Wealth structuring and regulationi Commonly used structures
Two structures are commonly used in Germany to hold assets: corporations and partnerships.
A corporation is subject to German corporate tax on its worldwide income if its effective place of management or statutory seat is located in Germany. The corporate tax amounts to 15 per cent plus the solidarity surcharge (see Section II.i). In addition to corporate tax, a trade tax is also levied. The trade tax due depends on the rates determined by the local authorities. A participation exemption may apply, however, for dividends and capital gains. Profits distributed to shareholders of the corporation are subject to withholding tax at a flat rate of 25 per cent plus the solidarity surcharge.
A foreign corporation with income from German sources might be subject to German corporate tax. If a foreign corporation has a branch in Germany that constitutes a permanent establishment, the corporation will be subject to German corporate tax and trade tax on all income effectively connected to this permanent establishment.
Partnerships are fiscally transparent in Germany for income tax purposes. The partners are subject to income tax at their individual tax rates (plus the solidarity surcharge, if applicable). If the partnership is engaged in trade or business, the partnership itself is subject to trade tax. Trade tax levied from the partnership is (to a large extent) credited against the income tax of the partners if they are individuals.ii Foundations
Foundations in Germany can be established either as charitable foundations or as family foundations. Charitable foundations are tax-privileged. Recognition as a charitable foundation requires that the foundation's activities are dedicated to the altruistic advancement of the general public in material, spiritual or moral respects. These purposes must be pursued altruistically, exclusively and directly. A charitable foundation may, however, use a third of its income for the maintenance of the founder and his or her family. The formation of a charitable foundation neither triggers any inheritance or gift tax, nor real estate transfer tax, if real property is transferred gratuitously to the foundation. A charitable foundation is released from almost every current form of taxation, especially corporate tax and trade tax.
In contrast, a family foundation is not tax-privileged. It is conducted for the personal benefit and the advancement of one or more families. The formation of a family foundation and later donations to the foundation generally trigger inheritance and gift tax. The current taxation of a family foundation generally complies with the taxation of other legal persons. A family foundation can, however, receive income not only from trade or business but any type of income. In addition, only family foundations are liable for a substitute inheritance tax. This special tax accrues every 30 years. Moreover, distributions to beneficiaries are subject to income tax. The liquidation of a family foundation leads to an acquisition of assets on the level of the beneficiaries. This acquisition is treated as a lifetime gift. Therefore, it is subject to gift tax. Income tax may be triggered as well. The classification of the tax bracket depends on the relationship between the founder and the beneficiary.
In contrast to German family foundations, foreign family foundations are not liable to pay substitute inheritance tax. Further, according to a recent ruling of the German Federal Fiscal Court,2 distributions from foreign family foundations to German resident beneficiaries are only subject to gift tax if they do not comply with the statutory purposes of the foundation or if the beneficiaries have an enforceable entitlement to distributions. However, the undistributed income of a foreign family foundation may be attributed to the personal income of the founder or the beneficiaries if they are resident for tax purposes in Germany (Section 15 AStG). This does not apply to family foundations that have their seat in a Member State of the EU or the European Economic Area if the foundation's assets are legally and effectively separated from the beneficiaries' property and a treaty regarding mutual administrative assistance exists between Germany and the state in which the foundation has its seat. These conditions have to be satisfied cumulatively.
Comprehensive changes will be applied in the law of foundations in the near future. At the end of June 2021, the German Parliament and the Federal Council passed the reform of the law on foundations. The two main objectives of the reform are to bundle the hitherto federally fragmented foundation law in a uniform and conclusive manner in the German Civil Code and to establish a centrally managed foundation register.
The new regulations will come into force on 1 January 2023. The public foundation register will be introduced on 1 January 2026.iii Trusts
Neither domestic nor foreign trusts are recognised in Germany. Germany does not have its own trust law. Germany did not ratify the HCCH Convention on the Law applicable to Trusts and on their Recognition 1985. Therefore, German property law does not recognise the transfer of assets located in Germany to a trust. In these circumstances, the terms of a trust are interpreted in accordance with German law for civil law and tax purposes.
Recent decisions by the German Federal Fiscal Court on matters of Inheritance and Gift Tax with regard to foreign trusts resolved some previous ambiguities about the gift tax treatment of trusts in Germany. The Court has clarified and confirmed criteria under which a trust qualifies as opaque or transparent for Inheritance and Gift Tax purpose. The crucial factor is how much power over the transferred assets still lies with the settlor. Generally speaking, a trust is transparent if the settlor can access its funds or assets like his or her bank account. Transparent trusts are effectively considered non-existent by German Tax Law. Therefore, the trust's assets are attributed to either the settlor or the beneficiaries (depending on the specific circumstances). Consequently, upon their deceasing, inheritance and gift tax is levied on the trust's assets. Opaque trusts, on the other hand, are treated similar to foreign foundations.