0211 / 550 84 35-0

BFH, judgement of 25.6.2021 - II R 13/19- (assets of an Anglo-American trust as assets of the settlor's estate)

Central standards 

ErbStG § 3 para. 1 no. 1, § 7 para. 1 no. 8, § 10, § 12, § 37 para. 1

BewG § 11, § 151 para. 1 sentence 1 no. 3, para. 4

AO § 90 para. 2, § 121 para. 1, § 179

FGO § 76 para. 1, § 118 para. 1 sentence 1

ZPO § 293, § 560

Guiding principles

  1. If the settlor of a foreign estate has reserved such extensive powers of control over the assets that the estate cannot actually and freely dispose of them vis-à-vis the settlor, these assets remain those of the settlor.
  2. The determination of foreign law to which the estate is subject is the task of the tax court as the court of fact. The extent to which the tax court determines the foreign law is at its discretion and depends on the circumstances of the individual case; the submissions of the parties involved must be taken into account.

Tenor

On the plaintiff's appeal, the judgement of the Schleswig-Holstein Fiscal Court of 23 January 2019 - 3 K 41/17 is set aside.

The case is referred back to the Schleswig-Holstein Fiscal Court for a different hearing and decision.

The decision on the costs of the proceedings is transferred to the latter.

Facts of the case

I.

1 The plaintiff and appellant (plaintiff) is co-heir to ½ of the estate of his mother (testator), who died on 25 September 2005 and was resident in Germany. Following receipt of the inheritance tax return, the defendant and respondent (the tax office --FA--) assessed inheritance tax in notices dated 5 October 2006 and 27 October 2009.

2 The declaration and the notices did not relate to a trust that had been established on 3 October 1997 in accordance with Guernsey law. The founders were the claimant and his predeceased brother, the settlor was the deceased, with whose assets the trust was also endowed. The trust manager was domiciled in Guernsey. In the course of the proceedings, the plaintiff submitted the deed of incorporation together with a translation and a Memorandum of Wishes (MOW). The Trust held a 100 % interest in each of two corporations incorporated under the laws of the British Virgin Islands, which were domiciled in Guernsey. (Administration Office) in Guernsey in 2005 and held assets in Switzerland.

3 In a voluntary disclosure dated 26/27 January 2015, the plaintiff informed the tax authorities about the trust. He stated its asset value for 2005 as € ... and itemised the assets of the two subsidiaries. In an assessment dated 8 July 2015, the FA amended the inheritance tax and recognised a share of € ... as the asset item „Other receivable assets [...] Trust“. The plaintiff based his objection on the fact that the assets of the trust, as an independent estate within the meaning of Section 7 para. 1 no. 8 sentence 2 of the Inheritance Tax and Gift Tax Act in the version of the Tax Relief Act 1999/2000/2002 (StEntlG 1999/2000/2002) of 24 March 1999 (BGBl I 1999, 402) --ErbStG-- were not to be allocated to the estate. It also calculated the net assets of the trust as at 25 September 2005 to be ... €. Following a notice of amendment dated 13/08/2015, the FA finally reduced the inheritance tax in the objection decision dated 28/02/2017 to the extent that it still took a share of € ... into account for the trust. Otherwise, it rejected the objection as unfounded. The trust was a dependent/transparent asset and was included in the estate.

4 The tax court dismissed the claim. The assets invested in the trust were to be included in the estate because, until the deceased's death, it was not an independent estate within the meaning of Section 7 para. 1 no. 8 sentence 2 ErbStG. The entirety of the contractual provisions made and the contractual practice practised until death had been aimed at a capital investment by the testator in the guise of a trust. Even if the (formal) legal ownership of the assets had already been transferred to the trust during the deceased's lifetime, the establishment of the trust and the transfer of assets were to be classified as a legally irrelevant sham transaction and/or as an invalid legal construction pursuant to Art. 6 of the Introductory Code to the German Civil Code. The value recognised corresponds to the information provided by the plaintiff. The foreign corporations did not justify any deviating valuation standards pursuant to § 11 of the Valuation Act (BewG), as they had not acted for entrepreneurial purposes, but for the purposes of capital investment for the trust. The judgement of the tax court has been published in Entscheidungen der Finanzgerichte (EFG) 2019, 982.

