How are such structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?
Private Client (3rd edition)
- Domestic trusts
In Colombia only those companies duly authorized by the Colombian financial authority (Superintendencia Financiera de Colombia) may offer trust services and act as trustees (i.e. compañías fiduciarias). Such entities are subject to SFC supervision and regulation.
Colombian tax law treats local trusts as flow-through entities for tax purposes. Thus, trusts must determine their profits annually and the beneficiaries have to include such profits in their own income tax returns for that same year and pay the relevant taxes.
The title to the assets that an individual contributes to the trust fund must pass to the trust fund (exceptions apply – for example, for the guarantee trust) or otherwise such assets would have to be declared by the individual as part of her/his equity and thus be subject to net worth taxes.
Additionally, if the individual receives fiduciary rights over the trust fund because of said contribution, he or she would be obliged to report such rights for Colombian income tax purposes.
Whenever the settlor or any of the beneficiaries receive income from the trust, they must pay the relevant taxes in Colombia. Income tax regulations establish that the results of any activities of the trust and all equity increases must be included in the income tax return of the beneficiaries.
- Foreign structures
There are no civil or commercial regulations regarding the establishment of foreign trusts, private foundations and life insurance policies. However, these are recognized by Colombian tax law and tax authorities.
Colombian tax residents are subject to income tax based on their worldwide source income. Therefore any distributions made by a foreign trust/foundation would be subject to income tax in Colombia at a 10% rate. As from FY 2019, life insurance indemnities are taxed as capital gains, only on the amount that exceeds 12.500 Tax Value Units (approx. USD 129.000).
If a trust/foundation is revocable and controlled by the settlor, then it would be considered as a CFC under Colombian law. Hence, net profits derived from passive income obtained by the trust/foundation shall be recognized immediately in proportion equivalent to the participation in the foundation/trust's capital or profits, and not upon receipt of profits. Which means, no tax deferral would be applicable in this case.
Colombian tax residents shall report on their income tax returns the passive income realized by the trust/foundation, considering the nature and characteristics of said income, as if it was received directly by them.
Assets held by a trust/foundation (which is revocable and directed) are understood to be directly held by the settlor and shall be reported in their Colombian income tax returns, as well as their foreign assets return (Form 160) as part of their own equity. If the characteristics of the trust/foundation are different, the reporting obligation could be of the settlor. This analysis should be carried case by case.
If the underlying assets of an irrevocable and discretionary trust/foundation cannot be attributed to the beneficiaries, the latter must be reported by the settlor. This, without any consideration of the trust/foundation's irrevocable and discretionary character.
From an income tax perspective, (foreign law) trusts (resident or not) can be subject to three different regimes. They can be (i) separate taxable persons subject to corporate income tax; (ii) subject to a transparency regime whereby the income of the trust is computed at the level of the trust but then imputed to the beneficiary (if the beneficiary has a right to the trust income); or (iii) wholly disregarded (this is the case for e.g. revocable trusts).
From an inheritance and gift tax perspective, according to the tax authorities’ view, the addition of assets to the trust fund is a taxable event. Tax rates and exempt amounts are computed based on the family relationship between the settlor and the beneficiaries.
The tax regime of foundations is similar to the tax regime of trusts.
Italian non-commercial partnerships are subject to a transparency regime, which allows preserving certain beneficial features of individual taxation (e.g. flat rates on most income and gains from financial assets and no taxation of capital gains on real property after a 5-year holding period).
Life insurance policies are exempt from inheritance tax and they allow the deferral of income tax upon the redemption or the death of the insured person. They also qualify for the 26% income tax rate upon redemption/death (12.5% rate to the extent that the underlying income and gains consist of income and gains from public bonds issued by Italy or white listed States).
Cyprus International Trusts (CIT) enjoy a tax status that provides significant opportunities.
Income, gains and profits of a CIT deriving from non-Cyprus sources are exempt from income tax, capital gains tax, special defence contribution, or any other levy, provided that the beneficiaries are non-Cyprus tax residents. In this case, only the income and profits earned from sources within Cyprus will be subject to taxation imposed in Cyprus.
In cases where the beneficiaries are Cyprus tax residents, Cyprus tax will be imposed on worldwide income.
No estate duty or inheritance tax is imposed in Cyprus.
