit tax implementations and only charge you when you actually sell your company in the future. I think that's pretty fair. It also doesn't hinder people from leaving the country.
"Free" healthcare though. It's a bargain!
Canada also has an unreasonable exit tax. Canadian founders are taxed on 50% of the FMV of their shares on departure. So if you own half of a company that is worth $50m, your taxable income for the year of departure is increased by $12.5m.
The current implementation which essentially simulates a "virtual" sale of your business once you leave the country is pretty terrible, as most normal humans don't have that sort of cash on hand because, well, they actually didn't sell their business at that point in time.
Interesting pointer on Canada - thanks!
Remember that in Germany you don't pay for University degrees. High education isn't just for a wealthy minority.
Exit taxes are generally applied as if the taxpayer sold all capital assets on the day of leaving.
At least in the US taxation regime (I'm unfamiliar with others), family cars don't qualify for a capital loss, and rarely appreciate. Clothing would be similar.
But it doesn't seem unreasonable that a country should want to be paid tax on unrealized gains as you're leaving. It would probably be more fair to wait until the gains were realized and then apportion the gains among the countries of residence, but if you're leaving, it's going to be hard to compel your participation later, so it makes more sense to do it as you're leaving.
Also, the "you can't leave because you owe society" argument, while not necessarily wrong, is strongly associated with the abuses of Communism.
Excuse me, why I need state permission for building business?
i’d love to see a comprehensive study on how much corporate tax avoidance costs a country vs food stamps so we can get an accurate view on who leeches/gains more. my suspicion is corporate wage theft/tax avoidance/evasion/subsidies are significantly higher, particularly if we add in executives and major stock holders.
I am sure they could achieve the same goals of fair tax but learn some game theory before doing so.
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If you just want to move out of the country you can also just keep the ownership of the company within the country. You do this by putting your shares into a holding that stays in Germany even when you move out. That holding needs to be managed within Germany, so you need to assign a friend or be in Germany twice a year to sign off on having done the management within Germany.
You do need a bit more expensive tax advisor, but it's not that difficult. There's a description here: https://www.juhn.com/fachwissen/internationales-steuerrecht/... (3.1.)
Of course, if you want to move the company out of the country, you'll need to pay taxes on any value increase the company had. As others have described this is pretty reasonable though - you get taxed exactly as if gains were realized. This is tax you would have had to pay some time in the future anyways, except by moving to a tax-evasion country.
The only unreasonable part of the law is how they can assume your valuation based on earnings, but that only applies if you can't provide a valuation based on German standards.
Doing this is standard practice if you are founding a company. You need to plan for your startup to be actually successful and being on the receiving end of a big exit. You can't just wing it and hope for the best.
Germany has a large amount of wealthy small investors, business owners, family owned businesses, etc. And many of those might retire in places like Spain, Italy, etc. There are ways. You just need to understand the system.
That's not to say that Germany is not a huge PITA when it comes to managing all these constructions, dealing with the bureaucracy, and the maze of silly government agencies that refuse to share even the most basic information with each other so you are stuck in ground hog day providing the same information over and over again (who are you, where do you live, what is your company registration, etc.). But once you know the how this backwards and dysfunctional system works, you can get it to work for you. Because painful as it is, the system does work more or less as advertised. But you do need to familiarize yourself.
BTW. this is a topic where LLMs can be helpful. You can skip a lot of the traditional advisers and other middle men, if you are a bit smart on that front. Using an accountant is actually worth the money for liability reasons. So don't skimp on that. But otherwise, knowing what you are getting into in terms of bureaucratic process can save a lot of time.
That's probably the very last spot where you want to use an LLM, especially not in Germany. One single mistake can cost you a fortune, and you won't be able to spot the mistake because you're not an expert. LLMs could be used to prime you for conversations with an expert (but be prepared to be corrected on points of law and fact) but they are no substitute. Corporate law is a legal minefield, tread with utmost care.
The whole proposition is in a way bizarre: if you have this problem you almost certainly can afford proper guidance and if you need to resort to an LLM for that guidance you almost certainly don't need such complex constructs in the first place!
That's where you hire a professional accountant. Which you should be doing anyway at the point where you raise any sort of external funding that's not family members.
I don't get why people are always complaining about German taxes. As long as you're small, you can just wing it. And when you pass the threshold, professionals are cheap.
A reasonable person could absolutely think it’s fair to impose a very high exit tax on someone who doesn’t want their books examined even when it would save them money.
Plus the article is wrong about not being allowed to move out of Germany. You still can, without paying the tax, you just need to keep a shell UG/GmbH alive inside Germany.
- Form a German holding company to manage the business
- Deal with any conflicting taxation/regulatory issues when operating a german holding company from your new country of residence (in some countries this is not trivial)
- Visit Germany twice per year and potentially more to deal with German authorities that require things be done on paper and in person (hope you didn't move too far away and hopefully you don't have small children!)
- Hire an abnormally expensive tax advisor, hope he is good
- Sell a large portion of the company to fund a giant exit tax bill (!!!!). For many companies this is likely a 1-2 year minimum process, and that's IF they can find a buyer. Not as many PE funds in Europe. Good luck on valuation when the buyer knows you're in this situation.
