FG Münster, Judgment of 23.03.2023 – 1 K 2478/21 E Income tax treatment of distributions made on the occasion of the dissolution of a US trust
Standards chain: Income Tax Act (EStG) § 20 para. 1 no. 2 and 9, § 32d para. 1, § 22 no. 1 sentence 2 half-sentence 2 letter a, § 3 no. 40 sentence 1 letter i
Inheritance Tax Act § 7 para. 1 no. 9 sentence 2
AStG § 15
GG Art. 3 Para. 1, Art. 20 Para. 3 in conjunction with Art. 2 Para. 1, Art. 100 Para. 1
Guiding principles:
1. Distributions granted upon the dissolution of a non-transparent US trust may be taxable for the recipient pursuant to Section 20 Paragraph 1 No. 9 Sentence 2 in conjunction with Sentence 1 Half-Sentence 2 in conjunction with Paragraph 1 No. 2 of the German Income Tax Act (EStG).
2. The taxation of distributions made on the occasion of the dissolution of a non-transparent US trust pursuant to Section 20 Paragraph 1 No. 9 Sentence 2 in conjunction with Sentence 1 Half-Sentence 2 in conjunction with Paragraph 1 No. 2 of the German Income Tax Act (EStG) in conjunction with Section 32d Paragraph 1 of the German Income Tax Act (EStG) does not violate Article 3 Paragraph 1 of the German Basic Law (GG) even if these distributions have already been subject to gift tax for the recipient pursuant to Section 7 Paragraph 1 No. 9 Sentence 2 of the German Inheritance and Gift Tax Act (ErbStG).
3. Insofar as Section 20 Paragraph 1 No. 9 Sentence 2 in conjunction with Sentence 1 Half-Sentence 2 in conjunction with Paragraph 1 No. 2 of the Income Tax Act also covers increases in value that arose up to the time of the promulgation of the Annual Tax Act 2010 on December 8, 2010 (Federal Law Gazette 2010 I 1768), the provision violates the constitutional prohibition of retroactivity if the beneficiary already held a stable asset position with regard to the trust assets at that time.
4. The provision of Section 20 Paragraph 1 Number 9 Sentence 2 in conjunction with Sentence 1 Half-Sentence 2 in conjunction with Paragraph 1 Number 2 of the Income Tax Act (EStG) can, in the event of a violation of the constitutional prohibition against retroactive application of laws, be interpreted in a manner consistent with the constitution such that it only covers increases in value that have occurred since December 8, 2010. A referral pursuant to Article 100 Paragraph 1 of the Basic Law (GG) is therefore not required.
Facts of the case:
1 The parties are arguing about the tax liability of asset transfers resulting from the dissolution of two US trusts.
2 The plaintiffs are a married couple who filed a joint income tax return for the tax year 2016. The husband earned income from employment in that year. In addition, the husband earned income from capital assets in the amount of €xxx and the wife earned income from capital assets in the amount of €xxx.
3 Furthermore, the plaintiff received income during the tax year in question from the dissolution of two trusts, which had been established on April 18, 1984, by the plaintiff's grandfather, N (hereinafter: Trust Grandfather), and on June 9, 1984, by the plaintiff's father, D (hereinafter: Trust Father), respectively, as grantors. Both trusts were irrevocable and were to remain in force until the death of the plaintiff's father. After their establishment, the two founders had no right to amend, supplement, revoke, or terminate the trusts or any provision thereof. The plaintiff and her sister, W., were appointed as trustees in both trusts, responsible for managing the respective trust assets. During the term of the trusts, the plaintiff's father was entitled to the entire net income from Trust Father and to those amounts from Trust Grandfather necessary for his maintenance and support. Disbursements during this period were made at the discretion of the trustees. Upon the death of the plaintiff's father, his estate was to be divided equally among all six of his children, namely the plaintiff and her siblings (W., M., D. Jr., T., and S.). In the event that a child predeceased the father, the estate was to be distributed among the deceased child's descendants according to lineage. Furthermore, the agreements contained special provisions for the event that one of the children had not yet reached the age of 22 (Grandfather Trust) or 25 (Father Trust) at the time of the father's death.
4 For further details, reference is made to the deeds of incorporation translated into German (pp. 89-105 and pp. 124-133 of the court file). The documents submitted to the court do not specify which assets were contributed to the trusts. Furthermore, it is no longer possible to determine whether, and if so, to what extent, any ongoing income from the trusts was actually paid out to the father.
5 Furthermore, the trusts remained in effect until the father's death on [date omitted]. By that time, all six children had reached the age of 25, so the assets (securities, cash, and a share in a property) were distributed to the plaintiff and her siblings in the tax year 2016. The plaintiff received the following assets from the dissolution of the two trusts:
6 Trust Grandfather
| Number | name | Value in US $ | Value in € (exchange rate 1:1.1103) |
| 2000 | xxx | x | y |
| 166 | xxx | x | y |
| 166 | xxx | x | y |
| 1696 | xxx | x | y |
| 513 | xxx. | x | y |
| 112 | xxx. | x | y |
| 6080 | xxx | x | y |
| 461 | xxx. | x | y |
| 1384 | xxx | x | y |
| 833 | xxx | x | y |
| 7837 | xxx | x | y |
| 2000 | xxx | x | y |
| 169 | xxx | x | y |
| 183 | xxx | x | y |
| cash | x | y | |
| sum | „"Sum 1"“ |
7 Trust Father
| Number | name | Value in US $ | Value in € (exchange rate 1:1.1103) |
| 3333 | xxx. | x | y |
| 833 | xxx | x | y |
| 333 | xxx. | x | y |
| 500 | xxx | x | y |
| 833 | xxx | x | y |
| 333 | xxx | x | y |
| 416 | xxx | x | y |
| cash | y | y | |
| Farmland | y | ggg | |
| sum | „"Sum 2"“ |
8 During the tax year 2016, the plaintiff sold the securities received from the trusts, resulting in a loss of vvv €, which was included in her aforementioned capital income.
9 The plaintiff filed an inheritance tax return with the N-Stadt tax office for the inheritance she received from her father. In this return, she declared, among other assets, the acquisition from her father's trust as a gift in the amount of €2, pursuant to Section 7 Paragraph 1 No. 9 Sentence 2 of the Inheritance Tax Act (ErbStG). On June 9, 2017, the N-Stadt tax office issued a certificate of exemption from gift tax with respect to this trust. The plaintiff's subsequent objection was dismissed as inadmissible due to lack of standing. No inheritance tax was assessed because the personal allowance was not exceeded without including the trust.
10The plaintiff declared the acquisition from the grandfather trust in the amount of €xxx in a gift tax return. The N-Stadt tax office subsequently assessed gift tax in the amount of €xxx on June 9, 2017.
11 In their income tax return for the tax year 2016, filed on September 25, 2017, the plaintiffs declared, in addition to other income, the distributions from the two trusts totaling "Total 1" + "Total 2" as foreign capital gains. However, they also pointed out that, in their view, no income tax was applicable because these amounts had already been included in the inheritance tax return filed, as this would otherwise result in double taxation.
12 The defendant nevertheless included these amounts in the income tax assessment of 29 December 2017, which was subject to review, as income from capital assets pursuant to Section 20 Paragraph 1 No. 9 of the Income Tax Act (EStG) with a tax rate of 25 %.
