by RA Johannes FialaFor income tax, church tax and the solidarity surcharge, children and other dependents are treated as independent taxpayers. In the case of an intact family, a great deal of tax can therefore be saved by structuring measures within a family.the starting point for the following considerations is the fact that for every taxpayer in 2002, the first 7,500 – 12,500 ? remain tax-exempt, and that the parts of the income in excess of this are initially only taxed at less than 30%. In the case of a student who receives only income from capital assets, for example, the first 10,000 ? of this income is retained in 2002. income tax-free, as the following calculation shows:

When shifting income to children, it must be remembered that child benefit and many other tax benefits cease to apply if an adult child in education earns more than ? 7,188 in 2002. has income and emoluments (§ 32 Abs.4 EStG). With adult children in education the 7,188 ?-income limit should be absolutely kept. Parents who wish to take advantage of the tax benefits of ‘family splitting’ and still retain influence over assets can achieve this by setting up a family company in which the children (and other dependants) are involved as minority shareholders. A family company also has the advantage that this company can make loans to a related business, whereas the donation of funds that are subsequently made available to such a business again as a loan must be planned very carefully from a tax point of view (St+W 2001,557). With regard to inheritance or gift tax, it is advantageous if the family company has commercial income. In this case, Sections 13a and 19a of the German Inheritance Tax Act (ErbStG) apply when a share in this company is donated, i.e. – the allowance for the transfer of business assets in the amount of 256,000 ? (Section 13a (1) of the Inheritance Tax Act), – the reduction of the valuation by 40%, as far as this tax-free amount is exceeded (§ 13a Abs.2 ErbStG) and – the favourable tax class I (§ 19a ErbStG). If parts of the assets are to be transferred to the life partner or to distantly related relatives, the tax rate for gift tax is at least 17% (§ 19 ErbStG). In such cases, the privileges in connection with the transfer of business assets associated with a commercial family partnership have a particularly advantageous effect, because the input tax rate for tax class I is only 7%. The (temporary) conversion of an asset-managing family company into a commercially active company can be achieved by the company becoming partially commercially active. In addition, the family partnership can participate in another commercially active partnership as a partner or atypical silent partner. However, the family partnership can also be established from the outset as a limited liability company or commercial partnership, e.g. as a GmbH & Co KG. If minor children are to participate in a family company, it must be considered that the appointment of a supplementary guardian and the approval of the guardianship court is required (DStR 2001,1538; St+W 2000,734). In addition, the speculation period must be observed if real estate from private assets is transferred to a family company or if shares in an asset-managing real estate company are transferred to children or other relatives. Since in such transfer transactions the debts encumbering the property are usually also transferred to the new owners on a pro rata basis, this is a private sale transaction for which income tax may be payable in accordance with § 23 EStG if the 10-year period has not yet expired. Calculation examples for this are contained in an order of the OFD Frankfurt of 5 February 2001 (S 2256 A-16-St II 27 in Finanz-Rundschau 2001 p.322). 
References:
a) Tax Euro Smoothing Act in BStBl 2001 I p.3. b) von Braunbehrens in Erbfolgebesteuerung 2001 p.204 (with sample contract). Jülicher in Erbfolgebesteuerung 2001 p.77 (with model contract).