Doubling of tax benefits for middle-class married couples

Johannes Fiala and Frank M. Strobelt
Medium-sized entrepreneurs are currently facing a whole host of problems for which they urgently need efficient solutions. The authors describe why foundations can answer a multitude of individual questions at once. Red. For many medium-sized companies, the topic 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 German Bundestag before the summer break. Significant improvements The draft law, which received a predominantly positive assessment in an initial statement by the Bundesrat in March, provides for the simplification of non-profit law. In addition, the German citizen should be able to enjoy far-reaching benefits. In addition to raising the deduction limit for donations to 20 percent of annual income, the bill also provides for significant tax relief for foundation founders. Instead of the current 307,000 euros, the draft allows founders to deduct up to 750,000 euros of founding 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 as of 1 January 2007. More liquidity for medium-sized companies 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 307,000 euros to 614,000 euros in accordance with the previously applicable provisions. Foundation founders can use the maximum foundation amount as a special tax-reducing expense once every ten years. Furthermore, founders can make use of the maximum foundation amount, which increases from EUR 20 450 to EUR 40 900 on the basis of the decree, as well as the maximum donation amount (see calculation on page 26). 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, can be seen as a modern, intelligent building block for solving the problem of succession and old-age provision. For example, the managing director of a GmbH (limited liability company) 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 are endowed with voting rights 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 sport, education and culture worldwide. The publicity measures often associated with this additionally strengthen the reputation and core business of their own company. Foundation as employer and pension instrument For owners of medium-sized companies, it is possible, irrespective of the double foundation described, 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. Unemployed periods in one’s own company can thus be cleverly 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. 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. Despite the numerous advantages that the trust foundation has over the foundation with legal capacity, there are few advisors 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. Qualified advice on trust foundations includes interdisciplinary thinking, since tax law must be taken into account in a special way in addition to civil law. However: 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. The tax effects over a five-year period for a middle-class couple through a charitable trust are shown in the calculation example above. The total tax saving is approximately EUR 348 864 over the next five years from 2007 to 2012. The charitable foundation will be endowed with assets amounting to 863 600 euros, the assets having come from separate property of the couple. All assessable assets can be brought into the foundation. Examples: Shares in limited liability companies, real estate, securities, works of art, fixed-term deposits, savings books, cash et cetera. Tax calculation basis: founder, married, 2 children, with tax class III, income tax and solidarity surcharge, no church tax. Calculation prepared using, among other things, the tax calculator of the Federal Ministry of Finance; the 2007 tax table was taken into account. This is a sample calculation. All information without guarantee. In individual cases, different tax and calculation values may result.
(Assets & Taxes 6/2007, 24)

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Dr. Johannes Fiala Dr. Johannes Fiala

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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