- Hope the government gives you a reasonable valuation on your company, and hope their decision is similar to that of your buyer (and the timelines for both line up), which I'm sure is a super easy and not at all complicated process.
Fun! I can't possibly see what people are complaining about.
One of the weirdest things about Europe is the irrational nationalism that arises when you tie a language, ethnic-identity, government and country into one thing. Anecdotal, but it feels like this leads to more of an inability to reflect on and criticize things. Americans have far thicker skin when it comes to criticizing themselves.
Can you not see how this incentivizes entrepreneurs to leave or start their companies outside Germany (not sure if you're aware the EU exists). Is this really how you think things should work in a non-authoritarian regime with democratic freedom of movement?
Snark aside, this chart makes total sense to me now: https://i.redd.it/fxks3skmvt4e1.png
> Snark aside, this chart makes total sense
> to me now: https://i.redd.it/fxks3skmvt4e1.png
E.g. Booking.com isn't there because it's now ... an American company on paper, but it was started in Europe, has most of its operations there, and (last I checked) Europe was its most important market.
But because the US stock market and US capital dominates globally, companies like that tend to be sold to a US company, and become American on paper. But that financial arrangement doesn't really reflect the overall state of European innovation.
Similarly, there's countless European startups that would have probably had a NASDAQ listing if they'd been US-based, but were instead sold to some of the larger European incumbents in their sector.
The overall amount of innovation delivered to consumers etc. might be the same, so that's more of an artifact of how capital flows in the US v.s. the EU generally.
On the other hand, no one expects to pay "an exit tax from a country".
Pretty stupid. You are signing paper that claims you never left Germany!!!
You are opening up yourself to personal German tax residency, with all pleasures it brings. Payable 10 years back!
And do not believe that 185 days bs. Correctly losing tax residency in state like Germany, Denmark, Norway or Australia is very difficult. You can not keep any assets like company or house there!
Edit: why downvotes? Many states only require 90 days or less to become tax resident. Australia is fine with a house. Norway will tax your income for 3 years after leaving!
Claiming you manage holding company within Germany, is a huge red flag!!!
No you aren't. You are signing a paper that says a managerial decision about the shares of the company happened in Germany. Where you live does not matter. You just have to do a board meeting, and be physically present in Germany during the meeting.
In fact, you likely want to keep any proof of your travel from a different country, which makes it obvious to the authorities that you don't spend all your time there.
There's multiple variants though, this is just one of them. You can also pay someone to manage the shares (and of course contractually bind them to not do anything without permission).
Edit: Also, to be clear, you don't need to manage the company from Germany. You only need to manage the holding company from Germany, where the only managerial decision is related to the shares themselves.
Alternatively, simply keep both the house and company in Germany. No exit tax since, thanks to that house, you haven't technically exited, right?
There's nothing reasonable about it, it's just an extortion. Your gains might never materialize, but your country does not care, they are just punishing you for leaving.
It’s because of a fundamental difference between how capital gains tax and income tax are collected.
Capital gains are deferred - so as years pass you’re working up a tax liability but most countries recognize that forcing collection every year is not practical given the often illiquid nature of capital gains and the difficulty around valuation.
I’m from a country which has no exit tax on capital gains and notoriously a certain wealthy telecoms magnet - having been resident all his life - moved to Portugal just before realizing billions of capital gain. Thus despite earning multiple billions through businesses activities in his native country, he effectively paid zero tax.
I myself have benefited from this lack of capital gain exit tax as I moved to a country with very low capital gains tax. So despite the fact that my modest equity portfolio earned most of its growth while I was living in Ireland, when I sell, the Irish government will get nothing.
The problem, it seems to me is the method of valuation for the deemed disposal and/or the fact that it can cause a “liquidity squeeze“ for the tax payer.
I don’t see a simple solution - maybe other than getting rid of capital gains taxes completely and collecting more consumption taxes, for example, but I’m sure this would just open up a range of other tax evading loopholes.
You can tax business at home by land/revenue/resources usage/ip protection taxes. As it is owners in different jurisdictions pay a different (or sometimes no) tax on selling shares. Selling itself is something you want to encourage, not discourage. It's a pointless tax that penalizes exactly the things you want to encourage.
You think that someone moving to Portugal to avoid it is unfair but then a share holder living in 0 cap gain jurisdiction in the first place would pay 0 anyway.
It would be better to tax IP protection, inheritance, resource use and land only but realistically if we get rid of capital gains the tax burden will land squarely on wage earners doing all of the actual work who are already taxed more than the people who own their productive output.
Source -> https://www.ato.gov.au/individuals-and-families/coming-to-au...
If you cease to be an Australian resident while overseas, we deem some of your assets – generally those not taxable Australian property – to have been disposed of for CGT purposes. This may mean you become liable to pay CGT.
You can choose not to have this deemed disposal apply. But if you do eventually dispose of the assets, we consider the whole period of ownership – including any period when you're not an Australian resident – when we calculate a capital gain or loss for CGT purposes.
