Taxation of Trusts in Germany
By John Büttner, FPS
Trusts are often used as foreign vehicles. Regarding the German tax treatment, which shall be briefly outlined, it is, however, decisive as to whether a trust qualifies as a transparent or non-transparent vehicle. Such qualification is generally made based on the respective trust agreement, along with all other agreements linked to the trust. The more influence the Settlor has, the more likely it is that the trust is deemed to be transparent.
The formation of a non-transparent trust is a donation under German tax law, provided the Settlor is domiciled in Germany, his habitual abode is in Germany, or he is a German citizen who was based in Germany within the last five years prior to the formation of the trust. An unlimited German income tax liability, according to the German Corporation Income Tax Act, may only apply if the seat or the place of management is in Germany. Otherwise, only a limited corporate income tax liability may be applicable.
If the trust distributes income to its individual beneficiaries and if a beneficiary is subject to a German income tax liability, such income will be taxed under a flat rate taxation regime at a tax rate of 25% plus 5.5% Solidarity Surcharge thereon. If the trust retains its earnings, such earnings may nevertheless be subjected to German income tax based upon Section 15 of the German Foreign Tax Act. Such rule generally provides for taxation on a fictitious allocation according to the respective share in the trust, which can also lead to problems in terms of liquidity, as income is taxed that has not actually accrued at the level of the respective beneficiary. Of course, it is a further prerequisite for such attribution of income that the Settlor or the beneficiaries have their domicile or habitual abode in Germany. In addition, the Settlor, his relatives, and their descendants must be entitled to benefit in the trust of at least 50%. In case of beneficiaries subject to an unlimited tax liability in Germany, the asset accumulation due to the liquidation of a trust is initially subject to German inheritance and gift tax.
If, from an economic point of view, the Settlor can still be qualified as the owner of the assets of a trust, the trust is treated as being transparent. In this case, generated income is taxable either directly at the Settlor’s level or at the beneficiary’s level according to the general German tax rules. For inheritance or gift tax purposes, immediate taxation of the endowment of the trust can be postponed until any special rights of the Settlor lapse. However, this is only possible in cases of contractual arrangements where the Settlor can require a retransfer of the assets at any time.
John BüttnerGGI member firm
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FPS is one of the largest fully independent German law firms, with four offices in Germany. FPS currently employs over 120 lawyers and notaries. One of the firm’s core areas of expertise is national and international litigation, as well as dispute resolution.
John Büttner advises on all areas of commercial taxation under both national and international law, including the law relating to fiscal offences and tax disputes. He has more than 20 years of experience in advising on international taxation, pre- and post-acquisition restructuring, structured products, and investment funds, as well as advising private clients and family-owned companies in all ongoing tax-related matters, including asset structuring and estate planning.
Published: Trust & Estate Planning Newsletter, No. 07, Spring 2021 l Photo: Comofoto - stock.adobe.com