13 During the proceedings concerning the objection filed against this assessment, the defendant conducted an abbreviated tax audit of the plaintiffs' 2016 income tax returns. In the abbreviated audit report dated May 4, 2020, to which reference is made for further details, the auditor stated that the capital gains should be reduced by the assets existing at the time of incorporation. However, only the single verifiable real estate could be considered as incorporation assets. All other additions to the assets (in particular, shares and securities) resulted solely from the income generated by the real estate. Therefore, for the purposes of calculating capital gains, the amount attributable to the real estate in the case of the trust trust father, amounting to €ggg, should be deducted; for the trust trust grandfather, nothing should be deducted. All other distributed surpluses were comparable to profit distributions and should therefore be recorded as income from capital assets.
14 Based on the results of the abbreviated external audit, the defendant subsequently issued an amended income tax assessment for 2016 on May 20, 2020, in which he set the plaintiff's capital income from the trusts at € ggg lower than before, i.e., at € kkk.
15 Regarding the amount of capital gains, the plaintiffs pointed out that initial assets also had to be deducted from the Grandfather Trust, since at the time of its establishment there were already 6,669 shares of X-Bank Corp. and 6,080 shares of Y-Bank Corp.
16 By decision dated September 2, 2021, the defendant rejected the objection as unfounded. The two share packages named by the plaintiffs were indeed to be considered as initial assets at the following amounts, based on their respective market values valid in 1984:
| X-Bank Corp. | x $ = y DM = z € |
| Y-Bank Corp. | x $ = y DM = z €. |
17 The farmland previously considered should only be deducted at its value at the time of contribution (x €) and not at its previously considered value (ggg €). At the time of the trust's dissolution, the farmland actually had a value of x €. The difference, less the additional shares considered (z €), is estimated as additional initial assets of the trustee, so that there is ultimately no adverse change in the trustee's position.
18 The plaintiffs filed a lawsuit against this on September 30, 2021.
19 They argue that the trusts are not comparable to estates, family foundations, or other special-purpose assets under German law within the meaning of Section 20 Paragraph 1 No. 9 Sentence 2 of the German Income Tax Act (EStG). In particular, the trusts are not economically independent because ongoing payments were to be made to the father for the duration of his life. The concept of dissolving a foundation upon the death of the founder is completely foreign to German law. Furthermore, according to Section 80 Paragraph 2 Sentence 2 of the German Civil Code (BGB), a family foundation must exist for a minimum period of ten years. Had the plaintiff's father died shortly after the trusts were established in 1984, the term would have been significantly shorter. Rather, the trusts are comparable to a usufruct or an executorship. Their purpose was to regulate and secure the inheritance. The trusts also did not meet the requirements of the Federal Fiscal Court's ruling of November 5, 1992 (IR 39/92, BStBl. II 1993, 388), because the assets and income were not earmarked for a specific purpose. Instead, the income would have gone to the father and the final assets to the children.
20 Furthermore, the proceeds from the dissolution of the two trusts are not comparable to profit distributions. Rather, the ongoing income was distributed to the father, and income from capital gains was generated through the reallocation of existing assets. Unlike profit distributions, there was no resolution by a corporate body; instead, the timing depended on the death of a person, which is unusual for profit distributions. The issue at hand is not the structuring of a profit distribution, but rather the generational transfer. Trusts are also not comparable to family foundations, as the latter are inherently "immortal." In the present case, there is also the unique aspect that—unlike the distribution of the liquidation assets of another entity—it was not cash, but the existing assets that were distributed.
21 The introduction of the reference to Section 20 Paragraph 1 Number 2 of the German Income Tax Act (EStG) into Section 20 Paragraph 1 Number 9 of the EStG, according to which liquidation distributions are now also subject to tax, was not, according to the ruling of the Federal Fiscal Court (BFH) of February 28, 2018 (VIII R 30/15, BFH/NV 2018, 857), merely a clarification. If this is correct, the legislator did not provide sufficient justification for the amendment and the law was therefore not legally valid.
22 Since trusts – unlike corporations – do not generate income from business operations, the purpose of Section 20 Paragraph 1 No. 9 of the German Income Tax Act (EStG), which aims to capture increases in value only in the case of commercially active corporations, does not apply.
23 Furthermore, a transaction subject to inheritance or gift tax cannot be economically comparable to a profit distribution. A transaction cannot simultaneously be considered both gratuitous and for consideration.
24 Furthermore, the practice of taxing the same transaction with two different types of tax is unconstitutional. This applies regardless of the fact that, in fact, no inheritance tax was incurred with regard to the trust father.
25 The double taxation violates Article 25, paragraph 4 of the Treaty of Friendship of October 29, 1954, between the Federal Republic of Germany and the United States of America (Federal Law Gazette II 1956, 487). This treaty is intended to eliminate obstacles to immigration, such as those faced by the plaintiff as an American citizen, from the USA to Germany.
26 In the event of a dispute, the double taxation should be eliminated by not levying income tax on the transaction, since Section 20 Paragraph 1 No. 9 of the Income Tax Act is subsidiary to the more specific provision of Section 7 Paragraph 1 No. 9 of the Inheritance Tax Act.
27 Furthermore, the extension of the scope of taxation to foreign partnerships by Section 20 Paragraph 1 No. 9 Sentence 2 of the German Income Tax Act (EStG) by the law of December 8, 2010, constitutes an impermissible retroactive effect. Until the promulgation of the amendment, the reliance on the tax exemption of capital gains was protected. In this respect, the plaintiffs referred to the decisions of the Federal Constitutional Court (BVerfG) of July 7, 2010, regarding the increase of the materiality threshold in Section 17 EStG and the extension of the speculation period in Section 23 EStG. Due to the prohibition of retroactive application, only capital gains from December 8, 2010, onward may be taxed. Since the timing of the payments depended on the father's death, no active planning was possible. A sufficiently established asset position existed, as the plaintiff had already acquired claims upon the establishment of the trusts, which merely became due only upon the father's death.
28 Since all securities in the grandfather's trust were acquired before December 31, 2008, and thus before the introduction of the withholding tax, no tax liability can arise in this respect. This applies to four of the seven securities in the father's trust. The remaining three were acquired after December 31, 2008, but before December 8, 2010, so only a partial tax liability can result. Accordingly, at most, an amount of €xxx would be taxable.
29 Since US tax law does not require the determination of the initial assets of trusts – unlike the endowment capital of a German foundation – it is impossible to retrospectively ascertain the amount of assets contributed by the trust settlors in 1984. In fact, the documents relating to the establishment of the trusts, which contained the lists of contributed assets, are no longer available. Even with an increased duty to cooperate due to the foreign element of the transaction pursuant to Section 90 Paragraph 2 of the German Fiscal Code (AO), the principle of proportionality must be observed because the tax liability was only introduced in 2010.
30 Following the defendant's suggestion that – should the disputed income not be, or only partially, covered by Section 20 Paragraph 1 No. 9 of the German Income Tax Act (EStG) – the loss incurred from the sale of the securities, also in 2016, would have to be recalculated, the plaintiffs argue that this loss would be reduced accordingly or eliminated entirely if the action is (partially) successful. In this respect, reference is made to the Excel spreadsheet submitted by the plaintiffs (pp. 322 et seq. of the court file). Accordingly, a maximum reduction of the income from capital assets by the difference between the amount previously assessed by the defendant (€kkk) and the capital loss already taken into account (€vvv), i.e., by €xxx, is conceivable.
31 The plaintiffs request,
to amend the income tax assessment for 2016 dated 20 May 2020, as modified by the objection decision dated 2 September 2021, to reduce the income tax by €xxx,
Alternatively, to allow the appeal.
32 The defendant requests that,
to dismiss the lawsuit,
Alternatively, to allow the appeal.
