The charitable trust foundation can be an effective solution for medium-sized entrepreneurs – especially in the case of liquidity bottlenecks and inheritance law.
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, for example 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 the point of ruin”. For example, the tax value for medium-sized companies is to rise sharply in the case of inheritance tax and company succession. Business assets could even 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, shares in corporations in the balance sheet) would then be taxed immediately and gift and inheritance tax would be due immediately. 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. They apply primarily to sole proprietorships, partnerships, but also to entrepreneurs who hold at least 25 percent of 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. It will now enter into force in 2009. The final withholding tax will probably be 25 percent at the beginning. For these reasons, intelligent solutions are in demand, which above all allow medium-sized companies decisive legally founded scope for their own business, but also for their private sphere. This automatically leads to a means that is little known to the public – the charitable foundation, which is also particularly encouraged by the federal government with substantial 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 on this special field and refers therefore usually – also for liability reasons – first of all 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 (GmbH), but also for owners of partnerships, doctors, pharmacists, among others, the non-profit trust foundation is to be seen as an optimal problem solution. Shareholders of medium-sized companies can transfer their company shares – in our example, shares in a limited liability company – to their own charitable trust. 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 interests and the income situation, the entrepreneur enjoys considerable tax refunds. Of course, in addition to GmbH shares, other assessable assets such as 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 offset balance sheet imbalances with regard to pension commitments, according to the experts. What is meant by this? When reviewing their pension commitments, many companies are currently shocked to discover that the reinsurance capital of their pension commitments 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 small and medium-sized entrepreneur, who can expect no financial help from the responsible insurance companies other than 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, Andreas M. Bosl of the MBD 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 shares in a limited liability company to a charitable trust, 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 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 from the sale are tax-privileged within the charitable foundation. For countless medium-sized companies, the construction described above represents a possibility of transferring the succession 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 the company’s business. 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. When setting up the charitable trust foundation, the founder can use up to 307,000 euros as special expenses to reduce tax in his income tax return. This maximum foundation amount of 307,000 euros 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 euros 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. The only prerequisite is that they are assessed together for income tax: This is stated in an instruction from 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 up to 5 percent 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 percent of the total amount of income.
Contact Johannes Fiala Fiala, Freisleben & Weber, Tel.: 089/17909035 80639 Munich Internet: www.fi ala.de Frank M. Strobelt Gesellschaft für Stiftungsförderung (GfS) 80538 Munich Internet: www.stifter.org
(campingimpulse 2/2007, 26)
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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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