Distributions from foreign foundations to German... | KPMG | GLOBAL

Distributions from foreign foundations to German beneficiaries may trigger gift tax

Distributions from foreign foundations to German...

On 22 April 2015 the Fiscal Court of Baden-Wuerttemberg (7 K 2471/12) ruled that distributions by a Swiss foundation to a natural person with his residence or habitual place of abode in Germany are subject to German gift tax.

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Facts

A family foundation governed by Swiss law made support payments to the members of a family in line with the foundation charter. The fiscal court classified this distribution as a taxable gift as defined by Section 7 (1) no. 9 sentence 2 of the German Inheritance Tax and Gift Tax Act (ErbStG). Based on this standard, any acquisition by intermediate beneficiaries while an estate under foreign law exists whose purpose is to tie assets is subject to gift tax.

Position adopted by the court

In the opinion of the fiscal court, an “estate under foreign law” includes particularly trusts but also foreign foundations.

The term “intermediate beneficiary” covers all those persons receiving payouts from their assets while an “estate under foreign law” is in existence.

Although distributions by domestic foundations are not subject to German gift tax, those of foreign foundations are.

The fiscal court did not see any discrimination of the Swiss foundation in this unequal treatment or any violation of the free movement of capital enshrined in European Union law. The domestic foundation is subject to substitute inheritance tax every 30 years under Section 1 (1) no. 4 ErbStG. Payments made to the beneficiaries designated in the foundation charter are not deductible in this connection, Section 10 (7) ErbStG. By contrast, the foreign foundation is not subject to substitute inheritance tax. Therefore, while the payment potential of domestic family foundations is liable to substitute inheritance tax (Section 1 (1) no. 4 ErbStG), in the case of foreign foundations, their payments are liable to substitute inheritance tax (Section 7 (1) no. 9 sentence 2 ErbStG), which justifies the differing taxation of the payments

Tax regime for payouts of foreign and domestic foundations from the perspective of the fiscal court

In the final analysis, the tax regime for payouts by domestic foundations on the one hand and foreign foundations or estates on the other hand are as follows according to this legal opinion:

  • If payments made to natural persons with their residence or habitual place of abode in Germany are not in accordance with the articles of association, they are always subject to gift tax, whether they are paid by a domestic foundation or a foreign estate or foundation.
  • If payments are in accordance with a provision incorporated in the articles of association,
    • this is not treated as a gift in the case of a domestic foundation
    • but it is treated as a gift in the case of a foreign foundation or estate.
  • An appeal on points of law against the judgement was not allowed. An appeal against denial of leave to appeal has been filed with the German Federal Fiscal Court (BFH II B 41/15).

Recommended practice

In practice, this means the following:

Payments to the beneficiaries of an “estate under foreign law whose purpose is to tie assets” should be carefully implemented if the beneficiary of the payment resides or has his habitual place of abode in Germany. Not only foundations under foreign law are affected in this case but also all independent legal entities in a broader sense, i.e. trusts, institutions etc. The different tax consequences for limited companies must be analyzed and treated separately.

  • If one wishes to obtain legal certainty prior to the payment, it may be advisable in individual cases to apply for a binding ruling or to combine the distribution with a reservation of the right of revocation. If the distribution is classified later as subject to gift tax, the gift tax can be eliminated retroactively if the reservation of the right of revocation is exercised.
  • If payments have already been made and these were not reported or declared in Germany for tax purposes, this can be carried out subsequently by means of a disclosure where applicable. However, if necessary this disclosure should meet the formal requirements for a voluntary self-disclosure in order to avoid any risks under applicable criminal tax law. In the context of such disclosure, it is, however, also possible to substantiate and agree a tax treatment more favourable to the foundation and the beneficiary. The procedure should be discussed and arranged individually upfront with a legal expert.

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