Attribution taxation for foreign family foundations contrary to European law

The so-called attribution taxation pursuant to Section 15 (1) of the German Foreign Tax Act (Außensteuergesetz; AStG) regulates the attribution of assets and income of a foreign family foundation to the founder who is subject to unlimited tax liability (in Germany) or to the persons who are entitled to receive or acquire the assets and income and who are subject to unlimited tax liability (in Germany) by fictitiously creating a distribution for tax purposes. The main purpose of this provision is to prevent capital flight and tax evasion, as well as the associated tax avoidance, through the targeted use of foreign (family) foundations and (family) trusts.

The attribution taxation applies to foreign family foundations in which the founder, his or her relatives, and their descendants are entitled to more than half of the benefits or assets (Section 15 (2) AStG). In the case of a foreign family foundation with management or registered office in an EU member state or a signatory state to the EEA agreement, the attribution taxation pursuant to Section 15 (6) AStG does not apply if it can be proven that the foundation’s assets are legally and effectively deprived of the power of disposal of the persons specified in Section 15(2) AStG and that the information necessary to carry out taxation is exchanged between Germany and the foreign EU/EEA country. In its decision of December 3, 2024 (case no. IX R 31/22), the German Federal Fiscal Court (BFH) had to clarify whether the exemption provision under Section 15 (6) AStG can be applied accordingly in cases involving third countries, because otherwise there could be a violation of the freedom of capital movement that must be guaranteed in Europe and beyond.

In the case in dispute, the tax office allocated the income of a Swiss family foundation to the beneficiaries living in Germany in accordance with their respective shares, as the beneficiaries were both entitled to receive and entitled to claim the income within the meaning of Section 15 (1), (2) AStG. The tax court and the BFH took a different view.

The conditions for attributing the foundation’s income to the domestic beneficiaries were essentially met. This was because the foundation was a foreign family foundation within the meaning of Section 15 (2) AStG. More than half of the beneficiaries were also entitled to receive payments. However, in the case in dispute, attribution of the income pursuant to Section 15(1) AStG was ruled out on grounds of EU law. This is because, in order to avoid a violation of the free movement of capital, it is irrelevant for the application of Section 15(6) AStG that the family foundation does not have its management or registered office in a member state of the EU or a signatory state to the EEA agreement, but in a third country – in this case Switzerland – due to the primacy of EU law. Otherwise, the tax implications could deter a potential founder from establishing a foundation abroad, particularly in a third country, and instead encourage them to set up a foundation in their home country. Furthermore, in the opinion of the BFH, the imputation tax pursuant to Section 15 (1), (2) AStG, taking into account the exemption provision pursuant to Section 15 (6) AStG, is both proportionate and in conformity with EU law.

Furthermore, the BFH clarifies that the assessment of whether the foundation’s assets are legally or factually withdrawn from the power of disposal of the persons referred to in Section 15 (2) AStG, i.e. the beneficiaries, depends exclusively on the civil law situation. If, on the other hand, economic criteria were to be taken into account, the group of beneficiaries would have to pay tax on the income generated by a foundation; there would therefore be no attribution taxation within the meaning of Section 15 (1) AStG. In the case in dispute, the foundation’s statutes did not give the beneficiaries any direct power of instruction over the foundation’s board of trustees. The board of trustees decided on the use of the foundation’s capital and income at its own discretion. Furthermore, the beneficiaries had no enforceable claims against the foundation. Consequently, they were legally and effectively deprived of the power to dispose of the foundation’s assets.