The worldwide income and assets of individuals whose tax residence is in Germany are subject to:

• income tax; and
• inheritance and gift tax.

If real estate located in Germany is acquired, the following taxes apply:

• real estate transfer tax; and
• (annual) real estate tax.

Corporations with its effective place of management or statutory seat in Germany are subject to:

• corporate tax; and
• trade tax.

The EU’s Anti-Tax Avoidance Directive (ATAD) obliges all Member States to implement a minimum standard for additional taxation in national tax law. Based on the Directive, the rules of the Foreign Tax Act (FTA) have been amended. The amended law is in force from 1 January 2022. In particular, the taxation of hidden reserves for departing natural persons with capital shares was tightened (exit tax). If an individual has owned more than 1% of shares in a corporation within the past 5 years and has been subject to unlimited tax liability in Germany for at least 7 of the 12 years prior to departure, the disposal of the shares is feigned. The increase in the value of the shares is taxed without realization (“dry income”). Any deferral and returner rules were tightened as a result of the amendment. Payment of the exit tax is now due immediately. Upon request, payment can be made in 7 annual instalments. Usually, a deferral is granted only upon the provision of collateral. In practice, tax offices often do not accept shares in the tax-triggering company as a collateral. Often this is also not possible due to the articles of association. Violation of certain rules of conduct may lead to the immediate maturity of the tax payment. The tax claim expires if the taxpayer returns to Germany within 7 years and has not transferred their shares in the meantime. An intention to return has to be made credible in the tax return.

In contrast to German family foundations, foreign family foundations are not liable to pay substitute inheritance tax. Further, according to a ruling of the German Federal Fiscal Court from 2021, 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 FTA).

Comprehensive changes will be implemented 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.

The relevant areas of law are all governed at the federal level, so there are no local developments. 

A recent decision by the Hamburg Fiscal Court attracted considerable attention and is particularly relevant in the area of non-German family foundations. The court ruled that Section 15 of the FTA did not violate higher-ranking law. Section 15 is an anti-abuse provision intended to prevent tax evasion and tax avoidance as well as exploitation of the shielding effect of foreign foundations for purposes of taxation. Therefore, Section 15 of the FTA attributes the assets and income of the foreign family foundation to the founder subject to unlimited tax liability or, alternatively, to the beneficiaries. The court also stated that the criterion of withdrawal of legal and factual power of disposal under Section 15 (6) No. 1 of the FTA has to be interpreted broadly, excluding the attribution of income if the foundation has its registered office or its management in an EU Member State or an EEA Treaty State. The persons referred to in subsections 2 and 3 have to prove that they are legally and factually deprived of the power of disposition. The possibility of proof requires that the tax authorities have a possibility of verification through mutual agreement by means of exchange of information. The taxation of foreign sourced income under Section 15 of the FTA is an expression of the scepticism of German law towards foreign family foundations. In practice, the desired tax effect of foreign family foundations can only be achieved if the founders are also willing to place their assets in the hands of third parties. The family foundation has to be able to provide evidence of the lack of legal and actual power of disposal.

Local case law developments are included above in Section 1.3 National case law developments. Court decisions of local courts are usually relevant beyond the borders of the individual federal state and should therefore be considered nationwide.

Two structures are commonly used in Germany to hold assets: corporations and partnerships.

Corporations

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% plus the solidarity surcharge. 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% 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

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.

Wealth tax has not been levied in Germany since 1997. Since then, there have already been numerous impulses in the political landscape for either reintroducing the tax or introducing a one-time wealth fee. This demand could even be found in some of the parties’ election programs for the 2021 federal election. Given the current coalition in the federal government, the introduction of a wealth tax is considered unlikely.

Unlimited inheritance or gift tax liability is triggered if either the decedent/donor (hereinafter both referred to as transferor) or the successor/donee (hereinafter both referred to as transferee) is resident in Germany, regardless of whether the assets received are effectively connected to Germany. If neither the transferor nor the transferee is resident, inheritance and gift tax is only due on certain assets situated in Germany (e.g., real estate and business property). The transfer of a German bank account between non-residents generally does not trigger inheritance or gift tax.

Concerning inheritance and gift tax, each transferee is liable for the tax on the value of the assets received, regardless of their personal wealth. The inheritance and gift tax rates range from 7% to 50%, depending on the relationship between the transferor and the transferee, and on the value of the assets received. Spouses and descendants pay inheritance and gift tax at a rate of 7% to 30%. Spouses receive a personal allowance of EUR 500,000 and a maintenance allowance of up to a maximum of EUR 256,000. Children receive a personal allowance of EUR 400,000 and an age-dependent maintenance allowance of up to EUR 52,000; grandchildren in principle receive a personal allowance of EUR 200,000. Transfers between most other relatives are taxed at a rate of 15% to 43%. Between unrelated persons, the applicable tax rate is 30% or 50% (for a transfer of more than EUR 6 million).

