Taxation of the Liechtenstein Trust in Germany

German tax law becomes relevant if a person liable to tax in Germany sets up an FL trust, the FL trust is or is to be endowed with assets located in Germany or beneficiaries of the FL trust are liable to tax in Germany.

Expertise

• Taxation of a transparent FL trust in Germany
• Taxation of a non-transparent FL trust in Germany
  • Taxation upon establishment of the trust
  • Inheritance and substitute inheritance tax
  • Taxation of distributions
  • Taxation on dissolution of the FL trust
  • Taxation of retained earnings

Taxation of the transparent FL trust in Germany

The decisive factor for tax categorisation in Germany is whether the trust is structured as “transparent” or “non-transparent”. The trust deed and the letter of wishes must be consulted for the classification and it must be examined who can dispose of the assets and income of the trust and who holds or actually exercises the management of the trust assets.

If the FL trust is structured like a German partnership or trust, it is transparent from a tax perspective:

This means, for example, that the settlor can continue to dispose of the assets transferred by him to the trust, arrange for re-transfers to himself or reserve the right to issue instructions to the trustee or replace the trustee or a beneficiary at any time.

Under German tax law, the transparent trust is ignored and the assets and income of the trust continue to be attributed to the settlor.

If a beneficiary has rights to issue instructions to the trustee, assets and income can also be attributed directly to the beneficiary with the tax consequence that German gift tax is payable if the settlor or the beneficiary has unlimited tax liability in Germany.

Taxation of the non-transparent FL trust in Germany

If the structure of the FL trust is comparable to that of a German corporation (corporation or foundation), it is non-transparent for tax purposes: this means that the settlor has transferred the trust property to the trustee in such a way that it is legally and effectively irrevocably and completely withdrawn from him and the beneficiaries.

If the FL trust itself is the taxable entity and the trust assets are special assets and the trustee can freely dispose of the trust assets at his own discretion, the German tax authorities assume that the trust is an irrevocable discretionary trust. This irrevocable discretionary trust is subject to the following taxation in Germany:

Taxation upon establishment of the trust:

Under tax law, the establishment is considered a gift and is therefore subject to inheritance/gift tax. The settlor must be resident or ordinarily resident in Germany or be a German citizen and have been resident or ordinarily resident in Germany for the last five years prior to establishment. The endowment is subject to the same tax class as for non-transparent foreign foundations in Germany.

Inheritance and succession tax:

The death of the settlor does not generally trigger any inheritance tax for the beneficiaries, provided they do not acquire any extensive rights of disposal over the trust assets as a result of the inheritance. There is no inheritance substitute tax if the FL trust has neither management nor its registered office in Germany.

Taxation of distributions:

Income distributions to beneficiaries are subject to withholding tax plus solidarity surcharge if the beneficiaries are liable for tax in Germany.

Taxation on dissolution of the FL trust:

If the FL trust is dissolved and its assets are subsequently distributed, the distribution is subject to gift tax if the beneficiary has unlimited tax liability in Germany.

Taxation of retained earnings:

If the income generated by the FL trust is not distributed but retained, there is no German income taxation of the income on the basis of a notional attribution to beneficiaries (pass-through taxation in accordance with the German Foreign Taxation Act).