Double taxation of an Estate's income - AStG

[PandaMunich 16,568]

 

20 hours ago, Straightpoop said:

@PandaMunich

As a practical matter - at least with respect to US estates and trusts - there will in most cases be only double taxation (German income and inheritance taxes) on income earned in a "family" trust/estate. That is because US trusts are exposed to a very severe rate of tax on their undistributed/undistributable income. They can avoid that tax by simply distributing it or accounting for it as Distributable Net Income (DNI).  When they do so, the US trust itself pays no tax on that trust income nor does it accrue any tax. Only the beneficiaries accrue the tax liability which is not actually owed until the year the trust income is actually distributed to them.  Because it is ultimately their foreign tax paid on their foreign capital income there should be no barrier to claiming a foreign tax credit under § 32d Abs. 1 even if the foreign tax is actually paid at in a later calendar tax year than when the income accrues to them for purposes of § 15 AStG.

 

Or is that being overly optimistic about how German tax law treats timing differences in connection with the foreign tax credit?

Yes, I am afraid so.

This takes care of the "name tag" part of the tax credit problem for capital income, but it still leaves the "timing" part.

 

The whole goal of §15 AStG is to pretend the trust doesn't exist and to transparently allocate all assets and income from that trust to the heirs.

If those assets had belonged to a heir resident in Germany, that capital income would have been "his" to declare in the year it was earned by the financial asset, not in a later year.

 

What you propose is like you saying: 

"I received income in 2021, but it was paid into my cousin's account in Zimbabwe. He only forwarded it to me in 2022, this means I only have to declare that income in my 2022 tax return, right?"

--> Nope, it has to be declared in your 2021 tax return.

 

May I remind you of your glorious post regarding the chicken coop in Zimbabwe (with the addendum that §15 AStG means that a label with your name gets stuck over the trust's name plate on that chicken coop):

As I see it, the capital income would have to be taxed in the German tax return of that US citizen living in Germany for the year in which the trust earned it, in this example in the German tax return 2021.

And if that US citizen only paid the 15% US source tax on dividends (since the D/USA DTA doesn't allow any other source tax for capital income) in 2023, after having done his US income tax return 2022, then and only then, after actually having paid it, can he apply for the German tax credit against his German income tax 2021.

 

I would then normally say that the old 2021 German income tax Bescheid could be changed to reimburse you those (15% * US dividends), since I see paying that US source tax as a "rückwirkendes Ereignis" (which is one of the norms to allow a Bescheid to be changed) in the sense of §175 (1) Nr. 2 AO: https://dejure.org/gesetze/AO/175.html

 

However, the BFH in its infinite wisdom denied a tax credit in a case where someone had not declared capital income and then tried to get the source tax recognised retroactively for those old years: https://www.bundesfinanzhof.de/de/entscheidung/entscheidungen-online/detail/STRE202110132/

• Allein die Vorlage der Steuerbescheinigung über die erzielten Kapitaleinkünfte ist kein rückwirkendes Ereignis im Sinne der Vorschrift. Dies wird durch § 175 Abs. 2 Satz 2 AO ausdrücklich angeordnet.

 

So even if you can convince the Finanzamt that yes, that 15% US source tax paid on those 2022 US dividends in your 2022 US tax return should reduce your 2021 German income tax, because  the 2022 US dividends from the US tax return are actually just the 2021 US dividends in your German tax return that you had to declare "early" because of §15 AStG, you still have the problem to find a valid change norm for the 2021 Bescheid, so as to actually get the tax credit applied.

 

--> Avoid that problem by not needing a change norm in the first place, i.e. by instead simply keeping the entire 2021 Bescheid "open" by doing an Einspruch against it that has to reach the Finanzamt within 1 month and 3 days of the date written on the Bescheid.

In this Einspruch, you would explain that this "2021" US source tax will only be paid by you at some point in 2023 (= once you have filed your 2022 US tax return), and that at that point, you will want a new 2021 Bescheid with that tax credit getting applied.

