In a final judgement (case no. 5 K 9/25), the Hamburg Fiscal Court ruled that income-related expenses incurred by a foundation in connection with free float dividends, i.e. dividends from shareholdings of the foundation with less than 10 % of the share capital, are generally only to be taken into account in the calculation of income in the amount of the saver's lump sum.
Furthermore, the tax court had no constitutional doubts that the prohibition of deductions for capital income from private assets should also be applied when calculating income for corporation tax purposes.
The dispute
The plaintiff is a family foundation with legal capacity that is subject to unlimited corporation tax and is not tax-exempt. It invests its assets predominantly in capital investments and, in the years in dispute, generates income from share dividends, interest income, fund distributions and sales proceeds from shares, bonds and investment funds, among other things. These are not shares that can be allocated to the trading portfolio of a credit, securities or financial services institution or to current assets.
Accordingly, the plaintiff also incurred expenses for office equipment, premises, the salary of the Management Board and the remuneration of the advisory boards as well as asset management costs in the form of account fees, custody account fees and ongoing legal and tax consultancy costs during the period in dispute. It was agreed that between 6% and 20% of these expenses were in connection with the income from the above-mentioned free float dividends.
In the administrative proceedings, the plaintiff unsuccessfully applied for the full deduction of the income-related expenses associated with the free float dividends. The tax office only recognised these income-related expenses in the amount of the saver's allowance.
The justification
In the opinion of the court, free float dividends from family foundations constitute income from capital assets within the meaning of Section 20 EStG. The commercial fiction of Section 8 para. 2 KStG does not apply to them because the family foundation is not a taxable person within the meaning of Section 1 para. 1 no. 1 to 3 (but no. 4) KStG. It calculates its income from capital assets as the surplus of income over income-related expenses. When determining the income of the family foundation, income-related expenses should therefore only be taken into account in the amount of the saver's allowance. A teleological reduction of these provisions in the case of free float dividends of a foundation is out of the question.
Furthermore, Section 8b (1) and (5) KStG does not give rise to any overriding provision on the deduction of income-related expenses for dividends within the meaning of Section 8b (4) sentence 1 KStG. The exemption provision for dividends was applicable in the present case. However, the associated provision of § 8b para. 5 KStG only covers operating expenses and not income-related expenses. Furthermore, this provision does not apply to free float dividends pursuant to Section 8b para. 4 sentence 7 KStG.
The tax court was also not convinced of the unconstitutionality. There was no violation of the general principle of equality under Art. 3 Para. 1 GG. The regulations at issue did not violate the principle of taxation according to financial capacity, nor was there any unconstitutional unequal treatment in comparison to foundations that held shares in corporations in excess of 10 % or generated income from another type of income. The plaintiff is also not unconstitutionally disadvantaged compared to other corporations to which § 8b para. 2 KStG applies.
Conclusion and recommendation
The taxation of family foundations is complex, as they are subject to corporation tax (Section 1 (1) No. 4 KStG) and can nevertheless generate rental income, capital income and entrepreneurial profits - unlike a GmbH, for example, which only recognises commercial income.
The decision of the Hamburg tax court has brought some clarity to a legal issue - albeit not at the highest court level. It can lead to massive additional tax burdens for the family foundation, especially if the family foundation does not separate its transactions or document them very well.
Yours TAXGATE Team supports wealthy individuals and family businesses with complex tax issues and their robust implementation.