Stamp duty of EUR 430 is payable at the creation of the CIT.
a. Please refer to the answer to Question 2 above for information relating to salaries tax and profits tax. Hence, the settlor, founder and the beneficiaries are not subject to tax in relation to gift, gains or income of the trust.
b. Trustee, on the other hand, is taxable on its trustee fees for acting as a trustee, so as the directors on its directors’ remuneration (if any) for providing directorship services to the underlying companies.
c. If the trust conducts any trade, profession or business in Hong Kong and engages in any property transactions through underlying companies, then the companies are, like any other standalone companies, subject to the normal profits tax and property tax.
As a starting point, it is important to mention that as indicated before, for Mexican legal purposes the Fideicomiso is a contract that lacks legal personality, so it is never considered as a taxpayer. Instead, Mexican law attributes the tax burden to either the beneficiary or the trustor, as the case may be, and even in some specific cases assigns different obligations to the fiduciary institutions.
In order to know who the taxpayer in each fideicomiso is and in what cases the fiduciary institution has different obligations, it is important to distinguish whether the fideicomiso carries out or not business activities.
• Fideicomiso with business activities
It is considered that a fideicomiso carries out business activities whenever it carries out commercial, industrial, agricultural, livestock, fishing or forestry activities.
In accordance with Mexican Laws, when business activities are carried out through a Fideicomiso, the fiduciary institution shall determine in the terms of the legal entities, the result or the tax loss of said activities in each tax year and shall perform on behalf of the set of beneficiaries the obligations indicated in the Law, including the one of making the advance payments.
However, there is a regulated exception in our legal order, since a fideicomiso that carries out business activities can be exempted from the previous obligations provided that at least ninety percent of the total income obtained through the fideicomiso, during the tax year in question, comes from passive income.
In the case of fideicomisos that carry out business activities, the tax is attributed to the beneficiaries, except in cases where there is no beneficiary, or they cannot be identified, in which case it will be understood that the business activities carried out through the fideicomiso are performed by the trustor.
In these cases, the beneficiaries (or the trustor, if applicable) shall accumulate to their other income for the year, the part of the tax result derived from the business activities carried out through the fideicomiso that corresponds to them, and they can credit in that proportion the amount of the advance payments made by the fiduciary institution.
• Fideicomiso without business activities
If the fideicomiso does not carry out business activities, it is considered as a transparent structure for tax purposes, and the fiduciary institution has no obligation other than calculate the percentage of participation that each of the settlors or beneficiaries (depending on whatever it is a revocable or irrevocable fideicomiso, as explained below) have in both the profits and the losses (or, if applicable, deductions) of the fideicomiso, for the purpose of each individual accruing said income in accordance to their corresponding schedular regime and calculate its general tax base for the year.
For purposes of knowing who the taxpayer in this type of trust is, it is important to determine if it is a revocable or irrevocable trust, since from this will depend to whom the generated income is attributed.
For tax purposes, the fideicomiso will be revocable when the trustor reserves the right to reacquire ownership of the assets that were contributed to the fideicomiso (right of reversion).
For its part, the fideicomiso will be irrevocable when the trustor does not have the right to reacquire ownership of the assets that were contributed to the fideicomiso.
The above distinction is of great importance, since it will condition that the constitution of a fideicomiso is considered as an assumption of alienation in favor of the beneficiary (there will be alienation if the trust is irrevocable, either from the moment of its constitution or when the trustor loses the right of reversion) and will determine to whom the tax burden of the fideicomiso will be attributed.
If the fideicomiso is revocable, it is considered that the income generated through it is received by the trustor, for which reason he is the one liable to pay the tax. Otherwise, if the fideicomiso is irrevocable, it is considered that the income is received by the beneficiary, so the tax burden is transferred.
As an example of this, Mexican Law establishes that in the fideicomiso operations for which the temporary use or enjoyment of real estate is granted, the income is attributed to the trustor even if the beneficiary is a different person, except in the cases of irrevocable trusts, in which case the income is attributed to the beneficiary from the moment the trustor loses the right to reacquire the real estate.
The income of trusts may be taxed in the hands of the trustees or beneficiaries depending on the kind of trust. Trustees are considered the representative assessees of a trust. In the case of a specific trust where the identity and share of the beneficiaries are known, tax is levied on the trustees or beneficiaries based on the individual slab rates of the beneficiaries. In the case of a discretionary trust or business trust, the trust is taxable at the maximum marginal rate. If the trust is a revocable trust, the settlor is taxable on the income of the trust. Further, a trust involves a single layer of tax and therefore, there should be no tax consequences on distributions to beneficiaries.
