Anyone considering emigration while also wanting to preserve substantial assets – a family business, real estate holdings, or a securities portfolio – beyond their own generation will almost inevitably come across the term family foundation (Familienstiftung). It is regarded as a classic instrument of wealth succession, yet in practice it is just as often misunderstood as the exit tax on GmbH shares: some expect it to provide permanent tax exemption, others a way to make assets “disappear” in the course of emigration. Neither expectation reflects the actual legal position. This article sets out the basic concept of the German family foundation, explains the substitute inheritance tax (Erbersatzsteuer), describes how it interacts with the founder’s emigration, and places foreign alternatives such as the Liechtenstein foundation or the trust in their proper tax context.
The Family Foundation: Independent Ownership of Assets Instead of Inheritance
Legally, a family foundation is a foundation with legal personality under civil law (rechtsfähige Stiftung des bürgerlichen Rechts) pursuant to Sections 80 et seq. of the German Civil Code (Bürgerliches Gesetzbuch, BGB) – §§ 80 ff. BGB. It comes into existence through a deed of foundation (Stiftungsgeschäft) – the dedication of assets to a purpose set out in the foundation’s articles of association (Satzung) – and recognition by the competent state foundation supervisory authority (Landesstiftungsbehörde). The core civil-law idea is that the assets become legally independent: once recognized, the contributed assets belong to the foundation itself from that point on. There are no longer any shareholders, stockholders, or owners – neither the founder nor the beneficiaries (Destinatäre) hold any proprietary interest in the foundation’s assets; at most, they have claims to distributions of income as provided for in the articles.
In a family foundation, the purpose set out in the articles is oriented substantially toward the interests of a family – for example, providing for relatives, preserving a family business across generations, or preventing the fragmentation of assets upon each succession. It is governed by its own bodies, typically a foundation board (Stiftungsvorstand), often supplemented by a family council (Familienrat) with a say in decisions as provided for in the articles.
This civil-law consequence is at the same time the practical advantage: if a beneficiary or the founder themselves dies, no succession occurs with respect to the foundation’s assets as a general rule – they remain unchanged with the foundation, rather than being fragmented through estate settlement disputes. It should be borne in mind, however, that funding the foundation can trigger a supplementary compulsory portion claim (Pflichtteilsergänzungsanspruch) under § 2325 BGB for relatives entitled to a compulsory portion, which must be asserted within a ten-year period that tapers off over time. This claim is directed in the first instance against the heir, not against the foundation itself. If the estate is insufficient to satisfy it, the person entitled to the compulsory portion may, under § 2329 BGB, claim on a subsidiary basis – that is, only to the extent the heir cannot make up the shortfall – restitution directly from the foundation as the recipient of the gift, to the extent needed to cover the missing amount.
The Substitute Inheritance Tax: An Inheritance Tax Peculiarity Every 30 Years
This very independence of the assets creates a problem from the legislature’s perspective: because a family foundation no longer involves any succession, the assets tied up in it would, absent a special rule, permanently escape inheritance tax – a “skipped generation” effect that would persist indefinitely. § 1(1) no. 4 of the German Inheritance and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz, ErbStG) – § 1 Abs. 1 Nr. 4 ErbStG – counters this effect with the substitute inheritance tax (Erbersatzsteuer): the assets of a foundation established substantially in the interest of a family are taxed every 30 years as though they had been notionally inherited. The fundamental permissibility of this periodic substitute taxation is recognized as constitutional.
The starting point of the period is governed by § 9 Abs. 1 Nr. 4 ErbStG: what matters is the date on which assets first passed to the foundation. For foundations whose first funding with assets occurred on or before 1 January 1954, 1 January 1984 applies as the first reference date, from which the 30-year cycle then continues to run.
On each reference date, the entire foundation’s assets are valued and taxed – though not as a straightforward full taxation as if held by a single individual. § 15 Abs. 2 Satz 3 ErbStG grants double the tax-free allowance under § 16 Abs. 1 Nr. 2 ErbStG – currently EUR 800,000 instead of the usual EUR 400,000 available to children – and applies the tax rate of tax class I that would apply to half of the taxable assets. As a result, the substitute inheritance tax is, in effect, calculated as though the assets passed to two children, which noticeably reduces the burden compared with unmitigated full taxation.
