Key facts at a glance
An exemption from cfc taxation under application of the escape clause is also possible to foundations and trusts having its seat in third countries.
In order to prove the deprivation of the power of disposal of the foundation’s assets it is crucial, that the founder and the beneficiaries can not claim the return of the foundation’s assets in accordance with civil law standards and that they can not effectively execute the return themselves. An economic perspective or indirect influence is irrelevant in this context.
Starting point
Founders and beneficiaries of family foundations having its place of management and registered seat outside of Germany are generally subject to cfc taxation in Germany (section 15 (1) AStG). Under these provisions, the income of a foreign foundation is attributed to the founder / beneficiaries and taxed on their personal level, regardless of actual distributions. This is a significant disadvantage compared to domestic family foundations.
However, under certain conditions, an exception applies. Thereafter, the attribution does not apply, if it can be proven that the foundation’s assets have been deprived from the power of disposal of the founder / beneficiaires (escape clause in section 15 (6) AStG). In the past, it was highly contentious how to provide this proof and which rights of the founder and beneficiaires are detrimental. Therefore, the necessary legal certainty has often been absent.
Finally, the exception, according to its legal wording, is limited to foundations having its registered office in the EU or EEA (e.g. Liechtenstein). Therefore, the escape clause did not apply to founders and beneficiaries of foundations having its registered seat in third countries (e.g. Switzerland).
Recently, the Federal Fiscal Court had the opportunity to decide about the applicability of the escape clause with regard to third countries and to specify its requirements (decision of December 3rd 2024 – IX R 32/22, published on April 24th 2025).
The BFH ruling in detail
Foundations and Trusts in Third countries
According to the Federal Fiscal Court, the escape clause applies beyond its wording to family foundations domiciled in third countries (in the case in question, Switzerland). Otherwise, there would be an inadmissible and unjustified restriction on the free movement of capital. The free movement of capital explicitly also applies to third countries (Article 63 (1) TFEU).
The ruling also applies to foreign trusts, if they qualify as opaque entities from a German tax perspective. Domestic beneficiaries of trusts domiciled in third countries can therefore also invoke the exemption rule. The Federal Fiscal Court explicitly emphasizes this point in its press release.
Deprivation of the Power of Disposition
In order to prove the deprivation of the power of disposition of the foundation’s assets, it is crucial, whether the founder or the beneficiaries can claim or initiate the return of the foundation’s assets. This question is to be answered purely from a civil law perspective, taking into account the interference with the free movement of capital and the legislative intention. Economic considerations or indirect influence mechanisms (such as the ability to dismiss members of a foundation’s body) are irrelevant. Accordingly, the founder and the beneficiaries may prove the revocation of their power of disposal if the foundation documents do not entail claims or instruction rights and if the founder and beneficiaries are not able to effectively execute the return of the assets themselves (e.g. due to a majority within the foundation’s executive board).
When is there still an Attribution?
Attribution is still likely to occur in the case of:
- direct instruction rights of the founder or beneficiaries towards the governing bodies of the foundation or
- majorities within the foundation’s bodies that have the power of effectively execute or instruct dispositions of the foundation’s assets.
What else should be considered?
- The applicability of the escape clause always requires that international mutual assistance through information exchange is ensured with the foundation´s country of domicile.
- Even if the requirements of the escape clause are met, reporting and declaration obligations in Germany still apply.
- In the opinion of the tax authorities, the escape clause does not apply to income generated at levels of the foundation’s subsidiaries, having their seat in a low-tax-jurisdiction.
Conclusion
The Federal Fiscal Court overrules the wording of national legislation in favor of the freedom of capital movement. At the same time, the court correctly limits the scope of cfc taxation with regard to foundations to those cases the legislator had in mind when implementing the respective provision – particularly, direct power of disposal or respective instruction rights of founders or beneficiaries.