GERMANY Law and Practice Contributed by: Christian von Oertzen and Philipp Windeknecht, Flick Gocke Schaumburg
Trust as a separate legal entity The creation of a testamentary trust triggers inherit - ance tax. As manager of the trust assets, the trustee is obliged to file an inheritance notification with the German tax authorities. In the creation of an inter vivos trust, the settlor and the trustee are obliged to file a gift notification. In the case of distributions from the trust to the settlor and/or the beneficiaries, the persons concerned have to file income tax returns and gift tax returns. The trus - tee as asset manager is also obliged to do this. If the trust fulfils the prerequisites for the unlimited or limited corporate income tax liability pursuant to Section 1 (1) or Section 2 (1) of the CITA, the trustee is obliged to file a notification pursuant to Section 137 of the German Tax Procedure Act after trust creation, and has to file corporate income tax returns annually. In 2023, the German tax authorities amended their decree on the application of the FTA in also address - ing the income taxation of trusts. If the trust assets can be attributed to the persons behind the trust pursuant to general tax principles, the trust qualifies as trans - parent. The qualification is determined by assessing how the agreements are structured and how they are implemented in each individual case. If, according to the underlying agreements, the settlor can dissolve the trust at their free will so the assets can be distrib - uted to the settlor, a transparent fiduciary agreement for German tax purposes can usually be assumed. Incidentally, ancillary agreements such as letters of wishes can also be included in the assessment. In 2024, the Schleswig-Holstein Fiscal Court decided if an opaque trust is subject to German inheritance tax following the death of the German resident settlor – if an Anglo-American trust has been validly established in accordance with the applicable law (in this case, Guernsey law) and the settlor has not reserved any powers of control which would allow them to continue to dispose freely of the assets held in the trust, the assets held in the trust are to be regarded as legally independent (an opaque trust) and do not form part of the settlor’s estate on the death of the settlor. Hence, the trust assets are not subject to German inheritance tax.
has established a last will under foreign laws together with a testamentary trust, the trust arrangement will be regarded as German executorship, and the trustee will be regarded as executor and not as heir/legatee. The trust beneficiaries will be treated as heirs/legatees. Inter vivos trusts Two different views are taken in Germany with respect to inter vivos trusts. According to one view, they are legal institutions similar to a contract for debt, in which case, the principles of the international law of contracts for debt pursuant to the EU Regulation on the law applicable to contractual obligations (Rome I) analogously apply to the contractual obligation. Thereby, an inter vivos trust could also be created by German nationals serving as settlors. Another more restrictive view considers the trust to be a legal institution under corporate law, in which case the link will be the same as under international corporate law. As the trustee’s function in a trust is solely of a fiduci - ary nature with no own interest in the estate and the income of the trust, the mere appointment of a Ger - man citizen to serve as a trustee will, as a rule, have no tax consequences. Place of business management in Germany However, if the trustee conducts business in Germany, the place of business management (see Section 10 of the German Fiscal Code) might be in Germany. Con - sequently, the trust itself will be considered a corpora - tion with unlimited tax liability according to Section 1 (1) No 5 of the CITA; as a result, all worldwide income gained by the trust will be subject to German corpora - tion tax. Similarly, unlimited tax liability will be estab - lished regarding gift and inheritance tax according to Section 2 (1) No 1 lit d) of the IGTA. Ultimately, if the place of business management is established outside Germany again, a taxable disjunction of trust assets can be triggered. For tax purposes, whether the concrete trust is a fidu - ciary arrangement or a separate legal entity must be determined. The tax implications for beneficiaries are the following.
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