GERMANY Trends and Developments Contributed by: Christian von Oertzen and Philipp Windeknecht, Flick Gocke Schaumburg
Gift Tax Generally no gift tax on distributions to beneficiaries or remaindermen in Germany The Federal Fiscal Court stated in July 2019 that dur - ing the existence of a foreign foundation (and thus also of a trust), any distribution of principal or income to a beneficiary or remainderman in Germany who does not have a legal claim to the assets, is not sub - ject to German gift tax. The Bavarian tax authority has confirmed the opinion expressed by the Federal Fiscal Court in a letter dated 5 March 2020. Exceptional gift tax on distributions from a trust The Munich Fiscal Court ruled in 2024 that the clas - sification of distributions from a US trust as gifts does not violate the free movement of capital. Distributions by a German foundation to a beneficiary resident in Germany are not subject to gift tax. Meanwhile, distri - butions by a foreign foundation to a beneficiary resi - dent in Germany are covered by the German gift tax. However, this distinction is justified by the fact that the German foundation has to pay back-up inheritance tax. The court was of the opinion that the coherence of the German tax system could act as justification. Separation of Estate and Trust Assets In 2024, the Schleswig-Holstein Fiscal Court decided if an opaque trust is subject to German inheritance tax following the death of the settlor, the following applies. If an Anglo-American trust has been validly estab - lished 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 (opaque trust) and do not form part of the settlor’s estate on their death. Hence, the trust assets are not subject to German inheritance tax. CFC Rules Partly Violate European Law The assets and income of a foreign family foundation are attributed to the founder, if they are subject to German unlimited tax liability, or otherwise, to German resident beneficiaries or remaindermen. If a family foundation has its place of management or its regis - tered office in EU/EEA countries and if there are suf - ficient exchanges of information between the foreign country and Germany, this provision is not applicable
agreement. German gift and inheritance tax law as well as income tax law, however, does recognise trusts, even though they are described as a “pool of assets, governed by foreign laws and aiming for the binding of assets”. The taxation of trusts is rather severe in Germany, especially in the case of distributions from the trust to beneficiaries in Germany. Qualification of Trusts The Federal Fiscal Court issued three decisions 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 subject to gift tax. Where the settlor does not have power over the trust assets, the trust is considered to be opaque. In 2023, the German tax authorities published a new decree on the application of the Foreign Tax Act. Among other things, the decree addresses 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 transpar - ent. The assessment is determined by how the agree - ments 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 and distribute the assets to the settlor, a trans- parent fiduciary agreement for German tax purposes can usually be assumed. Incidentally, ancillary agree - ments such as letters of wishes can also be included in the assessment. Double Taxation of Trust Distributions The distributions from a foreign opaque trust to a Ger - man resident are generally subjected to income tax and may simultaneously be subject to gift tax. Income of an opaque trust, that is not distributed to the ben - eficiaries, may also be attributed to German resident beneficiaries for income tax purposes. The Muenster Fiscal Court ruled in 2023, 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.
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