Tax advantages even in times of crisis
If business successors want to or have to restructure the parental business, there is a risk of a tax burden. The same applies if a deserving employee is given the business free of charge. In many cases, it is therefore worth considering whether a foundation is the better alternative.
For decades, many a medium-sized entrepreneur has run his business with great commitment and a lot of heart and soul. But at some point, the time comes for everyone to look for a business successor. The first glance then usually goes in the direction of the family.
If the two children have studied comparative literature and sinology and are not interested in managing a 500-employee wholesale business, the established staff can continue the business. But the entrepreneur can neither prevent the later destruction of his life’s work by his children nor can he avoid the new inheritance tax law by doing so.
Legal situation since January 2009
The transfer of business assets by way of so-called anticipated succession has brought about considerable changes in the taxation of estates since 1 January 2009.
A taxation of the business transfer depends on the so-called administrative assets contained therein. If this is below 50% of the total business assets, an 85% tax exemption can be achieved if the total wages and salaries in the business over the next seven years do not fall below 650% of the average total wages and salaries of the previous five years prior to the transfer of the business.
If the business has up to 10% of administrative assets and the payroll for the next ten years amounts to 1,000% of the average payroll of the last five years prior to the transfer of the business, a complete exemption from inheritance tax can even be achieved.
Monitoring compliance with these figures for seven and ten years respectively requires a considerable amount of bureaucracy. If the required wage total is not reached, the inheritance tax exemption is cancelled retroactively on a pro rata basis.
When calculating the share of administrative assets, it must be taken into account that liabilities of the company are primarily deducted from productive assets, which thus leads to a corresponding relative increase in administrative assets. In times of crisis, when the share of debt financing in companies regularly increases, this leads to the fact that more and more companies are not able to achieve the tax exemption according to the so-called “standard model 85” or also the “option model 100” described above.
Financial disadvantages in the event of staff reductions
In addition, such times of crisis are also characterised by personnel adjustment measures. Thus, even if the required proportions of administrative assets are complied with, there is a great risk that it will not be possible to meet the required wage totals for seven or ten years because correspondingly fewer employees will have to be paid than in the past. The consequence of violating these limits is the subsequent incurrence of inheritance or gift tax in the middle of a crisis, in which an entrepreneur tends to invest all of his available liquidity in his own business in order to save his life’s work. Both the successor to the business and the transferring donor are liable for this tax.
As a result, from an economic point of view, the new inheritance tax law penalises the restructuring of companies and a structural change that is linked to productivity increases or personnel savings.
Gifts can also be expensive
Some family entrepreneurs are childless, in other cases the suitability of the children is questionable, or they already have a different professional orientation. Often, however, there are suitable employees in the company to whom one would like to entrust the continuation of the company and life’s work. But here too there are pitfalls lurking: in cases where this transfer is to be made free of charge or for a rather symbolic amount, the reform of inheritance tax law raises the question of whether a gift of the business is really a sensible and favourable arrangement.
For the donee, the gift could turn out to be a dagger gift if the share of the transferred administrative assets is arithmetically high and, against the background of declining company results, payroll requirements may not be met over a period of seven or ten years. The donor also runs the risk of being liable for gift tax arising retrospectively from his “good deed” for seven or ten years. In such cases, it is therefore worth considering whether the transfer of the company to a charitable foundation might not be a sensible alternative.
In these cases, the transfer of the business assets is completely free of gift tax. The risk of an inheritance tax burden in the crisis is eliminated. The company can carry out restructuring, rationalisation and other structural changes without inheritance tax breathing down its neck. This significantly increases the company’s chances of survival. And the corporate “foster son” or “foster daughter” could be integrated into the hierarchy in such a way that the continuation of the company is highly interesting for him/her despite formal ownership of the foundation: On the one hand, an appropriately remunerated position in the company, for example as managing director, can be established. In addition, a function in bodies within the foundation, for example in a board of trustees or advisory board, can be guaranteed, which ensures influence on decisions for the company at shareholder level.
Working for a charitable foundation also ensures a high social prestige that should not be underestimated. Finally, the business transferee is exempt from paying a purchase price or the risk of subsequent gift tax. This gives the transferring donor the opportunity to promote charitable projects that are close to his heart through the results of the company. One’s own involvement in such projects can be a meaningful and fulfilling task for the elderly, which can also be remunerated or structured as a donation of services.
Maintenance of the family remains secured
Finally, if necessary, up to one third of the income of the foundation or the company behind it can be made available to the founder and his closest relatives to ensure an adequate standard of living, without losing the charitable status. In addition, the remuneration for the upkeep of the family can be flexibly increased further, for example by means of preference shares and similar arrangements. It is essential for the entrepreneur to pay attention to the independence of the persons who set up the foundation: Conflicts of interest can often be pre-programmed if the advisors subsequently also act as bodies (trustees, board of directors, executive board, etc.) of the foundation.
by Dr. Johannes Fiala and Dr. Uwe Dörnbrack
by courtesy of
www.die-stiftung.de (published in Die Stiftung, issue 03/2009, page 15 – 16)
www.hm-infinity.de (published in Halstenbeker Magazin, issue 6/2009, page 29-30)
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About the author
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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