GERMANY Law and Practice Contributed by: Christian von Oertzen and Philipp Windeknecht, Flick Gocke Schaumburg
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 2024, the BFH ruled that the restriction in Section 15 (6) of the FTA to foreign foundations that have their registered office or place of management in the EU/ EEA violates the free movement of capital. Hence, the provision is generally applicable to all foreign fam - ily 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 Property and (positive) income 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 bene - ficiary 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 accumulated trust income that was subject to taxa - tion 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. Possible reform of Section 15 of the FTA On 18 November 2025, the Federal Ministry of Finance published a draft for the reform of Section 15 of the FTA. A central change is the introduction of a low-tax threshold. The concept of a family foundation would be expanded to related parties and persons acting in concert. The current escape clause based on the sett - lor’s loss of control over foundation assets would be replaced by the BFH-inspired concept of an “artificial arrangement”. The escape clause would be extended to third countries. 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. 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
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