33 He argues that the two trusts are economically independent because the founders were only permitted to add assets to them, not withdraw them. Furthermore, the beneficiaries could not dispose of the trusts' assets during the father's lifetime. Comparability with German foundation law is not required. Rather, trusts, as pools of assets, are subject to corporation tax under Section 1 Paragraph 1 No. 5 of the German Corporation Tax Act (KStG) if their place of management is located in Germany. The criterion of economic comparability with profit distributions is to be interpreted broadly (Hamburg Tax Court, judgment of August 20, 2021 – 6 K 196/20, appeal pending before the Federal Fiscal Court under VIII R 25/21). Moreover, Section 20 Paragraph 1 No. 9 of the German Income Tax Act (EStG) applies not only to the corporations' business profits, but to all income. This is also covered by the legislative history.
34 There is no impermissible double taxation with income tax and gift tax. The legal provisions are not mutually exclusive. The fact that the trust distributions are also subject to inheritance tax under Section 7 Paragraph 1 of the Inheritance Tax Act does not lead to unconstitutional double taxation. Since Section 35b of the Income Tax Act even expressly provides for a tax reduction in the case of simultaneous inheritance tax liability, the legislator generally accepts double taxation. However, this provision is not applicable in the present case, as the trust was subject to gift tax and not inheritance tax. Double taxation is also recognized by the Federal Fiscal Court's case law because the Federal Republic of Germany does not have a uniform tax system. The defendant refers in this respect to the Federal Fiscal Court's (BFH) judgment of December 6, 2016 (IR 50/16, BStBl. II 2017, 324) concerning corporation tax, which is also applicable to income tax, as well as to the BFH judgment of June 25, 2021 (II R 31/19, BStBl. II 2022, 497). According to the Federal Constitutional Court's (BVerfG) jurisprudence, double taxation does not necessarily result in unconstitutional excessive taxation (decision not to accept the appeal of April 7, 2015, 1 BvR 1432/10). Rather, the legislature has broad discretion in this matter. In the present case, the total tax burden from both types of tax amounts to only approximately 36% and is thus below the regular progressive income tax rate. With regard to the trust, there is already no de facto double taxation.
35 Since there is no higher tax burden than for other nationals, the double taxation does not violate the 1954 US Friendship Treaty.
- Section 20 Paragraph 1 Number 9 of the Income Tax Act (EStG) should be applied in the version valid for the tax year 2016, since the amendments to the law through the Annual Tax Acts of 2007 (reference to Paragraph 1 Number 2) and 2010 (inclusion of foreign assets) were validly enacted. Because the amendments were made before the tax year 2016, there is no genuine retroactive effect. The application of Section 20 Paragraph 1 Number 9 of the Income Tax Act in its version valid for the tax year 2016 also does not lead to an impermissible quasi-retroactivity. The decisions of the Federal Constitutional Court (BVerfG) of July 7, 2010, are not applicable to the present case. The plaintiff did not possess a concrete, established asset position until her father's death. The increases in value had neither been realized nor established at the time of the amendments to the law in 2007 and 2010, nor had any payments been made. Rather, there was merely an expectation of acquiring a proportionate share of the trust's assets after the father's death. The mere possibility of later receiving tax-free profits does not constitute a concrete, established asset position. Before the father's death, the plaintiff had no power of disposal over the assets. Had she predeceased her father, her children would have received the capital income according to Section 20 Paragraph 1 No. 9 of the German Income Tax Act (EStG), as stipulated in the trust's provisions. Thus, the plaintiff only had a contingent right to the trust's assets. This is insufficient to meet the requirement of actual power of disposal over the individual assets as stipulated by the Federal Constitutional Court.
36 Even assuming a concrete, established asset position, sufficient grounds for justification exist. Section 20 Paragraph 1 Number 9 of the German Income Tax Act (EStG) serves to eliminate the unequal taxation of corporations and their shareholders on the one hand, and other taxable entities on the other. The reference to Section 20 Paragraph 1 Number 2 of the EStG serves to ensure comprehensive equal treatment of the distributions of corporations and other entities. By including foreign entities through Section 20 Paragraph 1 Number 9 Sentence 2 of the EStG, the legislator eliminated an unconstitutional unequal treatment compared to domestic entities. The insertion was necessary because the restriction to distributions from domestic entities was not justified within the tax system. Furthermore, payments to beneficiaries from foundations have been taxable under Section 22 of the EStG since the mid-1980s. Admittedly, this only applied to recurring payments. The inclusion of other economically comparable payments constitutes a sufficiently weighty justification for any retroactive effect. With regard to the issue of retroactivity, profit distributions should not be treated differently from the distribution of final assets. The defendant further refers to the Federal Constitutional Court's judgment of April 10, 2018 (1 BvR 1236/11) concerning the inclusion of capital gains from the sale of partnership interests in the trade tax base pursuant to Section 7 Sentence 2 of the Trade Tax Act (GewStG), in which no allocation of hidden reserves to periods before and after the promulgation of the law was assumed. Finally, the Hessian Finance Court (FG) also expressed no constitutional doubts about Section 20 Paragraph 1 No. 9 of the Income Tax Act in its ruling of May 25, 2021 (10 K 707/20, EFG 2021, 1540).
37 Regarding the amount of capital gains, the defendant argues that Section 20 Paragraph 1 No. 1 Sentence 3 of the German Income Tax Act (EStG) should be applied accordingly, according to which the repayment of capital contributions should not be included. The amount of the capital contributions can only be estimated in this case, as the corresponding documents relating to the two trust agreements are not available. The increased duty to cooperate pursuant to Section 90 Paragraph 2 of the German Fiscal Code (AO) must be observed. This is reasonable for the plaintiff, especially since she managed the two trusts together with her sister. The other unexplained capital contributions and the income from capital assets are based on the reinvestment of dividends and on increases in the value of the securities. It is unclear whether the father actually received all the income from the trusts. The defendant concludes from the fact that the plaintiff's father left his wife and children assets of more than xxxx US-$ that no distribution from the trust to the father was made during its term, as this was not necessary for his living expenses.
38 The income in dispute here did not fall under the transitional provisions for withholding tax, as the plaintiff only received it from the trusts in 2016.
39 A hearing before the rapporteur took place on October 27, 2022, and an oral hearing before the Senate took place on March 23, 2023. Reference is made to the minutes of the hearings.
40 The parties have agreed that, in the event of a constitutionally compliant interpretation of the law to the effect that only income or capital gains arising after December 8, 2010, may be included, the amount of €kkk previously subject to taxation would have to be divided such that a portion of €www would be taxable and a portion of €fff would be tax-free. For the calculation, reference is made to Appendix 5 to the statement of claim (page 80 of the court file) and to the Excel spreadsheet (tab 2) submitted by the plaintiff via link on December 13, 2022 (page 276 of the electronic court file). Furthermore, it is undisputed between the parties that, in the event of such a constitutionally compliant interpretation, the capital losses already taken into account in the amount of €vvv would continue to be recognized.
41 Furthermore, reference is made to the defendant's tax files, the court file, and the written submissions of the parties.
Reasons:
42 I. The admissible claim is partially justified.
43The income tax assessment for 2016 dated May 20, 2020, as amended by the objection decision dated September 2, 2021, is unlawful and infringes the plaintiffs' rights (Section 100 Paragraph 1 Sentence 1 of the Fiscal Court Code, FGO), insofar as the defendant has subjected distributions from the two trusts to taxation, which are based on increases in value and income up to December 8, 2010.
44The requirements of Section 20 Paragraph 1 No. 9 of the German Income Tax Act (EStG) in its version valid for the tax year 2016 are, in principle, met in the present case (see section 1). The provision does not violate the US Friendship Treaty (see section 2) nor a prohibition against double taxation with inheritance or gift tax (see section 3), but must be interpreted in a manner consistent with the constitution such that only those increases in value that arose from December 8, 2010 onwards are to be included as taxable income from the dissolution (see section 4).
