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,
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.
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