taxlaw-en

Facebook

Twitter

Copyright 2020 I. Skouzos & Partners.
All Rights Reserved.

Tax treatment of foreign trust and foreign foundation under Greek law (Circular 1114/2017 of the Ministry of Finance)

Iason Skouzos & Partners > Practice Areas  > Tax Law  > Tax treatment of foreign trust and foreign foundation under Greek law (Circular 1114/2017 of the Ministry of Finance)

Tax treatment of foreign trust and foreign foundation under Greek law (Circular 1114/2017 of the Ministry of Finance)

  1. GENERAL

According to Greek law, the Anglo-Saxon trust, which is an institution with origins in the common law, is a sui generis property management and liquidation regime, which has no legal personality and which is created either by a declaration of the owner of the property or by transferring such property, whether inter vivos or by means of a will. The settlor or trustor of the trust enters into a deed of settlement with the trustee and transfers to him assets, which he manages for the benefit of other persons, trustees or beneficiaries or to his own benefit (the trustee) or of the settlor in order to serve a certain purpose, which is set by the settlor. More specifically, the trustee acquires the property of the settlor separately from his own property and is required to maintain and return it in accordance with the terms of the trust, whilst the beneficiaries are natural or legal persons or entities that enjoy the benefits of the trust from the trustees, either through regular payments, or at the termination of the trust, under the terms set out by the settlor (while alive or after death).

The foundation is an institution similar to the trust that allows its settlor to manage and dispose of his property whether inter vivos or mortis causa, for the benefit of some persons. It is, in particular, a legal entity which typically has legal personality under the foreign law of its seat, but without displaying company features, to which the settlor transfers assets. Following the usual practice, the management of these elements, including the general management of the foundation, is entrusted to the Council (or Board), with a view to fulfilling the wishes of the settlor. The operation of the foundation is governed by its articles of association and the bylaws. The bylaws set out the beneficiaries and specify the type and range of benefits they receive, including the end beneficiaries of the foundation’s assets. Both the bylaws and their provisions may be revoked or amended. The Council may also amend the articles of association and the bylaws or dissolve the foundation, under the terms and conditions contained therein, generally in accordance with the wishes and instructions of the settlor, which are binding. The disposal of assets of the foundation to the designated persons also takes place in accordance with the instructions of the settlor, either during his life or after death.

 

  1. TAX LIABILITIES WHEN OBTAINING INCOME – INCOME TAX

2.1.1. Tax treatment of foreign trust and foreign foundation which obtain income in Greece

  1. In accordance with the provisions of Article 2(d) of Law 4172/2013, legal entity shall mean any arrangement with corporate or non-corporate organisation, whether profit-making or otherwise, which is not a natural or legal person, such as any form of trust or any arrangement of a similar nature, as well as all forms of foundations or associations or any arrangement of a similar nature;
  2. Furthermore, according to the provisions of Article 45(g) of the same Law above, income tax of legal persons and entities is levied on legal entities defined in Article 2 of the Income Tax Code which are not included in one of the preceding cases of Article 45.
  3. From the provisions of Article 3(2) of Law 4172/2013, in conjunction with the provisions of Article 5 of the same Law, it follows that the taxpayer that is not resident in Greece is subject to tax for the taxable income thereof that occurs in Greece and is obtained within a given fiscal year, as defined in Article 5(1) of the above Law. In order to determine whether the foreign trust or foundation has its tax residence in Greece, the provisions of Article 4(3) and (4) of the Income Tax Code shall apply.
  4. It follows from the above that any income from dividends, interest and royalties obtained in Greece by the above foreign legal entities (foundations and trusts) are taxed based on the provisions of Article 64(3) of Law 4172/2013, i.e. tax is withheld (15% or 20%, as appropriate) and, as a result, their tax liability is satisfied, insofar as they do not maintain a permanent establishment in Greece (see to this regard our Circular No ΠΟΛ 1042/2015).

Income from immovable property obtained by the above legal entities in Greece is taxed based on what has been specifically made clear in our Circular No ΠΟΛ 1138/2015, i.e. as income from business activity which is subject to a tax rate of 29%.

Lastly, the income (capital gains) obtained from the transfer of securities provided for in Article 42 of Law 4172/2013 is subject to the stipulations of our Circular No ΠΟΛ 1032/2015, i.e. it is not taxed in Greece, unless the above legal entities are considered to maintain a permanent establishment in Greece.

