New task for financial service providers: the charitable trust foundation

by Johannes Fiala, Lawyer (Munich), Mediator (Univ.), MBA Financial Services (Univ.Wales), MM (Univ.), Certified Financial and Investment Advisor (A.F.A.), EC Expert (C.I.F.E.), Lecturer (Univ. of Cooperative Education), Banker (
Effective solutions for medium-sized entrepreneurs – especially in the event of liquidity bottlenecks and in the law of succession
Almost completely unnoticed by the entire public, a fundamental reform of the inheritance and gift tax is imminent in 2007. This resembles a time bomb for the entire middle class, because the details become only now step by step of the public admits. Specialists and tax experts e.g. of the German Chamber of Industry and Commerce (DIHK) state ?in such a way the middle class is kaputt reformiert?
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 adopted actually affect the entire SME sector. They apply above all to sole proprietorships, partnerships, but also to entrepreneurs who hold at least a 25% stake in their own GmbH or AG. The new final settlement tax on interest incomes does then still another. It was originally also planned for 2007, but was postponed due to the corporate tax reform. Now it will step, after last messages 2008 into force. The final withholding tax is to be 30% at the beginning and will be reduced to 25% in the following years. This tax on interest income will then be levied directly at the 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 for his own company but also for the private sector, decisive legally founded leeway.
This automatically leads to a means that is little known to the public ? the charitable foundation, which is also particularly supported by the federal government 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 advised by TOPBerater 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 partnerships, doctors, pharmacists, etc., the charitable trust foundation can be seen as an optimal solution to problems. Shareholders of GmbH`s can sell their company shares ? in our example, investments of a GmbH – into the 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 is subject to certain maximum limits (see table; Taxes and charitable foundation). special expenses in the founder’s income tax return: Thus, depending on the valuation of the business holdings 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 transferred 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? Many entrepreneurs currently find out with fright when checking their pension commitments that the reinsurance capital of their pension commitment is by far not sufficient to be able 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 has no financial help to expect from the responsible insurance companies apart from empty words. In the event of tax audits by the competent tax authorities, the lack of reinsurance capital may result in the pension provisions formed having to be reversed in full or in part, thereby increasing profits. For many company owners, this would often mean going to the bankruptcy court in an emergency, Andreas M. Bosl of the MBD explains.
In this context, the liquidity gained privately 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 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 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 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 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.
Taxes and charitable foundation The founder can pay up to 307.00 ? of the tax on the establishment of the charitable trust foundation. as special expenses in his income tax return.
This maximum foundation amount of 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 expenses deduction of up to ? 20,450 per year is available to the founder. It is irrelevant whether the donation is made as a so-called endowment to the foundation assets or as a donation. Spouses may now even claim double the amount. The only prerequisite is that they are assessed jointly for income tax purposes. This is stated in an instruction issued by the Bavarian State Tax Office (valid throughout Germany; file number S 2223 -15 St 32/St 33). In addition, there is a further 40,900 euro 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.
The total tax savings amount to approximately 200,190 ? in the next 4 years from 2006 to 2009. The charitable foundation will be endowed with assets amounting to 450,800 ? equipped. All assessable assets can be brought into the foundation
Examples: GmbH shares, privately used real estate, stock/investment deposits, time deposits, savings books, federal treasury bonds, etc.) Tax calculation basis: founder with tax class I, wage tax and solidarity surcharge, no church tax. Calculation made with the tax calculator of the Federal Ministry of Finance, the tax table 2006 was taken into account. This is a sample calculation. All data without guarantee. In individual cases, other tax and calculation values may result.

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About the author

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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