By Johannes Fiala & Frank M. Strobelt
Effective solutions for medium-sized entrepreneurs – especially in the case of liquidity bottlenecks and inheritance law
Almost completely unnoticed by the general 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: “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. In future, business assets could even be divided into good and bad assets for tax purposes. The so-called evil assets = unproductive assets (cash assets, cash in hand, bank balances, shareholdings in corporations in the balance sheet) would then be taxed immediately and gift and inheritance tax would then also 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. 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 2009. The final withholding tax will probably be 25 percent at the beginning. For these reasons, intelligent solutions are required which allow the medium-sized entrepreneur in particular decisive legally founded leeway for his own company, but also for his private sphere. This leads automatically to a means little known in the public – the non-profit foundation, which is promoted to – that particularly by the Federal Government with substantial tax privileges. 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 in this special field and therefore refers – also for liability reasons – for the time being to do 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 medium-sized companies can transfer their company shares – in our example, shares in a limited liability company – to their own charitable trust foundation. In this context, it is important to ensure 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): 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 gained through this 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 commitments 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 responsible insurance companies apart from empty phrases. In the event of tax audits by the competent tax authorities, the lack of reserve 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 from MBD (Mittelstands Beratungs-Dienst) explains. In this context, the liquidity gained privately by the entrepreneur due to the establishment of the foundation is a welcome opportunity to raise the missing capital for the GmbH in the form 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.
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
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 EUR 307,000 can be applied in its entirety or spread over a period of up to ten years (Section 10b (1a) of the German Income Tax Act). In addition to the maximum foundation amount, a further special expense deduction of up to EUR 20,450 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 subject neither to gift tax nor to inheritance tax (§ 13 para. 1 no. 16 b Inheritance Tax Act). Furthermore, donations and endowments of up to five 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 five percent to ten percent of the total amount of income. The total tax savings amount to approximately 200,190 euros over the next four years from 2006 to 2009. The charitable foundation will be endowed with assets amounting to 450,800 euros. All assets that can be valued can be contributed to the foundation – examples: GmbH shares, privately used real estate, share/investment deposits, fixed-term deposits, savings books, federal treasury bonds etc. Tax calculation basis: founder with tax class I, income tax and solidarity surcharge, no church tax. Calculation prepared using the tax calculator of the Federal Ministry of Finance, among others; the 2006 tax table was taken into account. This is a sample calculation. All information without guarantee. Different tax and calculation values may result in individual cases.
(EAP Magazine 3/2007, 66)
Courtesy of www.eap-magazin.de.
(C) EuroAmusement Professional, Issue 3/2007, G.P. Probst Verlag GmbH