Due to an amendment of the German foreign transactions tax act, new tax rules for foreign trusts and family foundations will come into force as of January 1, 2013.
As before, the act provides for specific CFC-like rules for certain foreign trusts and family foundations. In cases in which either the settlor or a beneficiary is resident in Germany, the undistributed income accumulated by the trust or family foundation may be attributed to the German resident in proportion to the respective person's "share" in the trust or foundation's assets. However, the method of the income attribution will now be amended. Under the old regime, the total income of the trust or foundation had to be calculated as if the entity were subject to German corporate tax (i.e., also the available participation exemption for dividends and capital gains received by corporate entities was to be applied); the total income of the trust or foundation was then attributed to the German resident in one sum and was taxed at the individual's progressive tax rate. Under the new rules, however, the trust or foundation's different types of income may be attributed directly to the German resident as if this individual had received the income himself. This means that the flat tax applicable for capital income of individuals (26.375 %) will apply as far as the trust or foundation has received such capital income, whereas the individual progressive tax rate will apply as far as other income is attributed to the German settlor or beneficiary. There is still an escape clause for trusts or foundations with residence in a member state of the EU or the EEA in cases in which it can be demonstrated that neither the settlor nor the beneficiaries have any control over the trust or foundation's assets.
Furthermore, the new tax rules contain additional provisions with regard to the attribution of undistributed income of controlled foreign companies to the trust or foundation. This may apply to foreign companies controlled by the trust or foundation which itself receives "passive income" being subject only to low taxation. However, there is an escape clause for companies with residence in a member state of the EU or the EEA where a specific substance test is met. Thus, income of a controlled foreign company attributed to the trust or foundation in a first step may then be attributed to the German settlor or beneficiary in a second step.
The same may be true in cases in which the trust or foundation itself is a beneficiary of another foreign trust or family foundation. That other trust or foundation's undistributed income may be attributed to the first mentioned (favored) trust or foundation. However, there is an escape clause for trusts or foundations with residence in a member state of the EU or the EEA in cases in which it can be demonstrated that the favored trust or foundation has nom control over the other trust or foundation's assets.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.