News on the taxation of domestic beneficiaries of foreign foundations

An increasing number of fiscal court decisions deal with the long unresolved legal issues regarding the taxation of German beneficiaries of foreign foundations. Three recent decisions confirm this trend. According to a decision of the Fiscal Court of Hesse dated May 25, 2021 - 10 K 707/20 - benefits paid by a foreign foundation to its German beneficiaries are subject to German income tax pursuant to Section 20 (1) No. 9 sentence 2 of the German Income Tax Act (EStG) even if the domestic beneficiaries cannot exert any influence on the foundation’s governing bodies and thus on the foundation's distribution behavior. According to a decision of the Fiscal Court of Cologne dated February 24, 2021 - 4 K 1184/18 - the attribution taxation (Sec. 15 AStG) is not applicable if a close examination of the (historical as well as current) foundation documents shows that the founder, his relatives and their descendants are not entitled to receive or accrue more than half of the foundation’s income; the statutory characteristic of a “family foundation” (Sec. 15 (2) AStG) was thus confirmed as a taxation-limiting criterion. However, in its decision of December 17, 2020 - 6 K 307/19 - the Hamburg Fiscal Court ruled that participation rights of the foundation beneficiaries in the foundation bodies even far below the threshold of beneficial ownership (Section 39 (2) No. 1 AO) may be sufficient to lose the exemption for EU/EEA foundations from attribution taxation (Section 15 (6) AStG).