[Straightpoop 676]

21 hours ago, PandaMunich said:

What you propose is like you saying: 

"I received income in 2021, but it was paid into my cousin's account in Zimbabwe. He only forwarded it to me in 2022, this means I only have to declare that income in my 2022 tax return, right?"

 

Actually, no. That is most certainly not what I am saying.

 

Rather, the situation of § 15 AStG taxation might better be described as:  "No money or thing of value was put at my power to dispose of anywhere in calendar 2021. Yet, despite the fact that I cannot spend it, pledge it or donate it, or even know how much it was or its source or its character, § 15 AStG says I must somehow compute it and declare it on my 2021 tax return (in calendar year 2022) and pay taxes on it."

 

The only saving grace with this preposterous situation is that, as noted above, the putative donee in many cases has absolutely no idea what the value of his "income" was in the year it accrued because, unless he is also the trustee/personal representative, he very likely has no control over the trust principle, its records, etc.

 

In short, he will in all likelihood be governed by something German tax law regards as perhaps its most sacred principle of all:  the Zuflußprinzip. (Violated in the extreme by § 15 AStG).  He'll honestly declare it when he actually gets it; when he actually knows what it is and how much and when - whether it be in the form of money sent to his cousin's account or a chicken added to his coop in Zimbabwe.

 

The FA is unlikely to be any the wiser and everyone - including the wretched overworked FA Beamter - will be grateful for that.

 

In the meantime, the issue that my post is actually concerned with is timing.  Specifically, regardless of whether the FA is taxing real or imaginary foreign source income in a given calendar year, what timing problems arise with respect to claiming a foreign tax credit on that income when the calendar tax year of actual/imaginary income taxed does not coincide with the year the foreign tax is actually paid (by the taxpayer) on that income?

 

Let's start with the most common example. Assume the following:

 

Taxpayer A, a US citizen resident in Germany, actually receives $1,000 of US-source dividends on his US brokerage account in calendar tax year 2021.  Following the general rule in the US, no US tax is withheld on these dividends when paid.  Taxpayer A made no US tax payments in 2021 from any other source (e.g. wage withholding, estimated taxes, etc.). 

 

In 2022, A timely files a US tax return and computes a US tax liability for 2021 of $150 all of which is attributable to his $1,000 of US-source dividend income and he pays the tax in 2022.

 

Also in 2022, A timely files his German tax return, reports his US-source dividend income and claims a foreign tax credit against his Abgeltungsteuer liability of $150.

 

Q1:  Is A entitled to claim the credit even though he paid the tax in the calendar year following the tax year in which the income tax liability accrued?

 

 

Change the facts slightly:

 

In 2022, A procrastinates and files neither a US or German return for 2021. Nor does he file any extension requests in either country.

 

In early 2023 he finally gets around to filing his returns in the same sequence with the same result as in the example above (plus maybe a late filing/paying penalty or interest or both in either or both countries.)

 

Q2:  Is A entitled to claim the credit for 2021 foreign taxes on his late-filed 2021 German return even though he did not pay those taxes until calendar 2023?

 

Q3:  Would the answer to Q2 be different if A had received a filing extension and thus timely filed his 2021 German return?

 

 

 

 

 

 

[PandaMunich 16,568]

3 hours ago, Straightpoop said:

Taxpayer A, a US citizen resident in Germany, actually receives $1,000 of US-source dividends on his US brokerage account in calendar tax year 2021.  Following the general rule in the US, no US tax is withheld on these dividends when paid.  Taxpayer A made no US tax payments in 2021 from any other source (e.g. wage withholding, estimated taxes, etc.). 

 

In 2022, A timely files a US tax return and computes a US tax liability for 2021 of $150 all of which is attributable to his $1,000 of US-source dividend income and he pays the tax in 2022.

 

Also in 2022, A timely files his German tax return, reports his US-source dividend income and claims a foreign tax credit against his Abgeltungsteuer liability of $150.

