Key Takeaways
- The German Federal Fiscal Court (BFH) has ruled that the current limitation of the escape clause in Section 15 (6) of the Foreign Tax Act (AStG) to EU/EEA countries violates the free movement of capital under Article 63 of the Treaty on the Functioning of the European Union (TFEU), insofar as it categorically excludes family foundations in third countries from this exemption.
- A conforming interpretation in line with EU law requires that the escape clause also be applied to family foundations in third countries, provided certain conditions are met.
- Although foundations in the UAE may meet the legal thresholds set by Section 15 (6) AStG, the absence of a mutual agreement procedure between Germany and the UAE means that Section 15 (1) AStG still applies to UAE-based foundations whose settlors or beneficiaries are subject to unlimited tax liability in Germany.
I. Background
The decision concerns the application of attribution taxation under Section 15 AStG to foreign family foundations located in third countries. In the specific case, the matter involved a Swiss family foundation whose beneficiaries were German tax residents. The tax authorities attributed income from the foundation to the beneficiaries under Section 15 (1) AStG. The plaintiff contested this, citing EU law.
The plaintiff argued that the exemption under Section 15 (6) AStG should apply—i.e., that look-through taxation should not apply to foreign foundations if the foundation’s assets are legally and effectively removed from the control of the beneficiaries and the settlor.
II. Legal Assessment
The BFH found that the prevailing interpretation of Section 15 (6) AStG contravenes the free movement of capital under Article 63 TFEU when it generally excludes family foundations in third countries from the exemption clause. A conforming interpretation requires that the escape clause be applied to family foundations in third countries, provided that:
- The beneficiaries are legally and effectively deprived of control over the foundation’s assets, and
- There is a sufficient exchange of information between Germany and the third country to ensure proper tax administration (e.g., through a broad exchange of information clause in a double tax treaty).
In the case at hand, these conditions were met, meaning attribution taxation did not apply.
III. Germany – UAE Situation
Currently, there is no double taxation agreement (DTA) in place between Germany and the UAE. Likewise, no formal exchange of information mechanism exists, as there was prior to 2006. Until that year, the former Germany-UAE DTA included a mutual agreement procedure under Article 24. However, with the DTA’s termination, this provision also ceased to apply.
Although in some cases information from the UAE has been provided to Germany in connection with local matters that have German tax implications, there is no official agreement in place.
Until such an agreement or mechanism is established, the following applies to UAE foundations: even if the settlor and beneficiaries are legally and effectively deprived of control over the foundation’s assets, beneficiaries or settlors subject to unlimited tax liability in Germany will continue to be taxed on the income of the foundation in accordance with their economic interest, under Section 15 (1) AStG.
IV. Conclusion
Persons planning to establish a Family Foundation in a non-Eu Country should carefully assess the applicability of the escape clause in Section 15 (6) AStG. Key conditions include the beneficiaries’ lack of control over the foundation’s assets and the existence of a sufficient mechanism for information exchange with the non-Eu Country. This is particularly relevant for jurisdictions with comprehensive information clauses in a DTA.
The BFH ruling necessitates a review of existing structures and opens new opportunities for tax planning to avoid attribution taxation. Existing foundation structures should be reviewed in light of this judgment and, if necessary, adapted accordingly.
