GERMANY Law and Practice Contributed by: Christian von Oertzen and Philipp Windeknecht, Flick Gocke Schaumburg
Family Trusts Within the Meaning of Section 15 of the FTA (Special Tax Regime for Undistributed Income) Scope of application Section 15 of the FTA contains a special income tax regime for foreign so-called family foundations that are not subject to taxation of worldwide income and thus could be utilised to shelter income from taxation. Foreign family foundation and trusts A foreign family foundation is defined as an entity that has neither a registered office nor a place of effec - tive management in Germany, and that was created to benefit the members of a family. The latter require - ment is fulfilled if more than half of the foundation’s property and income is set aside for the founder and/ or their relatives (Section 15 (2) of the FTA). In Section 15 (1) of the FTA, a proportionate share of the foun - dation’s income is included annually in the income of the settlor or of those beneficiaries and remaindermen who are German residents. Section 15 (4) of the FTA extends this taxation mechanism to foreign “pools of assets” that were set up to benefit a family as required by Section 15 (2) of the FTA. The German Federal Fis - cal Court ruled in 1992 (Jersey trust) and 1994 (US trust) that trusts are such foreign “pools of assets”. Exemption for EU/EEA trusts Section 15 (6) of the FTA excludes family foundations that have their registered office or place of effective management in EU/EEA member countries from the special taxation regime, provided that the trust’s prop - erty is extracted from the power of disposition of the settlor and their relatives, and that Germany and the respective state have entered into a certain exchange of information agreement. Typically, the place of management of a trust is with the trustee. Nevertheless, when determining the place of management of a trust, one should also consider the rights and duties of a protector’s committee, if one exists. In 2025, the Federal Fiscal Court ruled that the restric - tion in Section 15 (6) of the FTA to foreign foundations that have their registered office or place of manage - ment in the EU/EEA violates the free movement of capital. Hence, the provision is generally applicable to
all foreign family foundations and trusts if they fulfil the additional requirements of Section 15 (6) of the FTA. Tax consequences and taxation regime pursuant to Section 15 of the FTA In accordance with the special taxation regime estab - lished by Section 15 of the FTA, which is applicable when the place of effective management of the trust is not located in Germany, property and (positive) income (negative income cannot be allocated to the settlor/beneficiary – see Section 15 (7) sentence 2 of the FTA) of the family trust are attributed to the beneficiary on a pro rata basis if the beneficiary is a German resident. As long as the beneficiary is alive and the trust income accumulates to the trust, the trust income – as determined by German tax law – is added to the taxable income of the beneficiary on a pro rata basis. The beneficiary is entitled to a foreign tax credit with respect to foreign income taxes paid on the income by the trust. The trust income is included in the taxable income of the beneficiary in the taxable year in which the income arises, under general income tax rules on the level of the trust. Distributions of accu - mulated trust income that was subject to taxation in a prior year are not taxed a second time. If the trust qualifies as a foreign family trust within the meaning of Section 15 of the FTA, and is not exempt under Section 15 (6), its property and income are attributed to the beneficiary on a pro rata basis and added to their taxable German income. According to Section 20 (1) of the FTA, double tax treaties cannot prevent the allocation of income pur - suant to Section 15 (1) of the FTA. However, distri - butions of accumulated trust income that have been taxed under Section 15 of the FTA will not be taxed a second time when distributed to the German ben - eficiaries, according to Section 20 (1) No 9 of the ITA. Trust distributions of income or capital to German residents The distribution of the income or capital of the trust to a German beneficiary may trigger income tax as well as gift tax.
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