The foregoing apply without prejudice to the provisions of Double Taxation Agreements (DTAs). Therefore, in the event where the trust/foundation is a tax resident of a country with which Greece has concluded a DAT, the provisions of the respective Agreement in force apply, otherwise the applicable provisions are those of domestic law.

2.1.2. Tax treatment of income obtained by the settlor of a foreign trust or a foreign foundation, tax resident of Greece, from the foreign trust or foreign foundation due to his status as one of the beneficiaries of its benefits

  1. In accordance with the provisions of Article 36(1) of Law 4172/2013, the term “dividends” means income deriving, inter alia, from the distributions of profits from all kinds of legal persons or legal entities, and any other related distributed amount.
  2. As it has been clarified by Circular No ΠΟΛ 1042/2015 of the Ministry of Finance, the meaning of dividend includes, inter alia, profit distribution of trusts.
  3. Furthermore, the provisions of Article 66(1) of Law 4172/2013 introduced provisions on the controlled foreign corporations regarding the inclusion in the taxable income of a taxpayer residing in Greece for tax purposes, whether a natural or legal person or a legal entity, of the non-distributed income of a legal person or legal entity residing for tax purposes in another country, provided that the conditions of points (a) to (d) of that paragraph are cumulatively met.
  4. In the light of the foregoing and given that the foreign trust and the foreign foundation are, in accordance with the provisions of the new Income Tax Code (Law 4172/2013), legal entities, profit distributions to settlors-beneficiaries, whether natural or legal persons or entities, constitute income from dividends and are taxed according to the provisions referred to in Circular No ΠΟΛ 1042/2015.

The above only apply if payments from the above legal entities are made to persons (beneficiaries) that have contributed their own funds to the entities in question, because only in this case the meaning of dividend is satisfied, as income from the beneficiary’s funds which have been deposited in order to participate in the profits of another legal person or entity.

Otherwise, distributions made to persons other than those that have contributed funds to the entities concerned (i.e. to third beneficiaries) are governed by the provisions on inheritance tax or donations (depending on whether they take place after the death of the settlor or during his life) and those specified in Chapter 3 hereof. By way of exception, if the settlor of the trust dies and the beneficiary heir obtains return on the assets which he acquired by reason of death or by means of a gift by reason of death (e.g. rents, dividends, etc.), such return constitutes income of the heir or the donee by reason of death, and are taxed in his name under the Income Tax Code, since the assets concerned have passed to his personal property (as referred to in subparagraph 3.2.4 hereof).

Under the above conditions, the taxable income of the respective settlor-beneficiary (whether natural or legal person or entity) includes also undistributed income of the trust/foundation, provided the conditions expressly laid down in Article 66 of Law 4172/2013 are met.

  1. Lastly, it is noted that, with respect to income tax, the trustees of the foreign trust or the administrators of the foreign foundation do not incur the same tax liability for income derived from a source in Greece, which is income of the trust/foundation, but are taxed only on professional fees that might receive as a result of the management services rendered, in accordance with the provisions of Law 4172/2013, based on the category of income obtained, as derived from the agreed terms of the trust and their type (natural or legal person). The foregoing shall be without prejudice to the provisions of the relevant DATs.

2.2. Before entry into force of Law 4172/2013

With respect to income derived from financial years that commenced before 1.1.2014, the following shall apply:

2.2.1. Tax treatment of foreign trust and foreign foundation which obtain income in Greece

  1. In accordance with the provisions of Article 101(1)(d) of Law 2238/1994, tax is levied on foreign undertakings that operate with any type of company, as well as any type of foreign organisations aimed at obtaining economic benefits.

The above pertain to foreign foundations, since foreign trusts are not included in the taxable subjects referred to in Article 101 of Law 2238/1994 and, therefore, do not fall within the scope of the provisions of the Income Tax Code.

  1. In the light of the foregoing, any income from dividends, interest and royalties obtained in Greece by foreign foundations are taxed based on the provisions of Articles 12, 24-27 and 54 (income from securities) of Law 2238/1994, i.e. tax is withheld based on the applicable rate and, as a result, their tax liability is satisfied, as well as the provisions of Article 13 (income from royalties) of the same law, i.e. a special separate statement is filed, with which the tax liability is likewise satisfied and to the extent that the above legal persons do not maintain a permanent establishment in Greece.