- Revocable trusts/foundations: income and wealth are attributed to the settlor and taxed at the settlor's level. No taxes are levied on endowments/distributions.
- Irrevocable fixed interest trusts/foundations: income and wealth are attributed to the beneficiaries and taxed at the beneficiaries' level. No taxes are levied on endowments/distributions.
- Irrevocable discretionary trusts/foundations: income and wealth cannot be attributed to settlor or beneficiaries. Distributions to Liechtenstein tax residents are taxed with income tax at the individual tax rate. Donations are taxed at a rate of 10.5%. Trusts/foundations can opt-in for wealth tax and donations and distributions are consequently tax exempt.
- trustees are not taxed as the tax law follows an economic approach.
Trusts made in accordance with Law n°214 are subject to a specific tax regime.
All property, wherever it may be, that is put in the trust is subject to the following duty arising on the creation or transfer of the trust in the Principality:
• 1 beneficiary: 1.30%;
• 2 beneficiaries: 1.50%;
• 3 or more beneficiaries: 1.70%.
There is a possibility to opt for an annual tax of 0.20%.
Monegasque securities are subject to a reduced duty of: 0.05%; 0.25%; or 0.45%.
Single or multi-family offices can become subject to corporate tax in the event that they carry out commercial or industrial activities generating more than 25% of their turnover outside Monaco.
Corporate tax is levied on the basis of the following rates:
• 31% for the fiscal year commencing on 1 January 2019;
• 28% for the fiscal year commencing on 1 January 2020;
• 26.5% for the fiscal year commencing on 1 January 2021;
• 25% for fiscal years commencing on or after 1 January 2022.
There is no other specific tax regime.
There are no special tax rules for settlors, founders, trustees, directors or beneficiaries of such structures and thus, the general tax rules described above shall be applied.
Tax treatment and compliance rules applicable may vary significantly in accordance with the structure chosen.
In general, the Family undertakings may be subject to CIT. In addition, distributions to Beneficial Owners may be subject to tax.
Russia does not recognise any forms of trusts. With regard to the recently established form of fund, the inheritance fund, there is no absolute certainty of taxation of this fund yet. We are of the opinion that in the absence of a specific tax regime (especially, in relation to the fund’s distributions) general provisions of the Tax Code related to the income of non-profit organizations applies (Art. 146, 149, 251 of the Tax Code).
Endowments are regarded as non-profit organisations, and in principle are not subjected to the corporate income tax (unless they earn income through selling goods or services, which would be very uncommon).
Endowments the purpose of which is charity or other public benefit are exempt on any taxation upon receiving gifts, donations, and other free-of-charge receipts of assets, including by way of a Will.
Tax laws do not provide for any different treatment of individuals on the basis that such individuals are members, directors or beneficiaries of an endowment.
Swiss family foundations are legal entities and subject to profit and capital taxes in Switzerland usually at reduced rates. The transfer of assets to family foundations is usually subject to Swiss inheritance or gift taxes if the testator/donor is resident in Switzerland or if Swiss real property is transferred. Distributions to beneficiaries may be subject to income or gift tax. In some cantons distributions are tax-exempt under certain conditions.
For the tax treatment of trusts, see question 22.
Domestic trusts are generally either ‘grantor trusts’ or ‘non-grantor trusts.’ Grantor trusts are trusts that are disregarded for income tax purposes, so that all items of income, gain, expense and loss are attributable to the grantor thereof and not to the trust. To be a grantor trust, the trust must contain certain IRS-approved provisions. Grantor trust status may confer beneficial treatment upon a trust in that all gains in the trust are taxed to the grantor and not to the trust, thereby allowing the trust to grow tax-free while it remains a grantor trust. There are ways in which grantor trust status may be turned off during the grantor’s life, so that future earnings are taxed to the trust. If not turned off previously, grantor trust status ends upon the death of the grantor. Non-grantor trusts are taxed on their income and gains. Distributions from a non-grantor trust to a beneficiary generally carry out distributable net income (DNI) to the beneficiary. Because trust tax brackets are more compressed than those for individuals, carrying out DNI to a beneficiary may result in a lower tax than if the income were taxed at the trust level.
