Tax & Legal

The free movement of capital under Article 63 of the Treaty on the Functioning of the European Union is not violated if the tax treatment of a donation to a foundation based in the Swiss Confederation is subject to national requirements that apply in the Member State of the donor. According to the Supreme Tax Court, the national legislature is not obliged to recognize the charitable status under foreign law.

The Federal Ministry of Finance (MoF) has sent the draft of a revised version of the attribution taxation for foreign family foundations pursuant to Section 15 of the Foreign Tax Act to certain associations. They as well as interested professionals are given the opportunity to comment until 15 January 2026.

In a currently published judgment, the European Court of Justice held that the German regulation providing favorable inheritance tax classes for domestic family foundations which are not available to foreign family foundations does not contravene the fundamental principle for free movement of capital provided that the legislation in question complies with the principle of proportionality.

In a recent judgment the Supreme Tax Court decided that a family foundation established in the Swiss Confederation and with its administrative headquarters in Germany is not subject to substitute inheritance tax in Germany as it is a foundation without legal capacity.

The Cologne Tax Court has asked the European Court of Justice for a preliminary ruling regarding the favorable inheritance tax classes for domestic family foundations which are not available to foreign family foundations. The Cologne tax court has doubts as to whether this different treatment is in line with the principle of free movement of capital. In his Opinion delivered today the Advocate General sees no infringement of EU law.

In a most recent decision, the Supreme Tax Court held that the unification of shares resulting from the transfer of shares in a property-owning corporation to a Dutch foundation is not exempt from real estate transfer tax pursuant to Section 5 (1) RETT Act if the comparison of legal types reveals that the legal structure of the foundation is not comparable to a joint ownership under German law.

The Supreme Tax Court decided that the one-time cash payment and distribution of shares to the plaintiff from a Swiss-based foundation in 2017 (year in dispute) was subject to German income tax as income from capital investment pursuant to Section 20 (1) no. 9 of the German Income Tax Act. In its decision the court explained under which circumstances the income from such a benefit is economically comparable to a regular profit distribution.

The recognition of a foreign foundation as a charitable foundation is based solely on German law. In its ruling, the Supreme Tax Court further states that the German legislator is not obliged under EU law to recognize a non-profit status established under foreign law.

Are payments and contributions in kind from a foreign family foundation subject to German income tax? And what is the situation as regards the gift tax? Two tax court decisions shed some light. According to the Supreme Tax Court there is no gift tax liability for the beneficiary. The Regional Tax Court of Hamburg is of the opinion that a one-time payment from the foundation is subject to German income tax.