In my article What is the German exit tax?, we learned that the German exit tax affects you if you (usually) own a GmbH. We also learned that the tax office performs a relatively absurdly high valuation of your company, namely with the factor 13.75 * annual profit; for a company with an annual profit of €100k, this means a value of €1.375 million.

And you have to pay tax on this value at approx. 27% if you leave Germany. This means for you that you would have to pay approx. €364k in taxes if you were the owner of the GmbH above and emigrated from Germany. Mind you, without having sold your company at all!

Logically, one then asks what solutions exist to reduce this absurdly high exit tax burden.

One solution is the low valuation of your company through the simplified capitalized earnings method.

It took me several months to even properly understand this method, and I got the impression that many tax advisors haven't properly understood it yet either (oh man).

Here's how it works: Roughly speaking, you have two options for valuing your company upon your departure:

So let's get back to the "hack" of the simplified capitalized earnings method; strictly speaking, we want this method to produce the lowest possible company value for our GmbH.

Let's assume in the first scenario that we have no idea how to optimally use the simplified capitalized earnings method for our benefit.

Then the company value is calculated with the factor 13.75 * annual profit, whereby we are supposed to use the average value of the last 3 years for the annual profit. Let's further assume that we have a GmbH with an annual profit of €100k.

"Naive" Scenario
In the naive scenario, we calculate as follows:

The starting position is therefore that you would have to pay approx. €364k in taxes if you emigrate with your €100k-annual-profit GmbH. Quite a lot!

I would assume that for most owners of such a GmbH, this is a sum of money that one doesn't just have lying around in a savings account.

So how can we optimize this?

The "theoretical" managing director salary
The tax office form for the simplified capitalized earnings method allows you to deduct a so-called "arm's length managing director salary" from your annual profit. So what does that mean?

Suppose the annual profit of your GmbH is €100k and you haven't paid yourself a salary so far. Additionally, we assume that an arm's length managing director salary would have been, for example, €120k / year. In other words: You worked for your GmbH for free as a managing director and, if you had hired someone else for this instead, you would have had to pay this person €120k / year in salary.

Then you are now allowed to deduct this theoretical managing director salary from your annual profit.

The calculation is now:

So you see that we have virtually reduced the valuation of your company to zero through this theoretical managing director salary. And that is already gigantic progress, because paying €0 exit tax sounds significantly better than paying €364k exit tax 😂

We don't get all the way to €0, because at this low company value, your company is valued using the net asset value instead. Hopefully I'll write another article about that... But the relevant thing for us here is that we were able to considerably reduce the valuation here and that is already huge progress!

The biggest question here is certainly: What is actually a correct arm's length managing director salary? Funnily enough, I asked this question to some tax advisors who all couldn't give me a particularly good answer. In the end, I read a book on the simplified capitalized earnings method (?!), which was super helpful. It cites the so-called "Karlsruhe Tables", which provide concrete numbers. Apparently, the "Regional Finance Office Karlsruhe" occasionally creates these tables with salaries that it considers to be arm's length.

The tables were even updated just recently (2024). Relevant for us is that the salaries in this table appear very high, which is of course very advantageous for us because it lowers the valuation of our company.

I would have intuitively said that for a small GmbH, a managing director salary of €100k - €120k / year seems realistic. The people in Karlsruhe seem to be of a different opinion; here €198k - €266k / year (!) would be the most likely amount to apply. To do this, look at the table below in the column "Turnover: under €2.5 million" and then in the column "Other services" (see table below). Here is the link to the "Karlsruhe PDF".

So we can successfully reduce the valuation of our company - to do this, we applied the highest possible arm's length managing director salary within the scope of the simplified capitalized earnings method for the German exit tax. And we don't even have to argue with risky "invented" salaries, but can simply make use of the officially published figures from the Regional Finance Office Karlsruhe.

The biggest disadvantage of this solution is probably that you have to carry out this simplified capitalized earnings method for every one of your shareholdings every time you leave Germany. This quickly leads to high tax advisor fees, as it is likely that you will prepare this calculation together with your tax advisor.

I've heard that tax advisors charge approx. €5k per company for this. This makes it easy to estimate in which scenarios this method could be a good solution: