GERMANY Law and Practice Contributed by: Christian von Oertzen and Philipp Windeknecht, Flick Gocke Schaumburg
German income taxation Generally, distributions of foreign irrevocable trusts are subject to German income tax pursuant to Sec - tion 20 (1) No 9 of the ITA. This is true for periodic or ad hoc distributions of trust income, and generally also for distributions of trust property (repayment of capital). However, repayments at the expense of the capital contribution account in terms of Section 27 of the CITA are not taxable. Moreover, the Muenster Fis - cal Court ruled in 2023, that in the event of dissolution of a trust, distributions might be subject to income tax but a step-up to the 2010 tax basis has to be granted. In 2023, the Federal Fiscal Court ruled for founda - tions that they cannot establish a capital contribution account like a corporation. However, tax-free repay - ments of capital may be proven in a suitable manner. Such distributions are taxed under the final flat-tax regime (withholding tax on capital gains) at a rate of 25% (plus solidarity surcharge and, if applicable, church tax) of the fair market value of the distributed assets. Under this law, not only income but also trust corpus is taxable income when distributed to a Ger - man beneficiary or remainderman. A distribution from a foreign irrevocable trust to the German beneficiary or remainderman is not taxed under Section 20 (1) No 9 of the ITA if the relevant income was already attributed to the German benefi - ciary under Section 15 of the FTA. German gift tax The distribution of trust property to remaindermen also constitutes a taxable gift under Section 7 (1) No 9 of the IGTA if the remaindermen are residents of Germany. The Munich Fiscal Court ruled in 2024 that the classification of distributions from a US trust as gifts does not violate the free movement of capital. Section 7 (1) No 9 of the IGTA applies to distributions upon the dissolution of testamentary and inter vivos trusts. It also applies to distributions of property from a trust that continues to exist, although the statutory language may imply otherwise. The wording of Sec - tion 7 (1) No 9 sentence 2 of the IGTA is as follows: “Transfers upon the dissolution of a foreign pool of assets, having the purpose of segregating property, as well as transfers to intermediate beneficiaries during
the existence of the pool of assets... are deemed to be a taxable gift.” The term “intermediate beneficiaries” is not legally defined. In 2019, the Federal Fiscal Court interpreted the concept of the intermediate beneficiary to mean that an intermediate beneficiary is any person who, irrespective of a specific resolution on a distribution, is legally entitled to the assets tied up in the trust or foundation and/or the income generated by the entity, whether – according to German legal concepts – in the form of rights in rem or in the form of claims under the law of obligations. This means that not all recipi - ents can be regarded as intermediate beneficiaries, but only those who are legally entitled to the grant, such as in a strict trust situation. This must apply to a trust in the same way it applies to a foreign family foundation. Consequently, only those grants pursuant to Section 7 (1) No 9 of the IGTA can be taxed when they are received by a beneficiary who has a legal claim to these grants from the outset. It is clear that the gift tax then arises on the actual receipt of trust income or trust property by the recipient of a discretionary trust. In Section 15 (2) sentence 2 of the IGTA, family relationships are taken into account when determining the applicable tax rate. Depending on their proximity to the decedent or settlor, beneficiaries and remain - dermen can qualify for Class I or Class III of the gift tax-rate system. However, the determination of the tax rate class can pose difficulties if the trust property was contributed by different persons. The Federal Fiscal Court has also ruled that distribu - tions from a foreign foundation are only taxable as gifts under Section 7 (1) No 1 of the IGTA if they clearly violate the purpose of the statutes. This is because a gratuitous transfer within the meaning of Section 7 of the IGTA can only be assumed if the distribu - tion clearly exceeds the statutory purpose of the for - eign foundation. Regarding the question of whether a distribution pursues the purpose of the articles of incorporation, there is a foundation-internal assess - ment prerogative, which restricts an examination by the tax office and/or the tax court accordingly.
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