Could this ECJ case set the direction for German exit tax?

Why the new ECJ case is relevant to exit tax

The Polish administrative court (Wojewódzki sąd administracyjny) has referred three ques-tions to the ECJ for a preliminary ruling on the compatibility of Polish exit taxation with the EU fundamental freedoms and the general right to free movement (C-430/25, Gena, date of the preliminary decision: 29 May 2025).

The case concerns an Italian-American citizen. He only became tax-resident in Poland on 1/1/2023 to start a job. At the time he held valuable shares in various companies but also some loss-making capital investments. Regarding his move to Germany, planned for 2028, the claimant asked the responsible authority several questions about the tax treatment of the exit connected to a “tax assessment pre-notice” (in Germany this most closely equates to an “advance ruling” [verbindliche Auskunft] under section 89 of the Fiscal Code [AO]). He also laid out his own understanding of the law on these questions. In a notice on 31/12/2024 the responsible authority said that its understanding of the law differed from his in substantial ways. In particular, Poland would want to tax undisclosed reserves that had already come about before he moved there and reject offsetting losses between different shares. The claimant then brought an action against the negative tax assessment notice at the court above.

Exit taxation in Poland

Polish exit taxation applies when natural persons leave who have been tax-resident in Po-land for at least five of the last ten years. Taxation includes hidden reserves in corporations. Hidden liabilities are not taken into account in exit taxation to reduce tax. On moving to Po-land, there is no “step up” to fair value; the historical acquisition costs are applied. There is no privilege for exiting within the EU and there is no permanent deferral. There is only the possibility to apply to pay in instalments over a maximum of five years. The Polish court had doubts whether these national rules were compatible with European Union law, and specifically with the right to freedom of movement (Art. 21 TFEU) and the right to freedom of movement for workers (Art. 45 TFEU) and referred the case to the ECJ under Art. 267 TFEU.

The questions can basically be applied to the doubts that are also being raised in Germany about the current exit tax. The decision could therefore set the direction for Germans leaving the country after 2022.

Background: What does exit tax in Germany currently regulate?

Exit tax typically concerns the taxation of gains on assets belonging to a natural person who moves abroad and is treated under section 6 of the Foreign Transaction Tax Act [Außen-steuergesetz – AStG] as if he had sold shares in a corporation held in his private assets at the date of leaving the country. This includes all participating interests in companies that amount to one percent in the company directly or indirectly as well as certain shares in in-vestment funds. In summary this means:

• What is affected – shares in corporations in which there was an (in)direct holding of at least one per cent within the last five years or certain investment fund shares
• Who is affected – those with resident tax liability in Germany for seven of the last 12 years
• End of resident tax liability due to ending residence or habitual abode or
• Transferring shares without compensation to a non-tax resident, or
• The German right to tax gains on disposal is excluded or restricted in other ways
• The result: shares held are deemed to have been sold (dry income)
• Valuation is determined by the value of the shares on the date of exit

The Polish preliminary ruling at the ECJ

This preliminary ruling is interesting for Germany because the rules on exit tax in Germany are as strict as those in Poland.

Specifically, the Polish court referred the following questions to the ECJ:

1. When a natural person leaves the country, are hidden reserves to be included in the exit taxation that came about in a period before the person had even moved to the country?
2. Are only increases in the value of shares to be included and losses to be excluded?
3. Is the exit tax to be collected immediately or in an instalment plan, instead of defer-ring payment of the tax until the assets are actually disposed of?

The answers to questions two and three could set the direction for Germany. The answer to question three in particular does more than set the course from the German point of view. Meanwhile, notices have been issued for the first exit tax cases as part of assessment for the tax year 2022 and the tax authorities have applied the new legal situation. This means spe-cifically that if immediate payment wasn’t opted for, payment of the exit tax by instalments in-cluding payment of security (in full!) was applied. In these cases the assessment notices or requests for payment should be kept open and contested. The referral described above may set a new direction.

Conclusion – a ground-breaking decision could send a clear signal to Europe

The ECJ’s decision in this case, which is expected within one to two years, is crucial to Ger-man exit tax and is therefore expected with great anticipation. In the meantime we still find ourselves in an uncertain situation, which makes concrete tax planning almost impossible. Exit tax is only deferrable – and the outflow of liquidity preventable – if there is an intention to return to Germany.

The recommendation still holds that considerations to leave should be discussed as early as possible. Considerations on succession planning, too, should always be made with exit tax at the back of your mind. Exit taxation is set to remain a complicated part of German tax law.