21.04.2026Federal tax court rules new or amended double tax treaties could result in exit taxation
No action by the taxpayer is necessary to trigger “passive exit taxation”
The German federal tax court in two separate decisions dated 19 November 2025 and published on 9 April 2026 ruled that the conclusion of a new double tax treaty (DTT) or the amendment of an existing DTT could result in exit taxation for German tax purposes if such conclusion or amendment excludes or limits an existing German taxing right.
Background
The exclusion or limitation of Germany’s right to tax the disposal of an asset is generally treated as equivalent to a disposal of that asset at its fair market value (FMV), which should trigger a capital gain equal to the difference between the FMV of the asset and its tax basis.
It was previously unclear whether such exit taxation could only be triggered through an action of the taxpayer (e.g., by transferring an asset to a foreign permanent establishment) or whether a change in legislation (“passive exit taxation”) could also result in such capital gains taxation. The German tax authorities in the past have taken the view that a mere change in legislation (which also includes the conclusion or amendment of a DTT) that results in an exclusion or limitation of Germany’s taxing right could be sufficient to trigger a capital gains taxation.
First case decided by the federal tax court
The first case decided by the federal tax court involved a German limited partnership that was holding shares in a Spanish corporation whose value consisted predominantly of Spanish real estate assets. Under the prior Germany-Spain DTT, the right to tax a capital gain from the sale of shares was exclusively allocated to the country where the shareholder was resident. A new Germany-Spain DTT was concluded (effective as from 1 January 2013), which grants the right to tax a capital gain from the sale of shares in a real estate-rich entity to both countries (i.e., the country where the real estate is located and the country where the shareholder is resident). In order to mitigate double taxation, the new Germany-Spain DTT includes an obligation for the country where the shareholder is resident to credit any tax that was imposed by the other country due to a share sale.
Based on the view of the tax authorities, the change from the exclusive right to tax a capital gain to the obligation to grant a tax credit resulted in a limitation of Germany’s taxing rights and, therefore, the taxation of any built-in gains in the shares of the Spanish corporation at the time when the new DTT came into force. The German limited partnership filed an appeal, arguing that such exit taxation requires an action by the taxpayer. The lower tax court of Muenster ruled in favor of the taxpayer, stating that the mere amendment of a DTT (in this case, through the conclusion of a new DTT) could not be attributed to the taxpayer and that exit taxation requires an action by the taxpayer. The tax authorities appealed the lower tax court’s decision and brought the case to the federal tax court.
In its decision, the federal tax court generally followed the arguments of the tax authorities that an exclusion or limitation of Germany’s taxing rights could be triggered regardless of any action by the taxpayer and in the case of a conclusion or an amendment of a DTT. The court based its decision on the wording and history of the applicable provisions and did not consider it necessary for exit taxation to be triggered by an action of the taxpayer. The federal tax court, furthermore, denied any breach of EU law or German constitutional law. From a timing perspective, the court concluded that exit taxation where a new DTT is concluded is triggered immediately before the respective article in the DTT becomes applicable.
Second case decided by the federal tax court
The federal tax court’s second decision involved a German corporation that directly held real estate assets located in Australia. As from 1 January 2017, an amended DTT between Germany and Australia became effective. The German tax authorities concluded that, because the amended DTT explicitly excluded a German taxing right for real estate assets located in Australia, the conclusion of the amended DTT resulted in a restriction of Germany’s taxing rights and, therefore, the conclusion of the DTT resulted in capital gains taxation for the German corporation.
Referring to the first case mentioned above, the federal tax court again highlighted that, in the case of an amended DTT, such passive exit taxation could be triggered and an action by the taxpayer would not be required in order to trigger capital gains taxation. In the present case, however, the court ruled against the tax authorities and denied that there was exit taxation because, under the previous DTT, Germany had no right of taxation in regard to the Australian real estate assets. As a result, the amendment of the DTT did not result in an additional restriction of Germany’s taxing right.
Comments
The two rulings issued by the federal tax court reinforce the position of the tax authorities as described in a Ministry of Finance circular dated 26 October 2018. Taxpayers should be prepared for the possibility that conclusions of new DTTs or amendments to existing DTTs (as well as changes in legal provisions) may lead to the taxation of built-in gains in business assets even without any action on the taxpayer’s part. In such circumstances, each individual case should be carefully examined to determine whether there has been an exclusion or restriction of Germany’s taxing rights. Since conclusions of new DTTs and amendments to existing DTTs regularly undergo lengthy procedural processes, there should be sufficient time to prepare accordingly.
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