GERMANY Law and Practice Contributed by: Christian von Oertzen and Philipp Windeknecht, Flick Gocke Schaumburg
granted. In 2023, the BFH ruled for foundations that they cannot establish a capital contribution account like a corporation. However, tax-free repayments 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 Distributions of trust property to remaindermen resi - dent in Germany generally constitute taxable gifts under Section 7 (1) No. 9 IGTA. In 2024, the Munich Fiscal Court confirmed that treating distributions from a US trust as gifts does not violate the free movement of capital. Moreover, distributions to “intermediate beneficiaries” are subject to gift tax. Following a 2019 ruling by the BFH, only beneficiaries who irrespective of a specific resolution on a distribution, are 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, qualify as “intermediate beneficiaries”. The applicable tax rates depend on the beneficiary’s relationship to the settlor or decedent. The BFH has further held that distributions from foreign foundations are taxable gifts under Section 7 (1) No 1 IGTA if they clearly exceed the founda - tion’s statutory purpose, with tax authorities generally required to respect the foundation’s own assessment of whether a distribution serves that purpose. 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 BFH 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 founda - tion’s statutes for receiving distributions, that is, if they belong to the group of beneficiaries and no considera - tion is to be paid in return. However, the recipient does not require any further asset or organisational rights under the foundation statutes. 3.4 Tax Consequences of Fiduciary and Beneficiary Roles In Germany, domestic family foundations are treated as opaque. The fact that an individual holds a dual or even triple role (founder, board member and ben - eficiary) within the foundation does not change this classification. This does not apply to foreign founda - tions or trusts. If the founder or settlor of a trust or foreign foundation retains powers of control, direction or disposal over the foundation or trust assets (eg, by having a role as a trustee or board member) or reserves rights of reversion or withdrawal, the foreign foundation or trust is generally regarded as transpar - ent for tax purposes. In 2024, the Schleswig-Holstein Fiscal Court had to decide if a trust, validly established in accordance with the applicable law (in this case, Guernsey law), was subject to German inheritance tax following the death of the German resident settlor. As the settlor did not reserve any powers of control which would allow them to continue to dispose freely of the assets held in the trust, the trust was considered opaque and the assets held in the trust did not form part of the settlor’s estate on the death of the settlor. Hence, the trust assets were not subject to German inheritance tax.
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