In its judgement of 13 August 2020, the Munich Fiscal Court ruled that the assets of an effectively established, legally independent and therefore non-transparent foundation are no longer attributable to the founder. A foundation legally established in another EU/EEA country (here: Principality of Liechtenstein) also does not lose its legal capacity by relocating its administrative headquarters to Germany, especially as the foundation can invoke the freedom of establishment as another legal entity.
Dispute in court and opinion of the tax authorities
The tax authorities had issued a gift tax assessment, taking the view in particular that a foundation established in Liechtenstein had lost its legal capacity due to the relocation of its administrative headquarters to Liechtenstein and that a gift made to the foundation was therefore attributable to the plaintiff under gift tax law. The plaintiff applied to the court to have the gift tax assessment cancelled.
In the opinion of the tax authorities, the foundation assets are attributable to the founder and not to the foreign foundation if the foundation is not actually and legally free to dispose of the donated assets in relation to the founder. In the case of Liechtenstein foundations, the founder (indirectly) secures extensive powers of control over the foundation assets via mandate or trust agreements with the foundation bodies. Whether such powers of control of the founder also exist in the case in dispute as a result of ancillary agreements made outside the foundation business is not known. In any case, as is often the case in such cases, no such powers of control of the founder would arise from the foundation deed in the case in dispute.
Facts of the case
The plaintiff, who is domiciled in Germany, set up a foundation under the law of the Principality of Liechtenstein. This foundation is entered in the land register as the owner of various properties in Liechtenstein and is also commercially active, as it operates a photovoltaic system and is a limited partner in several companies.
The purpose of the foundation is to support the plaintiff as the sole beneficiary during his lifetime. The monetary distributions are made exclusively to the plaintiff as the founder.
According to the above-mentioned agreements and regulations, the plaintiff as founder was entitled to none Authority to rule over the assets of the foundation. In the foundation statutes and the supplementary regulations, the plaintiff as founder was granted in particular No decision-making powers with regard to the investment and utilisation of the assets. The foundation can therefore exercise control over the assets transferred to it vis-à-vis the plaintiff as founder. free have at their disposal. The Board of Trustees the foundation "on our own responsibility", "free from instructions" and "taking into account the presumed will of the founder when the foundation was established". The plaintiff is also not authorised to change the beneficiary status via the foundation deed or the supplementary foundation deed.
By resolution of the foundation's Board of Directors, the foundation's administrative headquarters were relocated to Munich, from where a photovoltaic system - included in the foundation's assets - and various company and property investments are managed. The transfer of the administrative headquarters to Liechtenstein was confirmed in the official confirmation of the Office of Justice of the Principality of Liechtenstein.
The decision of the court
The tax court has clarified that the assets of an effectively established, legally independent and therefore non-transparent foundation are no longer attributable to the founder.
Once assets have actually and legally accrued to such a foundation, they can only be allocated to the foundation (see BFH ruling of 5 December 2018 II R 9/15, BStBl II 2020, 655). The Munich Fiscal Court is convinced of this in its decision.
However, if, according to the agreements and regulations made, the founder reserved comprehensive powers of control over the assets of a foreign foundation, so that the foundation is prevented from actually and freely disposing of the assets transferred to it vis-à-vis the founder, the assets would continue to be attributed to the founder. Powers of control in this sense arise, for example, through the reservation of the founder with regard to decisions on the investment and use of the assets, through the possibility of demanding the retransfer of the assets in whole or in part and through the fact that the foundation and its bodies are bound by instructions from the founder. In such cases, the founder can dispose of the foundation's assets as if they were his own bank account. This applies subject to changes to the agreements and regulations made or other interim dispositions up to the time of death (see BFH judgements of 28 June 2007, BStBl. II 2007, 669). The tax office assumed that the plaintiff had such powers of control without further examination because it was an FL foundation. The tax court rejected this argument.
Furthermore, the foundation has not lost its legal capacity due to the relocation of its administrative headquarters to Liechtenstein. This follows from the fact that the foundation established in Liechtenstein can invoke the freedom of establishment guaranteed by the EC Treaty (Art. 43, 48 of the Treaty on the Functioning of the European Union - TFEU).
Practical note
The appeal is authorised due to the fundamental importance of the legal issues decided. This may give the BFH the opportunity to create legal certainty. At the end of last year, it had already issued a Important decision on Swiss foundations and third-country foundations met.
As in the present case, it is evident that the German tax authorities still take a very critical view of FL foundations and want to deny their legal capacity across the board.
Yours TAXGATE Team supports wealthy private individuals and family businesses with complex tax issues and represents their interests vis-à-vis the tax authorities.
