Inheritance and gift tax 2007: Time bomb for medium-sized businesses

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 to the public step by step. Experts and tax experts, e.g. from the Association of German Chambers of Industry and Commerce (DIHK), state that “this is how small and medium-sized businesses are being reformed to ruin them”. 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 on the balance sheet) are then to be taxed immediately and gift and inheritance tax is then also immediately due. After the planned tax reform, the tax burden on the transfer of company assets within the framework 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 percent 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 percent at the beginning and reduced to 25 percent 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.
Intelligent solutions are needed
For these reasons, intelligent solutions are in demand, which above all allow the medium-sized businessman decisive legally founded scope for structuring 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 promoted by the federal government in particular with considerable tax concessions. 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 on this special field and therefore refers – also for liability reasons – for the time being 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 per- sonal companies, doctors, pharmacists, etc., the charitable trust foundation can be seen as an optimal solution to problems. Shareholders of limited liability companies can transfer their company shares – in our example shares of a limited liability company – to their own charitable trust foundation. It is important to note that, for tax purposes, these shareholdings are allocated to the private assets of the company owner: This is because in the case of so-called company splits or group structures, the company shares are attributed to the company assets for tax purposes. The value of the GmbH shares contributed to the charitable foundation constitutes special expenses in the founder’s income tax return up to certain maximum limits (see table below: Tax effects through a trust foundation): Thus, depending on the valuation of the company shares and the income situation, the entrepreneur enjoys considerable tax returns. In addition to shares in limited liability companies, other assets that can be valued, such as patents, antiques, art and real estate, can of course be transferred from private assets to the foundation in a tax-effective manner. 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 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 insurance companies other than empty words. In the event of tax audits by the tax authorities, the lack of reinsurance capital may mean that the pension provisions formed have to be reversed in full or in part, thereby increasing profits. For many company owners, this would mean going to the bankruptcy court in a serious case, Andreas M. Bosl of the MBD explains. The liquidity gained privately by the entrepreneur due to the establishment of the foundation is a welcome opportunity to provide missing pension capital within the framework of a capital contribution.
Full voting rights for entrepreneurs
When transferring shares in a GmbH 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 entrepreneur continues to exercise his full voting rights at the shareholders’ meeting of the GmbH and at the same time enjoys the advantages of the tax-privileged asset management of the foundation: 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 of the sale are tax-privileged within the charitable foundation. For medium-sized companies, the construction described represents a possibility of solving the succession problem in an elegant way. It is possible for the company owner himself to transfer the current business to a suitable external managing director from a certain point in time. Thereafter, the medium-sized entrepreneur can calmly withdraw from active business activities without having to fear that his life’s work will be smashed up by buyers or otherwise misused. He continues to have a decisive influence on the company’s affairs due to his majority in the shareholders’ meeting. By means of dispositions, the entrepreneur can determine during his lifetime how the GmbH is to be continued in the event of his death. Info: Frank M. Strobelt society for donation promotion (GfS). Tel.- 030 28598782;
(Der-Bau-Unternehmer Dec 2006)

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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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