Since a foundation’s assets are frequently illiquid – for example, in the case of business interests or real estate – the substitute inheritance tax may, on application, be paid under § 24 ErbStG in 30 equal annual installments. This installment arrangement is not interest-free: the calculation of the annual amounts is based on an interest rate of 5.5 percent. Anyone planning a family foundation with substantial, illiquid assets should factor this recurring burden into their liquidity planning from the outset, for instance by building up reserves.
Distributions to Beneficiaries: No Second Inheritance Tax on the Same Transaction
A point that frequently causes confusion when planning a family foundation: alongside the gift tax on the initial funding, does inheritance or gift tax fall due again later, once the beneficiaries actually receive payments from the foundation? For regular distributions made under the articles within the scope of the foundation’s purpose, the answer is, as a general rule, no – not, however, because a tax already paid is credited, but because such a transaction does not even qualify as a separate gift-tax event under § 7 Abs. 1 Nr. 1 ErbStG in the first place: the element of gratuitousness (Freigebigkeit) is lacking where the foundation is merely fulfilling its purpose as set out in the articles. The Bundesfinanzhof (Federal Fiscal Court) confirmed this principle in its judgment of 3 July 2019 (II R 6/16, published in the Federal Tax Gazette – Bundessteuerblatt, BStBl. II 2020, 61); it had already expressed serious doubts to the same effect earlier, in an order suspending enforcement (Aussetzungsbeschluss) of 21 July 2014 (II B 40/14), as to whether the same distribution could be subject to income tax and gift tax at the same time. Instead, such regular distributions are, as a general rule, subject to income tax at the level of the beneficiary as investment income under § 20 Abs. 1 Nr. 9 of the German Income Tax Act (Einkommensteuergesetz, EStG) – § 20 Abs. 1 Nr. 9 EStG – subject to the flat-rate withholding tax (Abgeltungsteuer).
Two exceptions should not be overlooked here. First, this applies only for as long as the distribution stays within the scope of the purpose set out in the articles; if it clearly exceeds that scope, a separate, gift-tax-relevant transaction may again be present. Second, the final dissolution of the foundation with the transfer of its assets to the beneficiaries is a separate taxable event under § 7 Abs. 1 Nr. 9 ErbStG, to be taxed independently – unlike a regular distribution made while the foundation continues to exist. And independently of all this, the substitute inheritance tax arising every 30 years continues to apply: it is not a double taxation of the same distribution, but a recurring, additional burden on the foundation’s assets as such, one that would not arise in the case of a direct transfer of assets to an individual.
What Happens for Tax Purposes When the Founder Emigrates?
For emigrants with an existing or planned family foundation, the natural question arises whether their own emigration triggers consequences similar to those for GmbH shares, where § 6 of the German Foreign Tax Act (Außensteuergesetz, AStG) – § 6 AStG – deems a fictitious capital gain to arise as soon as unlimited tax liability ends. For an already-established family foundation, the answer is, in principle, different: the founder’s emigration does not, by itself, give rise to a direct exit tax event. § 6 AStG is linked to the holding of shares in corporations within the meaning of § 17 EStG – but a family foundation has no shares, shareholders, or stockholders. This is the civil-law core of its independence as an asset pool: after the foundation is established, the founder no longer owns anything that could be captured by the exit tax.
The foundation’s own tax liability likewise does not follow the founder’s place of residence. Under § 2 Abs. 1 Nr. 2 ErbStG, a foundation is subject to unlimited inheritance tax liability if it has its place of management or registered seat within Germany. As long as these remain in Germany, the foundation remains subject to unlimited tax liability regardless of the founder’s place of residence – including the substitute inheritance tax due every 30 years.
