Inhaltsübersicht
The Federal Finance Court (BFH) had to deal with this question in its ruling of 25 June 2021 – II R 40/18.
This depends on various conditions:
According to the BFH’s findings, the recipient of the gift from a foreign trust would have to be a ‘resident’ at the time the gift was made in order for German gift tax to be levied at all.
This means that at the time of the acquisition of the assets, the recipient of the gift must have had either their domicile or at least their habitual residence in Germany. The time of execution of the gift is the moment at which the tied assets are effectively transferred to the beneficiary under civil law.
A further requirement is that the acquisition upon dissolution of an Anglo-American trust must be regarded as a gift within the meaning of the German Inheritance and Gift Tax Act. Only if, at the relevant time, it is an acquisition within the meaning of section 7(1) no. 9 sentence 2 first half-sentence of the ErbStG is the gift subject to gift tax.
The acquisition upon dissolution of a foreign trust is executed at the moment when the tied assets are effectively transferred to the beneficiary under civil law.
The point in time at which the individual assets of the estate are transferred to the acquirer must be determined on the basis of the relevant legal system, which is to be determined in accordance with the rules of private international law.
The determination of foreign law is the task of the FG as the court of fact. The extent to which the FG determines foreign law is at its discretion and depends on the circumstances of the individual case; the submissions of the parties involved must be taken into account.
The plaintiff is a British citizen. Until November 2008, he was resident in the Federal Republic of Germany. He is the beneficiary of a trust established in 1961 under the law of State K. The trust’s assets consisted of shares in a limited company (B) established under British law and cash. The trust was managed by trustees based in Switzerland. On …12.2006, the trustees decided to dissolve and liquidate the trust and distribute the trust assets to the beneficiaries. According to various documents, shares in B and cash appear to have been transferred to the plaintiff on …01.2009, while the transfer of shares in B may have taken effect on …01.2009.
In a decision dated 2 December 2013, the defendant and appellant (the tax office) assessed gift tax against the plaintiff for an acquisition on 12 December 2006 from the transfer of trust assets.
The acquisition fulfilled the requirements of section 7(1) no. 9 sentence 2, first half-sentence, of the Inheritance and Gift Tax Act (ErbStG). The tax arose at the time the donation was made on …12.2006. On that date, the plaintiff had acquired a claim to the B shares and was able to dispose of the shares freely in relation to the donor.
In his appeal, the plaintiff argued that he had not become the owner of the trust assets until 2009. During the liquidation, he had not been able to dispose of the trust assets freely. In its appeal decision of 17 September 2015, the tax office rejected the appeal as unfounded.
In the proceedings before the tax court (FG), the plaintiff submitted various documents in English, including the trust deed dated …1961 and the resolution on the dissolution of the trust dated …12.2006. The action was successful
The FG ruled that, according to the documents submitted, the trustees of the trust, which could not be revoked by the founder at any time, were completely free in their decisions regarding the dissolution and distribution of the assets and were not subject to any instructions.
The plaintiff did not acquire the trust’s assets in connection with its dissolution when the trust administrators passed the resolution on the dissolution in December 2006, but only when his share of the trust assets was actually transferred to him in January 2009. At that time, he no longer had a domestic residence.
The situation was similar to that of the dissolution of an association with or without legal capacity aimed at tying up assets by a resolution of its members under German law. In that case, too, it is not the resolution to dissolve the association that leads to the fulfilment of the acquisition requirement under section 7(1) no. 9 sentence 1 ErbStG, but rather the distribution of the surplus in accordance with section 49 of the German Civil Code (BGB). The judgment is published in Entscheidungen der Finanzgerichte (EFG) 2018, 2063.
In its appeal, the tax office asserts procedural errors and a violation of Section 7 (1) No. 9 sentence 2 half-sentence 1 ErbStG and Section 39 of the German Fiscal Code (AO).
The gift tax arose on …12.2006 – when the plaintiff was still a resident of Germany. The date of execution of the gift is the moment from which the assets are attributed to the plaintiff. The acquisition of ownership relevant for § 39 (1) AO is governed by foreign law; the FG did not make any findings in this regard. In any case, the plaintiff acquired beneficial ownership pursuant to § 39 (2) No. 1 sentence 2 AO with the dissolution resolution.
The position of the trust administrators during the trust liquidation is comparable to that of an executor and an ‘executor’ or “administrator” under the law of the State of New York. The latter holds the estate assets in trust as the ‘legal owner’ (see judgment of the Federal Finance Court (BFH) of 8 June 1988 – II R 243/82, BFHE 153, 422, BStBl II 1988, 808). Nevertheless, the assets are attributable to the heir in each case. After the dissolution decision, the trust no longer had legal personality for tax purposes.
The tax office requests that the previous decision be overturned and the action dismissed. The plaintiff requests that the appeal be dismissed.
II.