There is no gain or loss until the asset is sold. Taxation is not deferred, it applies when the gain is made, i.e. upon sale.
If I buy a house for $100k, and next year some idiot pays $1M for a very similar house three streets down, did I just magically make $900k? Should I be taxed on that gain immediately? Should I be forced to sell part of my property to cover it? What happens when that sale occurs at a much lower price, due to my need to liquidate, did that lower the prices of all the houses in the neighborhood back to normal? Does only the first person to actually pay the tax owe the tax?
That's the reasoning we're applying if we tax unrealized gains on stocks (or any other asset). We take what the highest bidder is willing to pay for some tiny percentage of an asset, and assume that means everyone else could get the same price, yielding these theoretical valuations that have no bearing on reality.
Property taxes have a similar problem but that is a whole other can of worms. I'd love to live in a world where the local tax assessor is obligated to purchase your property on demand for 80% of what they say it is worth -- surely they would jump at the chance to realize an instant profit, right?
You simply can't establish value without an actual transaction. Without a buyer and a seller you are just making up numbers.
Governments collect tax in lots of different ways: income taxes, sales/consumption taxes, import taxes, capital gain taxes, property taxes, inheritance taxes, etc,
What’s so special about capital gains taxes that requires the government to have had some sort of active involvement to be justified?
Regardless, the idea that the government can only tax you if it directly gave you sufficient benefit, _in your assessment_, is of course nonsense. Taxes are what you owe to the society you live in, not about what society owes to you.
If you are lucky enough to be internationally mobile, this does not exempt you from contributing to the communities you spend time in as you travel around the world. You cannot expect to arrive in a country, earn money from it, and depart again without paying your fair share of taxes.
If you do not like how a country has structured its tax law and what priorities it has as a society, you are of course always free to not move there in the first place.
It’s okay to name him here you know. [redacted] can’t get you on HN
I think the combination of capital and skilled labour fleeing is very concerning and a trend that could end up self-reinforcing and hard to stop.
As USA is the main destination for IPO, wouldn't many German companies naturally leave?
Also once you are successful you can afford to pay the costs to arrange the companies affairs in a tax efficient manner e.g. utilise low tax regions with the EU such as Luxembourg and wider world.
Why do you think that might be? Perhaps the Germans could make their IPOs more business friendly, so they have no reason to flee.
So when you get money out of this, you pay your fair share of taxes, like everyone.
Germany has Europe’s lowest share of entrepreneurs to workforce. So i guess the infrastructure, education and healthcare are not really factors.
> So when you get money out of this, you pay your fair share of taxes, like everyone.
this is already happening. people are paying their taxes. but Germany wants more than it’s fair.
cherry on top: Germany has been in recession for… 3 years now?
Empirically that seems to be false, given the number of successful businesses created in Europe in the past couple decades is way way less than in the US or China, even though Europe has better infrastructure, education and public healthcare.
Businesses are also fleeing California, New York, etc., because of high taxes.
- enjoy owning and managing a business
- do think that owning and managing a business should come with the same compensation as any other dayjob (hairdresser or whatever)
Let's say you can make $80,000 as a hairdresser. You are seriously proposing that someone who takes all of the risk of
* Renting their own hair salon,
* Building up their own clientele,
* Taking out loans to purchase hair dressing equipment, and
* The thousand other things the business owner has to do in addition to actually dress hair themselves,
should walk away with the same amount we the person who just gets hired to dress hair.
No one would ever start a legal business under such a regime. It's all downside! Which is why you never see people actually owning and running businesses (successful ones at least, and most unsuccessful ones too) with the mindset you describe.
The way the system works is people who create unfathomable amounts of wealth get to keep unreasonable amounts of it. If that link is broken, they'll stop at creating a reasonable amount of wealth and then everything grinds to a halt. If someone is in a situation where they are doing a good thing they should have every incentive to keep going and not stop.
It’s like rolling a 50/50 coin where your payout is 0 or 100%. Why would you play if there is only downside?
Ironically some of the biggest european companies are related to luxury items.
Why take all that risk, for no additional reward?
If the business fails, is the gov’t going to keep paying them like a hairdresser or whatever?
The reporting requirements for expats are insane: all bank/brokerage/whatever accounts with max levels during the year, FATCA and FBAR forms, and the cherry on top: Form 8858 ("Foreign Disregarded Entities", whatever that is) which is needed for your self-employment and for each of your rental properties. If you think this is easy, look it up — https://www.irs.gov/forms-pubs/about-form-8858
It's pretty much impossible to file your taxes yourself, you will never get it right. You have to pay specialized accountants, some of which will charge you >$1500 to prepare a yearly return with self-employment and rental.
Then come the actual taxes to pay, which are the least of all problems.
Expats are treated this way because they have no lobbying power.
On the other hand, if you do have an accountant by your side, you potentially expose yourself to some of the most powerful labor arbitrage on the planet as a tech worker. Making $100k remotely from the US might sound like a bad deal until you live in a country where the average wage is $20,000. Like all things US tax wise, you are disproportionately rewarded for being clever and reading a lot.