45 1. The requirements of Section 20 Paragraph 1 Number 9 of the German Income Tax Act (EStG) are met in principle. This provision, in the version valid in the tax year in question, had the following wording:
„"Income from capital assets includes receipts from distributions by a corporation, association of persons, or pool of assets not exempt from corporation tax within the meaning of Section 1 Paragraph 1 Numbers 3 to 5 of the Corporation Tax Act, which are economically comparable to profit distributions within the meaning of Number 1, insofar as they are not already included in the income within the meaning of Number 1; Number 1 Sentences 2 and 3 and Number 2 apply accordingly. Sentence 1 applies accordingly to distributions by comparable corporations, associations of persons, or pools of assets that have neither their registered office nor their place of management in Germany."“
46 a) The two trusts are comparable to domestic corporations, associations of persons or asset pools within the meaning of Section 20 Paragraph 1 No. 9 Sentence 2 of the German Income Tax Act (EStG).
47 (aa) The decisive factor for comparability in this sense is the comparison of legal types. Accordingly, foreign entities must correspond to a German corporate income tax subject, irrespective of any legal personality that may exist under foreign law (see Federal Fiscal Court [BFH] decision of December 18, 2019 – IR 33/17, BFH/NV 2021, 157). In its judgment of June 25, 2021 (II R 31/19, BStBl. II 2022, 497), the Federal Fiscal Court ruled on the inheritance tax treatment of a US trust pursuant to Section 7 Paragraph 1 No. 9 of the German Inheritance Tax Act (ErbStG) that the principles developed for foreign foundations apply equally to Anglo-American trusts. The decisive factor in each case is the specific structure (see Rengers in Brandis/Heuermann, Income Tax Law, Section 1 of the German Corporate Income Tax Act [KStG], marginal note 145a).
48 (bb) According to the Federal Fiscal Court (BFH) ruling of November 5, 1992 (IR 39/92, BStBl. II 1993, 388), there are generally three possibilities for attributing the assets and the resulting income of a trust. Attribution can be made to the settlor, to the beneficiaries, or to the trust itself. The decisive factors are the power to issue instructions and the position as beneficial owner. If the trust is an intermediate acquirer, the acquisition of the assets is subject to a condition precedent for inheritance tax purposes and is accepted directly from the settlor to the beneficiary. The trust itself then receives the income. These principles also apply to income tax (BFH ruling of July 20, 1971 – VIII 24/65, BStBl. II 1972, 170). Accordingly, a trust can generally be treated as either non-transparent or transparent under German taxation standards (Tischendorf, IStR 2022, 445, 450), whereby in the case of a transparent structure the broad wording of Section 20 Paragraph 1 No. 9 Sentence 2 of the German Income Tax Act (EStG) is fulfilled (see Werder/Wystrcil, BB 2015, 412, 418, who then express doubts about the comparability of the services with profit distributions).
49 (cc) Applying these legal principles to the present case, the assets and income generated during the existence of the two trusts are attributable to the trusts themselves. Attribution to the two founders (the plaintiff's grandfather and father, respectively) is not possible, as they no longer had any power of disposal or management over the transferred assets according to the agreements. They could not influence the management of the trusts, nor could they reverse the asset transfers (so-called "irrevocable trusts"). Attribution to the beneficiaries (the plaintiff and her siblings or their descendants) is also precluded, because they were only to receive the assets after the father's death. During the existence of the two trusts, they had no access to the assets or the income. Accordingly, the trusts must be considered independent entities.
50 dd) Under German law, the trusts would initially have generated the current income. To the extent that this income was paid out to the father, he would have had to pay tax on it at the time of receipt, assuming he was personally liable for income tax. Direct attribution of the current income to the plaintiff's father is not possible, as he was only entitled to the net income, and each payment required a discretionary decision by the trustees. There was no direct transfer of the income to the father. In the case of the Grandfather Trust, a payment to the father additionally required an assessment of its necessity for the father's maintenance and support.
51 (ee) The objections raised by the plaintiffs are unfounded. Insofar as they argue that domestic corporations typically do not terminate upon the death of a person and that foundation law provides for specific terms, this generally concerns the comparability of trusts with domestic corporate taxable entities. However, as explained above, this has not led the courts to consider trusts as generally incomparable. Nor does the purpose of the two trusts, namely to regulate and secure the generational transfer, preclude their treatment as opaque entities and thus as comparable to domestic corporate taxable entities. If an irrevocable trust is chosen to achieve this purpose, which is considered economically independent according to domestic standards, then the corresponding domestic regulations also apply.
52 b) The payments received by the plaintiff in connection with the dissolution of the two trusts are, in principle, also covered by Section 20 Paragraph 1 No. 9 of the German Income Tax Act (EStG), as they are comparable to the distribution of the final assets after the dissolution of a corporation. Since Section 20 Paragraph 1 No. 9 Sentence 1 of the EStG expressly refers to Section 20 Paragraph 1 No. 2 of the EStG, the payments must be comparable either to a profit distribution or to payments accruing after the dissolution of a corporation that do not consist of the repayment of nominal capital or repayments from the tax equity account. The conditions under which such comparability exists have not yet been definitively clarified.
53 (aa) The explanatory memorandum to the law suggests a broad understanding of comparability. Section 20 paragraph 1 no. 9 of the Income Tax Act (EStG) was introduced by the Act to Reduce Tax Rates and Reform Corporate Taxation (StSenkG) of October 23, 2000 (Federal Law Gazette I 2000, 433) with the aim of achieving equal treatment of the persons behind the assets mentioned therein with shareholders of corporations, which appeared necessary after the change in the system from the imputation system to the half-income system, since the reduced corporate tax rate applies equally to all corporations (Federal Council Document 90/00, pp. 161 et seq.). The explicit insertion of the requirement of economic comparability with profit distributions within the meaning of Section 20 Paragraph 1 No. 1 of the German Income Tax Act (EStG) by the Act on the Further Development of Corporate Tax Law (UntStFG) of December 20, 2001 (Federal Law Gazette I 2001, 3858) was intended only to clarify, not to expand, the scope of the taxable event. According to the explanatory memorandum to the Act, a benefit comparable to a profit distribution within the meaning of Section 20 Paragraph 1 No. 9 EStG is not deemed to exist, for example, if an association not exempt from corporation tax provides benefits to its members in fulfillment of its general statutory tasks based on contributions within the meaning of Section 8 Paragraph 5 of the German Corporation Tax Act (KStG), which the members are required to pay solely by virtue of their membership according to the association's statutes. These services are not comparable to a profit distribution, as they are generally covered by membership fees (BT-Drs. 14/6882, p. 35).
54 (bb) The Federal Fiscal Court (BFH), referring to the explanatory memorandum to the Corporate Tax Reform Act of December 20, 2001 (Bundestag printed matter 14/6882, p. 35), assumes that only those benefits should not be covered by Section 20 Paragraph 1 No. 9 of the Income Tax Act (EStG) for which the recipient of the benefit provides consideration in the broadest sense (e.g., in the form of a membership fee for an association). In contrast, it is irrelevant whether the recipient of the benefit has an interest in the assets, so it is immaterial whether the recipients of the benefit (in the case at hand, beneficiaries of a foundation) legally hold the position of shareholders; what is decisive is whether their position is economically equivalent to that of a shareholder. In any case, if the recipients of the services – similar to shareholders in the shareholders' meeting – can directly or indirectly influence the foundation's distribution policy, the services are economically comparable to profit distributions (Federal Fiscal Court ruling of 3 November 2010 – IR 98/09, Federal Tax Gazette II 2011, 417).