5 With the appeal, the plaintiff alleges a violation of procedural law in the form of insufficient clarification of the facts and a lack of reasoning, as well as of substantive law in the form of Section 3 (1) no. 1 ErbStG in conjunction with Section 10 ErbStG and Section 12 ErbStG in conjunction with Section 12 ErbStG. § 10 ErbStG and § 12 ErbStG in conjunction with § 11 BewG. § Section 11 BewG. The trust was a separate estate within the meaning of Section 7 para. 1 no. 8 ErbStG, especially as Guernsey law prohibits the termination of the trust and the distribution of the assets if the beneficiaries, in this case his brother's children who were still minors at the time of the testator's death, are minors. Even if the testator's rights to the trust assets had continued to exist, there were no findings as to whether these could be transferred to the plaintiff in accordance with Section 1922 of the German Civil Code (BGB).

6 Finally, the tax court had not determined the values correctly. The decisive factor was not the assets owned by the two subsidiaries, but the values of the shareholdings in these companies to be determined separately pursuant to Section 12 (2) ErbStG in conjunction with Section 151 (1) sentence 1 no. 3 BewG. § Section 151 para. 1 sentence 1 no. 3 BewG, but the values of the shareholdings in these companies to be determined separately. In the case of the arithmetical pass-through, the tax court should have clarified asset-reducing items such as liabilities or liquidation costs. Furthermore, the tax assessment notices were also vague and insufficiently substantiated.

7 The plaintiff applies analogously,
annul the preliminary decision, the amendment notices of 8 July 2015 and 13 August 2015 and the objection decision of 28 February 2017.

8 The FA requested that the appeal be dismissed.

9 In view of the individual structure of the trust, the tax court had correctly come to the conclusion that the testator had a claim for surrender and had not definitively disposed of her assets during her lifetime, so that the trust was transparent. It was sufficiently clear from the decision that it covered the trust assets. If the claimant disputes the valuation, he must determine and submit different values himself in accordance with Section 90 (2) of the German Fiscal Code (AO) in the foreign matter. A separate assessment would not take place in accordance with § 151 Para. 4 BewG and would also be practically pointless.

Reasons for the decision

II.

10 The appeal is well-founded. The contested judgement is set aside. The matter is referred back for further hearing and decision; it is not ready for judgement (§ 126 para. 3 sentence 1 no. 2 of the German Fiscal Court Code --FGO--). The Senate is not in a position to judge whether the taxable income pursuant to Section 1 para. 1 no. 1 ErbStG in conjunction with Section 3 para. § 3 para. 1 no. 1 ErbStG also includes half of the assets of the trust corresponding to his inheritance share. This requires additional findings on the relevant legal systems.

11 1. the contested notices are not to be cancelled simply because they lacked a statement of reasons. Pursuant to Section 121 (1) AO, a written administrative act must be accompanied by a statement of reasons insofar as this is necessary for its understanding. Insofar as the tax assessment notices refer to other claims, there is no lack of reasoning. All amendment notices after the trust became known contained the comment „[...] Trust“ as an explanation for the respective valuations and shares. This made it clear that the assets under the cover of the trust were meant. The legal imprecision of the term „receivables“ is irrelevant. With regard to the valuation, the reference in the objection decision to the plaintiff's letters makes it clear that the values stated corresponded to his own information. The correctness of the valuation is not a question of justification.

12 2. in the event of a dispute, the succession is subject to the German law of succession and therefore leads to universal succession pursuant to Section 1922 BGB. This relates to the testator's inheritable assets. Whether a right still exists at the time of death and constitutes an object of the estate is a preliminary question that is to be distinguished from the law of succession and is to be linked separately under conflict of laws (see decision of the Federal Court of Justice --BGH-- of 3 December 2014 - IV ZB 9/14, Neue Juristische Wochenschrift 2015, 623, para. 28; judgement of the Federal Fiscal Court --BFH-- of 5 December 2018 - II R 9/15, BFHE 263, 283, BStBl II 2020, 655, para. 23).

13 a) If the deceased has spun off assets into an effectively established, legally independent and non-transparent estate under foreign law within the meaning of §§ 3 para. 2 no. 1 sentence 2, 7 para. 1 no. 8 sentence 2, 7 para. 1 no. 9 sentence 2 ErbStG, it is no longer attributable to him and consequently does not form part of the estate. However, if the testator can continue to freely dispose of the assets on the basis of reserved powers, the estate is to be regarded as legally transparent and the assets continue to be attributed to the testator. Upon the death of the testator, it is included in the estate and is accessible to universal succession.