You're probably instead thinking of income tax, which the US does levy worldwide contrary to virtually every other nation on Earth and is, I can tell you from personal experience, not fun. There is a a much narrower exit tax for US citizens who wish to actually give up their citizenship outright (not just move out) but that generally only comes into play for anyone with $2 million or more in net worth, and exists probably to discourage tax evasion, to my understanding. There is truly nothing remotely like the "you have to pay us if you own 1% of any LLC anywhere and move out" approach Germany has.
To be clear, this is if you move _your company_ out of Germany (which I don't think the article makes very clear). In those terms it seems to make a little more sense. As outlined in this comment.[0]
The double income taxation of their expats that America, Eritrea, and Myanmar do is a bit different, but I think they have double taxation agreements with most countries. So in actuality most Americans don't have to fully pay the double tax (depending on where they live, and how much they earn) though they still have to file and everything.
I'm sure that a sizeable percentage of Americans own a significant amount of shares via 401k or whatever, but it feels surprising if 1 in 10 own more than 1% of a company, because all of those people holding shares as investments will be buying shares in companies with thousands or millions of other investors.
But maybe it's true - I just googled about the US has 340m people and 32.5m companies - so the majority of them must be small (population/number of companies). And while a lot of companies will be owned by the same people or just administrative divisions of a group of companies, most companies have multiple directors so maybe on average it does balance out to 1 in 10 owning a decent chunk of a company. It just feels like a surprising fact.
This site [1] has some interesting stats on size of businesses, although it's interesting that in 2019 these figures say there were less than 8m businesses, which disagrees with what google told me. Also says over half of US companies have 0-4 employees.
[1] https://paradoxesinc.com/resources/us-business-patterns/
That's certainly what I was thinking of, given I have a few US friends here in the UK. Isn't the way to stop that to simply give up dual citizenship?
_However_, you do still have to pay taxes on your US income if you're abroad. So if you are making money from freelancing with US companies (and, I assume, they aren't paying a European business you have set up), then you'll pay US taxes there, but due to tax treaties you are generally not double taxed.
You do, also, have to file every year.
0: https://www.taxfairnessabroad.org/blog/americans-abroad-by-t...
One of the most farcical examples of this is the decades-long race to the bottom on business taxes and incentives between Kansas City, Missouri and Kansas City, Kansas. For the non-Americans out there, this is basically one city but it sits at the border of two states. So the two states are constantly torching money to lure businesses that play this system and simply go back and forth.
I believe this situation will come to an end and there are several reasons for this:
1. For the EU in particular, reliance on US tech giants is increasingly becoming a security issue. The Eu will increasingly wants homegrown alternatives so the option of leaving will simply not exist because you could leave but then you lose the EU as a customer;
2. For a long time multinational companies used transfer pricing to avoid paying taxes. What's transfer pricing? Let's say you buy a sofa in China for @200, ship it to the US for another $200 and then sell it for $1000. You've made a gross profit of $600. What if instead you have a subsidiary in Vanuatu, which has no corporate income tax (AFAIK), and it buys the sofas for $400 and sell them to the US company for $950? Well, you've booked $550 in profit where there's no tax and only $50 profit where there is.
That's technically illegal. It's often-called transfer pricing manipulation.
So what do tech giants like Google do? They sell their IP to an Irish subsidiary. There's a nominal process to make sure this is done for a "fair" value (according to the IRS). Then they pay royalties to their own Irish subsidiary to shift profits to a lower tax regime. Previously, this created a problem because they couldn't repatriate the money without paying (then) 30%+ corporate taxes but this all changed in 2017 with a tax holiday and a change to how this kind of income was treated. The net result was way lower than 30% net tax however, even with Biden's 15% minimum tax (which was a good thing) that came later.
What's the difference between this kind of profit-shifting with IP and transfer pricing manipulation? Absolutely nothing, except one is illegal and one isn't.
3. Revenue will increasigly have to be taxed in the source country. For example, Google I believe books all UK ad contracts through Ireland such that the UK subsidiary has essentially zero income to tax. I believe governments will increasingly crack down on this such that if something is sold in the UK, it's taxed by the UK; and
4. While individuals may be able to notionally "leave", assets generally can't. Land can't be moved overseas. Natural resources that are mined or fished or logged can't be moved overseas. So it's really an empty threat.
I'm really sick of this "the businesses will leave" propaganda.
I don't think anything you've said convinces me it's propaganda.
Businesses are profit-seeking ventures. They will optimize their operations to maximize profits.
So I'm not sure why you'd call it "propaganda" to say that companies will leave. I think the evidence is that they will.
Of course, taxes are not the only variable in a profit-maximizing formula. US companies aren't going to flee in mass if Somalia decides to have zero corporate taxes. But you can't ignore that companies will optimize their operations and structure if they can lower taxes.
https://www.greenbacktaxservices.com/knowledge-center/exit-t...
So should greencard holders flee the US before they become too rich
But there is no Swedish moon base, or ultra high speed rail, etc. - where does it all go? We have higher taxes but less infrastructure investment than a century ago.
There is a persistent idea that we cannot or should not tax wealth because it's "unfair". We certainly can. We do it all the time. Property taxes, depending on your jurisdiction, are either taxed based on assessed value or whatever the assessment method is correlates strongly to property value.