This does not mean, however, that emigration has no tax consequences at all for the founder personally. If the founder moves to a country with low taxation, they may become subject to the extended limited tax liability under § 2 AStG. The provision cumulatively requires that the person concerned
- was, as a German national, subject to unlimited income tax liability for at least five years during the ten years preceding the end of their unlimited income tax liability,
- is now resident in a low-tax territory, or is not firmly resident in any foreign territory, and
- continues to have substantial economic interests within Germany – for example, an entrepreneurial shareholding, domestic income exceeding 30 percent of total income or EUR 62,000, or domestic assets exceeding 30 percent of total assets or EUR 154,000.
Low taxation within the meaning of the provision exists, under § 2 Abs. 2 AStG, where the foreign income tax burden is more than one third lower than a comparable German tax burden – unless at least two thirds of the German tax is actually paid. If the requirements are met, the person concerned remains subject to this extended tax reach for ten years beyond the ordinary limited tax liability. Whether the position of being entitled to benefits from a German family foundation, or other domestic assets, counts as a “substantial economic interest” in a given case can only be assessed on the basis of the specific asset structure and should be reviewed before emigrating to a low-tax country.
In the end, therefore, the family foundation lacks the sharp, one-off tax burden characteristic of the GmbH exit tax – but a move to precisely a low-tax country can instead trigger an extended tax reach that continues to have effect for years, provided economic ties to Germany remain in place.
Anyone even considering establishing a foundation abroad in the first place should also bear the sequence of events in mind: if the foreign foundation is established and funded with assets while the founder is still subject to unlimited tax liability in Germany, that funding is subject to German gift tax under § 7 Abs. 1 Nr. 8 Satz 2 ErbStG – taking the detour via a foreign jurisdiction changes nothing in this respect, as the following section shows. If, by contrast, the foundation is established only after the founder has already left Germany and ended their unlimited tax liability, the connecting factor of unlimited tax liability under § 2 Abs. 1 Nr. 1 ErbStG regularly no longer applies to the funding – provided that no beneficiary remains subject to unlimited tax liability in Germany either, and that the transferred assets do not form part of what is known as domestic assets (Inlandsvermögen) within the meaning of § 2 Abs. 1 Nr. 3 ErbStG (for example, domestic real estate or business assets), which are always subject to limited tax liability regardless of residence. Anyone combining the establishment of a foreign foundation with a planned emigration should therefore plan this sequence and the composition of the assets deliberately and on a case-by-case basis, rather than leaving it to chance.
Foreign Foundations and Trusts as an Alternative – and Attribution Taxation under § 15 AStG
Instead of a German family foundation, some clients consider foreign vehicles, such as a Liechtenstein foundation under that jurisdiction’s law of persons and companies (Personen- und Gesellschaftsrecht), or a trust modeled on Anglo-Saxon legal systems. The appeal often lies in the fact that many foreign legal systems have no periodic substitute taxation comparable to the German substitute inheritance tax. However, German tax law cannot simply be circumvented in this way, so long as the founder or beneficiaries are, or become, subject to unlimited tax liability in Germany.
Even the establishment itself is captured: § 7 Abs. 1 Nr. 8 Satz 2 ErbStG expressly equates the “formation or funding of an asset pool governed by foreign law whose purpose is directed at the retention of assets” with the establishment of a domestic foundation – and this also covers trusts. § 7 Abs. 1 Nr. 9 Satz 2 ErbStG applies correspondingly to dissolution. Taking the detour via a foreign structure therefore provides no gift-tax advantage upon establishment. The Bundesfinanzhof expressly confirmed that this equal treatment actually extends to Anglo-Saxon trusts as well, in its judgment of 25 June 2021 (II R 32/19) on the question of intermediate beneficiary status (Zwischenberechtigung) under § 7 Abs. 1 Nr. 9 Satz 2 ErbStG: the principles developed for foreign foundations apply equally to other asset pools governed by foreign law, including Anglo-American trusts.