14 b) The assets of a non-transparent, effectively established and legally independent foundation within the meaning of §§ 3 para. 2 no. 1 sentence 1, 7 para. 1 no. 8 sentence 1, 7 para. 1 no. 9 sentence 1 ErbStG are no longer attributable to the founder and are therefore no longer subject to statutory succession or disposition upon death under domestic inheritance law - irrespective of the foreign personal statute of the foundation. If assets have actually and legally accrued to a foundation prior to the inheritance, they are only attributable to the foundation. In this respect, the death of the founder is irrelevant under inheritance tax law (see BFH judgement in BFHE 263, 283, BStBl II 2020, 655, margin no. 21). However, if the agreements and regulations made reserve comprehensive powers of control over the assets of a foreign foundation to the founder, so that the foundation is prevented from actually and freely disposing of the assets transferred to it vis-à-vis the founder, the assets are still attributable to the founder. Powers of control in this sense result, for example, from the founder's reservation with regard to decisions on the investment and use of the assets, the possibility of demanding the retransfer of the assets in whole or in part, and the fact that the foundation and its bodies are subject to instructions from the founder. Based on his powers, the founder can dispose of the foundation's assets as if they were his own bank account. In the absence of changes to the agreements or other interim dispositions, this applies until the time of death (see BFH judgements of 28 June 2007 - II R 21/05, BFHE 217, 254, BStBl II 2007, 669, under II.2.b, and in BFHE 263, 283, BStBl II 2020, 655, margin no. 22).

15 c) These legal principles also apply to estates under foreign law, including Anglo-American trusts. If the settlor of the estate has reserved such extensive powers of control over the assets that the estate cannot actually and freely dispose of the assets vis-à-vis the settlor, these assets remain those of the settlor and are equivalent to the settlor's own bank deposits.

16 aa) The provisions on estates under foreign law in Sections 3 para. 2 no. 1 sentence 2, 7 para. 1 no. 8 sentence 2, 7 para. 1 no. 9 sentence 2 ErbStG were added to the previous ErbStG by the StEntlG 1999/2000/2002. They were primarily intended to cover typical forms of common law trusts commonly used in Anglo-American countries (BFH ruling of 3 July 2019 - II R 6/16, BFHE 265, 421, BStBl II 2020, 61, margin no. 40, with further references). This was a reaction of the legislator to the case law of the BFH, according to which the mere establishment of so-called testamentary trusts, which were not aimed at the immediate distribution of the trust assets, did not in principle lead to a taxable acquisition for either the trust administrator or the beneficiary, while the taxation of the (capitalised) future income, which was possible in principle, suffered from implementation deficits (cf. BFH judgement of 27 September 2012 - II R 45/10, BFHE 238, 540, BStBl II 2013, 84, margin no. 13, 24, with further references to previous case law; see also BFH judgement of 15 July 2014 - X R 41/12, BFHE 246, 442, margin no. 42).

17 bb) It is in line with the far-reaching equalisation of foundations and asset pools achieved by the newly introduced provisions to link non-transparency to the same requirements. Insofar as the BFH had linked the asset commitment required for the transfer of assets to a trust to the asset management in the interests of the subsequent beneficiaries (see BFH judgement in BFHE 238, 540, BStBl II 2013, 84, para. 13), this was merely a choice of words relating to the beneficiary instead of the settlor without a different meaning.

18 d) The question of whether powers of control have been effectively reserved must be assessed on the basis of the legal system that determines the legal relationships of the estate. The same applies to the question of whether these powers continue to exist upon the death of the settlor or whether they expire and thus the settlor or his heir loses legal jurisdiction over the assets in favour of the estate itself, which thus becomes non-transparent (cf. in detail BFH ruling in BFHE 263, 283, BStBl II 2020, 655, para. 24 f.). The relevant legal system is to be determined in accordance with the rules of private international law. In principle, the law of the place of the actual place of administration or the law of the state under which the formation was carried out can be considered (cf. on the personal status of legal entities formed abroad BFH decision of 8 January 2019 - II B 62/18, BFH/NV 2019, 293, para. 25 to 27). If it turns out that a transparent estate remains transparent even after the death of the creator, the individual assets can be transferred to the heir in accordance with Sections 1922 and 1942 of the German Civil Code (BGB), provided they are not themselves non-inheritable under the relevant law governing the rights to an asset.