Generally, private foundations are required annually to pay out an amount equal to at least 5% of their assets for charitable purposes, which includes, for grant-making foundations, grants to public charities. In addition, private grant-making foundations must pay an excise tax of 2% of net investment income; that tax may be reduced by 1% if the annual payment for charitable purposes is increased by at least 1%.
Single member LLCs are not required to file US income tax returns; their income is taxed to their member. However, single member LLCs owned by foreign persons must file an information return with the IRS when certain reportable transactions (such as capital contributions, withdrawals or sales) occur. Multimember FLPs and LLCs are required to file US income tax returns and are subject to US income tax on their earnings; generally their income is passed out to their partners or members. Certain non-corporate taxpayers, including multimember FLPs and LLCs, may deduct up to 20% of their "qualified business income" (generally, domestic business income from a "qualified trade or business"), subject to certain limitations in calculating their taxable income.
Generally, a settlor would not be subject to income tax in respect of the assets divested into the trust. Trustees (whether an individual or company) are subject to tax at the prevailing corporate rate (currently 17%). If income tax has been imposed on the trust, distributions by the trustee will be regarded as capital and not subject to further Singapore income tax in the hands of the beneficiaries. Trusts can be accorded tax transparency in respect of a beneficiary who is entitled to the trust income and is resident in Singapore (in other words, the trustee is not subject to tax at the trustee level, and instead, the beneficiaries are subject to tax). There are also specific tax incentives and tax exemptions that may apply to trusts.
Trusts (including foundations) are subject to Israeli taxation and reporting obligations if they have at least one Israeli tax resident settlor, or beneficiary, or have an Israeli asset. Whereas the extent of the taxation depends upon the type of the trust taxed, as further described below, in principle and similar to the taxation of individuals described above an Israeli tax resident trust is liable to tax on its world-wide income, while a non-Israeli tax resident trust (i.e., a trust that has no Israeli tax resident settlor and/or Israeli tax resident beneficiaries, and never had any Israeli tax resident beneficiary) is only subject to tax on its Israeli-sourced income.
Following are the different types of trusts for tax purposes and their applicable tax regimes:
(a) Israeli Resident Trust: A trust qualifies as an Israeli Resident Trust, and thus subject to tax in Israel on its worldwide income (as per the applicable individual’s tax rate, detailed above), if: (i) at the date of the trust’s settlement there was at least one Israeli tax resident settlor and one Israeli tax resident beneficiary, and in the assessed tax year there is one Israeli tax resident settlor, or one Israeli tax resident beneficiary; or (ii) all the trust’s settlors have passed away, and in the assessed tax year at least one beneficiary is an Israeli tax resident.
(b) Israeli Beneficiary Trust: A trust qualifies as an Israeli Beneficiary Trust, and thus subject to tax in Israel on its worldwide income (as per the applicable individual’s tax rate, detailed above), if it: (i) was settled by a non-Israeli tax resident who continued to be a foreign resident from the date of the trust’s settlement until the date of tax assessment and (ii) has at least one Israeli beneficiary.
(c) Relatives Trust: A trust qualifies as an Israeli Relatives Trust, and thus enjoys reduced tax rates, if: (i) the settlor is the beneficiaries’ parent, grandparent, spouse, child or grandchild; if the settlor and the beneficiaries are relatives of second degree, including siblings, siblings' issues, or parents' siblings, the assessing officer is to check and confirm that the trust and any contributions thereto were made in good faith and that no beneficiary has paid any consideration in order to be entitled to the trust's assets; and (ii) the settlor of the trust is still alive in the relevant tax year.
At the trustee’s irrevocable election, a Relatives Trust is subject to tax in Israel of either: (i) 30% of all distributions sourced from income generated and produced outside of Israel and distributed to Israeli beneficiaries, unless the distribution originates from the principal funds of the trust, which distribution is tax exempt; or (ii) 25% of all the trust's income generated or produced outside of Israel; and in such a case, any distributions made therefrom are tax-exempt. Income generated or produced in Israel is subject to tax in Israel at the tax rates applicable to individual taxpayers (described above).
(d) Foreign Resident Beneficiary Trust: A trust qualifies as a Foreign Resident Beneficiary Trust, and thus enjoys a tax exemption, if: (i) it is not an Israeli Resident Trust or a Testamentary Trust; (ii) it is deemed an irrevocable trust under the Israeli Income Tax Ordinance; (iii) all its beneficiaries are identified non-Israeli tax residents (in this respect, a yet to be born beneficiary is deemed to be identified); (iv) at least one of its settlors is an Israeli tax resident (including, a settlor who was an Israeli tax resident upon passing away); and (v) the trust’s terms specifically state that an Israeli beneficiary cannot be added to the class of beneficiaries. However, a Foreign Resident Beneficiary Trust is subject to Israeli taxation on its income generated or produced in Israel as per the tax rates applicable to individual taxpayers (described above).
