The foundation as a rock in the surf – value preservation and tax relief via the foundation

Foundations have existed in Germany for centuries.

Some of them still exist today and have survived wars, recessions, banking crises, changes of government and other events.

Many assets – such as works of art, collections, buildings with land – could be preserved for posterity with the help of a foundation. The topic of „foundations“ has become increasingly popular in Germany as a result of the new „Law for the Further Strengthening of Civic Commitment“.

This law, which came into force last year with retroactive effect from 1 January 2007, can benefit German taxpayers in a special way, because in addition to the promotion of charitable objectives, it also involves tax relief.


Improvement of liquidity through special expense deduction

The charitable foundation can significantly improve the liquidity situation of wealthy persons with a corresponding tax burden. Under the new law, donors can deduct up to 1 million euros in special expenses (up to 2 million euros for married couples) within ten years to reduce tax. The value of donated assets – real estate, securities, collections or cash assets – represents special expenses on the donor’s personal tax return and can significantly reduce taxable income. In addition, the general charitable deduction can be claimed at 20% of annual income. The tax office does not charge any gift or inheritance tax. There is also the possibility of entering tax allowances on the income tax card or reducing advance income tax payments. With the tax benefits, many citizens can, for example, expand their private pensions or compensate for the increased cost of living. The founder himself determines the charitable purpose to be supported and decides who, how or what is to be supported.


Asset protection and value preservation

The foundation should also be seen as an instrument of asset protection for the founder. Assets such as collections, works of art or patents can be entrusted to your own foundation, which is managed according to the founder’s specifications. In this way, the citizen can protect certain assets from being broken up by heirs in the event of death or, in principle, from being seized by third parties. Foundations are fundamentally designed for perpetuity. They consist of basic capital in the form of special assets that belong to themselves. Married couples and singles without heirs to relatives can appoint their own charitable foundation as heir. The inheritance transferred to the foundation in the event of death can be used to promote any charitable purpose. It is advisable to set up the foundation while the beneficiary is still alive and to endow it with a small amount of assets.


Regulating company succession and job preservation

According to calculations by the Institute for Research on Small and Medium-Sized Businesses, more than 300,000 family-owned businesses are facing a change of ownership in the coming years. It is estimated that in 40% of all cases there is no suitable successor from the family circle. In this context, the double foundation, which is one of the company-affiliated foundations, represents a contemporary, intelligent building block for solving the problem of succession. For example, the shareholder can transfer a large part of the privately held company shares to a charitable foundation without voting rights and tax-neutrally to the managing director of a GmbH. 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. Through the double foundation, solid medium-sized companies and the jobs associated with them can be secured.


Asset management without taxes on investment income

The assets within the foundation operate tax-free in tax-privileged asset management, so the investment income is also tax-free. This is an enormous advantage, especially as from 2009 the interest income tax of 25% plus solidarity surcharge will be levied on income from capital assets outside the foundation. The tax-free sale of assets via the charitable trust foundation is also possible; the proceeds of the sale then flow tax-free into the foundation.


Income and new jobs with your own foundation

If the foundation has sufficient capital, it is possible for the founder and other persons to work as permanent employees and to pursue the foundation’s purpose in Germany and abroad. However, the founder can also make use of legally regulated maintenance payments for himself and his dependents by applying to the charitable foundation. According to this, in principle up to one third of the income can be used for the living expenses of the beneficiaries. But also the preservation of the memory of the founder of the foundation as well as the care of the grave can be financed by the foundation (compare § 58 number 5 AO).


by Dr. Johannes Fiala and F. Strobelt, Munich

by courtesy of (published in Schweissen und Schneiden 61.2009, page 55-56)

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Über den Autor

Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala ist seit mehr als 25 Jahren als Jurist und Rechts­anwalt mit eigener Kanzlei in München tätig. Er beschäftigt sich unter anderem intensiv mit den Themen Immobilien­wirtschaft, Finanz­recht sowie Steuer- und Versicherungs­recht. Die zahl­reichen Stationen seines beruf­lichen Werde­gangs ermöglichen es ihm, für seine Mandanten ganz­heitlich beratend und im Streit­fall juristisch tätig zu werden.
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