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Pay attention when setting up a foreign foundation (here: foundation in Liechtenstein) – far-reaching tax consequences in case of an “unfortunate” design of the foundation statutes

also note to the Federal Fiscal Court judgement of December 5, 2018 - II R 9/15

The case heard by the Federal Fiscal Court concerned the question of whether the entire assets of a foundation established in Liechtenstein were taxable as a taxable acquisition under the German Inheritance Tax Act. The heir was a natural person, the testatrix was the founder. In 1999, the testatrix had transferred assets to a new foundation to be established in Liechtenstein. At the time of inheritance, the heir hoped simply to “enter” into the position of the foundation’s beneficiary, but not to have to pay tax in Germany on the Liechtenstein-based foundation’s total assets. In this case, inheritance tax would have to be paid without funds actually flowing to the heir, since the assets of the Liechtenstein foundation continued to be “tied” to the foundation even after the inheritance.

The inheritance tax office competent for the heir had taxed the foundation’s entire assets, which the heir appealed. Both Münster Finance Court as the lower instance and the Federal Finance Court considered the taxation to be lawful, however, and dismissed the heir’s complaint filed against the inheritance tax assessment. The grounds of the Federal Fiscal Court judgement reveal that the taxation of the foundation’s entire assets – which was extremely disadvantageous for the heir – was due to the “unfortunate” design of the foundation’s statutes in this respect.

The Federal Fiscal Court carried out a two-stage review of the statutes:

  1. First, the question was asked whether the statutes provide for a transparent or an intransparent foundation. Assets of an intransparent (= independent) foundation are not part of to the founder’s assets and therefore cannot be part of the inheritance upon the founder’s death. At a transparent (dependent) foundation, on the other hand, the assets continue to be attributed to the founder. In the case at issue, “comprehensive powers of domination” over the foundation’s assets were reserved to the founder in accordance with the provisions made in the statutes and bylaws. The foundation was thus prevented from actually and freely disposing of the assets transferred to it. Consequently, the Federal Fiscal Court continued to consider the foundation’s assets as attributable to the founder and thus affirmed a transparent, dependent foundation.

    Powers of domination” in this sense result, for example, from the founder’s reservation with respect to decisions on investment and use of the assets, the possibility of being able to demand the retransfer of the assets, or the agreement of the founder’s comprehensive powers of instruction towards the foundation board.
  2. Providing for such “powers of domination” alone did not lead to the allocation of the foundation’s assets to the heir’s estate and thus the assessment of inheritance tax, however. In a second stage, the Federal Fiscal Court examined the foundation’s statutes to determine whether the “powers of domination” were to be considered inheritable. In principle, corresponding powers of the founder are not inheritable, but expire upon the founder’s death. Thus, the attribution of the foundation assets to the founder is no longer necessary as of the founder’s death. In this case, the legal successor of the foundation’s assets is the foundation itself and not the founder’s heir. The heir may be a beneficiary of the foundation, however, provided that appropriate provisions are included in the statutes.

    According to the findings of the Federal Fiscal Court in the second examination stage, the “powers of domination” provided for in the statutes were designed such that they were expected to be inherited. Thus, the heir also entered into the founder’s position with regard to the special provisions for the founder, so that the foundation’s entire assets were to be assessed as a taxable acquisition. According to the Federal Fiscal Court, the presumption of inheritability was governed by provisions in the statutes according to which the founder, under certain conditions, was entitled to demand the distribution of the foundation’s assets or had the authority to amend the foundation’s statutes and bylaws.


The design of the statutes of a foreign foundation (here: foundation in Liechtenstein) is of considerable importance for the taxation of the founder during his lifetime, but in particular also for the taxation of the founder’s heirs. The provisions to be adopted must therefore always strike a balance between implementing the wishes of founders of influencing “their” foundation and the inevitably resulting tax consequences.


Christian Becker

Dr. Christian Becker


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