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Trust foundation as a progressive and flexible solution for medium-sized businesses

The medium-sized entrepreneur is currently facing a multitude of problems for which he urgently needs efficient solutions: According to calculations by the Institute for SME Research, more than 300,000 family businesses are facing a change of ownership in the next few years. It is estimated that in about 40 percent of all cases there is no suitable successor from the family circle or no descendants. Furthermore, due to the stricter banking regulations (Basel II) and the associated restrictions on the granting of loans, the liquidity situation of medium-sized companies is extremely tight. In addition, owners of small and medium-sized businesses often have to contend with a loss of income due, for example, to a downturn in orders or the premature closure of the business for health reasons.

The financial experts Frank M. Strobelt and Dr. Johannes Fiala describe the extent to which charitable foundations can, at least in part, provide a remedy. For many medium-sized companies, the subject of “foundations” was taboo until a few years ago and was associated with the commitment of large companies such as Bertelsmann, Henkel, Bosch or Hertie. However, this has changed since the reform of foundations in 2000 with the “Law on the Further Tax Promotion of Foundations”. Further positive impulses for the foundation system are to be expected from the new “Law for the Further Strengthening of Civic Commitment”, which is to be passed by the Bundestag before the summer break. The bill, which received a predominantly positive assessment in an initial statement by the Bundesrat in March, is to be passed by the Bundestag after the summer break. deduction limit for donations to 20 percent of annual income, among other things, significant tax relief is planned for foundation founders. Instead of the current 307,000 euros, the draft allows founders to deduct up to 750,000 euros of start-up capital as special expenses in their private tax returns. In the case of married couples assessed jointly, each spouse is then entitled to the increased maximum foundation amount separately. Following the decision of the Federal Cabinet, the advantageous regulations will come into force retroactively.

Charitable trust foundation

The deductibility of donations to charitable foundations from taxable income is already attractive for medium-sized companies: Based on a ruling by the Federal Fiscal Court in August 2005 and the decree issued by the Bavarian State Tax Office last year, which is valid throughout Germany, spouses who are jointly assessed can claim double the amount for tax purposes for donations to the asset pool of a charitable foundation. The maximum foundation amount for married persons thus increases from EUR 307,000 to EUR 614,000 in accordance with the previously applicable provisions. The foundation founders can use the maximum foundation amount as a special tax-reducing expense once every ten years. Furthermore, founders can increase the maximum foundation amount from 20,450 euros to 40,900 euros on the basis of the waiver, just as they can make use of the maximum donation amount (see calculation). Assets such as GmbH shares, real estate, securities, works of art, cash can be donated to the charitable trust foundation. The double foundation, which is one of the company-affiliated foundations, is to be seen as a contemporary, intelligent building block for solving the problem of succession as well as old-age provision.

Solve succession regulation via double foundation

For example, the shareholder can transfer a large part of the privately held company shares to a charitable trust foundation without voting rights and in a tax-neutral manner. The remaining GmbH shares, which carry voting and sufficient profit participation rights, are transferred to a family foundation in Germany or abroad. The family foundation regulates the provision of the family members and determines the fate of the GmbH even after the death of the founder via the shareholders’ meeting. The management of the company will be transferred to qualified external managers from a certain point in time. According to Andreas M. Bosl, owner of Mittelstands Beratungs-Dienst (MBD) in Pöcking, the charitable trust foundation is an ideal field of activity in the retirement phase of the GmbH managing director. This can be dedicated to charitable activities such as the promotion of sports, education, culture worldwide. The publicity measures often associated with this additionally strengthen the reputation and core business of their own company.

Supply instrument

For owners of medium-sized companies it is possible, independently of the described double foundation, to work for their own charitable trust foundation in a permanent employment relationship from a certain point in time in order to actively fulfil the purpose of the foundation at home and abroad. In this way, periods of unemployment within the company can be skilfully bridged. This option is also interesting for people who, at a certain point in time, are no longer able to carry out physical activities, for example in the trades, for health reasons.

Trust foundation or foundation with legal capacity

Legally regulated maintenance payments for the founder or his dependents, laid down in the foundation statutes, are an alternative to the employment model in the non-profit sector described above. The foundation with legal capacity is an independent bearer of rights and obligations. Two processes are necessary to establish the foundation as a legal entity: the foundation transaction and the state approval. With the approval of the competent supervisory authority of the respective federal state, the foundation acquires legal capacity. Thereafter, the foundation with legal capacity is supervised by this authority. In contrast to the foundation with legal capacity, the trust foundation does not need its own organisation. Fiduciary management is carried out by a legal entity which normally represents the company externally on the basis of a concluded trust agreement and the articles of association. In contrast to a foundation with legal capacity, a charitable trust foundation only requires an examination of its charitable status by the responsible tax office. In Germany, for example, foundations with legal capacity are supervised by two authorities at once: the tax office and the foundation supervisory authority. The fiduciary, also called dependent foundation, is the more flexible and at the same time the older basic form of foundation, especially for medium-sized companies. Trust foundations have a history in Germany spanning more than a thousand years.

Trust foundations can be set up fairly quickly. The incorporation can take place within one month, in exceptional cases within a few days. The associated granting of provisional non-profit status depends on the workload of the relevant tax office. If one draws a comparison between a foundation with legal capacity and a fiduciary foundation, the fiduciary foundation is preferred in most cases due to the following advantages:

• lengthy official approval procedures are no longer necessary,
• There is no state supervision of the ongoing activities of the foundation; instead, there are control mechanisms through the financial authorities and through foundation committees, which can be determined by the founder himself; the inflow and outflow of capital can be regulated more flexibly by the founder, depending on the income situation of the founder,
• there are cost advantages both in the establishment and in the ongoing operation of the foundation,
• the statutes of a fiduciary foundation can, in contrast to a foundation with legal capacity, be adapted to current circumstances without difficulty,
• the founder can transfer the entire administration of the foundation to the foundation sponsor and concentrate on fulfilling the purpose of the foundation Despite the numerous advantages that the trust foundation has over the foundation with legal capacity, there are few advisors in this field who can competently present the advantages of this legal form to founders and accompany the regular establishment of trust foundations in Germany and abroad.

Cross-border foundation constructions can only be realised with teams of experts who also have experience in practical implementation. Among other things, qualified advice regarding trust foundations requires interdisciplinary thinking, since tax law must be taken into account in a special way in addition to civil law. Only those who have actively dealt with both legal forms can judge in which cases the trust foundation appears to be advantageous for the founder.

by Dr. Johannes Fiala and Frank M. Strobelt

by courtesy of

www.network-karriere.com (published in Network Careers, Feb. 2008, 26)

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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