Moreover, income from immovable property obtained in Greece is determined based on Articles 20-23 of Law 2238/1994 and taxed under the provisions of Article 109 of the same Law.

Moreover, the income (capital gains) from transfer of securities, whether listed or otherwise, obtained from the above legal entities, is subject to the provisions of Articles 38 and 13, respectively, of the same Law.

The above apply only to foreign foundations, since the income of foreign trusts is taxed directly in the name of the beneficiaries-settlors thereof, as referred to in point 22.2.2. below.

2.2.2. Tax treatment of income obtained by the settlor of a foreign trust or a foreign foundation, tax resident of Greece, due to his status as one of the beneficiaries of its benefits

2.2.2.1. Tax treatment of the settlor of a foreign foundation

  1. If the settlor-beneficiary is a natural person, any benefit acquired by it constitutes income that cannot be classified under any of the categories A to G of Article 4(2) of Law 2238/1994, i.e. income of Article 48(3) of the same Law (G3).
  2. If the settlor-beneficiary is a legal person, the distributions of profits which he received from the foreign foundation constitute income from dividends, which are taxed under the provisions of article 109 of Law 2238/1994.

2.2.2.2. Tax treatment of the settlor of a foreign trust

Since the foreign trust is not included in the taxable subjects of Law 2238/1994, the founder settlor is taxed for the income obtained by reason of his status as a beneficiary of its benefits depending on its type (natural or legal person) and the source of income obtained, as follows:

  1. If the settlor-beneficiary is a natural person and the benefit acquired is derived from interest, it is taxed under the provisions of Article 12 or 24 of Law 2238/1994, respectively, while if it is derived from other securities, it is taxed in accordance with the provisions of Articles 24-27 of the same Law. Furthermore, if the benefit is derived from capital gains from transfer of non-listed shares, it is taxed under the provisions of Article 13, while if it is derived from capital gains from transfer of listed shares, it is exempt under the provisions of Article 38. Moreover, if the benefit is derived from the operation of immovable property, it is taxed based on the provisions of Articles 20-23 of Law 2238/1994.
  2. If the settlor-beneficiary is a legal person, the determination of its income is subject to the provisions of Article 105 of Law 2238/1994 and its taxation is based on the provisions of Article 109 of the same Law

2.2.3. Lastly, it is noted that, with respect to income tax, the trustees of the foreign trust or the administrators of the foreign foundation do not incur the same tax liability for income derived from a source in Greece, which is income of the settlor of the trust or the foundation itself, respectively, but are taxed only on professional fees they might receive as a result of the management services rendered, in accordance with the provisions of Law 2238/1994, based on the category of income obtained, as derived from the agreed terms of the trust and their type (natural or legal person). The foregoing shall be without prejudice to the provisions of the relevant DATs.

2.3. Tax treatment of the proceeds resulting from the dissolution of the foreign trust or foreign foundation

2.3.1. After the entry into force of Law 4172/2013

  1. According to the provisions of Article 57 of Law 4172/2013, the proceeds of the liquidation are considered profit distribution in the fiscal year within which the liquidation of the legal person or legal entity has been completed, to the extent that the proceeds in question exceed the paid-up capital.
  2. Further, with our circular No ΠΟΛ 1059/2015 it has been clarified that the proceeds of the liquidation, based on the above provisions, are treated as a dividend, for the purposes of tax provisions, in accordance with Article 36 of Law 4172/2013.
  3. It follows from the foregoing that in the event of dissolution of a foreign trust or foundation, the amount which, at its establishment, has been set to be obtained by the beneficiary-settlor upon dissolution of the legal entity shall be treated as proceeds of liquidation. Therefore, it is considered profit distribution and thus will be treated, for tax purposes, as a dividend of the beneficiary, whether natural or legal person or entity, to the extent that it exceeds the initial paid-up capital.