55 (cc) Some legal scholars have concluded from the aforementioned Federal Fiscal Court (BFH) ruling of November 3, 2010 (IR 98/09, BStBl. II 2011, 417) that payments to the beneficiaries of a foundation constitute benefits that are economically comparable to profit distributions within the meaning of Section 20 Paragraph 1 No. 1 of the German Income Tax Act (EStG) only if the beneficiaries can directly or indirectly influence the foundation's distribution policy (Bleschick in: Kirchhof/Seer, EStG, Section 20, marginal note 61; Jochum in Kirchhof/Söhn/Mellinghoff, EStG, Section 20, marginal note C/9-14; Ratschow in Brandis/Heuermann, Income Tax Law, Section 20 EStG, marginal note 338a). Werder/Wystrcil (BB 2015, 412, 418) also express doubts about comparability with regard to the lack of membership-based, capital participation in trusts.
56dd) In contrast, the Hamburg Tax Court, in its judgment of August 20, 2021 (6 K 196/20, EFG 2022, 241; appeal pending before the Federal Fiscal Court, VIII R 25/21), interprets the criterion of economic comparability broadly. The wording of the law does not require any influence on the payment. With regard to a foundation, the legislator intended that the distribution of surpluses generated within the scope of the foundation's purpose to the beneficiaries named in the foundation's purpose should be classified as income from capital assets. In this respect, Section 20 Paragraph 1 No. 9 of the German Income Tax Act (EStG) cannot be limited to those who established the foundation or act as its governing bodies. Otherwise, so-called "white income" could occur, which would counteract the equal treatment of foundations with corporations. Donations that comply with the foundation's statutes are subject to income tax, not gift tax.
57 The Hessian Finance Court argued similarly in its legally binding judgment of May 25, 2021 (10 K 707/20, EFG 2021, 1540), stating that the question of whether (one-off) payments from a foreign family foundation are comparable to profit distributions depends exclusively on whether the distribution was offset by consideration from the beneficiary.
58(ee) In the present case, however, the issue is not comparability with profit distributions, but rather with distributions of the final assets after dissolution. In the Senate's view, such comparability exists in the case of the two trusts.
(1) Section 20 paragraph 1 number 9 sentence 1 of the Income Tax Act was only extended by the reference to paragraph 1 number 2 inserted by the Annual Tax Act (JStG) 2007 of 13 December 2006 (Federal Law Gazette I 2006, 2878) to also include the distribution of the final assets upon dissolution. According to the explanatory memorandum to the Act, these are economically comparable to profit distributions and the reference is intended merely for clarification (Federal Council Document 622/06, p. 81 and Federal Parliament Document 16/2712, p. 49). The fact that the Federal Fiscal Court (BFH) did not follow the legislative justification regarding the issue of clarification, with the consequence that in its judgment of February 28, 2018, the distribution of the final liquidation assets of a foundation was not taxable in the tax year 2005 (VIII R 30/15, BFH/NV 2018), is irrelevant in the present case, which concerns the year 2016. Moreover, the flawed legislative justification has no effect on the validity of the formally enacted law.
59(2) The distribution of assets from trusts after their dissolution is comparable to the distribution of liquidation proceeds from a corporation, irrespective of whether the beneficiaries participate in the dissolution or not. The liquidation of a corporation presupposes its dissolution, after which it enters the liquidation phase. Dissolution of a corporation is understood to mean dissolution in the commercial law sense, as defined in Sections 262 and 289 of the German Stock Corporation Act (AktG) and Section 60 of the German Limited Liability Companies Act (GmbHG). A corporation can be dissolved by operation of law or by a resolution of its shareholders (Buge in Herrmann/Heuer/Raupach, EStG/KStG, Section 20 EStG, Note 123; Bleschick in: Kirchhof/Seer, EStG, Section 20, para. 58). Dissolution can occur not only by resolution of the shareholders (dissolution of a GmbH pursuant to Section 60 Paragraph 1 No. 2 GmbHG by shareholder resolution; dissolution of an AG by resolution of the general meeting, Section 262 Paragraph 1 No. 2 AktG). Rather, the law also recognizes grounds for dissolution that do not require the shareholders' involvement, e.g., expiry of the term (Section 60 Paragraph 1 No. 1 GmbHG, Section 262 Paragraph 1 No. 1 AktG), court judgment (Section 60 Paragraph 1 No. 3 GmbHG), or the commencement of insolvency proceedings (Section 60 Paragraph 1 No. 4 GmbHG, Section 262 Paragraph 1 No. 3 AktG). The fact that the participation of the beneficiaries was not required for the distribution of assets in the two disputed trusts, because the articles of incorporation already stipulated that they were to be dissolved upon the death of the plaintiff's father, does not preclude comparability with the distribution of liquidation proceeds in corporations.
60 (3) Furthermore, the payments received by the plaintiff are also economically comparable to distributions of liquidation proceeds. The beneficiaries receive what the trusts have generated from the contributed assets, whether through capital gains or income. The initial assets (the determination of which proves difficult in this case) are deducted, since the repayment of share capital or from the tax equity account is not taxable, even for corporations. Against this background of economic comparability, the Senate – contrary to the plaintiff's view – does not consider it decisive that the assets of the trusts were distributed to the beneficiaries and were not first liquidated, after which only funds would have been available for distribution.
61c) Contrary to the plaintiffs' assertion, the fact that the trusts themselves were not engaged in commercial activity does not preclude the application of Section 20 Paragraph 1 Number 9 of the German Income Tax Act (EStG). Such a limitation cannot be inferred from the wording of the law. Nor does the systematic structure of the law permit a differentiation of income based on the type of income generated by the corporation. Rather, Section 8 Paragraph 1 Sentence 1 of the German Corporation Tax Act (KStG) refers, in principle, to the provisions of the EStG regarding the determination of income. It follows that the provisions of the EStG concerning the determination of surplus income are also applicable in principle if corporations subject to unlimited corporation tax liability within the meaning of Section 1 Paragraph 1 Numbers 3 to 6 of the KStG generate surplus income (Section 2 Paragraph 2 Number 2 of the EStG) (Pfirrmann in: Herrmann/Heuer/Raupach, EStG/KStG, Section 8 KStG Note 22). Accordingly, for the purposes of taxing the individuals behind the corporation under Section 20 of the Income Tax Act (EStG), no distinction is generally made as to the type of income the corporation has generated. The fact that Section 8 Paragraph 2 of the Corporation Tax Act (KStG) establishes a fiction of business income for certain corporations does not alter this.
62d) Finally, the fact that the acquisition of assets upon dissolution of a trust is already covered by the provisions of Section 7 Paragraph 1 No. 9 of the Inheritance Tax Act (ErbStG) as a gratuitous transaction does not lead to a factual exclusion of Section 20 Paragraph 1 No. 9 of the Income Tax Act (EStG). Such an exclusion is not provided for by law and is, in fact, deliberately accepted by the legislator (see Federal Fiscal Court (BFH) judgments of June 25, 2021 – II R 31/19, Federal Tax Gazette (BStBl.) II 2022, 497 and II R 32/19, BFH/NV 2022, 595).
- Section 20 Paragraph 1 Number 9 of the German Income Tax Act (EStG), in the version applicable for the tax year 2016, does not violate Article 25 Paragraph 4 of the Treaty of Friendship, Commerce and Navigation between the Federal Republic of Germany and the United States of America of October 29, 1954 (Federal Law Gazette II 1956, 487). This provision defines the concept of "most-favored-nation treatment" and stipulates that, among other things, nationals and companies of one state may not be treated less favorably in another state than those of any third country. It is not apparent how Section 20 Paragraph 1 Number 9 of the EStG could violate this provision. On the contrary, the provision treats all companies and their shareholders equally, regardless of the company's registered office or the shareholder's nationality.
