High tax relief for the committed citizen

Foundations offer the entrepreneur far-reaching advantages

The state explicitly acknowledges the commitment of donors with generous tax breaks and benefits related to the law of public benefit. Even if it is not always comprehensible to outsiders at first glance that the charitable trust foundation in particular offers attractive advantages for citizens and efficient solutions to acute problems.

Positive effects for the foundation sector are now to be expected from the “Law to further strengthen civic involvement”, which came into force last year with retroactive effect from 1 January 2007. Founders can now deduct one million euros in special expenses (two million euros for married couples) within ten years with a tax reduction. The general donation deduction has been standardized and increased to 20 percent of annual income. The legislator has even doubled the deductibility for corporate donations.

Improvement of the liquidity situation

The charitable foundation can significantly improve the liquidity situation of wealthy persons with a corresponding tax burden. The value of the assets allocated to the basic assets of the charitable foundation, e.g. real estate, securities, collections, cash assets, represents special expenses up to certain maximum limits (cf. This is shown in the founder’s private tax return and can significantly reduce taxable income (see table on page 17).

Neither gift nor inheritance tax is levied by the tax office. There is also the possibility of registering allowances on the wage tax card or reducing advance income tax payments. Through their own foundation, citizens are thus given a certain amount of freedom in shaping their own affairs and can decide for themselves what exactly happens to their tax capital and additional liquidity.

The founder determines the charitable purpose to be supported and decides who, how and what is to be supported. Part of the foundation’s income is used directly or indirectly to fulfil the charitable purpose. Here, the founder can choose whether he wants to fulfill the foundation’s goals himself with his own activities or by passing on financial means to other non-profit organizations.

Tax-privileged asset management: no taxes on investment income

The assets within the foundation work tax-free in the tax-privileged asset management; there are no income taxes here. This is an enormous advantage, especially since from 2009 the final withholding tax of 25 percent plus solidarity surcharge will be levied on income from capital assets outside the foundation.

The tax-free sale of assets via the charitable trust foundation is also possible; the proceeds of the sale then flow tax-free into the foundation.

Solve succession regulation via double foundation

The dual foundation, which is one of the foundations associated with the company, is to be seen as a modern, intelligent building block for solving the problem of succession and retirement provision. For example, the managing director of a GmbH can transfer a large part of the privately owned company shares without voting rights and tax neutrally into a charitable foundation. The remaining GmbH shares, which carry voting and sufficient profit participation rights, are transferred to a family foundation in Germany or abroad. This regulates the supply of the family members and determines the fate of the GmbH even after the death of the founder beyond the shareholders’ meeting.

The management of the company will be transferred to qualified external managers from a certain point in time.

Foundation as part of the pension scheme and new employer

If the foundation has sufficient capital resources, the founder is able to work in the non-profit sector within the framework of a permanent employment relationship and to pursue the foundation’s purpose at home and abroad. However, the founder can also use the legally regulated right to a pension for himself and his relatives against the charitable foundation.

According to this provision, up to one third of the income can be used for the subsistence of the beneficiaries (see § 58 No. 5 AO). But also the preservation of the memory of the founder of the foundation as well as the maintenance of the graves can be financed by the foundation.

Foundation as PR and marketing instrument

The foundation can be seen as part of the communication and PR strategy of companies: Thus, in many cases the foundation bears the name of the company (e.g. Vodafone Stiftung – Vodafone 02 GmbH, Altra-Stiftung – Altra Computer Technik GmbH, Bertelsmann Stiftung – Bertelsmann AG). The charitable activities of the foundation are automatically linked by the client to the core business of the associated company.

Heirs can save inheritance tax

For many heirs, for whom the inheritance tax is a considerable burden, the charitable trust foundation is invaluable. For up to 24 months after the occurrence of the inheritance, assets from the estate of the charitable foundation may accrue to the heirs free of inheritance tax (cf. § 29 para. I no. 4 ErbStG). In principle, no land transfer tax is payable on the transfer of real estate assets (cf. § 3 no. 2 GrEStG). In this way the heritage can be preserved undiminished.

Self-fulfilment and new life task

At the end of their professional lives, many citizens see their own foundation as a new life task and an opportunity for self-realization. The founder is free to determine the objectives of his foundation. New ideas can be put into practice quite quickly. The foundation enables unbureaucratic help for many areas of life and new, meaningful structures for the community.

It is therefore not surprising that founders often combine happiness and joy with their foundation activities. The Koblenz entrepreneur, Martin Görlitz, whose corporation focuses on energy measurement systems, initiated the EUS Foundation. The Foundation for Energy, Environment and Social Affairs (EUS) has been supporting innovative projects dealing with the sensible generation and use of energy for many years. The Breuniger Foundation, which can be traced back to the late owner of the Stuttgart fashion and lifestyle trading company of the same name, who died in the 1960s, successfully realizes innovative projects and events in the education and health sectors. The Berlin master butcher Jürgen Bachhuber dedicates his charitable foundation to nature conservation. The charitable purposes of the foundation include the promotion of sport, education and training, environmental protection, science and research, art and culture, public health care or animal protection.

This is only a small part of the possibilities that the legislator offers the citizen.

The provisions set out in the Annex to § 48 para. 2 EStDV (Einkommensteuerdurchführungsverordnung) have now been included in the catalogue of § 52 para. 2 AO and supplemented by further purposes, for example the promotion of civic engagement.

Non-profit foundation as protection of life’s work

The foundation is also to be seen as a protection of the life’s work of the founder. Assets such as collections, company shares, works of art, patents can be entrusted to your own foundation. With the foundation that can bear his name, the founder experiences a piece of immortality at the same time: Foundations are basically designed for eternity. They consist of basic capital in the form of special assets that belong to themselves.

The charitable purpose is mainly financed by income from the foundation’s assets, which in most cases must be preserved. Trust foundations have a tradition in Germany that goes back more than a thousand years. Many foundations established hundreds of years ago still exist and operate today.

Tax effects of a charitable trust foundation – Increase in special expenses for the committed citizen

Tax savings for years 2008 2009 2010 2011 2012

Originally taxable

of income for married couples 220.000 200.000 220.000 215.000 210.000

Tax deductible foundation amounts

Distribution of endowment funds

Maximum amount 163.700 152.800 163.700 166.600 156.800

Distribution

Maximum amount of donations 16,000 9,000 17,000 10,000 12,000

Tax deductible

Foundation/total amounts 179,700 161,800 180,700 176,600 168,800

Taxable

Income after 40.300 38.200 39.300 38.400 41.200

Establishment of the Foundation

(point 1 – point 5)

Tax savings according to

Tax table 2007 74,683 66,423 74,973 73,021 69,993

The total tax savings amount to approximately €359,093 over the next five years from 2008 to 2012. The charitable foundation is endowed with assets amounting to € 867,600, whereby the assets come from separate areas of ownership of the couple. All assessable assets can be brought into the foundation.

Dates & Events

Examples: GmbH shares, real estate, securities, works of art, fixed-term deposits, savings books, cash etc.

Tax basis of calculation:

Founder, married, with tax class III, income tax and solidarity surcharge, no church tax Calculations were made using the tax calculator of the Federal Ministry of Finance, among others, and the 2007 tax table was taken into account. This is a sample calculation. All information without guarantee. Different tax and calculation values may result in individual cases.

The “Act to further strengthen civic involvement” passed by the Bundestag and Bundesrat came into force retroactively as of 1.1.2007 and now offers citizens considerable tax advantages.

by Dr. Johannes Fiala and Frank M. Strobelt

With friendly permission of www.lswb.de.

(Published in LSWB Info 1/2008)

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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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