I can't speak to the specifics of Sweden and its tax base but in general a key problem in the developed world is the skyrocketing cost of housing. Why is this a problem? Because it's an input into the cost of everything. It makes your labor more expensive, which in turns makes what they do more expensive. I have heard getting an apartment in Sweden is rather difficult. Stories of having to register at birth and waiting 20+ years. I could be wrong.
But everywhere in the developed world has high housing costs (in terms of real income) because we constrain supply, subsidize demand (particularly to the very rich) and allow people to hoard housing.
You can probably find more detailed breakdowns if you're really interested. But overall, most expenditures are probably in the categories healthcare, transfers to lower-incomes and education, like in most other European countries, and you probably won't find anything nefarious by looking into more detailed splits.
If there is an exit tax because companies would leave otherwise, why would someone rational start a new company in the country rather than leave first?
- Charge exit taxes on people who "leave". As someone else pointed out, the US already does this with citizens who renounce citizenship (and it applies to long term permanent residents too);
- A lot of assets simply can't leave. Physical assets, land, etc;
- Assets and corporations can be nationalized;
- You can use tariffs and other legislative methods to punish those companies that "leave";
- You can also just deny access to a market for pretty much any reason you want. For example, Huawei is heavily restricted in use in American telecoms infrastructure for "national security" reasons; and
- You can generally impose cvarious levels of capital controls to limit the inflows and outflows of capital in pretty much any way you want. China does this heavily.
China is often criticized because the companies are an extension of the state. That's true. They are. But what we have instead is governments that are extensions of corporations. Can we really say that's working out better?
The US economy is rapidly becoming Russia. Russia has autocratic rule with oligarchs who pay fealty to Putin. In return they can do whatever they want. Do you really think we're different at this point?
Compare that to China. China isn't afraid to "disappear" their billionaires for awhile to bring them into line aka Jack Ma [1]. Exactly where he went and why and what happened is still unclear. China continues to crack down on tax evasion by so called "yin and yang" contracts (eg [2]). And China executed two for a scandal involing tainted baby formula [3].
What do we get? A world where governments can't punish companies for offshoring because that violates "free trade". Companies can take governments to a WTO court. And have.
[1]: https://www.bbc.com/news/technology-56448688
[2]: https://www.globaltimes.cn/page/202403/1309137.shtml
[3]: https://www.theguardian.com/world/2009/nov/24/china-executes...
Wasn’t this only a thing while the UK was in the EU, because the EU expressly allowed it?
1. To lower labor costs. For example, the Big 3 auto makers are unionized. Tesla's manufacturing isn't. Guess who earns more? [1];
2. Deregulation. Some things (eg polluting) are way easier to get away with in Texas than, say, California;
3. To shift the tax burden from the owners to the workers. Texas famously has no state income tax. It does have sky high property taxes though. Property taxes are a super regressive tax;
4. For the politics of the owners; and
5. Other miscellaneous reasons. For example, Texas is about the absolute worst place to get divorced for a spouse who is a parent and isn't the primary income earner. Why? Texas courts won't let you move out of state with the children [2] and child support will be severely capped [3], even if, say, the other parent is a billionaire.
[1]: https://www.businessinsider.com/tesla-pay-vs-ford-gm-uaw-uni...
[2]: https://www.thetxattorneys.com/child-custody/relocation
[3]: https://ondafamilylaw.com/what-is-the-maximum-child-support-...
This means, if you start a not-yet-publicly-listed company, get investment at a high valuation (on paper), you must pay wealth tax as if you had that money liquid in your own name. But you don’t have it liquid, it’s yet just a valuation of a VC, so you are screwed.
This means any Norwegian trying to start eg a fast growing software biz must relocate to Sweden if they want to be close to home, or Switzerland more realistically, as swedens top income tax bracket is >50%.
Scandinavia is attractive as a destination if you are poor and especially from the 3rd world and could benefit from free government services and welfare, but for anyone entrepreneurial or already wealthy, there are many better alternatives.
There's nothing stopping them from doing that in Norway, they just have to pay their dues. Which are nowhere near the rate of those in a real communist system that people are so quick to label it as.
I find it very selfish to think that we should optimize everything to squeeze out the remaining 1.1% of the wealth, given that Scandinavia wouldn't have such a high living standard had it not been for the welfare system.
Not everyone's top priority is building a big ol' dragon pile of gold.
Balancing taxes for fairness and innovation is quite tricky...
https://www.euronews.com/business/2024/04/01/wealth-inequali...
If you have good advisors as a wealthy person you know this and leave as soon as an exit tax is on the table. If you start new businesses you start them outside of the country
If you're a regular non-wealthy person who happens to become successful you're stuck paying high taxes of course, but you'll probably learn and structure your next venture better.
Hoarding wealth isn't a problem if no wealth creation happens in the first place.
> You could, of course, sell or wind down your company, which would solve all problems outlined here. But this is not an option for most entrepreneurs.