2.3.2. Before the entry into force of Law 4172/2013

  1. In the event of dissolution of the foreign foundation, the amounts paid, to the extent that they exceed the initial contributed capital, constitute income for the beneficiary natural person, which cannot be classified into any of the categories A to G of Article 4(2) of Law 2238/1994, i.e. income of Article 48(3) of the same law (G3), while for the beneficiary legal person constitute income from securities of foreign origin and are taxed in accordance with the general provisions of Law 2238/1994.
  2. It is recalled that for income tax purposes, the dissolution of the foreign trust is tax-indifferent, since the provisions referred to in point 22.2.2. above apply.

2.4. Expenditure of acquiring assets upon establishment of a foreign trust or foundation for its settlor, a natural person, regardless of whether he is one of the beneficiaries of its benefits

  1. In accordance with the provisions of the Article 32(b) of Law 4172/2013, the annual expenditure of the taxpayer, his/her spouse and dependants are accounted for, among other funds, the ones that are actually paid for the purchase of undertakings or the establishment of or increase in the capital of undertakings which operate individually or in the form of a general or limited partnership, société anonyme, limited liability company, private company, society, joint venture, civil law partnership, or purchase of shares and securities in general.
  2. Moreover, according to the provisions of Article 17(b) of Law 2238/1994, as applicable from 1/1/1995 until repealed with Article 4(10) of Law 3091/2002, i.e. up to 31/12/2002, the annual expenditure of the taxpayer, his/her spouse and dependants, included, among other funds, the ones that are actually paid for the purchase of undertakings or the establishment of or increase in the capital of undertakings which operate individually or in the form of a general or limited partnership, limited liability company, private company, society, joint venture, civil law partnership, or purchase of shares and securities in general.
  3. In view of the above and given that the contribution of funds to a trust or foundation did not constitute a presumption of asset acquisition either before or after the entry into force of Law 4172/2013, it follows that the natural person, settlor of a foreign trust or foundation, does not incur the related expense of asset acquisition (presumption).

 

  1. TAX LIABILITIES IN THE TRANSFER/DISTRIBUTION OF PROPERTY – TAXATION ON INHERITANCE, GIFTS

3.1. General legislative framework

According to the Code on Taxation of Inheritance, Gifts, Parental Donations and Profits from Gambling, which was ratified by the first Article of Law 2961/2001 (Gov. Gaz. 266, Vol. A, hereinafter the “Code”), tax is levied on any form of property (movable or immovable) located in Greece and belonging either to Greek or foreign nationals, as well as on tangible or intangible property located abroad of a Greek national regardless of the domicile thereof or a foreign national who is domiciled in Greece, which is transferred by reason of death, gift or parental donation. By way of exception, the moveable property, which is located abroad, of a Greek national who is domiciled abroad for at least ten (10) consecutive years is exempt from inheritance tax. Moreover, tax is levied on the movable property, which is located abroad, of a foreign national, which is transferred by means of a gift to a Greek or foreign national, who is domiciled in Greece (Articles 3 and 35 of the Code). The tax is determined by the value of the property in question at the time of establishment of the tax liability and the degree of relatedness between the person liable for payment of the tax/recipient (heir or donee) and the grantor (deceased, donor). In principle, the tax liability is born at the time of death or at the time of establishment of the gift or parental donation (drafting of notarial deed or delivery in the case of movable property) or, by way of exception, at a later point in time, in the cases expressly set out in Articles 7, 8 and 40 of the Code (fulfilment of condition precedent or subsequent, expiry of time limit, etc.). In the case of gift by reason of death, the tax liability is born at the time of death of the donor, in the absence of any other condition precedent or other reason of transfer of the time of taxation.

(Please note that, for the purpose of imposing gift tax, acquisition of property by reason of gift includes both the one established according to the provisions of the Civil Code and any transfer of property without consideration and without legal obligation, which results in the decrease of the property of one person and the corresponding equal increase in the property of another person.)

3.2. Foreign trust

3.2.1. Foreign trust, which has been established by means of a will, concerning movable property located abroad

3.2.1.1. Implementation of Article 17(4) of the Code

According to Article 17(4) of the Code, in the case of assets located abroad but acquired and taxed in Greece, where they have been placed under trust management provided for in common law, by means of the deceased person’s will, the beneficiaries of sums collected each time are immediately taxed for them, unless otherwise exempt, and those to whom the property passes are taxed for full ownership of the property concerned at the time of passing to them.

The above provisions only address the case in which the inherited assets, which have been placed under trust management by means of the deceased person’s will, are located abroad, on the condition, however, that they are taxed in Greece. Specifically, they relate only to the tangible or intangible movable property located abroad.

