CFC Exemption: New Tax Options for Trusts & Foundations

New CFC Tax Structuring Options for Family Trusts and Foundations with German Beneficiaries 

In a landmark judgment dated 3 December 2024, the German Federal Fiscal Court (Bundesfinanzhof) opened the door for German-resident beneficiaries of third-country family trusts, family foundations, and similar structures to potentially be exempt from German CFC (Controlled Foreign Corporation) taxation. 

Previously, such exemptions were limited to structures based within the EU or EEA. 

Until now, such exemptions were limited to trusts and foundations with their statutory seat or place of effective management within the European Union or a state party to the EEA Agreement. The Court held that limiting the exemption to EU/EEA structures violates the EU principle of free movement of capital. 

CFC taxation: A key obstacle for non-EU/EEA trusts and foundations 

German CFC rules have long discouraged the use of non-EU/EEA trusts and foundations due to unfavourable tax treatment. Including German-resident beneficiaries in such structures was often complex and involved significant tax risk. 

Key consequences of CFC taxation for German-resident beneficiaries 

Under German CFC rules, passive income generated by a trust or foreign foundation may be attributed proportionally to German-resident beneficiaries. . Such income is taxable in Germany even if no distributions have occurred..

Applying CFC rules often requires maintaining a parallel “shadow accounting” system to align foreign structures with German tax standards.

Which trusts and foundations are affected by German CFC rules? 

Only foreign trusts and foundations deemed non-transparent (opaque) under German tax law are subject to CFC taxation. This classification depends on a detailed review of the foreign legal framework and the structure’s governing documents.A structure is considered non-transparent if it operates independently, without control or influence by the settlor or beneficiaries. Structures considered transparent from a German perspective are generally disregarded for tax purposes.

CFC rules apply only if the settlor or related parties are entitled to more than 50% of the assets or distributions—during the structure’s life or upon liquidation.

Requirements for exemption from German CFC taxation 

To qualify, it must be shown that the assets are legally and effectively removed from the control of both settlor and beneficiaries.This mirrors the conditions typically associated with a finding of non-transparency.

In addition, there must be an effective exchange of tax information between Germany and the jurisdiction of the trust or foundation.This requirement is generally met if a Double Taxation Agreement (DTA) with comprehensive exchange provisions exists.

German Tax Treatment of Foreign Trusts and Foundations Remains Complex 

While the Federal Fiscal Court’s decisions introduce greater flexibility, the taxation of foreign trusts and foundations involving German connections remains highly complex and fact-dependent.

Detailed tax analysis remains essential to avoid pitfalls such as unintended double taxation under income, gift, or inheritance tax regimes.

Now is the right time to review existing structures or planned arrangements involving German beneficiaries of foreign trusts or foundations.

Grant Thornton’s experienced team is available to assist with all matters concerning foreign trusts and foundations with German tax implications.