GERMANY Law and Practice Contributed by: Christian von Oertzen and Philipp Windeknecht, Flick Gocke Schaumburg
4. Family Business Planning 4.1 Asset Protection
The Federal Fiscal Court issued three more rulings in 2021 regarding the taxation of trusts. A trust is trans - parent for German tax purposes if the settlor still has power over the assets of the trust. In this case, the settlor is seen as the direct owner of the trust assets, and hence, the establishment of the trust is not sub - ject to gift tax. If the settlor does not have power over the trust assets, the trust is considered to be opaque. The distributions from a foreign opaque trust to a Ger - man resident are generally subject to income tax and may simultaneously be subject to gift tax. Double Taxation As highlighted above, trust distributions can trigger income tax as well as gift tax simultaneously. Pursu - ant to Section 35b of the ITA, inheritance tax can be credited against German income tax if triggered by inheritance but not by donation. However, German tax law does not provide for a credit of the income tax paid by the beneficiary on the gift tax, nor vice versa. In 2023, the Muenster Fiscal Court ruled that, in the event of dissolution of the trust, the distributions might be subject to income tax as well as gift tax. However, a step-up for income tax purposes was granted. Distributions From a Foreign Family Foundation Distributions from a foreign family foundation may be subject to income tax if they are comparable to divi - dends. In the case of a Swiss family foundation, the Federal Fiscal Court has ruled that, the recipient of the distribution must be comparable to a shareholder. This is the case if they fulfil the requirements set out in the foundation’s statutes for receiving distributions, that is, if they belong to the group of beneficiaries and no consideration is to be paid in return. However, the recipient does not require any further asset or organi - sational rights under the foundation statutes. 3.4 Exercising Control Over Irrevocable Planning Vehicles Retaining a certain amount of control for a settlor of a private foundation is possible. Nevertheless, retaining too much control can lead to the settlement or foun - dation being treated as a sham or fiduciary structure, especially in trust cases or when foreign foundations are involved. This was also the topic of a 2021 Federal Fiscal Court decision on trusts.
The most popular methods for asset protection are prenuptial and postnuptial agreements, family founda - tions and partnership structures. Marriage Agreement With a marriage agreement, it is also possible to transfer assets from one spouse to the other without incurring taxes, removing the assets from the reach of Assets that are transferred to a family foundation have left the property sphere of the founder and are attrib - uted to the foundation itself. In order for this effect to occur, it is a prerequisite that the founder has actually given up control over these assets, which is, in turn, assumed by the entities of the foundation. It is also advisable for the founder to have no means of influ - encing the entities of the foundation with regard to this property. Assets that are successfully transferred are exempt from being accessed by any creditors of creditors by doing so. Family Foundations Partnerships are often used (depending on the types of assets) to transfer wealth to the next generation but at the same time retain a degree of control over the gifted assets. 4.2 Succession Planning See 2.6 Transfer of Assets: Vehicle and Planning A partial interest will generally be valued at the current market value of the underlying assets. However, the Muenster Fiscal Court decided in 2022 that a valua - tion discount may be applicable to a co-ownership share in a real property, compared to full ownership. The valuation discount is subject to a well-founded appraisal. The Higher Regional Court Hamm ruled in 2023 that a substantial discount (30% to 50%) is applicable to a co-ownership share in a real property held by a community of heirs. Mechanisms and 1.2 Exemptions . 4.3 Transfer of Partial Interest the founder. Partnerships
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