For a software business, you could presumably:
- Incorporate a company in your country of choice
- Transfer subscribers from German company to new foreign company (depending on payments provider, this can be a massive effort, for example, not a simple form field in Stripe).
- If new company incorporated in a country you want to live in, use it to obtain an investor Visa
- German company now has 0 in revenue, wind it down and leave.
You forgot about employees. If German employment law is anything like the Dutch one, then it means you can't wind down the company while you have employees. They may refuse to leave. Firing them may be subject to government approval, who may also refuse.
If an employee is guaranteed X months salary upon notice of layoff in the contract, that's debt you have to resolve before you legally close. If you have a 5 year lease agreement for the property, that's also debt you have to resolve. It's exactly the same idea.
A question of legality might come from German authorities determining if this is solely to avoid tax, which is open-ended. It might be hard for them to make this argument if you can prove you transferred operations to country X to maximize company's growth, access local talent, closer proximity to customers etc.
Regardless, anther commenter pointed out that the exit tax applies to all companies that you own regardless of location. In that case, the approach isn't feasible.
Also it goes without saying, seek your own legal advice rather than trusting random comments on the internet.
This does not match the results from 5 minutes of googling, not for individuals at least. What is being taxed is the shares you're holding, as if you're selling them, which results in a tax on their increase in value compared to when you've bought them. [disclaimer: I just did a quick search on this, I'm not a tax consultant or lawyer.]
I haven't looked for the regulations on companies moving their headquarters away from Germany. It's possible those rules are the above, and the author confused them with the rules for individuals.
Either way, if the author believes they're right, they should dig up some citations. There are none in that article. Is this based on advice they've received? Did they do their own research? Are they a tax consultant or lawyer? 13.75 is a very "spottable" number, how about a link to the law that has that number?
- First off, your assumption is wrong that only the increase in value gets taxed. No, the entire value of your holding gets taxed, see § 6 Abs. 1 Satz 1 Außensteuergesetz (AStG) [1].
- The factor 13.75 originates from the calculation method called "vereinfachtes Ertragswertverfahren" (~ simplified earnings-based method), which itself is defined in Bewertungsgesetz (BewG), § 11 Wertpapiere und Anteile [2]
- Factor 13.75 is defined in Bewertungsgesetz (BewG), § 203 Kapitalisierungsfaktor [3]
- The tax rate of 42% is the marginal tax rate in Germany (at least below €250k income, beyond that it's 45%) - so the assumption here is that, in the year in which you leave Germany, you've already had some salary income (say, €90k) which bumps you into the marginal tax rate for any additional income on top of that.
[1] https://www.gesetze-im-internet.de/astg/__6.html
You're misreading that law. It says moving away is equivalent to selling shares and that §17 EStG is applicable. Which in turn says:
(2) Veräußerungsgewinn im Sinne des Absatzes 1 ist der Betrag, um den der Veräußerungspreis nach Abzug der Veräußerungskosten die Anschaffungskosten übersteigt.
> - The factor 13.75 originates from the calculation method called "vereinfachtes Ertragswertverfahren" (~ simplified earnings-based method), which itself is defined in Bewertungsgesetz (BewG), § 11 Wertpapiere und Anteile [2]
§199 BewG says "…kann das vereinfachte Ertragswertverfahren (§ 200) angewendet werden, wenn dieses nicht zu offensichtlich unzutreffenden Ergebnissen führt."
Key phrase there being "kann". It doesn't have to. You can probably sue against it getting applied, if they're really insisting on it. And note §11 BewG says:
"…so ist er unter Berücksichtigung der Ertragsaussichten der Kapitalgesellschaft oder einer anderen anerkannten, auch im gewöhnlichen Geschäftsverkehr für nichtsteuerliche Zwecke üblichen Methode zu ermitteln; dabei ist die Methode anzuwenden, die ein Erwerber der Bemessung des Kaufpreises zu Grunde legen würde…"
So, finding a reasonable method that a buyer would use to determine the values of the shares is explicitly pointed out.
1. Yeah, valid - I was assuming the default case of "you founded your company in Germany and are moving away at some stage". In that case, you could deduct the initial share capital (often €25k) from the valuation, as that was your "purchase price". In most cases, that doesn't lead to a significantly different outcome.
But yeah, if you actually bought shares of an existing company at a certain (higher) price, than of course the "taxable delta" might change your calculation.
In that respect, I was wrong as I assumed everything would get taxed. This is only roughly the case when you founded the company yourself in Germany, as mentioned above. Thanks for the correction!
2. True! As mentioned in my post, you can also pay someone to assess the value of your shares, which would most likely result in a valuation lower than 13.75x. You will have the additional costs of getting that assessment though, and you'll have to convince the authorities that your assessment is closer to the truth than the default valuation which is based on 13.75x.
https://de.wikipedia.org/wiki/Wegzugsbesteuerung
Essentially, it assumes you sell your assets at market value and taxes the difference to your expenses for it.
That doesn't seem particularly unfair. If you can image a scenario where someone buy Apple at $1, and it's now worth $1,000. They just leave Canada, pay no tax, then sell in a low tax jurisdiction.