19 3. the tax court must determine the relevant foreign law and the underlying facts of its own motion, taking into account the taxpayer's extended duty to cooperate.

20 a) The relevant foreign law is to be determined ex officio in accordance with Section 155 sentence 1 FGO in conjunction with Section 293 of the Code of Civil Procedure (ZPO). § Section 293 of the German Code of Civil Procedure (ZPO) (BFH judgements of 7 December 2017 - IV R 23/14, BFHE 260, 312, BStBl II 2018, 444, margin no. 37, and of 22 March 2018 - X R 5/16, BFHE 261, 132, BStBl II 2018, 651, margin no. 22).

21 aa) The court must determine not only the foreign legal norms, but also their application in legal practice. The law must be analysed as a whole, i.e. in its systematic context, using the methods commonly used in the foreign legal system and taking into account foreign case law and legal doctrine (BFH judgement in BFHE 260, 312, BStBl II 2018, 444, para. 37). If necessary, the court can obtain official information from the authorities of the country concerned or from German embassies, consulates and ministries or commission an expert opinion, e.g. from a scientific institute (see BFH judgement in BFHE 260, 312, BStBl II 2018, 444, para. 39).

22 bb) How the tax court determines the foreign law is at its discretion. The requirements for the scope and intensity of the duty of the judge of fact to investigate can only be determined in a general and abstract manner to a very limited extent (see BFH judgement in BFHE 261, 132, BStBl II 2018, 651, para. 23; BFH decision of 17 July 2019 - II B 35-37/18 BFHE 265, 14, BStBl II 2020, para. 394).07.2019 - II B 35-37/18, BFHE 265, 14, BStBl II 2020, 394, para. 18; BGH decision of 30 March 2021 - XI ZB 3/18, Neue Juristische Wochenschrift-Rechtsprechungs-Report Zivilrecht 2021, 916, para. 59 et seq, in each case with further references). The exercise of discretion by the tax court is guided by the respective circumstances of the individual case, in particular the available sources of information, but also the submissions of the parties involved (see BFH judgement of 17 December 2020 - VI R 22/18, BFH/NV 2021, 758, para. 23; BGH decision of 17 May 2018 - IX ZB 26/17, Monatsschrift für Deutsches Recht --MDR-- 2018, 1079, para. 19, with further references). However, the complexity of foreign law does not release the tax court from its duty to investigate. A decision based on the principles of the burden of proof is also not possible in this area. The foreign legal principles do not become facts (see BFH judgements of 13 June 2013 - III R 10/11, BFHE 241, 562, BStBl II 2014, 706, para. 29, and in BFHE 261, 132, BStBl II 2018, 651, para. 23; BGH decision in MDR 2018, 1079, para. 19, in each case with further references).

23 cc) The scope of application of Section 293 ZPO only relates to questions of law and not to facts that are relevant to the decision. The general requirements for the burden of presentation and establishment apply to these (see BGH judgement of 25 June 2019 - X ZR 166/18, MDR 2019, 1303, para. 25, with further references). As a court of fact, the tax court is obliged to investigate the facts of the case ex officio in accordance with Section 76 (1) FGO, exhausting all available evidence. The parties involved must co-operate in the clarification of the facts and provide complete and truthful explanations of the factual circumstances (§ 76 Para. 1 Sentences 2, 3 FGO). In the case of facts that relate to transactions abroad, the taxpayer has a duty to cooperate in accordance with Section 76 (1) sentence 4 FGO in conjunction with Section 90 (2) AO. § Section 90 para. 2 AO an increased duty to clarify and obtain evidence. In particular, the parties involved must clarify the facts of the case and obtain the necessary evidence and make it available to the FA or the tax court in accordance with Section 90 (2) sentence 1 AO (see BFH judgement of 7 November 2001 - I R 14/01, BFHE 197, 287, BStBl II 2002, 861, under II.10.). However, it should be noted that the extended duty to cooperate pursuant to Section 90 (2) AO is also limited to facts (BFH judgement in BFHE 241, 562, BStBl II 2014, 706, para. 27, 29 et seq.).

