Tax benefits for foreign family foundations?

There is always interest in the advantages and disadvantages of a family foundation. In many cases, the ultimate loss of one's own assets when transferring them to a family foundation is not seen as a disadvantage for reasons within the family or is even desired as long as the income from the foundation's assets remains in the family. However, the question of inheritance tax burdens and the possibilities of reducing them also plays a major role. The truth is that, unlike the transfer of assets to a charitable foundation, the transfer to a family foundation is subject to inheritance tax. In addition, every 30 years a fictitious transfer of genartions takes place and the so-called inheritance tax is triggered. Inheritance tax is reduced by material allowances, such as those for business assets or rented property, and personal allowances, the amount of which depends on the degree of relationship. As there is naturally no family relationship to the founder with family foundations, taxation is based on the relationship of the founder to the most distant beneficiary named in the articles of association in accordance with Section 15 (2) of the Inheritance Tax Act (ErbStG). If, for example, the articles of association of the family foundation stipulate that the founder's children are to be beneficiaries, the tax-free amounts for children, i.e. € 400,000, and the tax rates for tax class I apply. However, according to § 15 para. 2 ErbStG, this regulation only applies to family foundations in Germany. The establishment of foreign family foundations is often considered in order to avoid the inheritance substitute tax applicable to German family foundations, which is due every 30 years. The downside of this consideration is that foreign family foundations are only granted an allowance of EUR 20,000 and the inheritance is subject to at least 30% inheritance tax on the basis of the unfavorable tax class III.

In this context, the Cologne Fiscal Court had to decide on a case in which a German founder set up a family foundation in Liechtenstein and, in her inheritance tax return, took the relationship to her daughter as the beneficiary, i.e. applied for the tax-free amount of € 400,000 and the calculation of inheritance tax according to tax class I. This was rejected by the tax office on the basis of the wording of Section 15 para. 2 Inheritance Tax Act (ErbStG). The tax office rejected this, citing the wording of Section 15 (2) ErbStG. The founder appealed against this. The Cologne Fiscal Court has now referred this case to the European Court of Justice in a ruling dated November 30, 2023, asking it to decide whether the restriction of Section 15 (2) ErbStG violates the European principle of the free movement of capital. Should the European Court of Justice agree, this would have enormous consequences for the establishment of foreign family foundations in Germany. 

In practice, all cases in which this question plays a role must be kept open with the tax authorities.