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58Is Reinhard Schinkel according to Handelsblatt one of Germany's best tax advisors and specialist author for tax law. Reinhard Schinkel was born in Berlin in 1970. Two days after being appointed tax advisor, he founded his own law firm in 2007 and embarked on the adventure of self-employment. Since 2009 he has published various books as a specialist book author. Since 2011 he has been writing on a monthly basis for the renowned business magazine Fuchsbriefe from Berlin, since 2016 his judgment comments have been published in the magazine Agrarbetrieb. He is managing partner in the tax consulting company HSP STEUER Berlin Südost, true to the credo “Passionate tax advisor” More information at www.hsp-steuerberater-berlin-suedost.de/

Establishing a German foundation as a tax-efficient form of business: First steps

Searching for meaning is the trend. No wonder that foundations are also becoming more and more interesting for ordinary people. One of the main reasons for this are the advantages in terms of asset transfers and taxes. But what must be taken into account when setting up a company and during ongoing business operations?

German-Stiftung reasons-6

What is a foundation?

First, we must define what a foundation is: a foundation is an independent organization, a body. It has no members or shareholders. The legal basis is the mother of all laws, the Civil Code. The statutory basic data are to be found there from the paragraph 80 ff. The federal states have adopted further regulations in the foundation legislation (eg the Stiftungsgesetz Berlin).

The foundation of a foundation has various advantages: on the one hand, the immense tax advantages for the donors of charitable foundations should be mentioned. On the other hand, foundations can also be used for asset protection. This is done in the area of ​​family-oriented family foundations.

How does a foundation work?

But how exactly do you start a foundation? First you have to know: Foundations are differentiated according to whether they have legal capacity or not. A key feature of the foundation is that a business asset must be available, the so-called foundation assets. As a rule, this endowment must not be "consumed".

Only the income from the asset stock is used for the operation of the foundation. Another core feature of the foundation is that the income can only be used for the purpose of the foundation.

The purpose of the foundation

When the foundation is established, a foundation purpose is defined. In this it is determined from the start what the money may be used for. Foundation purposes can be in
sovereign area.

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For this exist public legal foundations private area lie. These would be so-called family foundations or company foundations or non-profit areas. This area is of particular interest to the tax authorities, as donations to the assets of such a foundation can be deducted as generous as donations (more on this later).

Foundations of public law

Foundations of public law are established by a statutory administrative act. They serve the fulfillment of public tasks.

Examples of foundations of public law are:

  • the foundation remembrance, responsibility and future (serves the compensation of former forced laborers)
  • the Contergan Foundation for disabled people, (support for people suffering from permanent damage caused by the drug thalidomide (better known as Contergan)
  • the Stiftung Preußischer Kulturbesitz, (administered formerly Prussian cultural objects such as libraries or art collections)
  • the Berliner Philharmoniker (bearer of this foundation is the Land Berlin)

Federal Foundations

Federal foundations are erected by a federal law and serve to commemorate outstanding statesmen of German history. This is exemplified by the American presidential libraries.

Examples for the Federal Foundation are:

  • the Foundation Chancellor-Adenauer-Haus in Rhöndorf
  • the foundation Reichspräsident-Friedrich-Ebert-memorial in Heidelberg
  • the Federal Chancellor Willy Brandt Foundation in Berlin

The non-legal foundation

The non-legal foundation is actually the little brother of the legally valid foundation. Legal capacity is granted to independent foundations with the approval of the foundation authorities. Before the approval, which has a legal effect, all foundations are not legal.

In the case of the non-legal foundation, the assets are transferred to a trustee (fiduciary) by means of a trustee agreement (foundation agreement). This trustee is required to use the money only for the previously defined purpose of the foundation.

How to found a legal foundation?

The establishment of a non-legal foundation is quite simple, in contrast to the legal foundation. You only need

  • a foundation purpose - who should receive the assets?
  • a trust treaty
  • a person / organization of your trust

Low administrative expenses

Most of these forms of foundation run under the umbrella of non-profit organizations (e.g. Caritas). This means: You determine for what purposes your foundation assets should be used within the scope of the non-profit organization. This can be broken down to individual projects.

An immense advantage is the greatly reduced administrative costs, in contrast to the legal foundations. You do not need your own board for the foundation. The founding documents will not be audited again separately by the Foundation Authority and the annual financial statements will not have to be submitted to the Foundation Supervision.

Only small assets necessary

For this reason, the establishment of a non-legal foundation is already practicable with a rather small capacity. A small asset is an asset that is less than 100.000 €. Why is that so?

The foundation purpose of a legally valid foundation may only be pursued through the income from the asset stock. In addition to the purpose of the foundation, however, the current expenses are also to be paid out of these income.

Pens to resolution

In the case of 100.000 € assets and an assumed interest rate of 5%, 5.000 € is therefore available for a good cause (before deduction of current expenses). This is not very much. However, the non-legal foundation can also be used for the purpose of the foundation.

The foundation is dissolved when there are no more assets. For this reason, a non-incorporated foundation should always be given priority in the case of rather small assets.
Alternatively, the assets could also be transferred via an endowment.

Increase in assets

The term "endowment" refers to the transfer of money from an existing foundation. With an endowment you thus increase the assets of an existing foundation.

