Key facts at a glance
While the underlying legislative concept of Section 15 AStG is intended to be retained, the draft proposes substantive structural amendments. Key elements are:
- Introduction of a low-tax threshold of 15%,
- general opening of the escape clause for non-EU/EEA country structures,
- revision of the escape clause: Replacement of the criterion ‘depreviation of power of disposal’ by the open-ended criterion ’no artificial arrangement‘, and
- tightening for multi-tier structures by the non-applicability of the escape clause for subsidiaries of the foundation in low-tax countries that qualify as CFCs.
The introduction of the minimum tax threshold and the opening of the escape clause for non-EU/EEA countries are to be welcomed. The considered revision of the escape clause requirement would, however, gives rise to significant legal uncertainty. The criterion of “artificial arrangements” in vague and hardly applicable to foundations and trusts. The exclusion of the escape clause for low-taxed subsidiaries contradicts the systematics of the concept and raises significant concerns under EU law.
Current Legal Framework
In its current form, the attribution taxation under Section 15 AStG governs the attribution of a foreign family foundation’s income, or the income of comparable arrangements such as trusts, to settlors or beneficiaries who are subject to unlimited tax liability in Germany. For German tax purposes, the provision deems income arising at the foundation level, to be income of settlors or beneficiaries tax resident in Germany and therefore subjects that income to German income taxation. This applies irrespective of whether the foundation actually makes distributions to the settlor or the beneficiaries, resulting in so-called dry income taxation.
Attribution taxation is not limited to income arising directly at the level of the foreign foundation. Where the foundation holds a controlling interest in low-taxed foreign companies generating passive income (so-called intermediate companies – Zwischengesellschaften – CFCs), the income of those companies is likewise subject to attribution taxation. In such cases, the income is first attributed at the level of the foundation and, in a second step, to the settlors or the beneficiaries (Section 15 (9) AStG).
Under current law, relief has in principle been available under the so-called escape clause pursuant to Section 15 (6) AStG. Under this provision, attribution did not apply where the settlors and the beneficiaries were effectively deprived of any power of disposal over the foundation’s assets. In a recent decision, the Federal Fiscal Court (Bundesfinanzhof – BFH) significantly expanded the scope of this clause, extending its application to foundations and trusts established outside the EU and the EEA (BFH judgment of 3 December 2024 – IX R 31/22)
Proposed Amendment
Unlike the current rules, the draft amendment limits attribution to income that, at the foundation level, is subject to low taxation, defined as an effective income tax burden of less than 15%. Unlike the controlled foreign company (CFC) rules under Sections 7 et seq. AStG, however, the draft does not distinguish between active and passive income. In addition, the draft amendment broadens the categories of persons to whom attribution may apply. Going forward, attribution would also extend to indirect beneficiaries.
With respect to the amount of income to be attributed to the attribution recipients, the draft introduces a statutory definition. Primary attribution to a domestic settlor is determined by reference to the fair market value of the assets transferred. Secondary attribution to domestic beneficiaries is determined by reference to the fair market value of the respective entitlement. The draft does not address how discretionary structures commonly used in practice are to be treated where individual beneficiaries do not hold a quantifiable entitlement.
Moreover, the family circle relevant for the definition of a family foundation is proposed to be expanded to include closely related persons like companies owned by family members.
In line with the above case law, the draft further provides that the escape clause shall also be available to family foundations and trusts established outside the EU and the EEA. Substantively, relief would require proof that the interposition of the foreign family foundation is not based on an “artificial arrangement”. However, the draft does not define this concept. The explanatory notes instead refer to the principles developed in the case law of the European Court of Justice, in particular the ECJ judgment of 26 February 2019 (C-135/17, X). Nevertheless, concrete criteria can hardly be derived from the ECJ’s case law. Especially in the case of foundations, it is hard to imagine how an ‘artificial arrangement’ can exist at all if the foundation’s assets are actually withdrawn from the settlor’s and beneficiaries’ power of disposal. In this respect, the old criterion would remain in place. Furthermore, trust structures, which are common succession and asset protection vehicles in Anglo-Saxon jurisdictions, can hardly be considered artificial if the parties involved or the assets are connected to the Anglo-Saxon legal system.
In cases involving subordinate intermediate companies or foundations, the concept of multi-tier attribution is, in principle, retained. The escape clause, however, shall now be excluded (Sec. 15 (3) sentence 3 draft AStG). This approach reflects the tax authorities’ current position, which likely contradicts the wording of the current law (see para. 852 of the Administrative Principles on the German Foreign Tax Act – AEAStG). This irritates, as there are serious concerns whether such approach is in line with EU law.By contrast, at the subordinate levels only the general escape clause would remain available for EU and EEA companies pursuant to Section 8 (2) AStG.
Conclusion and Outlook
The draft appears immature and raises more questions than it answers – e.g. with respect to the treatment of discretionary structures when determining the attribution ratio, as well as to the vague legal concept of an ‘artificial arrangement’. Insofar, the BFH had just created more clarity and legal certainty for settlors and beneficiaries. Corrections in the legislative process appear necessary, but at the same time likely. Against this backdrop, structural adjustments with regard to the new regulations seem premature; however, careful monitoring of further developments is urgently required.