The tax office’s appeal is well-founded. It leads to the reversal of the previous decision and to the case being referred back to the tax court for further hearing and decision (Section 126 (3) sentence 1 no. 2 of the German Fiscal Court Rules (FGO)). On the basis of the findings made, the Federal Fiscal Court cannot conclusively assess when the requirements of section 7(1) no. 9 sentence 2 first half-sentence of the Inheritance Tax Act were met.
1. According to § 7 (1) No. 9 sentence 1 ErbStG, a gift inter vivos (§ 1 (1) No. 2 ErbStG) is deemed to be anything acquired upon the dissolution of a foundation or an association whose purpose is to tie up assets. This is equivalent to the acquisition upon dissolution of a foreign legal entity whose purpose is to tie up assets (Section 7(1) No. 9 sentence 2 first half-sentence ErbStG).
a) The provisions on foreign-law asset pools in Sections 3(2) No. 1 Sentence 2, 7(1) No. 8 Sentence 2 and 7(1) No. 9 Sentence 2 ErbStG were incorporated into the Tax Relief Act 1999/2000/2002 (StEntlG 1999/2000/2002) of 24 March 1999 (Federal Law Gazette I 1999, 402) into the previous ErbStG.
They were primarily intended to cover typical forms of common law trusts commonly used in Anglo-American countries (BFH ruling of 3 July 2019 – II R 6/16, BFHE 265, 421, BStBl II 2020, 61, margin number 40, with further references).
This was a response by the legislator to the case law of the Federal Fiscal Court, according to which the mere establishment of so-called testamentary trusts that were not intended for the immediate distribution of the trust assets did not, in principle, lead to a taxable acquisition either for the trust administrator or for the beneficiary, while the taxation of (capitalised) future income, which was possible in principle, suffered from implementation deficits (cf.
BFH ruling of 27 September 2012 – II R 45/10, BFHE 238, 540, BStBl II 2013, 84, margin number 13, 24, with further references to earlier case law; see also BFH ruling of 15 July 2014 – X R 41/12, BFHE 246, 442, margin number 42). According to the explanatory memorandum to the draft bill for the StEntlG 1999/2000/2002 of 9 November 1998, the transfer of assets to the trust upon its establishment and to the beneficiaries upon its dissolution was to be included in Sections 3 and 7 of the ErbStG as an additional taxable event, as the corresponding arrangements had previously either avoided or delayed tax liability (BTDrucks 14/23, p. 200).
b) The asset commitment required under Section 7(1) No. 9 Sentence 2 ErbStG is to be assumed in the case of a trust if the settlor has determined that the trustees are to manage the assets in the interests of the subsequent beneficiaries and transfer them to them as part of a long-term asset succession (BFH judgement in BFHE 238, 540, BStBl II 2013, 84, margin number 13).
2. In the case of inter vivos gifts, the tax liability for the entire asset transfer arises in accordance with § 2 (1) No. 1 sentence 1 ErbStG, among other things, if the acquirer is a resident at the time the tax arises. According to § 9 (1) No. 2 ErbStG at the time the gift is made. For acquisitions upon the dissolution of a foreign-law estate within the meaning of § 7 (1) No. 9 sentence 2 first half-sentence ErbStG, the time of execution of the gift is the moment at which the tied assets are effectively transferred to the beneficiary under civil law
(see Fumi in von Oertzen/Loose, Erbschaftsteuer- und Schenkungssteuergesetz [Inheritance Tax and Gift Tax Act], 2nd edition, Section 9 margin number 174; Fischer in Fischer/Pahlke/Wachter, ErbStG, 7th edition, Section 9 margin number 126; Gottschalk in Troll/Gebel/Jülicher/Gottschalk, ErbStG, § 9 Rz 111; Meincke/Hannes/Holtz, Inheritance Tax and Gift Tax Act, Commentary, 17th edition, § 9 Rz 58; Söffing in Götz/Meßbacher-Hönsch, eKomm as of 25 June 2017, § 9 ErbStG Rz 45, updated on 21 September 2021; BeckOK ErbStG/Felten, ErbStG § 7 Rz 382).
a) A characteristic feature of a gift is the transfer of assets, i.e. a reduction in assets on the part of the donor and an increase in assets on the part of the recipient. The gift is executed when the transfer of assets is final. This is the case when the recipient can actually and legally dispose of the gifted assets independently of the donor, as a gift presupposes a final material enrichment of the beneficiary.
(cf. BFH judgements of 6 March 1985 – II R 19/84, BFHE 143, 291, BStBl II 1985, 382; of 21 May 2001 – II R 10/99, BFH/NV 2001, 1404, under II.1., and of 6 May 2015 – II R 34/13, BFHE 250, 197, BStBl II 2015, 821, margin number 15).
A gift within the meaning of Section 7(1) No. 1 ErbStG is generally only deemed to have been made when the beneficiary has received what is to be provided to them under the gift agreement. The decisive factor is the occurrence of the performance.
(BFH judgement of 20 January 2010 – II R 54/07, BFHE 228, 177, BStBl II 2010, 463, margin number 14 et seq.; BFH decision of 28 July 2015 – II B 145/14,