What is an exit tax on unrealized gains, and when does it become relevant for PE managers?
An exit tax treats an individual as if they had sold their shareholding at current market value when they move their tax residence out of the country — even though no cash has changed hands. It commonly applies above a minimum stake (e.g. ≥1%).
Why relevant for managers? Managers with sweet equity trigger the exit tax if they relocate abroad after investing. Many regimes now allow the tax to be paid in interest-free installments (e.g. over 7 years), regardless of the destination country.
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| Item | Value |
|---|---|
| Current market value of sweet equity | $5m |
| Book value (initial investment) | $0.2m |
| Deemed disposal gain | $4.8m |
| Partial inclusion (60% taxable) | $2.88m |
| Tax (~45% top rate) | ~$1.37m |
The manager owes ~$1.37m of tax even though no cash has flowed — the classic liquidity trap.
- Installments: many regimes now allow ~7 interest-free annual installments for all departures.
- Holding structure: hold the stake via a holding company rather than directly.
- Stake <1%: not applicable for very small stakes.
- Intent to return: temporary departures may qualify for deferral, subject to proof.
Question: "What happens if I relocate abroad with sweet equity?"
Answer: "The exit tax triggers — a deemed disposal at market value. Increasingly it is payable in interest-free annual installments regardless of destination. Pre-departure tax advice is essential for PE managers."