GERMANY: German taxation of foreign trusts and foundations in light of European fundamental freedoms

Settlors and beneficiaries of foreign trusts and foundations are exposed to a broad range of German tax risks, which may give rise to concerns under European fundamental freedoms. The establishment of a foreign trust or foundation may already trigger German inheritance or gift tax at rates of up to 50%, whereas domestic foundations may benefit from significantly lower tax rates. Moreover, distributions to domestic beneficiaries may trigger both German income tax and gift tax. Even undistributed income of the foreign trust or foundation may be subject to German income tax at the level of the domestic settlor or beneficiaries. Also, considerable legal uncertainty remains as to whether a foreign foundation may be effectively managed from Germany.