63 3. There are no constitutional concerns regarding the application of Section 20 Paragraph 1 No. 9 of the Income Tax Act (EStG) in the version valid for the tax year 2016, with regard to the double taxation with inheritance or gift tax pursuant to Section 7 Paragraph 1 No. 9 of the Inheritance Tax Act (ErbStG) on the one hand and income tax on the other.
64 a) According to the Federal Fiscal Court's (BFH) jurisprudence, double taxation by both types of tax is permissible, as demonstrated by the existence of Section 35b of the Income Tax Act (EStG). There is no constitutional principle requiring that all taxes be coordinated and that loopholes and multiple taxation of the same facts be avoided. If double taxation occurs due to the consistent design of each individual tax, this is unavoidable and not unconstitutional. The legislature has thus consistently accepted the double taxation through gift tax and income tax, including the associated hardships. Accordingly, in its judgments of June 25, 2021 (II R 31/19, BStBl. II 2022, 497 and II R 32/19, BFH/NV 2022, 595, each with further references), the Federal Fiscal Court (BFH) ruled on the inheritance tax treatment of Anglo-American trusts pursuant to Section 7 Paragraph 1 No. 9 of the German Inheritance Tax Act (ErbStG) that there are no objections to double taxation with both types of tax. The Senate concurs with the reasoning of this BFH case law, which it considers convincing, and therefore does not follow the criticism expressed in the literature (Tischendorf, IStR 2022, 489, 491 et seq.).
65b) In the present case, it should also be noted that no excessive taxation is apparent. The trustee, the father, was fully exempt from inheritance and gift tax by the exemption certificate issued by the N-Stadt tax office on June 9, 2017. The distributions from the grandfather's trust to the plaintiff were subject to gift tax at a rate of 15% (after deduction of the allowance of €400,000) and income tax at a rate of 25% (after deduction of the estimated initial assets). Thus, after taxes, the plaintiff retained more than 60% of the distributions from the grandfather's trust.
- However, Section 20 Paragraph 1 Number 9 Sentence 2 in conjunction with Sentence 1, second half-sentence in conjunction with Number 2 Sentence 2 of the Income Tax Act violates the constitutional prohibition against retroactive application of law insofar as it covers increases in value from trusts that arose before the promulgation of the Annual Tax Act 2010 on December 8, 2010 (Federal Law Gazette I 2010, 1768) (see a). This unconstitutionality must be remedied by interpreting the law in conformity with the constitution (see b).
- a) Section 20 paragraph 1 no. 9 sentence 2 in conjunction with sentence 1 second half-sentence in conjunction with no. 2 sentence 2 of the Income Tax Act is unconstitutional in its application to the case at hand with regard to increases in value and income accrued up to 8 December 2010.
66 (aa) There is no genuine retroactive effect. The Basic Law (GG) expressly prohibits retroactivity only in criminal law (Art. 103 para. 2 GG). Outside of criminal law, the fundamental prohibition of retroactive, burdensome laws is based on the constitutionally protected interests of those affected, as well as the principles of legal certainty and the protection of legitimate expectations (Art. 2 para. 1 in conjunction with Art. 20 para. 3 GG). It protects confidence in the reliability and predictability of the legal order established under the Basic Law and the rights acquired on its basis. If the legislature subsequently alters the legal consequences of past conduct in a way that is burdensome, this requires special justification under the rule of law and the fundamental rights enshrined in the Basic Law, under whose protection the relevant facts were "brought into being." It would significantly endanger individual freedom if public authorities were permitted to retrospectively impose more burdensome legal consequences on an individual's conduct or circumstances affecting them than those in effect at the time of the legally relevant action. A legal norm has genuine retroactive effect if its legal consequences, with their burdensome effect, are intended to apply to factual situations that were already completed before the time of its promulgation („retroactive application of legal consequences“). This is generally inadmissible under constitutional law. The relevant legal consequence of tax law norms is the creation of a tax liability. In the area of tax law, genuine retroactivity exists only if the legislature subsequently modifies a tax liability that has already arisen. (Federal Constitutional Court decisions of March 25, 2021 – 2 BvL 1/11, BVerfGE 157, 177 and of December 7, 2022 – 2 BvR 988/16, each with further references).
67 In the case at hand, the conditions of Section 20 Paragraph 1 Number 9 of the German Income Tax Act (EStG) were only met with the transfer of assets to the plaintiff in the tax year 2016. The tax liability only arose at the end of 2016 (Section 36 Paragraph 1 in conjunction with Section 25 Paragraph 1 EStG). The law had already been in force for several years at that time.
- bb) However, Section 20 Paragraph 1 No. 9 Sentence 2 of the Income Tax Act (EStG) has a so-called non-genuine retroactive effect with regard to increases in value that had already occurred before the promulgation of the law on December 8, 2010.
68 (1) Insofar as adverse legal consequences of a legal norm only take effect after its promulgation, but are triggered by a factual situation that has already been set in motion („factual retroactivity“), this constitutes a case of non-genuine retroactivity. Such non-genuine retroactivity is not fundamentally inadmissible. Granting complete protection in favor of maintaining the existing legal situation would paralyze the legislature, which is obligated to the common good, in important areas and would resolve the conflict between the reliability of the legal order and the necessity of amending it in light of changing circumstances in an unacceptable manner, to the detriment of the legal order's adaptability. In particular, constitutional protection of legitimate expectations does not extend so far as to protect citizens from every disappointment. Unless there are additional factors warranting protection, the mere general expectation that the applicable law will continue unchanged in the future does not enjoy special constitutional protection. However, insofar as the legislature bases future legal consequences on already implemented facts, it must give sufficient consideration to the constitutionally mandated protection of legitimate expectations. The interests of the general public pursued by the regulation and the individual's reliance on the continued validity of the legal situation must be weighed against each other. The principle of proportionality must be observed. Therefore, retroactive application is compatible with the principles of fundamental rights and the rule of law regarding the protection of legitimate expectations only if it is suitable and necessary to further the purpose of the law and if, in a comprehensive assessment of the weight of the disappointed reliance and the weight and urgency of the reasons justifying the change in the law, the limits of what is reasonable are respected. Even though, in cases of retroactive application, the protection of legitimate expectations—unlike in cases of genuine retroactivity—does not regularly take precedence, the adverse effects of a disappointment of legitimate expectations always require sufficient justification according to the standards of proportionality. The addressee of a legal norm only has to accept a disappointment of their trust in the old legal situation insofar as this is justified by special public interests that specifically justify the reversion to the previous legal situation, while maintaining proportionality. (Federal Constitutional Court decisions of March 25, 2021 – 2 BvL 1/11, BVerfGE 157, 177 and of December 7, 2022 – 2 BvR 988/16, WM 2023, 561, each with further references).
69 The mere possibility of later receiving profits tax-free does not establish a legally protected position based on legitimate expectations. Increases in value cannot be reliably anticipated at the time of acquisition, so the disappointment of hopes for future tax-free increases in assets cannot be considered an impairment of tangible assets (Federal Constitutional Court decisions of July 7, 2010 – 2 BvL 14/02, 2/04 and 13/05, Federal Tax Gazette II 2011, 76, para. 64 and 2 BvR 748/05, 753/05 and 1738/05, Federal Tax Gazette II 2011, 86, para. 52). Accordingly, increases in value that occur only after the promulgation of the law are not covered by the protection of legitimate expectations. The extension of the speculation period in Section 23 of the Income Tax Act and the reduction of the materiality threshold in Section 17 of the Income Tax Act therefore do not raise any constitutional concerns, insofar as they cover future increases in value.
