Germany: Exit taxes keep germans local

Date: 23 Oct 2019

Bumblebee Design

Following years of wrangling, Germany finally completed a reform of its gift and inheritance tax laws in 2016 after proposed changes were declared unconstitutional on several occasions, and the country is now enjoying a period of stability on the estate planning side.

But with fears of recession around the corner, and negative interest rates impacting German savers, private client advisers say they remain busy working to support the country’s many wealthy business owners.

“This year will become the best year in our history,” says Christoph Philipp, partner with the law firm Pöllath + Partners in Munich. “In the wave of new amendments to the inheritance tax laws, our private clients transferred their assets, and we transferred billions as a law firm in the past decade. But today, it is still possible for wealthy individuals to structure their assets with a lot of tax exemptions. There are a lot of restrictions, and those restrictions are pretty difficult to navigate, so that is what keeps us busy.”

In an economy characterised by family-owned businesses, Germany’s wealthy tend to stay loyal to the local economy and invest their assets close to home. It is not typical to see HNWIs emigrating, not least because of exit taxes that are levied on capital gains, and because if German residents emigrate to tax havens, they can be liable for tax on income from all non-foreign sources for 10 years after they leave.

Martin Feick, private client partner at the law firm Schilling, Zutt & Anschütz, says: “Very relevant at the moment is the question of exit tax, regarding family-owned businesses where a large number of shareholders are in the younger generation. People go and study or live abroad and if there’s an exit tax due in Germany, we do a lot of planning to avoid that. For people who hold shares in German corporations, that can impact decisions on where to live.”

Philipp says that in the past, clients have looked to move wealth out of Germany and relocate to places like Austria, Switzerland and the UK, but there is very little movement out of the country today.

Instead, money is being channelled into German real estate, leading to high prices for investors.

Regina Costello runs investment management and family office advisory firm Ars Pecuniae. She says: “Most people are very doubtful about the capital markets right now, and about investments in general. Traditionally, Germans have a lot of investment in real estate, but people are quite reluctant to invest because prices are very high, making them uncomfortable.”

She says: “The investment philosophy we are seeing from clients is really very hesitant. I’m a big sceptic on Germany and most of my clients are too. They are not thinking of emigrating or anything, but they are thinking of putting money into real estate in other countries. German is very export dependent. We have a few industries that are highly successful, especially the car industry, but that is facing a lot of disruption. The old business models of a lot of German companies are under pressure these days.”

Germany is also mulling a ban on banks imposing negative interest rates on savers, amid growing frustration with the radical monetary experiments of the European Central Bank. The German economy relies heavily on individuals earning interest from savings, and there is widespread pushback about plans to start charging monthly fees on accounts. “Since 2016, the savings rates of individuals have increased quite substantially,” says Costello. “That just shows you that negative interest rates are psychologically not good for anybody.”

Such challenges are putting pressure on Germany’s private banking sector, which is struggling in the face of low margins and intense competition from foreign banks like BNP Paribas of France and HSBC. This despite the country being home to 1.35 million HNWIs in 2018, according to Capgemini’s World Wealth Report, down slightly from a record of 1.36 million the year before but way up on the 810,000 in the country a decade ago.

Feick says: “Germany is an old economy and that’s where the wealth comes from. There are a lot of so-called ‘hidden champions’, which are medium-sized companies with hundreds of millions of Euros in revenues. They tend to have down-to-earth owners who don’t make much fuss but do need some estate planning, and those clients keep us busy.”

While recession may be around the corner, current stability in the German tax regime means steady workflows for German advisers.