(e) Testamentary Trust: A trust qualifies as a Testamentary Trust if: (i) it was settled under a deceased person’s valid will; and (ii) all the deceased settlors were Israeli tax-residents when passing away.
A Testamentary Trust is subject to Israeli taxation depending on the beneficiaries’ tax residency. If at least one beneficiary is an Israeli tax resident, the trust is subject to tax in Israel on its worldwide income (as per the tax rates applicable to individual taxpayers); otherwise - it is tax-exempt in Israel, except for income generated or produced in Israel which is subject to the tax rates applicable to individual taxpayers (described above).
(f) Foreign Residents Trust: A trust qualifies as a Foreign Residents Trust, and thus enjoys a tax exemption, if (i) all its settlors and beneficiaries are non-Israeli tax residents, and there were no Israeli tax resident beneficiaries since the settlement of the trust; or (ii) all its settlors passed away, and there were no (and currently are not) Israeli tax resident beneficiaries since the settlement of the trust. A Foreign Settlor Trust is tax-exempt in Israel on its worldwide income, except for income generated or produced in Israel which is subject to the tax rates applicable to individual taxpayers (described above).
It should be noted that in addition to the taxation of trust’s income, distributions from the trust are taxed separately. While distributions from a Foreign Resident Beneficiary Trust, as well as from Testamentary Trust, are tax exempt in Israel, the distributions from an Israeli Resident Trust, an Israeli Beneficiary Trust, and a Foreign Residents Trust are subject to Israeli taxation in the same manner as if the assets or funds distributed were transferred directly from the settlor to the beneficiaries (currently, except for real estate transfers, there is no gift tax on bona-fide gifts, provided the donee is an Israeli tax-resident).
Originally the only tax law referring to trusts was article 120-9° of the French tax code which provides that distributions of income made by trusts are assimilated to dividends from foreign sources. The Law of 29 July 2011 (Trust Tax Law) introduced a comprehensive wealth, gift and inheritance tax regime.
The tax regime of trusts currently applicable in France can be summarised as follows.
20.1 Income tax
- Income tax on the trustee
Trustees investing in France in their capacity as trustees of foreign trusts are taxable on income and capital gains as apparent owners of the trusts’ assets. The applicable regime depends on the quality of the trustees. Individual trustees owning directly French assets are taxable in France as explained in 2.2. Corporate trustees are subject to the tax treatment applicable to foreign corporations.
Finally, when the trustees (individual trustees or corporate trustees) use intermediate companies to own French located assets (see our comments in § 21), the French tax treatment depends on the tax regime applicable to the intermediate company.
As a consequence, assuming, for example, a pass through French company (“société civile immobilière “SCI”) is used by the trustee to own a French real estate, individual income tax rules would apply if the trustee is an individual trustee and corporate tax rules would apply if the trustee is a corporation.
Rental income received by a corporation (French or foreign) is subject to corporation tax at the rate of 28 % (progressively reduced to 25% from 2018 to 2022). Because the taxable basis for corporate tax is determined in depreciating the building, the taxation of rental income is, as a general rule, less expensive for corporation than for individuals despite the limitation of interest which only applies for corporation tax purposes.
Financial income received by foreign companies are subject to a withholding tax at the rate of 30%. Certain exemptions or reduction of rates apply depending on the country of residence of the companies.
Capital gains taxation is also different depending on the quality of the trustee (individual or corporation). Individual trustees are taxable as explained in §2.2. Corporate trustees are subject either to corporation tax at the current rate of 28 % (progressively reduced to 25% from 2018 to 2022) or to withholding taxes depending on the nature of the capital gains realised and the country of residence of the trustee.
- Income tax on the beneficiaries
When the income generated by the trust is distributed by the trustees to French resident beneficiaries either at the trustees’ discretion or because the beneficiaries have a vested entitlement to the income, the latter are subject to French tax under the provisions of Article 120-9° of the French Tax Code.
Distributions of capital or accumulated income and gains upon the death of the original settlor are not subject to income tax but to inheritance tax (see below).
