ECJ Upholds German Gift Tax Rules for Foreign Family Foundations, Including Liechtenstein Entities

Introduction

The European Court of Justice (ECJ) delivered a significant preliminary ruling on November 13, 2025, concerning German gift tax regulations as they apply to foreign family foundations. The ruling, officially published in the EU Official Gazette on January 12, 2026, addresses a challenge brought by a Liechtenstein-based family foundation against the German tax authorities. The case, identified as C-142/24, examined whether Germany's differentiated tax treatment for foreign foundations violates the principle of free movement of capital under the European Economic Area (EEA) Agreement.

Background to the Dispute

The dispute originated from a challenge by a Liechtenstein-based family foundation, established by a German resident, against the application of the highest tax class (Class III) for gift tax purposes on asset transfers to the foundation. The foundation argued that this practice restricted the free movement of capital as guaranteed by Article 40 of the EEA Agreement. The Finanzamt Köln-West (Tax Office, West Cologne, Germany) had denied preferential treatment to the foundation on the grounds that it was not established in Germany, despite serving family interests.

German Tax Framework for Foundations

Under German law, the transfer of assets for the creation of a family foundation is subject to gift tax, irrespective of the foundation's location. However, a key distinction exists: foreign family foundations are generally taxed more heavily than their domestic counterparts. This is primarily because domestic German family foundations are subject to a substitute inheritance tax every 30 years, a requirement not imposed on foreign foundations. Consequently, foreign foundations are typically classified under the highest tax bracket, Group III, leading to a lower tax exemption threshold and a higher tax rate compared to domestic foundations.

ECJ's Decision and Justification

The ECJ ultimately ruled that Article 40 of the EEA Agreement does not preclude national legislation that results in a less favorable tax class for foreign family foundations compared to resident foundations, provided that such legislation adheres to the principle of proportionality. The Court found that the stricter taxation applied to foreign foundations is justified. This justification stems from the fact that it compensates for the absence of the substitute inheritance tax that domestic foundations are required to pay, thereby maintaining the coherence of the German tax system. The ECJ concluded that this measure was proportionate to its objective.

Conclusion

This preliminary ruling by the ECJ clarifies the scope of the free movement of capital in relation to national tax sovereignty, particularly concerning the treatment of foreign family foundations. The decision reinforces the ability of member states and EEA countries to implement tax measures that ensure the coherence of their tax systems, even if these measures result in differentiated treatment for cross-border entities, provided they are justified and proportionate.