Trust foundation as a progressive and flexible solution for medium-sized businesses

By Dr. Johannes Fiala and Frank M. Strobelt
The medium-sized entrepreneur is currently facing a multitude of problems for which he urgently needs efficient solutions. According to calculations by the Institute for Research on Small and Medium-Sized Businesses, more than 300,000 family businesses are facing a change of ownership in the next few years. It is estimated that in about 40 percent of all cases there is no suitable successor from the family circle or no descendants. Furthermore, due to the stricter banking regulations (Basel II) and the associated restrictions on the granting of loans, the liquidity situation of medium-sized companies is extremely tight. In addition, owners of small and medium-sized businesses often have to contend with a loss of income due, for example, to a downturn in orders or the premature closure of the business for health reasons. For many medium-sized companies, the topic of “foundations” was taboo until a few years ago and was associated with the commitment of large companies such as Bertelsmann, Henkel, Bosch or Hertie. However, this has changed since the reform of foundations in 2000, the “Law on the Further Fiscal Promotion of Foundations”. Further positive impulses for the foundation system can be seen in the recently adopted ten-point programme of the Federal Government. With the 400 million euro funding package, Federal Finance Minister Peer Steinbrück also wants to support charitable foundations. Increasing the liquidity of medium-sized companies via charitable trust foundations The deductibility of donations to charitable foundations from taxable income is now even more attractive, especially for medium-sized companies: Based on a ruling by the Federal Fiscal Court in August 2005 and the decree issued by the Bavarian State Tax Office last year, which is valid throughout Germany, spouses who are assessed jointly can claim double the amount for donations to the asset pool of a charitable foundation for tax purposes. The maximum amount for married persons thus increases from 307,000 to 614,000 euros. The maximum foundation amount can be deducted from tax as a special expense once in ten years if such a foundation is endowed with corresponding assets within 12 months. Furthermore, the maximum foundation amount, which may increase from EUR 20,450 to EUR 40,900 on the basis of the decree (see calculation), can be claimed. Assets such as GmbH shares, real estate, securities, works of art, cash can be donated to the charitable trust foundation. Solving succession problems via a double foundation The double foundation, which is one of the company-affiliated foundations, is to be seen as a contemporary, intelligent building block for solving the problem of succession as well as old-age provision. For example, the managing director of a GmbH (limited liability company) can transfer a large part of the privately held company shares to a charitable trust foundation without voting rights and in a tax-neutral manner. The remaining GmbH shares, which carry voting and sufficient profit participation rights, are transferred to a family foundation in Germany or abroad. The family foundation regulates the provision of the family members and determines the fate of the GmbH even after the death of the founder via the shareholders’ meeting. The management of the company will be transferred to qualified external managers from a certain point in time. According to Andreas M. Bosl, owner of the Mittelstands-Beratungs-Dienst (MBD) in Pöcking, the charitable trust foundation is an ideal field of activity in the retirement phase of the GmbH managing director. This can be dedicated to charitable activities such as the promotion of sport, education and culture worldwide. The publicity measures often associated with this additionally strengthen the reputation and core business of their own company. Charitable trust foundation as a new employer and pension instrument For owners of medium-sized companies, it is possible, independently of the double foundation described, to work for their own charitable trust foundation in a permanent employment relationship from a certain point in time in order to actively fulfil the foundation’s purpose at home and abroad. Unemployed periods in one’s own company can be cleverly bridged in this way, explains foundation expert Andreas M. Bosl from MBD. This option is also interesting for people who, at a certain point in time, are no longer able to carry out physical activities, for example in the trades, for health reasons. Legally regulated maintenance payments for the founder or his dependents, laid down in the foundation statutes, are an alternative to the employment model in the non-profit sector described above. Trust foundation or foundation with legal capacity The foundation with legal capacity is an independent bearer of rights and obligations. Two processes are necessary to establish the foundation as a legal entity: the foundation transaction and the state approval. With the approval of the competent supervisory authority of the respective federal state, the foundation acquires legal capacity. Thereafter, legally capable foundations are supervised by this authority. In contrast to the foundation with legal capacity, the trust foundation does not need its own organisation. Fiduciary management is carried out by a legal entity, which normally represents the company to the outside world on the basis of a concluded trust agreement and the articles of association. In contrast to a foundation with legal capacity, a charitable trust foundation only requires an examination of its charitable status by the responsible tax office. In Germany, for example, foundations with legal capacity are supervised by two authorities at once: the tax office and the foundation supervisory authority. The fiduciary, also called dependent foundation, is the more flexible and at the same time the older basic form of foundation, especially for medium-sized companies. Trust foundations have a history in Germany spanning more than a thousand years. Trust foundations can be set up fairly quickly. The incorporation can take place within one month, in exceptional cases within a few days. The associated granting of provisional non-profit status depends on the workload of the relevant tax office. If one draws a comparison between a foundation with legal capacity and a fiduciary foundation, the fiduciary foundation is preferred in most cases due to the following advantages: – there is no need for lengthy official approval procedures, – there is no state supervision of the ongoing foundation activities; the capital inflow and outflow can be regulated more flexibly by the founder, depending on the income situation of the founder – there are cost advantages both in the establishment and in the ongoing operation of the foundation – the articles of association of a fiduciary foundation can, in contrast to a foundation with legal capacity, be adapted to current circumstances without difficulty, the founder can transfer the entire administration of the foundation to the foundation sponsor and concentrate on the fulfilment of the foundation’s purpose Despite the numerous advantages which the trust foundation has over the foundation with legal capacity, there are few advisors who can competently present the advantages of this legal form to founders and who accompany the regular establishment of trust foundations at home and abroad. Cross-border foundation constructions can only be realised with teams of experts who also have experience in practical implementation. To a qualified consultation concerning the trust foundation belongs among other things interdisciplinary thinking, since apart from the civil law, the tax law must be considered in a special one. Only those who have actively dealt with both legal forms can judge in which cases the trust foundation appears to be advantageous for the founder. Further information: [1], [2] The author: Dr. Johannes Fiala, senior partner of Fiala, Freisleben & Weber, tax consultant, auditor, lawyer, patent attorney, mediator, Munich (mf)
( on 23.01.2007)

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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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