According to this article, distributions made by trusts are assimilated to dividends from foreign sources. Irrespective of the nature of the income generated by the trust property (dividends, interest, capital gains…), distributions of trust income to French resident beneficiaries are subject to income tax and social contributions at a flat rate of 30% (including income tax at the flat rate of 12.8% and social contributions at the rate of 17.2%). The beneficiary may however elect for the application of the progressive scale rates (up to 45%) and social contributions (at the rate of 17.2%).
- Application of the CFC rules to trusts
Article 123 bis of the French tax code provides in substance for the taxation, under specific conditions, of all undistributed income capitalized within “entities” established in low tax jurisdictions, in the hands of their beneficial owners who are French resident individuals.
The Constitutional Court ruled in a decision of 1st March 2017 that the difference in treatment depending on the jurisdiction where the “entity” is established was contrary to the principle of equality before public burdens.
As a result, French tax resident settlors and/or beneficiaries of non-EU trusts are now allowed to bring the proof that the trust was not created for tax avoidance purpose in order to avoid application of the CFC rules.
Similarly, assuming Article 123 bis of the French tax code should apply, French tax resident settlors and/or beneficiaries of trusts established in jurisdictions having no exchange of information agreement with France can now bring the proof that the trust’s real income is inferior to that determined by application of a theoretical rate of return.
As a conclusion, if properly created and managed, an irrevocable and discretionary trust prevents against the application of the French CFC rules provided by article 123 bis of the French tax code.
20.2 Wealth tax (ISF or IFI)
Up until December 31, 2011, according to case law, wealth tax (ISF at this time) was due neither by the settlor nor by the beneficiaries of a discretionary trust even when the trust held French assets. One of the main purpose of the Law was to close what the French tax authorities considered unsurprisingly to be a loophole.
As from January 1, 2012, assets or rights held in trusts (including irrevocable and discretionary trusts) as well as income or capital gains which are capitalized in said trusts are taxable in the hands of the original settlor or if he/she died in the hands of the beneficiaries thereafter deemed to be settlors irrespective of the nature of the trust.
The French resident settlors (or deemed settlors) must therefore include in their wealth tax return (ISF or IFI as from 1st January 2018) the worldwide assets of the trust as if they were their own assets, irrespective of the terms of the trust and its characterization as revocable or irrevocable, even if they are not beneficiaries and/or do not receive any distributions.
In case of failure by the settlor (or deemed settlor) to comply with the wealth tax (IFI/ISF) obligations of reporting and payment (when the tax is due) a sui generis tax applies at the flat rate of 1.5 % regardless of the value of the assets (as opposed to the wealth tax there is no threshold). The 1.5 % tax should be paid by the trustees before June 15 of the relevant tax year. If they do not pay the tax, the law provides that the beneficiaries are jointly liable to pay it.
20.3. Gift and inheritance tax regime applicable to trusts
The transfer of assets from the settlors to trusts is not treated as a taxable event for French gift tax purposes.
As from July 31, 2012, when a transfer of assets made through a trust is treated under civil law as a transfer on death (succession) or transfer inter vivos (donation), taxation occurs under the same regime which would apply in the absence of a trust. In other words, upon distribution of the assets (including accumulated income) of the trust, the beneficiaries should benefit from the standard tax-free allowances and tax rates corresponding to the family relationship between them and the settlor or deemed settlors (see § 5).
Even when no distribution occurs, the death of the settlor (or deemed settlors) is treated as a taxable event for inheritance tax purposes subject to the following rates:
- If at the date of the death the share of the assets which is due to a particular beneficiary is determined, this share is subject to inheritance tax according to the rates corresponding to the family relationship between the settlor (or deemed settlor) and the beneficiary. The trust’s assets have to be included in the inheritance tax return to be filed by the heirs.
- If at the date of the death a specific share of assets is globally due to the descendants of the settlor (and only to the descendants) these are subject to inheritance tax at the flat rate of 45 %.
- If at the date of the death a specific share of assets is globally due to the surviving spouse of the settlor, no inheritance tax is due.
- In all other cases, inheritance tax is due at the flat rate of 60 %. The rate of 60% also applies to trusts created by French resident settlors after May 11, 2011.
A corporation is subject to German corporate tax, which amounts to 15 per cent plus solidarity surcharge. In addition, a trade tax is levied. A foreign corporation with income from German sources might be subject to German corporate tax. If a foreign corporation has a branch in Germany that constitutes a permanent establishment, the corporation will be subject to German corporate tax and trade tax on all income effectively connected to this permanent establishment. Distributions to shareholders are subject to income tax.