More decisive is the ongoing taxation, governed by § 15 AStG. In the case of a “foreign family foundation” – one with its place of management and registered seat outside Germany, where the founder, relatives, and descendants are entitled to more than half of the benefits or entitled to more than half on dissolution – the assets and income of the foundation are attributed, under § 15 Abs. 1 AStG, to the founder, provided the founder is subject to unlimited tax liability, and failing that, to the persons entitled who are subject to unlimited tax liability, in proportion to their respective entitlement. For German tax purposes, the foreign foundation is thus, in effect, looked through as though it did not exist – ongoing income is attributed directly to the founder or the beneficiaries. That this applies correspondingly to trusts follows directly from the statute itself: under § 15 Abs. 4 AStG, the attribution rule applies correspondingly to “other purpose-bound asset pools, asset masses, and associations of persons with or without legal personality” – a wording that, according to the practically unanimous understanding, also covers foreign trusts, independently of the BFH decision mentioned above, which concerns the level of the ErbStG, not the AStG.
Within the category of “trust,” however, a blanket equation of all structural variants is not appropriate. In the case of a revocable trust, the settlor typically remains the party to whom attribution is made, because they have retained the power of disposal; the attribution under § 15 AStG in this case typically applies to the settlor, not the beneficiaries, for as long as no actual distribution has been made. In the case of an irrevocable trust with fixed entitlement shares determined from the outset (a fixed trust), by contrast, the settlor no longer has any right of recourse; attribution generally applies to the beneficiaries in accordance with their fixed shares. In the case of a discretionary trust, where the trustees decide at their own discretion on the nature, timing, and recipient of a distribution, it must be clarified on a case-by-case basis who is even to be regarded as the party to whom attribution is made, or as an intermediate beneficiary (Zwischenberechtigter) – a purely potential claim that has not yet become concrete is not, according to the case law cited above, sufficient for this on its own.
§ 15 Abs. 6 AStG provides for an exception for foundations with their registered seat or place of management in an EU or EEA member state: attribution ceases to apply if two conditions are met at the same time. First, it must be demonstrated that the foundation’s assets are “legally and factually withdrawn” from the power of disposal of the founder and the beneficiaries – put simply, neither the founder nor the beneficiaries may still be able to determine what happens to the assets, or when and in what amount distributions are made; if the founder retains, for example, a seat on the foundation council with rights of intervention, or a right of revocation, this proof generally fails. Second, there must be a “basis for administrative and enforcement assistance in tax matters” between Germany and the state where the foundation is seated – put simply, there must be an agreement or comparable legal basis under which the German tax authorities can obtain information from, and if necessary enforce tax claims through, the state where the foundation is seated; without such an instrument of administrative assistance, attribution continues to apply even if the first condition is met.
As an EEA member, Liechtenstein belongs to the group of states for which this exception is generally available. For foundations and trusts outside the EU/EEA, the exception long did not apply at all from the outset – but here, the Bundesfinanzhof made an important clarification in two judgments of 3 December 2024 (IX R 31/22 and IX R 32/22, both concerning Swiss family foundations): restricting the escape clause to EU/EEA foundations violates the free movement of capital guaranteed under EU law (Article 63 of the Treaty on the Functioning of the European Union, TFEU), which also applies in relation to third countries. The exception must therefore also be open to family foundations with their registered seat or place of management in a third country, provided that – as in the case of Switzerland – a suitable basis for administrative assistance exists there, and the remaining conditions, in particular the withdrawal of the power of disposal, are demonstrated in the specific case. For trusts in states with no basis for administrative assistance in tax matters at all, for example in some Caribbean jurisdictions, full attribution without any escape option continues to apply.