3.2.1.2. Property non-taxable in Greece

The movable assets which are located abroad, have been placed under trust management by means of the deceased person’s will and are acquired in Greece are exempt from tax, if the property in question is not taxable in Greece, but not from the obligation to submit a statement. Example: trust of movable property set up by a Greek established abroad for more than ten years (Article 25(2)(e) of the Code).

3.2.2. Foreign trust, which has been established by means of a deed inter vivos concerning movable property abroad

A trust which has been established by deed inter vivos of the settlor, to which movable assets have been contributed which are situated abroad, on the condition that they pass to the beneficiaries either at a specific time or periodically, while the settlor is alive, is treated by applying the provisions on gift set out in the Code (Article 34), the donor being the settlor, the donee being the beneficiary, and by applying the corresponding bracket (or tax rate) based on their relatedness (or absence thereof).

A trust which has been established by deed inter vivos of the settlor, to which movable assets have been contributed which are situated abroad, on the condition that they pass to the beneficiaries at the time of his death or under any condition precedent after his death, is treated by applying the provisions on gift by reason of death provided for in the Code (Article 39(2), 40(1)(a), the donor being the settlor and the donees by reason of death being the beneficiaries. (until the condition precedent has been fulfilled, the management of the assets of the trust is governed by the provisions on income tax, as referred to in subparagraphs 2.1.1 and 2.2.1. hereof)

3.2.3. Foreign trust, which has been established by means of a will or by deed inter vivos concerning immovable property located abroad

Immovable property located abroad which is transferred by reason of death, gift or parental donation is not subject to tax.

3.2.4. Foreign trust, which has been established by means of a will or by deed inter vivos concerning movable or immovable property located in Greece

In these cases, the trust is not governed by the provisions of Article 17(4); instead, the provisions of domestic law are sought and applicable, which more closely resemble those of the trust and meet the true intention of the settlor.

The settlor/testator may wish, for instance, to appoint an executor, establish a trust, appoint a heir, set out the payment of a sum after fulfilment of a condition precedent or period, etc. Furthermore, the management of the trust/transfer of property may take place while the settlor is alive, which is a transfer of property inter vivos, or the trust may have been established by a deed inter vivos of the settlor, but for the purpose of passing the assets, which have been contributed to it, to the beneficiaries after his death (gift by reason of death) or if, at the time of his death, they have reached a certain age, or a condition precedent or deadline has been fulfilled, etc. Please note that in this case, until fulfilment of the condition precedent or subsequent, deadline, reaching of age, etc., the management of the assets of the trust is governed as above by the income tax provisions, as referred to in subparagraphs 2.1.1 and 2.2.1. hereof.

All the above cases are governed by the respective tax provisions of the Code.

For example:

– A trust which has been established so that the trustee distributes sums of money or other assets (provisions, etc.) to the beneficiaries while the settlor is alive is treated according to the provisions on gifts set out in the Code (Articles 34 et seq. in conjunction with Article 44(2)) the donor being the settlor and the donee being the beneficiary, and by applying the corresponding bracket (or tax rate) based on their relatedness (or absence thereof). (In contrast, distributions of sums to the settlor-beneficiary are treated for tax purposes (as income thereof), as stated in subparagraphs 2.1.2 and 2.2.2. hereof).

– A trust which has been established in order for the trustee to distribute, after the death of the settlor, the entire property or proceeds from the sale of such property to the beneficiaries, is treated as the case may be, based on the provisions on inheritances or gifts by reason of death and the trustee is equated with the executor of will or property administrator while the beneficiary with an heir/legatee or a donee by reason of death (Articles 2, 37, 39(2), 61). The beneficiary-heir/donee is taxed on the value of the acquired assets, in relation to the deceased person-settlor, by applying the corresponding tax calculation bracket based on their relatedness (or absence thereof). (Please note that after the acquisition by reason of death (or gift by reason of death), in the case where subsequent payments are involved (such as rent from immovable property, share dividends, etc.), the beneficiary will be taxed according to the income tax provisions (since the property which has been acquired as above constitutes property of the heir or donee by reason of death).

