A Swiss family trust cannot be subject to imputation taxation across the board, according to a ruling by the Federal Fiscal Court (BFH) dated 3 December 2024 (IX R 32/22). TThe court clarified that Section 15(6) of the Foreign Tax Act (AStG) is contrary to European law insofar as it excludes trusts in non-EU countries from the exemption.
What happened?
The case in question concerned a family trust in Switzerland. The tax office imposed so-called imputation taxation (Section 15 AStG) for the years 2012–2016, even though the beneficiaries – i.e. the German taxpayers – had no real power of disposal over the assets.
The Federal Fiscal Court has now confirmed that the German regulation violates the free movement of capital (Article 63 of the Treaty on the Functioning of the European Union (TFEU)) because it does not extend the exemption provided for in Section 15(6) of the AStG to non-EU countries such as Switzerland.
What is imputation taxation?
In short, the tax office acts as if the beneficiaries of a foreign family trust had generated the income themselves – and taxes it in Germany, even if no distribution has been made. This is intended to prevent tax avoidance – for example, by ‘parking’ assets in trusts in low-tax countries.
To what extent did the Federal Finance Court overturn the regulation?
The Federal Fiscal Court has clarified: If Section 15(6) of the Foreign Tax Act provides an exception in the event of the legally and factually withdrawal of power of disposal, this exception must also apply to trusts in non-EU countries, such as Switzerland. This is because:
- The free movement of capital applies not only within the EU, but also to non-EU countries.
- It is not justified to disadvantage trusts in countries outside the EU if there is no tax-relevant influence.
The consequence
If a trust in a non-EU country (such as Switzerland) is structured in such a way that German beneficiaries have no actual disposal rights, the tax office cannot assume imputed taxation, even as a precautionary measure.
What should you check now?
- Is there a foreign family trust with ties to Germany?
- Has the tax office allocated income in the past, even though no distributions were made?
- Is the power of disposal of the German beneficiaries excluded under civil law?
If so, it is worth examining the options for appeal and amendment.
Conclusion
The ruling of the Federal Fiscal Court is groundbreaking for clients with foreign family trusts. Those who do not have power of disposal should not be subject to fictitious taxation, regardless of the country in which the trust is based. This is good news for anyone who has previously been subject to double or premature taxation due to imputation taxation.
Are you the beneficiary or founder of a foreign trust and would like to know how the ruling affects your tax liability? Contact us – we specialise in international matters and will be happy to advise you.