 

Q1:  Is A entitled to claim the credit even though he paid the tax in the calendar year following the tax year in which the income tax liability accrued?

Yes.

I know the IRS is sensitive to that issue when it comes to tax credits, they want the tax "for a year" to have been actually paid "in that year".

 

For the Finanzamt, it doesn't matter, it just has to be tax paid on income earned in that year (im jeweiligen Veranlagungszeitraum bezogenen Kapitalerträge),

They will only do the tax credit after you have paid the US tax (die auf ausländische Kapitalerträge festgesetzte und gezahlte und um einen entstandenen Ermäßigungsanspruch gekürzte ausländische Steuer).

See §32d (5) EStG: https://www.gesetze-im-internet.de/estg/__32d.html

 

 

3 hours ago, Straightpoop said:

Change the facts slightly:

 

In 2022, A procrastinates and files neither a US or German return for 2021. Nor does he file any extension requests in either country.

 

In early 2023 he finally gets around to filing his returns in the same sequence with the same result as in the example above (plus maybe a late filing/paying penalty or interest or both in either or both countries.)

 

Q2:  Is A entitled to claim the credit for 2021 foreign taxes on his late-filed 2021 German return even though he did not pay those taxes until calendar 2023?

Yes.

 

If you have a Steuerberater, the filing deadline for 2021 is 31. August 2023, so the 2021 tax return being filed in 2023 is not late.

 

****************************************************************************************************

 

The only thing the Finanzamt won't do, is give you a tax credit for tax that you had already paid at the point the Bescheid became "set in stone" at 1 month + 3 days after the date the Bescheid was issued, i.e. when it became bestandskräftig - because in these cases, you should have told the Finanzamt about the already paid tax and gotten the Bescheid amended, or if you had difficulty getting the proof that you had paid this tax, should have done an Einspruch to keep that Bescheid "open".
 

So if:

1. you had paid that US source tax on 2021 income in the "2021 US tax return" which you filed 2022 and
2. then do your "2021 German tax return" in 2023 and forgot to ask for the tax credit for the US tax in that 2021 German tax return, and also do not remember to do so within 1 month (and 3 days) of the date of the German Bescheid, while it can still be changed,

the Finanzamt will refuse to change that Bescheid.

 

You would have needed it to be a "rückwirkendes Ereignis" (retroactive event) to get the Bescheid changed.
But simply belatedly showing the Finanzamt proof (= Bescheinigung or Bestätigung) that US tax was paid at some point up to the Bestandskraft (= date of Bescheid + 1 month + 3 days), i.e. about something that has already happened (= "bereits gegebener Sachverhalt"), does not count as a "rückwirkendes Ereignis".

If you ask for that tax credit after the Bescheid became "set in stone", the Finanzamt would simply point you to §175 (2) Satz 2 AO: https://www.gesetze-im-internet.de/ao_1977/__175.html

• The subsequent issue or presentation of a certificate or confirmation shall not be deemed to be a retroactive event.

See the AEAO (Anwendungserlass zur Abgabenordnung), i.e. the instructions by the BMF (German Ministry of Finance) to the Finanzamt on how to apply the AO (you need to click on that + in a Microsoft browser, e.g. Edge, it won't clap open in Google Chrome):  https://ao.bundesfinanzministerium.de/ao/2022/Abgabenordnung/Vierter-Teil/Dritter-Abschnitt/Erster-Unterabschnitt/III/Paragraf-175/inhalt.html#controls-toc-2ec63c52-28b1-42ab-9468-76052a9cc0ba