Partnerships are fiscally transparent in Germany for income tax purposes. The partners are subject to income tax at their individual tax rates plus the solidarity surcharge. If the partnership is engaged in trade or business, the partnership itself is subject to trade tax. Trade tax levied from the partnership is (to a large extent) credited against the income tax of the partners if they are individuals.
Charitable foundations are tax privileged. The formation of a charitable foundation neither triggers any inheritance or gift tax, nor real estate transfer tax if real property is transferred gratuitously to the foundation. A charitable foundation is released from almost every current form of taxation, especially corporate tax and trade tax. In contrast, a family foundation is not tax-privileged. Taxation of a family foundation generally complies with the taxation of corporations, however, a family foundation can receive income not only from trade or business but any type of income. Distributions to beneficiaries are subject to income tax.
20.1 The tax treatment of settlors (§19.2), trustees (§19.2) and beneficiaries (§19.2) of a trust (§19.2) (other than a bare trust (§19.3)) depends in the first place on whether they are UK-resident (§1.5-1.7; §21.5) and, in the case of settlors and beneficiaries, whether they are domiciled (§1.9), deemed domiciled (§1.10) or deemed domiciled for inheritance tax purposes (§5.9) in the UK. Property held on a bare trust is treated for tax purposes as belonging to the beneficiaries, and the rules described below do not apply to bare trusts.
20.2 In general, the non UK assets of a trust, provided the trust was funded by a settlor (§19.2) who (at the time of the funding) was neither domiciled (§1.9) nor deemed domiciled for inheritance tax purposes (§5.9) in the UK, fall outside the scope of inheritance tax (§5), and this continues to be the case even if the settlor later becomes domiciled or deemed domiciled for inheritance tax purposes in the UK (unless he is a formerly domiciled resident (§5.9)). For this purpose, non UK assets representing the value of UK residential property are generally treated as UK assets.
20.3 On the other hand, a trust (§19.2) which holds UK assets (or non UK assets representing the value of UK residential property), or which was funded by a settlor (§19.2) who (at the time of the funding) was domiciled (§1.9) or deemed domiciled for inheritance tax purposes (§5.9) in the UK or who is a formerly domiciled resident, is generally subject to inheritance tax (§5) charges every 10 years and when assets are distributed to beneficiaries (§19.2) otherwise than as income. However, if such a trust is a life interest trust (§19.3) created before 22 March 2006, or a life interest trust created under a Will or for a disabled person, the property of the trust might not be subject to these charges every 10 years and on distributions, and might instead be treated for the purposes of inheritance tax as included in the estate (§5.3) of the beneficiary entitled to the life interest.
20.4 The overall UK income tax (§2.1) and capital gains tax (§2.6) treatment of a trust (§19.2) depends very significantly on whether the trustees (§19.2) are UK-resident. The trustees as a body are treated as UK-resident if, for example, they are individuals who are all UK-resident (§1.5-1.7) or where the only trustee is a company which is resident in the UK for UK tax purposes. The trustees as a body will be treated as non-UK resident if, for example, they are individuals none of whom is UK resident or where the only trustee is a company which is not resident in the UK for UK tax purposes. If at least one trustee is UK-resident and at least one is not, then generally the trustees as a body are treated as UK-resident only if the settlor was UK-resident or domiciled (§1.9) or deemed domiciled (§1.10) in the UK when he made the trust or provided funds. For the purposes of the above rules, a trustee which is a company is treated as UK-resident if it is acting as trustee in the course of a business which it carries on in the UK through a branch, agency or permanent establishment there.
20.5 If the trustees (§19.2) and the settlor (§19.2) are UK-resident (§1.5-1.7; §21.4) and the settlor or his spouse or civil partner can benefit from the trust in any circumstance whatsoever, then income arising to the trustees is generally charged to income tax (§2.1) on the settlor. Even where the settlor or his spouse or civil partner cannot benefit, the income arising to the trustees will still be charged to income tax on the settlor if a minor child of the settlor actually benefits from income (including accumulated income) of the trust, or the trustees make (or repay) a loan to the settlor or his spouse or civil partner.