24 b) If the establishment of an estate is governed by foreign law in accordance with private international law, the relevant contract must logically be interpreted in accordance with the applicable foreign law (contractual statute), taking into account the relevant -foreign - methods of interpretation. §§ Sections 133, 157 BGB shall not apply. The legal terms used by the contracting parties in the text of the contract shall only be given the meaning assigned to them under the foreign legal system. Ultimately, the German court must apply the foreign law as the courts of the foreign state would interpret and apply it (see BFH judgement in BFHE 260, 312, BStBl II 2018, 444, para. 27 f.; BGH judgement of 7 June 2016 - KZR 6/15 „Pechstein/International Skating Union“, BGHZ 210, 292, para. 70, with further references).

25 c) An appeal on points of law cannot be based on the fact that the preliminary ruling is based on the incorrect application of foreign law, as foreign law is not part of „federal law“ within the meaning of Section 118 (1) sentence 1 FGO. Rather, the findings on the existence and content of foreign law are generally binding for the appeal court (Section 155 sentence 1 FGO in conjunction with Section 560 ZPO). They are to be treated as findings of fact for the purposes of appeal. However, if the tax court has overlooked foreign law, it is not binding. If the judge of fact has decided a legal question, to which non-revisable law applied, according to revisable law or vice versa, or if he has interpreted a contract, to which non-revisable law was to be applied, according to revisable law or vice versa, then the application or non-application of revisable law means a violation of revisable legal principles. Such a violation of (substantive) federal law must be taken into account by the BFH without objection (BFH judgement in BFHE 260, 312, BStBl II 2018, 444, margin no. 33 f.).

26 d) The duty of the tax court to investigate the underlying facts must be distinguished from the ex officio investigation of foreign law. As a court of fact, the tax court is obliged to investigate the facts of its own motion in accordance with Section 76 (1) FGO, exhausting all available evidence. The parties involved must co-operate in the clarification of the facts and provide complete and truthful explanations of the factual circumstances (Section 76 (1) sentence 3 FGO). In the case of facts relating to transactions abroad, the taxpayer has a duty to cooperate in accordance with Section 76 (1) sentence 4 FGO in conjunction with Section 90 (2) AO. § Section 90 para. 2 AO, the taxpayer has an increased duty to clarify and obtain evidence (BFH judgement in BFHE 241, 562, BStBl II 2014, 706, margin no. 30 f.).

27 (4) The tax court assumed different principles for the application of foreign law. The matter is not ready for judgement. On the basis of the findings made to date, the BFH is unable to conclusively decide whether the assets of the trust belonged to the estate of the deceased and thus half of the taxable acquisition of the plaintiff and whether the decision therefore proves to be correct as a result. Insofar as the law of Guernsey determines the legal relationships of the trust, the tax court did not establish under what conditions the settlor, in this case the testatrix, is effectively reserved powers of control under this legal system, nor whether any continuing powers of control under this law continue or expire with the death of the settlor. The tax court limited itself to interpreting the deed of formation of the trust without making any reference to the legal system governing the trust. Nor did it make any findings as to whether the powers of control and thus the transparency of the trust survived the death of the testator and, as a result, whether the assets in the trust could be inherited. The tax court will have to make these findings in the second instance and, on this basis, decide again on the inclusion of the trust assets in the estate.

28 Since the complaint of substantive law is already successful, the existence of any procedural errors is no longer relevant.

29 5 Should it transpire in the second instance that the plaintiff's inheritance also included half of the assets of the trust, these are to be valued in accordance with Section 12 ErbStG in the same way as all other assets of the estate. This also applies to shares in corporations. A separate determination of their value within the meaning of § 179 AO does not take place for the key date in 2005, which is decisive in the case in dispute, because § 12 para. 2 ErbStG did not yet provide for this. According to § 37 para. 1 ErbStG in the version of the Inheritance Tax Reform Act of 24 December 2008 (BGBl I 2008, 3018), the current version only applies to acquisitions for which the tax arises after 31 December 2008 and also continues to exclude foreign assets from the separate assessment in accordance with § 151 para. 4 BewG. In addition, the Senate would like to point out that, with regard to the valuation of foreign assets, the plaintiff is also entitled under Section 76 (1) sentence 4 FGO in conjunction with Section 90 (2) AO. § Section 90 para. 2 of the German Fiscal Code (AO).

30 6 The transfer of the decision on costs follows from Section 143 (2) FGO. The Senate decides in accordance with Section 121 sentence 1 FGO in conjunction with. § Section 90a FGO by court order.