• 2.2
  Ob einer nachträglichen Änderung des Sachverhaltes rückwirkende steuerliche Bedeutung zukommt, bestimmt sich allein nach dem jeweils einschlägigen materiellen Steuerrecht. Nach diesem ist zu beurteilen, ob zum einen eine Änderung des ursprünglich gegebenen Sachverhalts den Steuertatbestand überhaupt betrifft und ob sich darüber hinaus der bereits entstandene materielle Steueranspruch mit steuerlicher Rückwirkung ändert (BFH-Beschluss GrS vom 19.7.1993, GrS 2/92, a. a. O.).Der Fall eines rückwirkenden Ereignisses liegt vor allem dann vor, wenn die Besteuerung nach dem maßgeblichen Einzelsteuergesetz nicht an Lebensvorgänge, sondern unmittelbar oder mittelbar an Rechtsgeschäfte, Rechtsverhältnisse oder Verwaltungsakte anknüpft und diese Umstände nachträglich mit Wirkung für die Vergangenheit gestaltet werden (BFH-Urteil vom 21.4.1988, IV R 215/85, BStBl II S. 863). Nach § 175 Abs. 2 Satz 2 AO gilt die nachträgliche Erteilung oder Vorlage einer Bescheinigung oder Bestätigung nicht als rückwirkendes Ereignis. § 175 Abs. 2 Satz 2 AO ist nicht auf die Bescheinigung der anrechenbaren Körperschaftsteuer bei verdeckten Gewinnausschüttungen anzuwenden (siehe hierzu und zum Anwendungszeitraum der Vorschrift Art. 97 § 9 Abs. 3 EGAO). Beweismittel, die ausschließlich dazu dienen, eine steuerrechtlich relevante Tatsache zu belegen und die als solche keinen Eingang in eine materielle Steuerrechtsnorm gefunden haben, sind auch dann kein rückwirkendes Ereignis i. S. d. § 175 Abs. 1 Satz 1 Nr. 2 AO, wenn sie erst nach Bestandskraft eines Bescheids beschafft werden können; ggf. kommt hier aber § 173 AO zur Anwendung.Eine rückwirkende Änderung steuerrechtlicher Normen ist kein rückwirkendes Ereignis i. S. d. § 175 Abs. 1 Satz 1 Nr. 2 AO (BFH-Urteil vom 9.8.1990, X R 5/88, BStBl 1991 II S. 55).Auch eine Entscheidung des BVerfG stellt kein rückwirkendes Ereignis i. S. v. § 175 Abs. 1 Satz 1 Nr. 2 AO dar (vgl. u. a. BFH-Urteil vom 12.5.2009, IX R 45/08, BStBl II S. 891).
   

• 2.3
  Die Änderung des Steuerbescheids nach § 175 Abs. 1 Satz 1 Nr. 2 AO ist nur zulässig, wenn das rückwirkende Ereignis nachträglich, d. h. nach Entstehung des Steueranspruchs und nach dem Erlass des Steuerbescheids (ggf. des zuletzt erlassenen Änderungsbescheids) eingetreten ist. Die Voraussetzungen des § 175 Abs. 1 Satz 1 Nr. 2 AO liegen nicht vor, wenn das Finanzamt - wie im Fall des § 173 Abs. 1 AO - lediglich nachträglich Kenntnis von einem bereits gegebenen Sachverhalt erlangt (vgl. BFH-Urteil vom 6.3.2003, XI R 13/02, BStBl II S. 554).Ist im Einzelfall die Änderung des Steuerbescheids nach § 175 Abs. 1 Satz 1 Nr. 2 AO ausgeschlossen, kann in Fällen, in denen das Ereignis zwar schon vor Erlass des Steuerbescheids eingetreten, dem Finanzamt jedoch erst nachträglich bekannt geworden ist, die Änderung des Steuerbescheids nach § 173 Abs. 1 AO in Betracht kommen (vgl. BFH-Urteil vom 17.3.1994, V R 123/91, BFH/NV 1995 S. 274).

 

3 hours ago, Straightpoop said:

Q3:  Would the answer to Q2 be different if A had received a filing extension and thus timely filed his 2021 German return?

No, no different.

 

 

[Straightpoop 676]

2 minutes ago, PandaMunich said:

the IRS is sensitive to that issue when it comes to tax credits, they want the tax "for a year" to have been actually paid "in that year".

 

Nope.  Not in the least.

 

The US tax code is highly flexible on the subject of timing of foreign tax credits.

