Technical article
Why the Same Payment Can Be Taxed Twice, and When a Country Gives Credit
A US trust that pays a person who lives abroad must hold back 30% of US-source income such as dividends.
Picture a widow in Texas whose family trust holds US stocks. The trust pays a grandchild who lives in Germany. Say the payment is US$100,000 of dividends. This is an example, not a forecast.
The payment may meet three tax offices. The trustee holds back tax at the source. The trust may owe tax of its own before the money leaves. The grandchild's home country taxes what arrives. The question is whether each one counts when the next one calculates.
The three taxes, in order
The first is withholding at source. A US trust that pays a person who lives abroad must hold back 30% of US-source income such as dividends. The trustee reports it on Form 1042 and Form 1042-S. A treaty can lower the 30%, and the heir claims that on Form W-8BEN. Bank deposit interest and some capital gains are exempt. Income earned outside the United States is outside this charge.
The second is the trust's own tax. A US trust that keeps income pays trust rates, which reach 37% above US$16,000 in 2026. A trust that pays income out gets a matching deduction, so the income is taxed once on its way through, in the hands of the person who receives it. For the heir abroad, that tax is the withholding.
The third is the heir's home tax. This is where the rules differ most.
What three places say
| Place | What the heir's country does | Credit and reporting |
|---|---|---|
| Germany | Taxes a payout from a foreign trust as capital income at 25% plus a 5.5% surcharge on that tax, on the full amount, income or capital | The 25% is reduced by foreign tax that can be credited |
| Germany, gift side | Taxes the payout as a gift only if the heir has a legal claim to it, at rates by relationship to the person who set up the trust | One law-firm article (tier C) says inheritance tax can be credited against income tax and gift tax cannot |
| United Kingdom | Taxes income at up to 45% above GBP 125,140 (about US$163,000); payments from a non-UK trust are matched to the trust's income and gains | Must be disclosed on the tax return even when reported in the US |
| France | Taxes distributions as investment income; foreign inheritance duties are creditable | Credit for income tax depends on the treaty |
A treaty with the United States is what decides the French income case. For Germany, the sources describe credit written into German law itself, and few treaties on inheritance and gift tax. The German credit for foreign inheritance tax needs an application, and the German tax must arise within five years of the foreign tax.
Where credit is built in and where treaties decide
Some countries give credit by their own law. Germany does so for the flat tax and for foreign inheritance tax. Australia taxes the trustee on a non-resident beneficiary's share, and the beneficiary then claims credit. Argentina and Ecuador tax residents on worldwide income and give credit for foreign tax. France credits foreign duties on inheritances.
Other cases are left to treaties. The 30% US charge drops only by treaty. Canada's 25% charge on payments to non-residents is 15% under the Canada-US treaty for certain income, according to one firm's guide. The IRS lists 15 estate or gift tax treaties, and none is listed for Spain, Portugal, Belgium, Mexico or Brazil.
The German case in one sentence
Germany can tax one trust payout as income and also as a gift. A Munich tax court in 2024 found no breach of the constitution or of free movement of capital. That is one law firm's account of the case, so it is tier C. EY Germany notes that Germany's top tax court narrowed the gift rule in 2021 to heirs with a legal claim, so a purely discretionary beneficiary is outside the gift tax.
You could
You could list the heir's countries and ask of each: is there a treaty with the United States, does local law credit foreign tax, and which tax does the credit cover? You could also ask the trustee which payments carry withholding and which are exempt.
Which of the three taxes worries you most for the people you have in mind? Share what you have learned here. Someone else weighing the same payment may find it useful.
Figures are estimates for planning, based on public data. Date read: October 2026.
Sources
- IRS Publication 515 and Cornell LII 26 USC 871 and 1441 (A)
- IRS Form 1042 instructions (A)
- IRS estate and gift tax treaty list (A)
- German income tax act section 32d and inheritance tax act sections 21 and 7 on gesetze-im-internet.de (A)
- Chambers Private Wealth 2026 Germany (B)
- EY Germany on foreign trust payments (B)
- PwC tax summaries Argentina and Ecuador (B)
- GOV.UK income tax rates (A)
- Blick Rothenberg on UK beneficiaries of US trusts (B)
- Australian Taxation Office on non-resident beneficiaries (A), notaires.fr and French law-firm guide (B and C)
- Chambers Canada (B)
- Mondaq law-firm article on German double taxation (C)
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