20.6 In addition, where the trustees (§19.2) are UK-resident (§21.4), they are generally subject to income tax (§2.1) and capital gains tax (§2.6) in a broadly similar way to individuals but sometimes at higher effective rates, with the trustees' precise income tax treatment depending in part on whether the trust is a life interest trust (§19.3). There are rules to prevent double taxation where the settlor (§19.2) also suffers income tax on the trustees' income under the rule described in §21.5. Similarly, where a UK-resident beneficiary (§19.2) receives from UK-resident trustees a distribution which is chargeable to income tax in the hands of the beneficiary, credit may be available to that beneficiary for income tax which has been paid by the trustees.
20.7 Where the trustees (§19.2) are non-UK resident (§21.4) and do not realise UK source income or dispose of certain kinds of UK assets (such as UK property or shares in a property rich company (§8.3)), charges to income tax (§2.1) and capital gains tax (§2.6) do not generally fall on the trustees themselves, but may in certain circumstances fall on the settlor (§19.2) or beneficiaries (§19.2) instead.
20.8 For example, if a settlor is UK resident and is domiciled (§1.9) or deemed domiciled (§1.10) in the UK, chargeable gains (§2.7) arising (or deemed to arise (§20.11; §20.12)) to the non UK resident trustees are generally charged on the settlor. Similarly, if a settlor is UK resident and is domiciled or deemed domiciled in the UK, income arising to the non-UK resident trustees (or to a non UK company owned or ultimately owned by such trustees) and from which the settlor (or his spouse or civil partner) can benefit directly or indirectly is generally charged on the settlor. There exists transitional protection from the above charges for a UK resident settlor who was neither domiciled nor deemed domiciled in the UK when he made the trust (or any addition to the trust) and has subsequently become deemed domiciled (but not actually domiciled) in the UK, but this protection is not available to a settlor who is a formerly domiciled resident (§5.9), and the protection is irreversibly lost if, for example, the settlor adds further property to the trust at a time when he is deemed domiciled in the UK.
20.9 Where chargeable gains or income are not taxed on the settlor under the rules described in §20.8 above (for example, because the settlor is non-UK resident or dead, or is neither domiciled nor deemed domiciled in the UK, or enjoys the transitional protection described in §20.8 above), the chargeable gains or income can be charged on UK resident beneficiaries who receive (or, in some cases, have received in the past) benefits from the trust. Such beneficiaries, if neither domiciled nor deemed domiciled in the UK, may in some cases obtain protection from these charges by claiming the remittance basis (§10) if the benefits are not remitted to the UK (§10.3). Anti-avoidance rules may apply, for example, where non-UK resident trustees (§19.2) make distributions to non-UK resident (§1.5-1.7) or non-UK domiciled individuals who, later, make onward gifts (directly or indirectly) to UK resident individuals within specified time limits. The main effect of the application of these anti-avoidance rules is to impose income tax and capital gains tax on the onward gifts as if they were distributions made directly by the non-UK resident trustees to the ultimate UK resident donees.
20.10 Protection from some of the income tax charges described at paragraphs §20.8 and §20.9 above may be claimed in certain circumstances where the arrangements were genuinely commercial and did not have a tax-avoidance purpose.
20.11 Trustees (§19.2) are generally deemed for the purposes of capital gains tax (§2.6) to make a disposal (§2.8) at market value of any asset which is distributed to a beneficiary (§19.2) (or to which a beneficiary becomes absolutely entitled), in which case the beneficiary takes the asset with a base cost equal to that value. However, where the distribution of the asset attracts a charge to inheritance tax under the rules described in §20.3, it may be possible to elect for the beneficiary to take the asset at the trustees' base cost, so that capital gains tax is deferred.
20.12 In some circumstances a capital gain arising to a non-UK resident company is attributed to trustees (§19.2) or UK-resident (§1.5-1.7) individuals who are shareholders or creditors of the company, subject to reliefs for commercial arrangements.
20.13 A partnership is generally treated as transparent for UK tax purposes so that, broadly, the partners are taxed on the profits of the partnership in proportion to their rights to share in those profits
20.14 A family investment company (§19.1) which is incorporated under the laws of the UK or is centrally managed and controlled in the UK is generally exposed to corporation tax at 19% on its worldwide profits, subject to a range of potential reliefs, including relief under a double tax treaty.
20.15 Directors of a company, and individuals (known as "shadow directors") with significant influence over such directors, generally suffer income tax (§2.1) as if they were employees on the remuneration and other benefits that they receive from the company.