Credits can be claimed for taxes "paid" or "accrued" at the taxpayer's option.

If a creditable foreign tax in a calendar exceeds the credit limit for that tax year, the balance can be carried back 1 year and forward for 10 years until finally exhausted in prior or subsequent tax year.

 

 

[PandaMunich 16,568]

7 minutes ago, Straightpoop said:

Nope.  Not in the least.

Nice to know.

Had to raise a client's income tax prepayments to a positively indecent amount because he had one-off income that year and his CPA had told him that he needs to have paid that German tax in that year so that it can then be used as a tax credit in his US tax return for that year.

Simply paying the German tax the next year, after the German Bescheid got issued, wasn't deemed enough.

[PandaMunich 16,568]

On 31/12/2022, 19:37:09, Straightpoop said:

Credits can be claimed for taxes "paid" or "accrued" at the taxpayer's option.

But if I understand the instructions for form 1116 correctly, once you have chosen "accrued taxes" for the foreign tax credit in the US income tax return, you are stuck with having to always used "accrued taxes" in all future years?

 

source: https://www.irs.gov/instructions/i1116#en_US_2022_publink11441fd0e4601

• Generally, you can take a foreign tax credit in the tax year you paid or accrued the foreign taxes, depending on your method of accounting. If you report on the cash basis, you can choose to take the credit for accrued taxes by checking the “Accrued” box in Part II on a timely filed original return. You can’t make this choice on an amended return. Once you choose to do this, you must credit foreign taxes in the year they accrue on all future returns.

So you cannot go back to "paid" after you had chosen "accrued" in an earlier year?

[alpenstar 3]

3 hours ago, PandaMunich said:

But if I understand the instructions for form 1116 correctly, once you have chosen "accrued taxes" for the foreign tax credit in the US income tax return, you are stuck with having to always used "accrued taxes" in all future years?

 

So you cannot go back to "paid" after you had chosen "accrued" in an earlier year?

 

Correct. You can claim foreign tax credit for however many years you need on cash/paid basis, but once you claim it on accrual basis, you are stuck with it on all future returns, unless you can convince the IRS to grant you an exception. Interestingly enough, the year you switch to accrual, you can credit both the tax you paid that year and the tax you accrued for that year.

 

The US CPA of your client was probably trying to avoid getting him/her stuck with the accrual tax reporting since it requires filing an amended tax return when accrual estimate was off from the actual tax paid later. There is currently no way to e-file 1040x amendments, so you are stuck with snail mail and the requisite processing delays on top of the additional expenses incurred in getting an amendment prepared.

[PandaMunich 16,568]

41 minutes ago, alpenstar said:

The US CPA of your client was probably trying to avoid getting him/her stuck with the accrual tax reporting since it requires filing an amended tax return when accrual estimate was off from the actual tax paid later. There is currently no way to e-file 1040x amendments, so you are stuck with snail mail and the requisite processing delays on top of the additional expenses incurred in getting an amendment prepared.

Thanks.

Yes, that makes sense.

[Straightpoop 676]

@alpenstar is correct.

 

However, the obligation to file amended returns applies just as much (or as little) to those using the cash paid as opposed to the accrual method.  If an amount paid in a given year (e.g. Vorauszahlungen in Germany) proves excessive and some or all is refunded in a later year, an amended return may have to be filed if the credit claimed was based on the amount paid and the amount of that overpayment that was refunded would cause a reduction of the foreign tax credit in the year claimed. 

 

I found over the years that the accrual method works best to avoid amended returns. That is especially the case where the foreign tax payments paid in a given year diverge greatly from one year to the next from the amount actually owed and where there is no controversy regarding the amount of foreign tax actually owed. 

 

 

[PandaMunich 16,568]

54 minutes ago, Straightpoop said:

However, the obligation to file amended returns applies just as much (or as little) to those using the cash paid as opposed to the accrual method.  If an amount paid in a given year (e.g. Vorauszahlungen in Germany) proves excessive and some or all is refunded in a later year, an amended return may have to be filed if the credit claimed was based on the amount paid and the amount of that overpayment that was refunded would cause a reduction of the foreign tax credit in the year claimed. 

