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European Law Monitor News Direct taxation: Commission launches infringement proceeding against Germany for its discriminatory rules on foreign family foundations

The European Commission has formally requested Germany to change its system of taxation of non-resident family foundations ("Familienstiftungen") as it is incompatible with the principles of free movement of capital and free movement of persons as guaranteed by Articles 56 and 18 of the EC Treaty. The request takes the form of a reasoned opinion (second step of the infringement procedure provided for in article 226 of the EC Treaty). If the relevant national legislation is not amended in order to comply with the reasoned opinion, the Commission may decide to refer the matter to the European Court of Justice.

According to the current German legislation, in case a family foundation established its registered office or its management in Germany, beneficiaries must pay tax on benefits that they receive from it. However, for tax anti-avoidance reasons, if the family foundation is domiciled abroad, the income of the family foundation is attributed to the founder or to the beneficiaries and taxed in their hands, irrespective of whether and in what amount they actually receive benefits from the foundation. As a matter of fact, German law (section 15 of the "Außensteuergesetz" [AStG]) lays down that the profits of a foreign family foundation are taxed (on a yearly basis) notwithstanding the fact that they are not distributed to the beneficiaries.

The Commission takes the view that this differing treatment of domestic and foreign foundations is incompatible with the free movement of capital (Article 56 EC Treaty).

The Commission's opinion is supported by the judgment of the European Court of Justice of 12.09.2006 in case C-196/04, ´Cadbury Schweppes´. In that occasion, the Court ruled that anti-abuse provisions may only relate to "wholly artificial arrangements". Accordingly, anti-abuse provisions must not be applied where it is proven, on the basis of objective factors which are ascertainable by third parties that, despite the existence of motives of "fiscal" nature, the foreign company is actually established in the host Member State and carries on genuine economic activities there. These requirements are not met in the case of the German anti-abuse provision at stake.

In addition, the Commission considers that the German law is incompatible with the free movement of persons (Art. 18 EC Treaty) as beneficiaries originally resident abroad are dissuaded from establishing in Germany due to the tax treatment of foreign foundations.

The Commission's case reference number is 2003/4610.

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Reproduced with the permission of the European Commission IP/07/1151