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02.09.2016 | KPMG Law Insights

Criminal Tax Law – Donations by a foreign foundation to German beneficiaries may trigger gift tax

Donations by a foreign foundation to German beneficiaries may trigger gift tax

According to a ruling by the Baden-Württemberg Fiscal Court dated April 22, 2015 (7 K 2471/12), gifts made by a Swiss foundation to an individual domiciled or habitually resident in Germany are subject to German gift tax.

The facts

A family foundation under Swiss law had paid out support benefits to the member of a family in accordance with the foundation deed. The Tax Court of Baden-Württemberg considered this gift to be a taxable gift within the meaning of Sec. 7 (7) of the German Income Tax Act. 1 No. 9 Sentence 2 Inheritance Tax Act. According to this norm, the acquisition by intermediate beneficiaries during the existence of an estate under foreign law, the purpose of which is to bind property, is subject to gift tax.

The legal opinion of the court

In the opinion of the Tax Court, the definition of “assets under foreign law” includes trusts in particular, but also foreign foundations. The term “intermediate beneficiary” includes all persons who receive payments from the assets of the “foreign-law estate” during its existence. While corresponding gifts from domestic foundations are not subject to German gift tax, this is the case with foreign foundations.

The Tax Court did not consider this unequal treatment to be discriminatory against the Swiss foundation or a violation of the freedom of capital movements enshrined in Union law. The domestic foundation is subject to substitute inheritance tax every 30 years pursuant to sec. 1 para. 1 No. 4 Inheritance Tax Act. Payments to beneficiaries entitled under the foundation deed are not deductible in this respect, Sec. 10 para. 7 ErbStG.

The foreign foundation, on the other hand, is not subject to substitute inheritance tax. Thus, if the disbursement potential is recorded in the case of domestic family foundations in the context of substitute inheritance tax (Section 1 (1) No. 4 ErbStG), it is recorded in the case of foreign foundations when the disbursement is made (Section 7 (1) No. 9 Sentence 2 ErbStG). According to the court, this justifies the different taxation of the payouts.

Taxation Regime for Disbursements of Foreign and Domestic Foundations from the Perspective of the Fiscal Court

As a result, according to this legal interpretation, the taxation regime for disbursements by domestic foundations on the one hand and foreign foundations or estates on the other hand is as follows:

  • Unless payments to a natural person domiciled or habitually resident in Germany are in accordance with the articles of association, they are always subject to gift tax – regardless of whether they are paid out by a domestic foundation or a foreign estate or foundation.
  • Provided that disbursements are in accordance with a regulation laid down in the Articles of Association, there is no gift in the case of a domestic foundation. In the case of the foreign foundation or estate, on the other hand, there is a gift.

No appeal was allowed against the verdict. An appeal against this decision was filed with the Federal Fiscal Court (Case No. BFH II B 41/15).

Recommendations for practice

Payments to beneficiaries of an “estate under foreign law whose purpose is to bind assets” should be implemented with caution if the beneficiary of the payment is domiciled or habitually resident in Germany. This applies not only to foundations under foreign law, but also to all independent legal entities in the broader sense, i.e. trusts, institutions etc. For a limited company, the tax consequences may differ.

If you want to obtain legal certainty before making a payment, it may be advisable in individual cases to request binding information or to combine the grant with a reservation of revocation. If the gift is later deemed to be subject to gift tax, the gift tax may be retroactively eliminated upon exercise of the reservation of revocation.

If payments have already been made and these have not been reported or declared for tax purposes in Germany, this should be disclosed to the tax authorities as a precautionary measure. This disclosure should then, if applicable, also meet the formal requirements of a voluntary disclosure exempting the company from prosecution, in order to also prevent any risks under criminal tax law. Within the scope of this disclosure, a more favorable legal interpretation for the foundation and the beneficiary can nevertheless be sought. The procedure should be coordinated in advance with a consultant in each individual case.

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