In its ruling dated March 23, 2023 - 1 K 2478/21 E, the Münster Tax Court (Finanzgericht Münster) decided that the assets distributed upon the termination of a "non-transparent" US trust may be taxable under § 20 (1) No. 9 sentence 2 in conjunction with sentence 1 subsection 2 in conjunction with (1) No. 2 of the German Income Tax Act (EStG). The appeal was admitted. As no appeal was lodged, the judgment is final.
Analysis
The question in which cases distributions from a (U.S.) trust are comparable to a "profit distribution" and are taxable under Sec. 20 (1) No. 9 EStG has not yet been decided by the German Federal Fiscal Court (BFH) and it remains to be seen whether other courts will follow the decision of the Münster Tax Court.
It should be emphasized that also according to the opinion of the FG Münster, the return of "contributions" is not taxable - which was doubted by individual voices in the literature if no "contribution account" is kept (which is regularly not the case with trusts).
For lack of relevance, no mention was made of the fact that income already attributed under Sec. 15 AStG is not taxable again under Sec. 20 (1) No. 9 EStG, which follows directly from Sec. 15 (11) AStG.
Insofar as the decision results taxation of unrealized capital gains, we believe that Sec. 20 (1) No. 9 EStG should be teleologically reduced to the effect that only the (realized) accumulated income is taxable upon the final distribution.
If the Germany-US Income Tax Treaty prevents Germany from taxing distributions, that derive from such sources of trust income that the US only may tax (e.g. income from US real estate), was not discussed in the decision. Based on reasoning of the ruling, it is likely that the tax court of Münster would not exempt such distributions.
As long as this has not been clarified by the BFH, it will often be advisable to sell the assets of the trust before the final distribution with the effect that the assets are attributed to the German resident beneficiary in accordance with Sec. 15 AStG and he can claim the Treaty benefits
