Non–Conformity of Section 15 German Foreign Tax Code Concerning the Taxation of Foreign Family Trusts with EC Law?

Abstract

This article analyzes the EC law conformity of Section 15 German Foreign Tax Code (‘GFTC’), a special regulation concerning the taxation of foreign family trusts according to German domestic tax law. In particular, it reflects on the current infringement proceeding initiated by the European Commission dating 23 July 2007 and the proposed new amendment of Section 15 GFTC by the German annual tax law for 2009 recently introduced by the German government as a consequence of the infringement proceeding. According to the current German legislation, in case a family trust established its registered office or its management in Germany, the settler as well as the beneficiaries must pay tax on benefits deriving from the family trust. However, for tax anti–avoidance reasons, if the family trust is domiciled abroad, the family trust assets as well as the trust income is attributed to the settler and to the beneficiaries and regarded as derived for domestic tax purposes, irrespective of whether and in what amount benefits are actually derived from the family trust. As a matter of fact, Section 15 GFTC lays down that the income of a foreign family trust is taxed (on a yearly basis) even though no income is distributed to the settler or the beneficiaries but maintained within the family trust. Consequently, this income derived according to Section 15 GFTC has to be declared in the annual income tax return and the non–compliance in doing so should be qualified as tax evasion according to Section 370 German Fiscal Code. The importance of Section 15 GFTC was shown just recently, when the global tax evasion scandal was discovered in February 2008 in Germany. The respective tax evasion discovered was based on the non– disclosure of income derived by family trusts located in Liechtenstein according to Section 15 GFTC.