In two decisions dated May 17, 2023 (I R 42/19 and I R 46/21), each published on October 12, 2023, which are essentially identical in content, the First Senate of the German Federal Fiscal Court (BFH) dealt with the issue of maintaining a tax-specific contribution account (steuerliches Einlagekonto) for private foundations with legal capacity under German civil law, which has been the subject of much discussion in the past.
Key Facts
The First Senate of the German Federal Fiscal Court has decided that, according to the current legal provisions, a separate assessment of the tax-specific contribution account of a private foundation with legal capacity under German civil law is not possible due to the lack of a legislative basis. However, the BFH left open the far more important substantive question of whether legally capable private foundations under German civil law can return “contributions” to the founder or even pay them out to their beneficiaries free of German income tax.
Background
In the last decade, the question of the possibility of income tax-free repatriation of assets in the case of private foundations with legal capacity under German civil law has been the subject of much discussion. In essence, this concerns the disbursement of other assets which have been added to the foundation’s assets by the founder or a third party.
A prevailing opinion has emerged in the tax literature: According to this, a return of capital contributions free of income tax should also be possible in principle for foundations with legal capacity, since the taxation provision for foundation distributions (Sec. 20 Para. 1 No. 9 EStG, German Income Tax Act) refers in this respect to the taxation provision for corporations (Sec. 20 Para. 1 No. 1 Sent. 3 EStG). In addition, an analogous application of Sec. 27 Para. 7 KStG (German Corporate Tax Act) and thus the possibility of a separate assessment of a tax-specific contribution ac-count within the meaning of Sec. 27 Para. 2 KStG also in the case of foundations with legal capacity has been advocated in the literature. As a rule, the tax-specific contribution account serves to distinguish the contributions made by the shareholder of a corporation (which can be paid out tax-free) from the (taxable) income generated by the corporation.
In two decisions from 2019, the Fiscal Courts of Münster and Rheinland-Pfalz then took the view that a tax-specific contribution account must also be assessed for foundations with legal capacity (FG Münster, 16.1.2019 – 9 K 1107/17 F, DStRE 2019, 755; FG Rheinland-Pfalz, 31.7.2019 – 1 K 1505/15, DStRE 2019, 1384). Both court decisions were appealed to the BFH; the tax administration responded with a non-application decree (LfSt Nieder-sachsen, 26.9.2019 – S 2836 – 1 – St 241, DStR 2020, 556).
Decision of the BFH
In its decisions dated May 17, 2023, the BFH confirmed the view of the tax authorities and ruled that, in any case, a separate assessment of the tax-specific contribution account of a private foundation with legal capacity is inadmissible under the current legal status. The different statements of the literature as well as from the two fiscal court decisions are considered desirable in their objective, but are rejected regarding the clear wording of the law in this respect. Section 179 Para. 1 AO provides for a separate assessment of the basis of taxation only based on an explicit statutory legal basis. However, neither Sec. 27 Para. 1 KStG nor Sec. 27 Para. 7 KStG provides such a legal basis. For private foundations with legal capacity, the legislator usually uses the term assets (“Vermögensmasse”), which is missing in Sec. 27 Para. 7 KStG.
An application of Sec. 27 Para. 7 KStG beyond its wording was ruled out, as there is no unplanned regulatory loophole in the law. Moreover, an analogous application of the law would only be permissible if it would only serve to the benefit of the taxpayer. The BFH rejects the latter on the grounds that the procedure for the separate assessment as such could already have a burdening effect on the taxpayer. In addition, an analogous application of Sec. 27 Para. 7 KStG is not even necessary to enable a tax-free repatriation of capital contributions, since the local tax offices can decide on the question of income-tax-free repatriation of capital contributions even without a separate assessment of a tax-specific contribution account.
Outstanding questions and outlook
The BFH’s decisions on the inadmissibility of a tax-specific contribution account for civil law foundations with legal capacity do not come as a surprise. They seamlessly follow the previous case law of the First Senate of the BFH on the tax-free return of capital contributions in the case of corporations with their registered office and management in so-called third countries (i.e. outside the EU and the EEA) (cf. BFH, 10.4.2019 – I R 15/16, IStR 2019, 825). Similarly, the BFH has denied the necessity of maintaining a tax-specific contribution account in the case of third-country corporations and has nevertheless affirmed the tax exemption of the return of contributions to the shareholder. Consequently, also in the case of third-country corporations, the respective local tax offices must directly examine whether a tax-free repatriation or a taxable distribution has been made.
Accordingly, the two decisions of the First Senate only deal with the procedural side of the tax-specific contribution account for foundations with legal capacity. The more important question of whether a return of capital contributions free of income tax is possible under German tax law in the case of private foundations with legal capacity has certainly not been answered in the negative.
According to the law, for a benefit paid by a foundation with legal capacity to be subject to German income tax, it must be economically comparable to a profit distribution by a corporation (cf. Sec. 20 Para. 1 No. 9 Sent. 1 EStG). It is questionable whether this is given in the case of a payment from the total assets of a foundation. Therefore, in all relevant cases the non-taxability of such foundation payments should be claimed in the context of the income tax assessment of the respective beneficiaries.
However, it can be assumed that the tax authorities will make high, possibly excessive demands on taxpayers with regard to the concrete proof of the “return of contributions” of the foundation, which will probably exclude a tax-free return of contributions from a practical point of view in many cases. Also in this respect, a comparison with the practical situation in connection with the tax-free repatriation of capital contributions in the case of corporations in third countries seems obvious (cf. BMF, 21.4.2022, BStBl. 2022 I p. 647). At least the separate assessment of a tax-specific contribution account is not (or no longer) required in the case of civil law foundations with legal capacity.
According to the law, for a benefit paid by a foundation with legal capacity to be subject to German income tax, it must be economically comparable to a profit distribution by a corporation (cf. Sec. 20 Para. 1 No. 9 Sent. 1 EStG). It is questionable whether this is given in the case of a payment from the total assets of a foundation. Therefore, in all relevant cases the non-taxability of such foundation payments should be claimed in the context of the income tax assessment of the respective beneficiaries.
However, it can be assumed that the tax authorities will make high, possibly excessive demands on taxpayers with regard to the concrete proof of the “return of contributions” of the foundation, which will probably exclude a tax-free return of contributions from a practical point of view in many cases. Also in this respect, a comparison with the practical situation in connection with the tax-free repatriation of capital contributions in the case of corporations in third countries seems obvious (cf. BMF, 21.4.2022, BStBl. 2022 I p. 647). At least the separate assessment of a tax-specific contribution account is not (or no longer) required in the case of civil law foundations with legal capacity.