date | theme

23. February 2021 | Management of a foundation in Liechtenstein – using organs sensibly

18. February 2021 | Asset management of banking assets of a foundation in Liechtenstein

17. February 2021 | Foundation in Liechtenstein: 6 advantages over a German foundation

11. February 2021 | Establishing a foundation in Liechtenstein: Requirements & Procedure

20. January 2021 | Family Foundation in Liechtenstein: no income tax in Germany (this contribution)

When setting up a family foundation in Liechtenstein, there is the question of whether your profits are taxable in Germany. In principle, it is regulated by law that such services from foreign foundations are considered as capital gains. However, since this means from a tax point of view a different treatment of foundations in the EU/EEA area, which is contrary to EU law (principle of equal treatment), a special statutory addition comes into play, which allows for equal treatment under certain conditions. Thus, neither the founders nor the beneficiaries may have influence on the foundation assets. In addition, the foreign EU/EEA Foundation must enable a fiscal exchange of information regarding the foundation located there. Otherwise, there will be an additional taxation of profit in Germany. Fortunately, a family foundation in Liechtenstein can meet all these criteria.

Foundations in EU/EEA: The key to tax design according to § 15 para. 6 AStG | With Prof. Gierhake

1st Family Foundation in Liechtenstein: the Zumwinkel Affair

To understand why it is important to pay attention to all the details when setting up a family foundation in Liechtenstein, we take a small historical excursion into 2008.

The reason for this was that German tax law at the time refused recognition to a foreign foundation. Because if a founder or one of the beneficiaries is able to influence the foundation indirectly or even directly, then the German financial administration could assume that this is basically not a foundation. After all, it is a characteristic of German foundations that there is a strict separation of the foundation assets from founders and destinataries. But Klaus Zumwinkel and many other tax evaders, who were then targeted by the German law enforcement agencies over the sale of bank data, had designed their family foundation just like this. Basically, they were only private wealth funds, in which the founders could reach at any time.

2nd Family Foundation in Liechtenstein: Legal bases

The above-mentioned legal framework, with which the German Treasury considers the existence of a foreign family foundation before 2009 as irrelevant for domestic tax purposes, are in § 15 (1) AStG. At that time, of course, it was a pleasure that such tax evasion from Germany could be classified as tax evasion. But at the same time, the legislator had to realize that this regulation meant a different tax treatment of family foundations in the EU compared to German foundations. But this is precisely what contradicts the principle of equality that applies within the EU.

Therefore, a legal supplement to this legal standard was submitted. Since then, § 15(6) AStG stipulates that the different treatment of foreign foundations does not apply if this foundation is located in the EU or in an EEA country. However, it also introduced two restrictions that ensure comparability with German foundations. On the one hand, it must be excluded that neither the founder nor destinatär have legal or actual access to the foundation assets, whereby this must be demonstrable. Secondly, an exchange of information between the German and foreign tax authorities must be established.

Although the Principality of Liechtenstein does not belong to the EU, it belongs to the EEA. And since EU law also applies to the three EEA countries Iceland, Norway and Liechtenstein, foundations in these countries are also exempt. But in the case of the Family Foundation in Liechtenstein, what about compliance with the two premises for the application of § 15 paragraph 6 AStG?

3rd Family Foundation in Liechtenstein: Exchange of Information with Germany

Due to a certain lack of transparency, Liechtenstein was also a popular tax haven in the heart of Europe. But they wanted to break with this image in order to prove that they also strive to combat unfair international financial and fiscal practices. This may be partly due to the fact that media reported on a connection between a foundation in Liechtenstein and the then active Basque terrorist organization ETA for the purpose of money laundering. In any case, the Principality of Liechtenstein adapted its tax laws in such a way that a transparent exchange of information with other EU/EEA countries now takes place; and thus also with Germany (since 2010). This criterion, which requires § 15(6) AStG, has now been fulfilled.

But now to the delicate point, the separation of the founder and the destinataries from the foundation assets. As already outlined, it is inevitable that a German founder completely abandons his direct influence on the foundation assets when establishing a foundation in Liechtenstein. After all, he transfers the foundation assets to the foundation to be established for a good reason. With this asset, the foundation should be able to fully fulfil the foundation’s purpose. However, this is in no way compatible with a revocation clause in the foundation statutes, as is possible for example for foundations in Austria, but was previously also common practice at the family foundation in Liechtenstein. Finally, a cancellation clause makes it possible for the founder to virtually reverse the foundation business. Of course, this is by no means in the sense of the actual orientation of a foundation, which is usually supposed to enjoy a permanent existence.

Therefore, when drafting the statutes of a family foundation in Liechtenstein, one must pay close attention to the fact that this withdrawal of the foundation’s assets from the influence or even access of the founder or destinataires is given and can be proven at all times. This is established through the regulation of the management of the Family Foundation in Liechtenstein. Otherwise, the benefits received are taxed in Germany, whereby the German financial administration classifies them as income from capital assets similar to a GmbH dividend. In other words, 25 % of the capital gains tax will then apply to the grant less the lump sum.

If, however, the criteria stipulated in Section 15(6) of the AStG are not respected, in Germany taxes are paid on the profits of the Family Foundation in Liechtenstein, but at least no taxes on the grants it receives (Section 15(11) of the AStG).