Thanks.

 

Though I would have assumed that in the "cash" method, for example, that German tax that had been overpaid in 2020 (for the year 2020) was reimbursed in 2022 after the 2020 tax return had been processed, would reduce the "2022 foreign tax paid", i.e. the tax of the year in which it was reimbursed.

But from what you say, you have a mix of "cash" and "accrued", i.e. for the initial foreign tax credit, you use the "cash" method, but as soon as you have a reimbursement, you have to allocate that reimbursement to the "old" year to which it "belongs" and get that old year's foreign tax corrected, i.e. suddenly you have to act "accrual"-wise?

[Straightpoop 676]

@PandaMunich

 

I'm not sure I understand your fact scenario.

 

The decision to switch from cash to accrual has to take place on an original return for the "election" year. It cannot be made on an amended return and the election when made does not relate back (i.e. it is not retroactive) to prior years in which the cash method was in use.

 

The only tax year in which taxes paid and accrued can be aggregated is the year an election is made to switch from cash to accrual.  In that year only taxes paid (for a prior year) can be added to the taxes accrued for the current year to figure the current year's foreign credit.  Excess credits from that election year can be carried back 1 year or forward 10 years.

 

The refund in calendar 2022 of taxes overpaid and claimed in 2020 to a cash method taxpayer would not reduce the amount of creditable taxes paid in 2022 but might constitute a "foreign tax redetermination" that could trigger the obligation to file an amended return for tax year 2020 e.g. if the balance of taxes paid in 2020 after reduction for the amount refunded would cause an increase in the US taxes owed for that year or would cause a reduction in the amount carried forward - and used effectively to reduce US taxes - in a year subsequent to 2020.

 

If, however, on his 2020 return the cash basis taxpayer anticipated he would be due a refund and thus claimed only the amount he paid in 2020 that he knew he would owe, then the later refund would not constitute a foreign tax redetermination and he would not have to file an amended 2020 return nor correct his carryforward or carryback computations. In other words: the accrual method.

 

If the cash basis taxpayer gets hit with a sizable German tax bill for a tax year in the distant (i.e. more than a year before the current tax year) and the hit is either unexpected or the taxpayer failed to claim a provisional credit (allowed if petitioned for in advance when the foreign tax is unpaid but controverted), then the big late payment cannot be claimed on an amended return for that earlier year because his tax credit in that earlier year was based on taxes paid rather than accrued.  The accrual basis taxpayer, on the other hand will have the benefit of a 10-year statute of limitations to file an amended return rather than just the 1-year carryback.

 

 

 

 

 

 

[PandaMunich 16,568]

1 hour ago, Straightpoop said:

The refund in calendar 2022 of taxes overpaid and claimed in 2020 to a cash method taxpayer would not reduce the amount of creditable taxes paid in 2022 but might constitute a "foreign tax redetermination" that could trigger the obligation to file an amended return for tax year 2020 e.g. if the balance of taxes paid in 2020 after reduction for the amount refunded would cause an increase in the US taxes owed for that year or would cause a reduction in the amount carried forward - and used effectively to reduce US taxes - in a year subsequent to 2020.

I was just pointing out that if the IRS had stuck to the "cash" method to the bitter end, the reimbursement of the 2020 tax that happened in 2022 should have reduced the 2022 foreign tax credit, instead of triggering a "repair" of the 2020 tax return.

In other words: the "cash" method as applied by the IRS to the foreign tax credit isn't entirely "cash".

[Straightpoop 676]

21 minutes ago, PandaMunich said:

the "cash" method as applied by the IRS to the foreign tax credit isn't entirely "cash".

 

Exactly. Ultimately, the credit will be limited to what has accrued on a year-by-year basis and if you don't elect accrual accounting you may find yourself shortchanged under certain scenarios.

 

Hence my general recommendation to use the accrual method ab initio.