However, it can be a massive pain in the ass for illiquid assets or assets you don't intend to sell at that point in time. A good example might be a pension. Getting hit with a tens of thousand dollar tax bill for a pension you won't receive for another 2 decades is painful.
That is also what Germany does. The 13.75 multiplier is the fallback number used if there is no valuation for the company. It's such an irrelevant number that tax advisers writing about the topic don't even bring it up. Get a valuation.
Same thing in the U.S. but I think the first $800 or so is exempt.
Also, Canadian laws don't stop at the border as a citizen... so breaking laws in other places still puts you in legal peril for extradition.
Notably, corporate tax rates are often much lower in Canada, and export free trade is available with most trading partners. Note the US taxes on citizenship regardless of where you live (or if you hold multiple citizenship), and failure to file your IRS statement was an $8k fine last I heard. The fine often stays even if you owe the IRS $0, and temporarily live in another region.
The TLDR version: talk with corporate tax accountants in each region before filing, and do not assume the late tax filing fines will magically not apply to your situation. AMCHAM will usually help guide investors on their filing obligations for type C corporations in the US. =3
https://www.canada.ca/en/revenue-agency/services/tax/interna...
Departure tax for corporations:
https://www.canada.ca/en/revenue-agency/services/tax/interna...
Now I know why the brand trademarks are usually held by an independent entity, and licensed to a domestic number company.
I guess that is why we pay the corporate accountants. lol =3
I would understand if they'd tax the sale of the business.
- A printer (the most important equipment of any German startup founder)
- Envelopes for letters
- A stamp with your company name (some companies and agencies you deal with require you to stamp things, because a stamp obviously proves, beyond any doubt, that you are acting on behalf of your company, because obviously no one would be able to create a similar stamp with your company's name on it, right)
- A virtual office address at a coworking space (because you're receiving physical mail, and also there are weird tax reasons not to register your company at your home address)
- A mail-scanning service (because you don't want to walk to the coworking space every few days to pick up your physical mail)
- A mail-forwarding service (so that the mail gets forwarded from your virtual office address, which now has exactly no purpose at all, to your mail-scanning service)
Poland is pretty good at digitalizing bureaucracy as well. You can do most things online including talking to the tax office and solving problems with your tax declarations.
Taxes are reasonable but I am still bitter about cap gain tax as it's a form of a wealth tax for someone that invest in equities - at some point moving to more tax friendly jurisdiction saves enough that you can fund your comfortable life and save 100% of your income.
I also think tax burden is going to increase significantly there in coming years.
So selling them presumably doesn't help.
It's one thing to tax people on assets they actually have or that are easily realisable like ETFs, as they then pay a portion of money they have ready access to. It's quite a different thing to invent a value for something and tax on that. The company ownership in question might not be realisable at anything close to that amount, especially for a startup, if you don't leave before making a profit
So don't do startups in Germany. The exit tax is just one of many reasons for that, the whole German system is bureocratic and inflexible compared to nearby countries.
Some countries such as Sweden implements this only minimally - making capital gains of Swedish companies you hold realised within 10 years of moving abroad are taxed, so just don’t sell in 10 years but take out credit with those assets as collateral.
Of course outside the EU, such as Switzerland and the UK, these governments are not bound by EU rules and don’t impose exit taxes.
Which is why so many European millionaires are doing their best to live in these countries
Like maybe just pay your dues? Contribute back to the society that enabled you to become rich in the first place instead of parasitically extracting value?
But I just see working world as a net negative to my life. Being forced to work makes me hate it, doesn't matter if it's in a job that allows me to do whatever the f i want or if I had a very strict plan. It's still being forced to do shit I dont want to do in the first place. It's still taking away tons of time from my one life, just so I can afford food.
The moment we talk about piracy it's all about how poor billionaires will have to sleep in their cars if you make a digital copy of something you would not have otherwise bought, but when it comes to supporting the society that created you and your wealth, suddenly it's all about finding ways to weasel out of paying.
Pretty sure “fair” means both sides agree that it’s fair. You can’t just say “I think it’s fair that I take a half of what you made”.
You could say that people know what the conditions are before starting the business, so they implicitly agree that it’s fair if they start.
But this article exactly explains what to expect because people don’t know it beforehand, and thus they now can make better informed decisions.
Yes. The happiest countries have the highest taxes because they tax those able to contribute so that everybody has a decent standard of living. Who do you think works in local government? Aliens? It's the people who live there.
https://www.greenbacktaxservices.com/knowledge-center/exit-t...
> The purpose of this rule is to tax the increase in value of these shares that came about in Germany but has not yet been realised before they are able to escape the reach of German taxes by the move abroad.
Doesn't sound all that crazy to me.
Also, the proposed analogy to the Berlin wall feels quite pathetic for those that have actually lived behind it.
We're a big country and the world's 3rd largest economy. From our perspective it makes no sense to become a financial haven for foreign founders who just want to benefit from government support which can be quite extensive only to leave after a few years for some tax haven.
We need to do do more to encourage people to invest here and build ecosystems and make starting companies easier but an exit tax clearly only matters to the get-rich-quick and relocate to Dubai crowd.
