GERMANY Law and Practice Contributed by: Christian von Oertzen and Philipp Windeknecht, Flick Gocke Schaumburg
Trust as a separate legal entity for tax purposes 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. The BFH issued three rulings in 2021 regarding the taxation of trusts. A trust is transparent 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. 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 German resident are generally subject to income tax and may simultane - ously be subject to gift tax. 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/
in Germany, as the German civil law system does not acknowledge the concept of a trust in its own right. 3.3 Taxation of Trusts, Foundations and Similar Entities Located in Other Jurisdictions Treatment of Trusts Germany is not a member of the Hague Trust Con - vention and thus has not ratified its provisions. The German treatment of trusts is typically determined by analogising the trust in question to some other legal arrangement recognised under German law. The analogising procedure involves searching for “similar” or comparable legal structures that can be used for estate planning purposes in the German jurisdiction instead of a trust. The analogising procedure is mainly influenced by the specific trust structure. Testamentary trusts If German succession law applies to the decedent’s estate, it is not possible to establish a trust mortis causa nor to bequeath parts of the estate to an exist - ing trust. In such a case, especially when the testator 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. 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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