Almost completely unnoticed by the entire public, a fundamental reform of the inheritance and gift tax is imminent in 2007. This is like a time bomb for the entire middle class, because the details are only now becoming known step by step.
Experts and tax experts, for example from the Association of German Chambers of Industry and Commerce (DIHK), state: “This is how small and medium-sized businesses are being reformed.” For example, the tax value for medium-sized companies is to rise sharply in the case of inheritance tax and company succession. Accordingly, business assets are to be divided into good and bad assets for tax purposes in the future. The so-called evil assets – unproductive assets (cash assets, cash in hand, bank balances, shareholdings in corporations in the balance sheet) are then to be taxed immediately and for this gift and inheritance tax is then also immediately due.
Under the planned tax reform, the tax burden on the transfer of company assets as part of the generation change will then increase almost eightfold. For the unproductive assets, the tax burden is still almost three times as high as the old tax, but for the entire business. The new tax regulations that have yet to be passed actually affect the entire middle class. These apply primarily to sole proprietorships, partnerships, but also to entrepreneurs who hold at least a 25% interest in their own GmbH or AG.
The new final withholding tax on interest income then does the rest. It was also originally planned for 2007, but was postponed due to the corporate tax reform. Now, according to the latest reports, it will come into force in 2008. The final withholding tax is to be 30% at the beginning and reduced to 25% in the following years.
This tax on interest income should then be levied directly at source, i.e. at the banks. The already “transparent citizen” will finally become reality and all loopholes for tax dishonesty will be closed. For this reason, intelligent solutions are in demand, which above all allow the medium-sized entrepreneur decisive legally founded leeway for his own company, but also for his private sphere.
This automatically leads to a means that is little known to the public – the charitable foundation, which is also especially encouraged by the federal government with significant tax breaks. This legal opportunity to combine meaningful action for a charitable purpose with advantageous legal tax privileges has so far been used primarily by large corporations, but now also by very high-earning athletes and celebrities in Germany, who are supported by top advisors in tax and foundation law.
The own tax adviser is often not trained in this special field and therefore refers – also for liability reasons – first to doing nothing. This is a glaring mistake, as medium-sized companies in particular could benefit enormously from the establishment of a charitable foundation. Especially for managing partners of medium-sized companies (GmbHs), but also for owners of partnerships such as physicians and pharmacists, the charitable trust foundation can be seen as an optimal problem solution. Shareholders of GmbHs can transfer their company shares – in this example shareholdings of a GmbH – to their own charitable trust foundation.
In this context, it is important to ensure that these shareholdings are allocated to the private assets of the company owner for tax purposes: This is because in the case of so-called business splits or group structures, the company shares are attributed to the business assets for tax purposes. The value of the GmbH shares contributed to the charitable foundation constitutes a special expense in the founder’s income tax return up to certain maximum limits: Thus, depending on the valuation of the company shares and the income situation, the entrepreneur enjoys considerable tax returns. Of course, in addition to GmbH shares, other assets that can be valued, such as patents, antiques, art, real estate from private assets can also be spun off into the foundation with tax effect. The additional liquidity thus gained can be used in a variety of ways.
For many entrepreneurs, these tax refunds represent a kind of lifeline that can compensate for balance sheet imbalances with regard to pension commitments, according to the experts. What is meant by this? When reviewing their pension commitments, many entrepreneurs are currently shocked to discover that the reinsurance capital of their pension commitment is far from sufficient to finance the company pensions one day. In very many cases, the reason for this is that numerous German endowment life insurance policies, which serve as reinsurance for pension commitments, have generated too low a return in the past.
The scapegoat is the middle-class entrepreneur who can expect no financial help from the responsible insurance companies apart from empty phrases. In the event of tax audits by the competent tax authorities, the lack of reinsurance capital may mean that the pension provisions formed have to be reversed in full or in part, with a corresponding increase in profit. For many company owners, this would often mean going to the bankruptcy court in an emergency, Andreas M. Bosl from MBD (Mittelstands-Beratungs- Dienst, Pöcking) explains.
In this context, the liquidity privately gained by the entrepreneur due to the establishment of the foundation is a welcome opportunity to provide missing pension capital for the GmbH within the framework of a capital contribution. When transferring GmbH shares to a charitable trust foundation, it seems advisable to concentrate the voting rights on a few shares remaining in the private ownership of the entrepreneur or even to transfer them to a separate institution. In this way, the clever entrepreneur continues to exercise his full voting rights at the shareholders’ meeting of the GmbH and at the same time enjoys the benefits of the foundation’s tax-privileged asset management:
The profit distributions of the GmbH accruing to the foundation are tax-free within the foundation. A sale of the GmbH shares via the trust foundation is possible at any time; the proceeds from the sale are tax-privileged within the charitable foundation. Solve succession problem elegantly! For countless medium-sized companies, the construction described above represents a way of elegantly solving the problem of succession.
It is advisable for the company owner himself to transfer the day-to-day business to a suitable external managing director from a certain point in time. After that, the medium-sized entrepreneur can calmly withdraw from the active business activities of his GmbH without having to fear that his life’s work will be smashed by greedy buyers (locusts) or otherwise abused. Due to its majority in the shareholders’ meeting, it continues to have a decisive influence on company events. By means of special dispositions, the entrepreneur can determine during his lifetime how the GmbH is to be continued in the event of his death.
For more information, please contact Frank M. Strobelt, Gesellschaft für Stiftungsförderung (GfS), Tel. (030) 28598782. www.stifter.org Taxes and charitable foundation When setting up the charitable trust foundation, the founder can use up to EUR 307,000 as special expenses to reduce tax in his income tax return. This maximum foundation amount of EUR 307,000 can be applied immediately as a whole or spread over a period of up to ten years (§ 10b para. 1 a Income Tax Act).
In addition to the maximum foundation amount, a further special expense deduction of up to EUR 20,450 per year is available to the founder for charitable foundations. It is irrelevant whether the donation is made as a so-called endowment to the basic assets or as a donation. Spouses may now even claim double the amount.
Only requirement:
They can be assessed together for income tax: This is what is stated in an instruction of the Bavarian State Office for Taxes (valid nationwide; file number S 2223-15 St 32/St 33). In addition, there is a further 40,900 euros tax deduction – as an “additional maximum deduction amount”. In addition to the advantages with regard to income tax, the transfer of assets to a charitable foundation is not subject to gift or inheritance tax (13 para. 1 no. 16 b Inheritance Tax Act). Furthermore, donations and endowments of up to 5% of the founder’s total income can reduce his or her taxable income. In the case of scientific, charitable or cultural purposes recognised as particularly worthy of support, this amount is increased by 5 to 10% of the total amount of income.
by Dr. Johannes Fiala and Frank M. Strobelt
courtesy of
From www.venatus.de (published in (Gunsmith.Knives and Scissors 01/2007, page 12)
and
in Confectionery Production of 14 November 2006, page 6
and
www.channelpartner.de (published 10/23/2006 under the headline: The Charitable Trust Foundation: Effective Solutions for Small and Medium-Sized Businesses).
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About the author
Dr. Johannes FialaPhD, 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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