BFH: Important decision for Swiss foundations and US trusts with beneficiaries in Germany (Section 15 AStG)

The Federal Fiscal Court (BFH) ruled in its judgement of 03.12.2024 decided that the Exemption from attributed taxation in accordance with section 15 AStG must also apply to foreign foundations in third countries. The current restriction of the exemption to foundations with their management or registered office in a member state of the European Union or a signatory state to the EEA Agreement violates the free movement of capital.

Background to imputed taxation for foreign foundations 

The assets of domestic (family) foundations are subject to inheritance substitute tax every 30 years. The inheritance replacement tax does not apply to foreign (family) foundations. This is another reason why foreign (family) foundations are popular instruments for asset structuring. In addition, due to international mobility, beneficiaries of a foreign (family) foundation or (family) trust are often resident in Germany.

Due to attribution taxation, only (family) foundations in other EU/EEA countries are shielded for the purposes of current income taxation, provided that the beneficiaries can prove that, among other things, they do not govern the foundation and that a large information clause has also been agreed with the jurisdiction.

For (family) foundations in third countries, the tax authorities have so far rejected a shielding effect in all cases. As a result, the income of the foundation/trust was fully attributable to the beneficiaries living in Germany as part of their income tax return.

Facts of the BFH decision

A founder ordered the establishment of a foundation in her will. After its establishment following the death of the founder, the family foundation (Z Foundation) was established under the law of the Swiss Confederation (Switzerland). The foundation is domiciled in Switzerland. The beneficiaries of the family foundation are the iBeneficiaries living in Germany or parties involved in the determination (Plaintiff). According to the foundation statutes, the Board of Trustees decides on the utilisation of the foundation capital and income at its own discretion. The beneficiaries have no actionable claims against the family foundation. Legal recourse is therefore excluded as long as the beneficiaries have not been notified in writing of a decision by the Board of Trustees regarding a donation. The Board of Trustees is the body responsible for organising the Foundation's business.

The tax office had attributed the income of the Swiss family foundation to the plaintiffs on the basis of the Foreign Tax Act (AStG). The claimants therefore had to pay tax on the income of the Swiss family foundation, even though they had not received any distributions from it. The tax office refused to make an exception to the attribution because, according to the AStG, this only applies to family foundations with their management or registered office in a member state of the European Union or a contracting state of the EEA Agreement.

The decision of the BFH

The BFH has now ruled in favour of the plaintiffs. The free movement of capital also applies to third-country situations and requires the application of the exemption from imputation taxation to family foundations with management or registered office in a third country.

Valuation

In practice, this decision has far-reaching significance, as foundations/trusts under US law, for example, are very popular in the Anglo-American region. Any beneficiaries resident in Germany were previously exposed to a tax risk and a genuine dry-income tax. In future, such beneficiaries, e.g. from a discretionary US trust, will also be able to invoke the exemption from attribution taxation under section 15(6) AStG. It remains to be seen how the tax authorities will position themselves following this decision.

Practical note

Even if the beneficiaries living in Germany (now increasingly) invoke the exemption from attributed taxation (pursuant to Section 15 (6) AStG), tax declaration obligations must be observed.

Yours TAXGATE team assists wealthy private individuals and family businesses with complex tax issues and represents their interests vis-à-vis the tax authorities. Dr Tobias Stiegler, Patrick Bubeck and Stephan Scheffold advise on various cases in German foreign tax law and are tax advisors at TAXGATE, a tax law firm specialising in transactions, investments and tax compliance.