70 However, this must be assessed differently for increases in value that could have been realized tax-free up to the date the law was promulgated. In this respect, an increased need for justification arises from the acquisition of a specific asset portfolio through the expiration of the two-year holding period for real estate or from the occurrence of interim increases in value when holding shares in corporations up to 251,000 (Federal Constitutional Court decisions of July 7, 2010 – 2 BvL 14/02, 2/04 and 13/05, Federal Tax Gazette II 2011, 76, para. 66 and 2 BvR 748/05, 753/05 and 1738/05, Federal Tax Gazette II 2011, 86, para. 54). The mere intention to generate more state revenue is not, in itself, a public interest that overrides the legitimate expectations of affected taxpayers. because this would mean that the protection of legitimate expectations against retroactive tax increases in tax law would be practically rendered meaningless (Federal Constitutional Court decisions of 7 July 2010 – 2 BvL 14/02, 2/04 and 13/05, BStBl. II 2011, 76, para. 75 and 2 BvR 748/05, 753/05 and 1738/05, BStBl. II 2011, 86 para. 60 of 25 March 2021 2 BvL 1/11, BVerfGE 157, 177, para. 87). Aspects of combating abuse and closing tax loopholes do not constitute grounds for justification (Federal Constitutional Court decision of 7 July 2010 – 2 BvR 748/05, 753/05 and 1738/05, Federal Tax Gazette II 2011, 86, para. 61 et seq.).
71 (2) In the present case, the plaintiff had a secure financial position within the meaning of the case law of the Federal Constitutional Court until the introduction of the law promulgated on 8 December 2010.
72 (a) According to the trust deeds, the applicant was one of the beneficiaries. Neither the founders nor any other person had the power to remove the trust assets or to remove the applicant from the trusts' beneficiary status. In the present case, the situation is further complicated by the fact that, during her father's lifetime, the applicant had no means of disposing of the trust assets and thus no opportunity to react to any pending changes in the law – for example, by prematurely terminating the trust or selling her share. The timing of the income was solely dependent on her father's death.
73 (b) Contrary to the defendant's view, the possibility that the plaintiff died before her father does not preclude the assumption of a concretely established asset position in this sense. In that case, her children would have succeeded to the plaintiff's asset position as her legal successors. In this respect, there is no difference to the cases decided by the Federal Constitutional Court. The owner of a property or the shareholder of a corporation could also have died before a (planned) sale. In that case, his legal successors could likewise have invoked the principle of legitimate expectations. In the Senate's view, there is no difference whether the legal succession is already stipulated in the articles of incorporation or occurs through inheritance (statutory or testamentary) universal succession.
74 (c) Contrary to the defendant's view, the fact that the plaintiff did not hold a position under civil or corporate law does not preclude a sufficiently consolidated asset position. The decisive factor for the fulfillment of the requirements of Section 20 Paragraph 1 No. 9 Sentence 2 of the German Income Tax Act (EStG) is the economic independence of the trusts and the resulting comparability with domestic taxable corporations. If the law treats the plaintiff accordingly, like a shareholder of a taxable corporation, the same must apply to the examination of the protection of legitimate expectations.
75 (3) The introduction of Section 20 Paragraph 1 No. 9 Sentence 2 of the Income Tax Act is not constitutionally justified insofar as the provision also covers increases in value and income in the past and thus has retroactive effect.
76 (a) The explanatory memorandum to the law does not provide sufficient grounds for a constitutional justification. The legislator justifies the inclusion of foreign corporations by arguing that it is not justified to include only payments from domestic corporations. Since dividends are also covered in principle by Section 20 of the Income Tax Act (EStG) even if they originate from a foreign debtor, Section 20(1)(9) EStG must also apply to comparable foreign corporations (Federal Council Document 318/10, p. 77; Federal Parliament Document 17/2249, p. 52). The explanatory memorandum to the draft law contains no further justification, particularly with regard to the retroactive inclusion of capital gains and accrued income. Insofar as the legislator intended the reference in Section 20 Paragraph 1 No. 9 Sentence 1 of the Income Tax Act (EStG) to Paragraph 2 by the Annual Tax Act 2007 of December 13, 2006 (Federal Law Gazette I 2006, 2878) to merely serve a clarifying function (Federal Council Document 622/06, p. 81 and Federal Parliament Document 16/2712, p. 49), this reasoning is incorrect according to the Federal Fiscal Court (BFH), a view shared by the present panel (BFH judgment of February 28, 2018, VIII R 30/15, BFH/NV 2018, 857). Rather, the Annual Tax Act 2007 established for the first time a tax liability for the distribution of liquidation assets. The legislator has not provided any further justifications.
77 (b) The justifications put forward by the defendant are also unconvincing. While it is true that payments to beneficiaries of foundations have been subject to tax under Section 22 No. 1 of the Income Tax Act since 1986, this provision only applies to ongoing payments in the form of recurring income and not to the distribution of the final liquidation assets. Although including the latter may serve the purpose of equal treatment of economically comparable transactions, this ultimately amounts to closing a tax loophole, which, according to the established case law of the Federal Constitutional Court, is not sufficient justification for retroactive application.
78 (c) Insofar as the defendant relies on the judgment of the Hessian Tax Court of May 25, 2021 (10 K 707/20, EFG 2021, 1540), it is true that no constitutional concerns regarding Section 20 Paragraph 1 No. 9 of the German Income Tax Act (EStG) were raised therein. However, the case decided there did not concern the distribution of the final assets after the dissolution of the foreign family foundation. Rather, the Hessian Tax Court relied solely on Section 20 Paragraph 1 No. 9 in conjunction with No. 1 of the EStG and not on No. 2. In the present case, however, the constitutional issue arises solely from the distribution of the final assets, with respect to which the plaintiff held a vested asset position. Whether – as the defendant argues – equal treatment of profit distributions and the distribution of final assets is required in light of the issue of retroactive effect, the Senate does not need to decide, since the case at hand concerns exclusively the distribution of final assets. The question of whether the inclusion of payments from accumulated income comparable to profit distributions is (partially) unconstitutional is therefore irrelevant to the decision.
79 (d) The Senate also does not need to decide whether the introduction of Section 20 Paragraph 1 No. 9 of the Income Tax Act served to eliminate an unconstitutional situation with regard to the unequal treatment of income from domestic and foreign corporations. Firstly, the legislature itself did not aim to eliminate an unconstitutionality (see (a) below). Secondly, any unconstitutional unequal treatment could have been eliminated in ways other than by retroactively taxing already accrued capital gains. Ultimately, the legislature's sole aim was to close a tax loophole, which is permissible for the future but – as already explained – cannot justify the retroactive inclusion of an established asset position in the taxation.
80 (4) The Federal Constitutional Court's judgment of April 10, 2018 (1 BvR 1236/11, BVerfGE 148, 217), cited by the defendant, does not contradict the Senate's view. That case concerned the introduction of Section 7 Sentence 2 No. 2 of the Trade Tax Act by the Fifth Act Amending the Tax Officials Training Act and Amending Tax Laws, which subjected profits from the sale of partnership interests to trade tax at the partnership level from 2002 onwards. While the Federal Constitutional Court addressed the issue of retroactive effect in that decision, it did not consider whether increases in value that had already accrued before the law's promulgation were protected by the principle of legitimate expectations.