Is it really that complicated to go that route? This is an honest question, I have little knowledge about these things, but from the outset: How hard could it be to set up a trust, especially in Liechtenstein, where presumably there are already thousands of them and this kind of business is basically an economic sector of its own.
I have little knowledge of these things either, I've only heard second hand because aspects of historical tech $work used to put me in close proximity to professionals who deal with these things. Eventually you get a noob level understanding once you've been in the same room long enough.
TL;DR A trust is not a "simple" legal form like a company is.
You have to consider the three-way "internal" relationship (settlor <-> trustee <-> beneficiaries). Which can be legally structured as you wish (blank sheet when writing the trust deeds). And then for "external" relationships (trust <-> third party), the in-country law will apply and so you need to know how that fits in.
Then you need to know what type of trust you want. Do you want a Fixed Interest Trust ? A Discretionary Trust ? A Charitable Trust ? A Special Purpose Trust ? Something else ?
Then you have things like professional relationships. Your trust will, for example, almost certainly need an in-country bank account. Your professional advisor will almost certainly know some bankers.
So sometimes its easier just to hire an advisor, work through the prep, then fly in for the day for a nice lunch with your advisor to sign a few papers.
Sure, you can't port your company out of germany, but there is nothing stopping you re-structuring so that you have an umbrella company based in the country of choice.
In the UK, you have to specifically request HMRC to authorise any such plans if you want to avoid paying tax on it, and even then I believe it's only (relatively) simple if you're doing a straight share swap - so the existing company becomes fully owned by a newly created group company and the existing shareholders get the same allocation of shares in the new company. Anything else needs HMRC to assess the values of both companies and decide whether a taxable event has occurred, and what the nominal value to be taxed is. I'm pretty sure if you were trying to move an existing company into an offshore parent company, it'd be treated as a sale.
However that was UK/US and some EU but non-german subsidiaries.
I suspect you are right about movement being considered a sale. My assertion was imprecise as I suspect it requires an upfront company layout, rather than post-hock.
You cannot even move your company between member states without paying the exit tax. It is funny how the EU claims it is a single market but it is actually not.
https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CEL...
^^^ The Anti-Tax Avoidance Directive.
Jeez.
Just don't be surprised to see a decline in tax revenue when countries like Germany chase the wealth creators out of the country with high taxes + exit taxes.
I would attribute that term to the workers who work 1.3 billion hours overtime, most of them unpaid
https://dailywrap.net/en-gb/unprecedented-unpaid-overtime-re...
And then the company owner whine when they habe to pay their share?
Abusing workers and but paying overtime is bad and it's a completely separate issue. It's also not a big issue in tech.
This sort of law is stretching things to the point of utter bad faith.
Then there are restrictions due to public health, personal conduct, public security
And likening that to the Berlin wall, where people literally got shot dead, is honestly pretty disgusting.
Yes, it is literally an option, you dunce. There is no law requiring you to keep ownership of a business. You might not like that option very well, but it is an option, which is infinitely better than the denizens of the GDR got.
Man, this post got my blood boiling with its callous stupidity.
In the US we do have issues with businesses, but it's not like the Bosch, Thyssen, or Tschira family are any less unethical.
The level of hierarchy I've noticed in German firms and founders is insane to say the least. I'd love to do some quantitative research into this, but I haven't been in academia or policy for years now.
I wrote up another post with more generic notes on the exit tax [1] which might be a better post to compare to your link.
The minor benefit of my post is that I don't have an incentive to sell you expensive tax advice, chuckle..
There have been many articles about the struggles of entrepreneurialism in Europe.
Does anyone else see a connection here? One more straw on the camel’s back?
this is the money quote here
By your own admission, this person earned almost a million euros in the past 3 years.
Just wanted to reiterate that I really appreciate what you have done with both OpenRegulatory and Formwork, as it was a big unlock for one of the companies I helped a few years ago as we navigated our way into the QMS / FDA / med. reg. world.
While reading this as a many-times-over-founder myself, I deeply felt multiple emotions which this would bring upon me if I were in your shoes after all the work I know you’ve put in.
I hope you are able to navigate this to a happy / successful outcome for yourself and any others involved for the relevant compan(y/ies)!
I am grateful for what you have contributed over the years on the software and documentation fronts with OpenRegulatory and Formwork both.
Which proves again that regulatory environment is downstream from culture: In a country like Germany, with Europe’s lowest share of entrepreneurs/workforce, there is very little political emphasis on creating comfortable environments for the out-group.
Most Germans can’t relate to these people at all, and every awareness campaign have to incorporate teaching the target audience (in order to make them understand the problem in the first place). A meticulous, tenacious, undertaking one can imagine that immediately gets stomped once the political gravy train comes around full steam with anti-capitalist or otherwise hyperbolic rhetoric.
(I haven’t looked but would bet that adherents to this rhetoric are already at it even in the comments here, pointing out how deserved the exit tax is etc)
https://de.wikipedia.org/wiki/Wegzugsbesteuerung
So thank your greedy ancestors for that.
In addition it is mentioned in the article above that it is possible to pay this tax over a time period of seven years. So you don't have to pay it all at once.