German Gift Tax on Distributions from a U.S. Trust to a German resident Subsequent to an Election under Art. 12 para 3 of the Germany-U.S. Estate and Gift Tax Treaty

German Gift Tax on Distributions from a U.S. Trust to a German resident Subsequent to an Election under Art. 12 para 3 of the Germany-U.S. Estate and Gift Tax Treaty

On March 6, 2019 the Ministry of Finance of Brandenburg published a binding decision on the taxation of distributions from a U.S. trust subsequent to electing the right under Art. 12 para 3 of the Germany-U.S. Estate and Gift Tax Treaty. The decision was rendered after the Ministry conferred with the ministries of all other German States.

According to the Ministry of Finance, even after making use of the election right, distributions from a U.S. Trust to an individual which has a fiscal domicile in Germany, is subject to German gift tax (Schenkungsteuer).  The decision is concerning and inconsistent from a practical and intellectual perspective: Pursuant to Art. 12 para 2 of the Treaty, the beneficiary of a trust may elect within five years after a transfer that is not taxable in Germany to a U.S. trust “to be subject to all German taxation (including income taxation) as if a taxable transfer”. Applying the decision of the Ministry of Finance of Brandenburg Germany would result in double taxation: Taxation would occur upon the transfer to the trust and again once the distributions to the beneficiary are made. The Ministry’s analysis conflicts with the clear wording of the Treaty. Accordingly, any decision rendered pursuant to the Ministry’s analysis should be subject to appeal.  

For further information on the Taxation of Trusts in Germany, please see our articles Taxation of U.S.-Trusts under the German Inheritance and Gift Tax Act and U.S.-Trusts in German-American Estate Planning.

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