Sales risk: Closed-end investments with trust structures

“Most transportation taxes, including sales taxes, have no deeper purpose than to bring money to the state.”

Federal Fiscal Court (BFH), in: BStBl 1973, p.96
From an initiator’s point of view, the involvement of a trustee offers considerable advantages, for example in the case of KG investments. The effort for the “register publicity” of the subscribers is omitted, and the administration is substantially facilitated with transfer of shares. The participation of minors (often only possible with the prior consent of the guardianship court) is usually to remain as secret as the participation of celebrities.
Legal advice risk: From the point of view of the intermediary or distributor, the decisive factor is how the trust is structured. The mere holding of an investment does not require a licence. If, on the other hand, further structuring tasks are added, such as the conclusion of financing agreements, the entire trust structure may be void due to a violation of the Legal Advice Act. For the financial advisor, who according to the jurisdiction of the Federal Court of Justice is obliged to carry out a “plausibility check2 , this is usually a very demanding task, because there is neither “the typical trust” nor a special law for it ? and thus many design variants can be found in practice.

Income tax risk: usually the profits and losses for income tax purposes fall on the settlor. Disclosure of the trust to the tax authorities is advisable. It is essential that the trustee only holds the investment in the interests of the settlor/investor. Even without a trustee, there is the risk that an investment model turns out to be a “snowball system” which sooner or later becomes insolvent. Then it happens that the trustor/investor also has to pay tax on profits which later turn out to be a ?bogus return? A well-known example in this sector is the “ABMBROS” case.

Inheritance tax risk: The relatively new trust decree of the tax authorities has abolished the treatment as if the settlor/investor is directly and immediately involved.
In the past, the value in the case of inheritance and gifts was determined by valuing the fund assets. In the case of asset management funds, such as private equity, the “Stuttgart method” was applied: The tax value was thus usually significantly below the market value.

In the case of commercial funds, there was a double advantage, firstly because “only” the tax balance sheet values were used, and then additionally because there were further deductions due to the business assets characteristic. What is new now is that these privileges have been abolished – the decisive starting point for the valuation is the “claim for surrender of the investor/trustee” against the trustee. The tax lawyer then calls this a “claim in kind”, which is valued at the “fair market value”.

Inheritance tax saving arrangements: However, this view of things also enables the heir or donee to make tax-saving arrangements after an acquisition: one could think, for example, of only transferring these shares in trust within five years in order to avoid subsequent taxation. Without taking the safest route, e.g. obtaining binding information from the tax authorities beforehand, the prudent practitioner will not want to solve such problem situations.
Another variant is the situation where the investor has neither a domicile nor a habitual residence in Germany. In the case of foreigners, rights to claims, such as the claim for restitution from the trustee, are currently tax-exempt.
It would also be tax efficient to dissolve the trust in good time and/or to agree an effective safe clause whereby the trust terminates on inheritance and/or gift. This needs to be designed so that it is not seen as a workaround by the tax authorities at a later date.
The interposition of a special additional limited partnership as asset manager can also have the desired tax-saving effects.
Liability risk in the consultation: Investors and their financial advisors should consider these options and if necessary make a contract adjustment, because often in the folders and selling documents ? no longer valid today ? Statements made on inheritance tax privileges. This point can develop into a liability trap in the event of a long-term customer relationship or previous incorrect advice. Tax advice is not covered by the financial advisor’s liability for pecuniary loss.


by Dr. Johannes Fiala

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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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