Is Attribution Taxation on the brink of reform? A draft bill looks at revising Sec. 15 of the German Foreign Tax Act (of 18 November 2025)

Section 15 of the German Foreign Tax Act (Außensteuergesetz, “AStG”) provides that, under certain conditions, the current income of foreign foundations and trusts is attributed to their domestic founders and beneficiaries for German tax purposes. This may result in tax being due on income that never actually accrued (“dry income”). Compared to the beneficiaries of domestic foundations, who have to pay tax only on the foundation’s income when it is actually distributed, this puts them at a significant disadvantage.

In response to a ruling by the Federal Fiscal Court on 3 December 2024 (case no.: IX R 32/22, IStR 2025, 399 annotation Tischendorf, Mitschke), the Federal Ministry of Finance has now submitted an initial discussion draft (dated 18 November 2025, case no.: IV B 5 - S 1361/00010/001/047) for consultation with associations on a revision of Sec. 15 AStG. Now, we will provide an initial, non-exhaustive overview of the most important changes that are being proposed:

Introduction of a low-taxation threshold

Until now, all foreign-family foundation income was subject to attribution taxation, i.e. not only passive low-taxed income within the meaning of Sec. 8 (1) and (5) AStG. The discussion draft now provides that income will only be attributed if it is subject to low taxation within the meaning of Sec. 8 (5) AStG (less than 15%). However, it is unclear why active income from the foreign family foundation should continue to be attributed to the recipients. The declared aim of the discussion draft is to harmonise the attribution taxation pursuant to section 15 AStG with CFC rules pursuant to Secs. 7 et seq. AStG. If this is the case, the attribution in accordance with Sec. 15 AStG – as in the case of CFC taxation – should be limited to passive income of the foreign family foundation. Furthermore, it is regrettable that there is no exemption limit for mixed income comparable to Sec. 9 AStG, which could remove minor cases from the scope of application for procedural reasons.

Family foundation

Attribution taxation requires the existence of a foreign ”family foundation”. This was previously defined as a foundation in which the founder, his or her relatives, and their descendants are entitled to more than half of the income or capital. The discussion draft provides for the concept of a family foundation to be significantly extended by not only referring to the founder, his or her relatives (Sec. 15 of the German General Tax Code [“AO”]) and their descendants, but also to persons related to them. “Related party” is defined in Sec. 1 (2) AStG; in addition, “acting in concert” in accordance with Sec. 7 (4) AStG can also lead to related-party status.

Inclusion of indirect beneficiaries and deletion of the concept of business foundation

In addition to family foundations, the scope of application of attribution taxation under current law also includes “business foundations” within the meaning of Sec. 15 (3) AStG. Due to various normative inconsistencies (see Kühn/Tischendorf/Linseisen, ISR 2025 - forthcoming), the concept of the “business foundation” is now to be abandoned. Instead, “indirect” beneficiaries are also to be included in the scope of application of attribution taxation, for example the shareholders of a beneficiary company.

Withdrawal of power of disposal vs. “artificial arrangement”

To date, Sec. 15 (6) AStG (“escape clause”) provides that attribution taxation does not apply if (i) it can be proven that the foundation assets are legally and effectively beyond the control of the founder and the other persons within the meaning of Sec.15 (2) and 3 AStG and if (ii) there is a sufficient exchange of information between Germany and the country of residence of the foreign foundation. With regard to the first criterion, the Federal Fiscal Court recently ruled that the power of disposal is also withdrawn if persons within the meaning of Sec. 15 (2) and (3) AStG could de facto effect the surrender of the foundation assets, for example by replacing foundation bodies; in this respect, only the power of disposal under civil law is to be taken into account (judgement of 3 December 2024 – IX R 32/22, IStR 2025, 399 annotation Tischendorf, Mitschke). In response to this case law, the criterion of deprived power of disposal is now to be replaced by the concept of an "artificial arrangement" known from the case law of the ECJ (see ECJ of 26 February 2019 – C-135/17, "X"). However, the draft bill does not provide a more detailed description of this concept, which is thus left to case law. However, trust structures commonly used in English-speaking countries for succession planning will generally no longer fall within the scope of attribution taxation rules. This is a welcome development and better reflects international circumstances.

Extension of the escape clause also to third countries

According to the wording, the exemption under Sec. 15(6) AStG applied only to foundations with their registered office or place of management in the EU or EEA. In the Federal Fiscal Court’s opinion, however, the escape clause must also be open to foundations and trusts outside the EU and the EEA, as the relevant freedom of movement of capital also applies in relation to third countries (judgement of 3 December 2024 – IX R 32/22, IStR 2025, 399 annotation Tischendorf, Mitschke). The discussion draft implements this and opens up the escape clause to foundations in third countries.

Multi-level attribution

If a foreign family foundation has a foreign company or foundation beneath it in the structure, the concept of multi-tier attribution is essentially to continue to apply (previously set out in Sec. 15(9) and (10) AStG), albeit with certain adjustments. In particular, it should be noted that with regard to the income of subordinate companies and foundations/trusts, the escape clause will be expressly excluded. Instead, in these cases, proof that no “artificial arrangement” exists must be provided at the level of the subordinate company/foundation/trust. At least the tax authorities take a similar view under the current legal situation. According to the explanatory notes to the discussion draft, the proposed restriction on the escape clause is therefore merely “clarifying,” meaning that it also applies retrospectively. However, as there has so far been no legal basis for the tax authorities’ view, this seems highly doubtful in our view (see Tischendorf, IStR 2024, 289, 295).

Conclusion

With the discussion draft of 18 November 2025, the tax authorities are taking an important step towards improving legal certainty in the area of attribution taxation. The extension of the escape clause to third countries – as required by the courts – is particularly welcome. During the forthcoming consultation phase, further issues should be clarified to ensure the greatest possible legal certainty for taxpayers and advisers when applying these rules, including the rather imprecise notion of an “artificial arrangement.”