Germany Christian Birkholz Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm. Using Trusts in Family Wealth Planning Wednesday March 21, 2007
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Germany
Christian Birkholz
Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm.
• The foundation of an invervivos trust is possible according to German civil law– Foundation of an intervivos trust is not subject to law of
succession, but subject to law of obligations (Schuldrecht)
• German civil law differs between the law of obligations and the law of property (Sachenrecht). The transfer of legal title of assets usually requires effectiveness of both sides.
The foundation of an intervivos trust is possible according to German law of obligations
• What about law of property?– According to law of property the transfer of legal title is based
on the law where the assets are located
– As German civil law does not acknowledge the trust as a legal entity, the transfer of e.g. legal title to a trust is invalid, as far as assets are concerned, which are situated in Germany
• Further issue: the transfer of assets (situated in Germany) which are subject to registration – Can a trust be the legal owner of a real estate in Germany (legal
ownership requires registration in the real estate register)?
– Can a trust hold a participation in a limited partnership (limited partner is required to be registered in the trade register)?
• Example– Mr. Müller is a German citizen and wants to set up a trust in order to
avoid forced heirship rules. For this purpose he sets up a trust and transfers his entire German situated real estate to the trust. Was he successful in avoiding the forced heirship rules?
• The actual transfer of title in the real estate is legally valid only to the extent German law of property (Sachenrecht) has been followed
• Furthermore German law of property requires the registration of the acquirer of the real estate who should be registered as legal owner of the real estate in the real estate register?
• What is required to acknowledge a trust as “own” legal estate– The assets which have been transferred to the trust must have left
economic ownership of the settlor
– Trust as a separate legal estate requires a specific economic independence of the trust
– Extensive rights of settlor to give instructions to the trust may result in economic ownership of settlor
– Same is true if the administration of assets by the trust is predominantly in the interest of settlor (in such a case fiduciary relationship according to German law)
– Lack of legal capacity is of no further relevance for the acknowledgement of a trust for German tax purposes (Federal Tax Court, Decision of June 23, 1992 and February 2, 1994)
• § 15 Foreign Tax Act (AStG)– § 15 AStG deals predominantly with the taxation of so called “family foundations” – § 15 AStG is an anti-avoidance provision which provides a deemed income
allocation to the founder/settlor and/or the beneficiaries – § 15 AStG also applies to trusts – Any income of a trust will be allocated to the founders/beneficiaries, even if there
is no actual “distribution” of income to those persons– § 15 AStG is subject to supervision by the European Commission, European
Commission opened a breach of contract procedure against Germany because § 15 AStG seems to discriminate foreign foundations/trusts
– A suspension of this provision by Germany within Europe would not necessarily comprise trusts located in countries outside the EU such as in the US
• Example: Mr. Berger, who is a German citizen but who has been living for more than five years in the US sets up a US trust. Beneficiaries are his family members B, C and D. B will acquire the entire assets in case of dissolution of the trust. C and D are entitled to ongoing benefits.
Alternative a): C and D are not family members of Mr. Berger
Alternative b): B is not a family member of Mr. Berger
Alternative c): B and C are not family members of Mr. Berger
• In the basic alternative B is entitled to receive the entire assets. The trust is a family trust. Any income of the trust is allocated to B, C and D.
• According to alternative a) again only B is entitled to receive the entire assets. The trust qualifies again as a family trust.
• According to alternative b) the entitlement of C and D is decisive for the qualification of the trust as a family trust.
• According to alternative c) the trust does not qualify as a family trust.
• According to § 15 AStG any income of a family foundation with place of management/registered office outside of Germany is allocated to the individuals as far as they are subject to unlimited tax liability
• Family foundation is described as a foundation where the founder, his relatives and/or their descendants are entitled to more than half of the benefits of the foundation/trust