– In the event of a trust, for which it is stipulated inter alia, by means of a will, that certain assets will pass to the beneficiary after reaching a certain age, who will be periodically collecting certain sums until that time, the beneficiary in question will be taxed as a heir, firstly, at the time of death, for the value of periodic provisions (Article 14 of the Code) and, secondly, upon reaching the prescribed age, as an heir of the other assets, by taking account of the inheritance tax paid.

– The case in which the immovable property of a foreign national, which is situated in Greece and is placed under trust management, has been conveyed to the name of the trustee, who, in order to manage it for the purposes of the trust for the benefit of the beneficiary, has accepted the inheritance, may be treated as a trust (Article 17(1) of the Code), with the trustee incurring taxes as usufructuary and the beneficiary being the trustee (full owner).

3.2.5. Tax treatment of settlor and trustee

It should be noted that the contribution of assets to the trust by the settlor does not establish a tax liability of gift for the trustee. Moreover, it cannot be considered that a tax liability of gift is established in the event where assets revert to the property of the settlor, since, as mentioned above, the trust has been set up for the purpose of management of the settlor’s property. The dissolution of the trust and return of its assets to the settlor is governed by the provisions referred to above in paragraph 2.3. hereof.

3.3. Foreign Foundation

The foreign foundation, as an institution, is not regulated by the Greek legal order or by the law on inheritance and gift taxation, with the exception of foreign foundations that demonstrably pursue national or religious purposes or wider charitable, educational, artistic purposes or purposes for public benefit within the meaning of Article 1 of Law 4182/2013 (Article 25(3)(b) of Law 2961/2001), in which case, and for taxation purposes, the provisions of domestic law will be sought, which more closely resemble its arrangement and satisfy the true will of its settlor and the general framework of inheritance and gift taxation. In other words, the individual provisions and definitions of its deed of establishment and the bylaws should be examined on a case-by-case basis, including all parameters, in general, that determine the management and further disposal of the assets of the foundation (based on the respective facts and details supplied). Moreover, since the Council of the foundation may have extensive powers in determining the rights of the beneficiaries but also the revocation of or amendment to the bylaws and the articles of association or may be fully bound by the instructions of the settlor and not have free power of disposal of its assets, it is clear that for determining the tax liabilities of the beneficiaries, the critical element are the stipulations of the bylaws or the articles of association of the foundation, as formed at the time of death of the settlor and, in particular, the provisions therein on the management of assets and the provisions for the time when the settlor is alive and for the time when such provisions are made.

Therefore, if for example there is a provision on payment of sums of money or other movable property to the beneficiaries when the settlor is alive, the provisions in question should be treated as gifts by the settlor to the beneficiaries. If it is set out that after the death of the settlor, the beneficiaries become heirs/donees by reason of death, where appropriate, of the entire property of the foundation, each beneficiary will be taxed on the value of the specified rate or item which passes thereto by reason of death, according to the relatedness to the settlor, and the tax time will be either the time of death or any other later time, if another time is set out in the regulation of the foundation (condition precedent or subsequent, deadline, etc.). If, for example, it is stipulated that the beneficiaries will be periodically receiving, either during the life or after the death of the settlor, various sums of money, Article 14 of the Code for the taxation of provisions – indefinite, lifelong or fixed time, will apply. In other words, beneficiaries will incur, in this case, either gift tax or inheritance tax, depending on the cause, based on the relationship with the settlor (while no income tax is levied on the benefits concerned.)

In the event of transfer of assets (transfer of title or other right in rem) to a foundation from third parties (with the exception of the settlor) without consideration, it will be examined whether the provisions on gifts are applicable at the stage of acquisition of the assets in question by the foundation.

Finally, it cannot be considered that a tax liability of gift is established in the event where the beneficiary of provisions, etc. is the settlor, or where assets of the foundation are transferred to the settlor, which have been contributed by the same, provided the foundation has been established for the management of the property. If, however, ownership of immovable property has passed to the foundation, for any reason or from any person, the terms and commitments of the articles of association and the bylaws and, mainly, the facts of each case will be examined, based on which the relevant taxes will be levied, both at the time of acquisition and when transferring the assets in question further to the beneficiaries.

 

*             The information is accurate to the best of our knowledge as at the time of writing. We have no obligation to update it. We accept no responsibility against any third party who is not a client of the firm and has not signed the terms of our engagement.