How would other countries calculate exit tax on private holdings like you describe? If you accept the general principle of exit taxation in a residence-based taxation system, then the only alternative methods I can think of either leave the tax authority vulnerable to not getting their fair share at a subsequent liquidity event or require putting up some kind of acceptable security or continuing limited German tax jurisdiction over those assets to prevent that outcome.
It's only my opinion, but a fair tax scheme only collects taxes at the time where you have actually made gains to pay the taxes from, not any theoretical on-paper gains.
To ensure the "fair" tax is levied i'd propose a limited continued tax jurisdiction over the shares until the time they get liquidated, with the optional alternative of prematurely ending that jurisdiction by settling it at the time of the shareholders convenience, with the ensuing valuation being kicked off then. The limited continued tax should assume a linear value growth over time and armed with that calculate back what the tax would have been at the point the share holder left the tax system.
Since the valuation is largely out of the hands of the founder, the abuse potential is limited to knowing of upcoming changes in the valuation, but since they would be future changes in the valuation, i don't see a legitimate reason why the state you leave should tax you for it.
> It's only my opinion, but a fair tax scheme only collects taxes at the time where you have actually made gains to pay the taxes from, not any theoretical on-paper gains.
I doubt your proposal is implemented in any, or many, countries worldwide. Why? Your proposal seems far more prone to abuse than the status quo.
After all, even most of Elon Musk's Tesla gains have not been realized in the sense of the TSLA stock being sold for a profit. He's sold some shares of course, but most of the wealth he accesses is by borrowing against his on-paper gains, not realizing them in the tax or accounting sense.
So, wealthy people like him who can clearly afford to pay the taxes on their gains would just be exempted by that policy merely due to their choice to borrow against rather than sell their shares.
If an arms-length investor has said that your shares are worth $XMM when they were worthless before, it's not unreasonable for the tax man to expect you to find some way of paying tax on those gains in a timely manner, even if you have to borrow to do so. Every other person with an on-paper gain outside the world of private corporate shares sometimes has to do similar things to satisfy their exit tax. This sometimes even happens in the world of private corporate equity where there is enough of a secondary market for third parties to buy options off of people who don't have the liquidity to pay the taxes required to exercise.
> To ensure the "fair" tax is levied i'd propose a limited continued tax jurisdiction over the shares until the time they get liquidated, with the optional alternative of prematurely ending that jurisdiction by settling it at the time of the shareholders convenience, with the ensuing valuation being kicked off then.
This is absolutely a reasonable way of doing it... almost. Allowing the shareholders to choose the time of tax exit separately from any real-world substantive transaction is so very prone to abuse. They'd just wait until the next recession to minimize taxes, even if they don't move or do any major corporate ownership or investment transactions during that recession.
And the limited continuing tax jurisdiction needs some way to ensure that enforcement will be possible, such as posting acceptable security, at least when the person doesn't move to another a cooperative tax treaty partner country that is willing and able to help with any required enforcement. Otherwise, again, they can just move their residence and assets to a tax haven country and thumb their noses at Germany.
Maybe you're wondering, how is posting acceptable security different than paying taxes, or just plain how would it work? First answer is to go look at other countries like Canada which already offer this option as a way of deferring exit tax on illiquid assets and see what they do.
But purely speculating here: It doesn't necessarily have to prevent you from getting a return on investment on the security you're posting. For example, maybe the security could be in the form of a temporary restriction on your right to withdraw a certain amount of funds from a German bank account, but retaining the right to earn interest on that money and possibly also to withdraw that interest.
> The limited continued tax should assume a linear value growth over time and armed with that calculate back what the tax would have been at the point the share holder left the tax system.
Why would it be linear when that's in no way a reasonable approximation of what happens to most businesses which end up in the tax-trap scenario you're describing? But more importantly, why would one need to care about subsequent events when valuing the company at the moment of departure? Just value the company at the moment of departure, whether or not tax is deferred.
Let me give another scenario or two. What if you die soon after the valuation round instead of leaving Germany? Or, same thing, but what if you divorce instead of die? Either way, you need to value the company well enough to value your shares for whatever inheritance or asset-splitting process follows the death or divorce. To me, applying the same valuation to a residence-based exit tax seems like the fairest and most just solution.
> Since the valuation is largely out of the hands of the founder, the abuse potential is limited to knowing of upcoming changes in the valuation, but since they would be future changes in the valuation, i don't see a legitimate reason why the state you leave should tax you for it.
I don't understand the point here, but I agree that the state you leave should not normally be taxing you on changes in valuation which happen after you leave. Exceptions might exist in some edge cases where you can reasonably attribute the change in valuation to the period before you leave. (Imagine a case where a term sheet is signed before ending German tax residence, prompting you to try to dodge the tax hit by emigrating before closing.)