Besides income tax and inheritance and gift tax, only a few other taxes are relevant for private clients. A real estate transfer tax with different regional rates ranging from 3.5% to 6.5% applies to the acquisition of real estate or a substantial shareholding (at least 90%) in a company holding real estate. Furthermore, real estate tax is levied annually and is calculated on the basis of rates determined by the local authorities, and property values, which were last assessed in 1964 or 1935. However, the German Federal Constitutional Court found that these obsolete valuation methods are inconsistent with the constitutional principle of equality of taxation. In October 2019, the German Parliament passed a law that is supposed to change how the assessment of property values is conducted by local authorities from 1 January 2022 onwards. Due to the new tax law, more than 30 million properties have to be reassessed. For this purpose, property owners will have to submit tax returns as early as 2022. For this, each state will require different information from taxpayers, which further complicates the matter.

Trusts are generally not recognised in Germany. The use of trust structures in connection with German resident settlors or beneficiaries or German assets can therefore trigger inheritance and gift tax in several ways. The establishment of a trust by residents or of a trust comprising assets located in Germany is considered to be a transfer of assets that is taxable in accordance with the Inheritance and Gift Tax Act. Distributions to beneficiaries during the trust period or on the trust’s dissolution may trigger income tax and gift tax as well, if the beneficiary is a German resident or if German situs assets are distributed. The relationship between gift tax on the one hand and income tax on the other with regard to trust distributions has not yet been ultimately clarified by the courts. According to a recent ruling of the German Federal Fiscal Court (BFH II R 6/16), 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. Even though the ruling referred to foreign family foundations, it should also be applicable to trusts.

In addition, corporate tax can be triggered if income is received by a foreign trust from German sources. The worldwide income of a foreign trust may be subject to corporate tax if the trust’s management is in Germany and if certain other conditions are met; for example, if the effective management of a trust is vested with a trustee resident in Germany.

Undistributed income received by a foreign trust can be attributed to the settlor or the beneficiaries if they are German residents. In this case, it can be subject to the settlor’s or the beneficiary’s personal income tax.

The relevant areas of law are all governed at the federal level, so there are no local developments.

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 purposes. 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 their bank account. Whether a settlor can freely dispose of the trust’s assets or whether a beneficiary has a sufficient legal claim to demand distributions is to be determined by the applicable foreign trust law. The burden of proof lies with the taxpayer. 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). Opaque trusts, on the other hand, are treated in a similar way to foreign foundations. For income tax purposes, distributions made by an opaque trust are treated as capital income (similar to dividends). An additional gift tax may only be levied if distributions are made in violation of the provisions of the trust deed or if the recipient is legally entitled in any way to receive the distributed funds (i.e., has a claim to receive distributions as a beneficiary or remainderman). In such cases, trust distributions may trigger both inheritance and gift tax and income tax.

See above Section 2.3 National case law developments. Court decisions of local courts are usually relevant beyond the borders of the individual federal state and should therefore be considered nationwide.

The most recent rulings of the Federal Fiscal Court as outlined above provide more clarity, but some uncertainties remain. It remains to be seen what conclusions and practice trends will be drawn from this.

No pandemic-related developments are to be highlighted.

No national legislative and regulatory developments concerning trusts are to be highlighted here.

The relevant areas of law are all governed at the federal level, so there are no local developments.

The above-mentioned decisions of the Federal Fiscal Court also have an impact on inheritance tax in the area of trusts. The assets of an opaque trust are no longer attributable to the settlor and can therefore, under domestic inheritance law, be subject neither to statutory succession nor to a disposition upon death (non-transparent trust). If, as described above, the settlor of the trust has reserved for himself so many powers of control over the trust assets that he can deal with them in a manner comparable to a bank deposit, the trust is a transparent trust. The assets of a transparent trust can be inherited and are therefore subject to inheritance tax.

Local case law developments are considered above in Section 3.3 where national case law developments are outlined. Court decisions of local courts usually have a relevance beyond the borders of the federal states and can therefore not be considered separately.

In the private sector, a transfer of assets subject to usufruct is a suitable option. Usufruct (Sections 1030 et seq. of the German Civil Code (BGB)) is a form of easement and entitles the usufructuary to draw the benefits from the encumbered property himself. The usufruct is often used in the transfer of real estate. The advantage is that the asset substance is transferred and the allowances are used, but the income remains with the donor. For inheritance tax and gift tax purposes, a separate property value is determined and the usufruct burden with its capitalized value is deducted from this.

No pandemic-related developments are to be highlighted in this field.

1. What are possible structuring options with regard to shares held in a corporation (>1%) that prevent the triggering of exit taxation under Section 6 FTA?

Two possible solutions are the implementation of a foundation or a management holding company in the legal form of a partnership.

Both options can have the effect that the shares in the corporation are not withdrawn from the German tax base and are therefore not subject to exit taxation under Section 6 FTA.

However, it should be noted that both structuring options have certain other tax consequences themselves. 

2. How can I best set up my philanthropic project in Germany?

Clients who wish to implement a philanthropic project in Germany often feel overwhelmed by all the bureaucratic burden. They are often concerned not only with maximizing tax savings that certain structuring options can bring, but more importantly with making the philanthropic project sustainable. Within the framework of a variety of options, a charitable foundation or a non-profit limited liability company are often the most suitable vehicles.

Both options have their advantages and disadvantages and depend on the goals of the philanthropist.

If the philanthropist intends a more flexible solution and a moderate capital outlay, this argues in favour of the non-profit limited liability company.

If, on the other hand, it is important to the philanthropist to pursue the charitable goals they have set for a long time, even after their death, this speaks in favour of a charitable limited liability company.