For orientation, the interaction of the two central regimes can be summarized as follows:
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| Structure | Substitute Inheritance Tax Every 30 Years | Attribution under § 15 AStG for a German Founder/Beneficiary |
|---|---|---|
| German family foundation | Yes, § 1 Abs. 1 Nr. 4 ErbStG | Not applicable – not a “foreign” foundation |
| Liechtenstein family foundation (EEA) | No, the German special rule does not apply | Generally yes; an exception is possible where withdrawal of the power of disposal and administrative assistance are demonstrated (§ 15 Abs. 6 AStG) |
| Foundation/trust in a third country with a basis for administrative assistance (e.g. Switzerland) | No, the German special rule does not apply | Generally yes; since BFH 3 Dec 2024 (IX R 31/22, IX R 32/22), an escape option is likewise available where withdrawal of the power of disposal is demonstrated |
| Trust in a state without a basis for administrative assistance | No, the German special rule does not apply | Yes, without any escape option |
Illustrative Example
*The following example is entirely fictional and serves solely for illustration; it does not describe any actual case or any real person.*
An entrepreneurial family establishes a German family foundation in 2015 and funds it with an interest in the family’s own business as well as real estate. The most remote persons entitled under the articles are the founder’s grandchildren, so that the funding is taxed under tax class I. In 2026, the founder permanently relocates their residence to Dubai, where their income is subject only to very low taxation; they remain a member of the foundation board and are themselves entitled to benefits. In this – entirely fictional – example, the foundation, since its registered seat and place of management remain in Germany, would continue unchanged to be subject to unlimited inheritance tax liability; the next substitute inheritance tax would fall due in 2045, 30 years after establishment. The founder personally, by contrast, would need to have it examined whether, because of their continuing economic ties to Germany, they fall within the extended limited tax liability under § 2 AStG, since the time-related requirements and low taxation would be met here.
The Family Foundation as an Instrument of Succession Planning – Not a Shortcut to Tax Avoidance
Establishing a family foundation is a far-reaching civil-law step intended to be permanent: the contributed assets leave the founder’s estate for good, later amendments to the articles are possible only to a limited extent, and the substitute inheritance tax is a recurring burden that is firmly built into the structure from the outset. Anyone considering such a structure should think through governance questions – the board, the circle of beneficiaries, succession in the management of the foundation – just as thoroughly as the ongoing tax burden.
Neither the establishment of a German family foundation nor the detour via a foreign structure is a means of defeating existing obligations toward creditors or persons entitled to a compulsory portion. Measures that are recognizably designed to serve this purpose can be unwound under the German Anfechtungsgesetz (the statute governing the avoidance of transactions to the detriment of creditors) and may, in individual cases, also be relevant under criminal law. The legitimate motives for a family foundation lie elsewhere: in the long-term preservation of a family business across several generations, the avoidance of asset fragmentation upon each succession, the prevention of conflict among heirs, and the orderly provision for relatives. This is precisely where the difference lies between serious succession planning and short-term tax structuring.
When Is Advice Worthwhile?
- early clarification of whether the purpose and structure of a family foundation actually fit the family’s and the business’s situation, or whether classic instruments such as a will or anticipated succession are sufficient,
- careful drafting of the circle of beneficiaries before establishment, since the most remote person entitled under the articles determines the applicable tax class,
- liquidity planning with a view to the recurring substitute inheritance tax, including the option of interest-bearing installment payments under § 24 ErbStG,
- in the case of a planned emigration: assessing whether the extended limited tax liability under § 2 AStG could apply, particularly in the event of a move to a low-tax country,
- when considering a foreign foundation or trust: assessing the attribution taxation under § 15 AStG and any applicable escape clause for EU/EEA states,
- coordination with tax advice in the destination country to avoid a double burden.
Conclusion
The German family foundation is a civil-law instrument that effectively bundles assets across generations – purchased at the cost of giving up direct ownership and taking on the recurring substitute inheritance tax every 30 years. The founder’s emigration alone does not trigger a direct exit tax event, but it can have continuing consequences through the extended limited tax liability under § 2 AStG if the destination country imposes low taxation and economic ties to Germany remain in place. Foreign alternatives such as a Liechtenstein foundation or a trust generally change nothing in this regard, so long as German founders or beneficiaries are involved: the attribution taxation under § 15 AStG regularly captures such structures, and an exception may be available where the power of disposal has demonstrably been withdrawn and a basis for administrative assistance exists – since the BFH case law of December 2024, no longer only for EU/EEA foundations, but also for third-country structures with a suitable basis for administrative assistance. Anyone considering a family foundation should therefore understand it for what it legally is: a long-term instrument of succession planning, not a short-term tax-saving scheme.
The Fiala law firm has published extensively on international asset and foundation law and supports clients in soundly assessing, from both a legal and tax perspective, the establishment of a family foundation, its interaction with a planned emigration, and possible foreign alternatives. Please feel free to contact the firm on a non-binding basis to discuss your personal situation in an initial consultation.