81However, the Senate does not conclude from this that the Federal Constitutional Court intended to depart from its decisions of July 7, 2010 (2 BvL 14/02, 2/04 and 13/05, BStBl. II 2011, 76 and 2 BvR 748/05, 753/05 and 1738/05, BStBl. II 2011, 86). This would have required a more thorough examination of the aforementioned case law. Rather, in its more recent decision of March 25, 2021 (2 BvL 1/11, BVerfGE 157, 177), the Federal Constitutional Court confirmed the principles of the decisions of July 7, 2010, and, based on these principles, declared Section 11 Paragraph 2 Sentence 3, first half-sentence of the Income Tax Act partially unconstitutional. The Senate considers it more appropriate to apply the Federal Constitutional Court's case law on the income taxation of private assets, and not the judgment concerning the trade tax of partnerships, to the present case, especially since the Federal Constitutional Court elaborated on the special features of the trade tax treatment of co-entrepreneurships and corporations in that judgment (Federal Constitutional Court judgment of 10 April 2018 – 1 BvR 1236/11, BVerfGE 148, 217, para. 27 et seq.).
82 b) The Senate refrains from referring the matter to the Federal Constitutional Court pursuant to Article 100 Paragraph 1 of the Basic Law. Instead, it interprets Section 20 Paragraph 1 No. 9 Sentence 2 in conjunction with Sentence 1, second half-sentence, in conjunction with No. 2 Sentence 2 of the Income Tax Act in a manner consistent with the Constitution, such that, in the case of the distribution of the final assets of a foreign trust, only those payments that arose after the promulgation of the Annual Tax Act 2010 on December 8, 2010, are included.
83 (aa) This is not contradicted by the fact that the wording of the law provides no support for such an interpretation. According to the established case law of the Federal Constitutional Court and the specialized courts (see the references in Drüen in Tipke/Kruse, AO, FGO, § 4 AO para. 355) and according to the prevailing legal doctrine, the courts are entitled and obligated to develop the law (supplementarily). If, in exceptional cases, a literal interpretation of the law leads to an absurd result, i.e., if there is a divergence between the wording of the law and its purpose, the courts are even called upon to develop the law by amending the wording of the law. The instruments used in this process are teleological reduction and extension (Federal Fiscal Court judgment of March 23, 2011 – XR 28/09, BStBl. II 2011, 753, para. 18). The courts apply a constitutionally compliant interpretation, particularly in cases involving retroactive application. This applies in particular to transitional provisions that are too broad – and thus contain hidden gaps – and that also cover factual situations for which the legislator – had they considered them – would have enacted a special application rule to avoid an unconstitutional retroactive effect. Such a hidden regulatory gap must be closed by way of supplementary legal development by adding the constitutionally required restrictions to the wording of the law (Federal Fiscal Court judgment of March 27, 2012 – IR 62/08, Federal Tax Gazette II 2012, 745, para. 18). Accordingly, the courts sometimes even adopt a constitutionally compliant interpretation that contradicts the clear wording of the law (Federal Fiscal Court judgment of June 18, 2009 – VI R 14/07, Federal Tax Gazette II 2010, 816, para. 24 et seq. on the application of the deduction prohibition under Section 12 No. 5 of the Income Tax Act to a second course of study; Federal Fiscal Court judgments of December 12, 2000 – VIII R 10/99, Federal Tax Gazette II 2001, 282; of March 25, 2004 – IV R 2/02, Federal Tax Gazette II 2004, 728 and of October 19, 2005 – IR 34/04, Federal Fiscal Court/Non-Official Reports 2006, 1099: constitutionally compliant restriction of Section 4 para. 2 sentence 2 of the Income Tax Act (balance sheet change) for Periods prior to 1999; Federal Fiscal Court (BFH) judgments of December 14, 2006 – III R 27/03, Federal Tax Gazette (BStBl.) II 2007, 332: no restriction of the investment allowance pursuant to Section 3 Paragraph 1 Sentence 2 of the Investment Allowance Act if the investments had already commenced before the final adoption of the amendment to the law, and of March 23, 2011 – XR 28/09, Federal Tax Gazette (BStBl.) II 2011, 753: excess withdrawals within the meaning of Section 4 Paragraph 4a of the Income Tax Act (EStG) of the calendar year 1998 are not to be taken into account).
84 bb) With regard to the reduction of the participation threshold from 10 % to 1 % in Section 17 of the Income Tax Act (EStG) by the Tax Reduction Act of October 23, 2000 (Federal Law Gazette I 1433), which is comparable to the present case and the cases decided by the Federal Constitutional Court on July 7, 2010 (Federal Constitutional Court decisions of July 7, 2010 – 2 BvL 14/02, 2/04 and 13/05, Federal Tax Gazette II 2011, 76 and 2 BvR 748/05, 753/05 and 1738/05, Federal Tax Gazette II 2011, 86), the tax authorities themselves even adopt a constitutionally compliant interpretation (Federal Ministry of Finance letter of December 20, 2010, Federal Tax Gazette I 2011). 16 under D.; see also Lower Saxony Fiscal Court, judgment of 28 February 2012, 12 K 10250/09, EFG 2012, 1337; Schmidt in: Herrmann/Heuer/Raupach, EStG/KStG, § 17 EStG note 10; critical: Düsseldorf Fiscal Court, judgment of 16 April 2013, 13 K 4190/11 E, Juris, para. 27).
85 (cc) In the present case, the Senate considers a corresponding, constitutionally compliant interpretation of Section 20 Paragraph 1 No. 9 of the Income Tax Act (EStG) to be necessary, such that the distribution of final assets after the dissolution of foreign corporations is not subject to the taxation insofar as it includes increases in value that arose before the promulgation of the law on December 8, 2010. Due to the unjustifiable retroactive effect with regard to the taxation of increases in value before December 8, 2010, it must be assumed that the legislator – had he recognized the retroactive effect – would have made a corresponding limitation of the statutory provision.
86 5. The tax reduction to be made thereafter amounts to xy €.
87 a) In the present case, a constitutionally compliant interpretation leads to the conclusion that only the increases in value from December 8, 2010, until the transfer of assets to the plaintiff in 2016 are taxable. These amount to – which is undisputed between the parties – www €. The amount of kkk € previously assessed by the defendant is therefore to be reduced by fff € and the tax at the tax rate of 25% (§ 32d para. 1 sentence 1 EStG) by xy €.
88 b) Due to the interpretation carried out by the Senate in conformity with the constitution, the question disputed between the parties as to whether and, if so, to what extent additional initial assets should be taken into account is no longer relevant.
89 c) Contrary to the plaintiffs' assertion, a further reduction with regard to securities acquired before January 1, 2009, is not possible. For the disposal events under Section 20 Paragraph 2 of the German Income Tax Act (EStG), Section 52 Paragraph 28 Sentences 11 et seq. EStG stipulates application only to shares or rights acquired after December 31, 2008. However, the relevant provision in this case, Section 20 Paragraph 1 No. 9 EStG, is not covered by this application rule.
90 d) The losses from the sale in the tax year 2016 of the securities received by the plaintiff after the dissolution of the trusts are to be recognized in the declared and taken-in amount of €vvv. A constitutionally compliant interpretation does not result in any change to the values to be recognized as acquisition costs pursuant to Section 20 Paragraph 4 of the German Income Tax Act (EStG) at the time of acquisition by the plaintiff. This is also not in dispute between the parties.
91II. The decision on costs is based on Section 136 Paragraph 1 Sentence 1 of the German Fiscal Court Code (FGO). The decision on provisional enforceability is based on Sections 151 Paragraph 3, 155 FGO in conjunction with Sections 708 No. 10, 711 of the German Code of Civil Procedure.
92III. The appeal on points of law is admitted due to the fundamental importance of the legal issue (§ 115 para. 2 no. 1 FGO).