The German Federal Tax Court recently published a decision
stating that distributions from a foreign trust to
beneficiaries resident in Germany are subject to German gift
tax (Bundesfinanzhof, September 27, 2012 – II R
According to the court, distributions by an irrevocable trust
before its termination – be they principal or income,
discretionary or fixed-interest – to beneficiaries
resident in Germany are subject to German gift tax. An exception
should apply only for the settlor himself. This view had been taken
by several German tax authorities before, but was controversial.
With the recent Federal Court ruling there is hardly any room left
for a differing reasoning.
The recent ruling did not address thequestion of how
this gift taxation relates to income tax imposed on trust
distributions. Trust distributions have usually
been considered as being taxable under the German Income
Tax Act. Therefore, it may be assumed by tax authorities
that trust distributions trigger double taxation,
both income and gift tax. Though from a systematic standpoint, a
distribution should be subject only to either income tax or gift
tax. The Federal Tax Court did not have to address this issue.
In short, foreign trusts as estate planning tools
involve significant risks, if the settlor or one
of the beneficiaries has his or her residence or habitual
abode in Germany.Distributions may
trigger a heavy tax burden. The same applies to the
formation and dissolution of a trust. Moreover,
undistributed income of a trust may be attributed
to a settlor or beneficiary with German tax residence.
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.
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