Another advantage is that you can use the simple foundation to "practice". Could it be that you do not like the idea of ​​a foundation? If you like, the non-legal foundation can be converted into a legal foundation (with a corresponding increase in assets).

Disadvantages of the non-lawful foundation

As so often in life, there are not only advantages but also disadvantages. The person / organization of your trust - the trustee - is not subject to state restrictions (supervision by the Foundation Supervision). So if he acts contrary to your good purpose, you have hardly a handle to stop the bustle.

Under civil law, the property even goes into the ownership of the fiduciary. If this happens badly, the trustee's transferred assets are used for their own purposes rather than for foundations. If the trustee is a natural person and dies, the foundation is forced to be dissolved.

The foundation business

The so-called foundation business takes place in the first stage. This is a unilateral written declaration of intent that needs to be received.
The main component of the foundation's business is the establishment of a statute.

The absolute core compo- nents of the foundation business are:

  • Name
  • Seat
  • organs
  • Pledge of the transfer of property by the founder
  • assets equipment
  • Purpose of the Foundation

Request sample statutes

In addition, the individual countries have laid down further provisions in their foundation laws. If you are playing with the idea of ​​setting up a foundation, you can request or download sample rates from the respective state authorities.

This is very helpful, since, in addition to the required components according to the German Civil Code (BGB), the country-specific regulations are also incorporated, and a modified pattern kit can thus shorten the following stage two.

Name and seat of the foundation

But first a few explanations of the listed components: Foundations are often supposed to represent a legacy. Therefore, the name of the foundation will mostly contain the name of the founder or the name of the person to be remembered with the foundation (e.g. Konrad-Adenauer-Foundation).

The seat of the foundation is freely selectable, so it can be determined independently of the place of residence of the founder. Legal minimum organ of the foundation is the executive committee. Depending on the size of the foundation and the assets to be managed, other bodies may be set up, such as an advisory board, a board of trustees or a supervisory board.

If the foundation was established during the lifetime, the founder may reserve a right to designate the organs. In doing so, he himself can be called an organ.

The foundation assets

As already explained, the foundation's assets should not be too tight. The foundation's assets must be at least so high that the purpose of the foundation is fulfilled and the ongoing administrative expenses can be covered by the income.

If this is not ensured due to the small size of the property, the rejection of the foundation fee will result. The purpose of the foundation should, however, not be defined too narrowly, so that the foundations of the foundations can still be left to decide.

The purpose of the foundation

They have set up a foundation with the purpose of founding and maintaining the children's playground in the Schwabenallee in Berlin-Biesdorf. This works for several years wonderful, but then the area is rebuilt with a school. The playground does not exist anymore.

The purpose of the foundation can no longer be fulfilled. The foundation would have to be dissolved. It is possible that the foundation supervisory authority adapts to the purpose of the foundation in order to avoid dissolution. Nevertheless, it is advisable to consider the purpose of the foundation more generally (eg maintenance and maintenance of a children's playground in Berlin-Biesdorf).

Submit the statute

If the foundation business is set up together with the statutes, this is submitted to Section 2 of the Senate Administration (eg Senate Administration for Justice). In the case of a non-profit foundation (contribution follows), it is also necessary to recognize the charitable status of the Directorate-General.

In order to accelerate the recognition process, it is also advisable to submit the drafts in advance in order to request informally desired changes. If the foundation business meets the legal requirements, the foundation is recognized. With recognition, the founder is obliged to transfer the assets indicated in the foundation business. The foundation business can start!

Beware of taxation in the start-up phase

Whoever wants to set up a foundation has to pay more attention to things like taxation during the start-up phase. Taxation in the start-up phase sounds paradoxical at first. Because the foundation does not yet exist in the founding phase, so no income can be generated. However, German tax law is designed to fully tax the income earned (apart from a few exceptions).

What does that have to do with? In the so-called foundation business, the founder undertakes to transfer assets and this is where taxation begins. On the one hand, a distinction must be made between non-profit and private-law organized (family) foundations and, on the other hand, the taxation of the founder must be examined in the founding act.

Transfer to a non-profit foundation

On the part of the founder, care must be taken as to whether the assets are transferred from the private assets or from a working capital. If a transfer is made to the Foundation free of charge, this is free of income tax. No capital gain is achieved. The foundation assumes the asset (for example a property) with the amortized cost.

If the transfer is carried out out of an operating capacity, for example, a partial operation or whole operation is transferred, a distinction is made as to whether or not transmission takes place under detection of the hidden reserves.

Under hidden reserves, the difference between amortized cost (original purchase price minus deduction for wear short Afa) and the actual value at the time of the transfer is understood.

The thing about the book value

Ten years ago you bought a multi-family house for 1 Mio. €. Depreciation and amortization amounted to 200.000 €, so the carrying amount is still 800.000 €. Shortly before the transfer, you received a purchase offer of 1,5 million € for this property. The property thus contains 700.000 € hidden reserves (actual value 1,5 € million. /. 800.000 € book value).

It is possible to transfer this property directly from the operating assets to book values ​​(§ 6 Abs. 3 EstG, as a partial business) -? 800.000 €, or under uncovering the hidden reserves with an actual value of € 1,5 million.

Profit from the silent reserve

If the transfer is made at book value, no profit is recorded from the donor's side. Transfer value (withdrawal) 800.000 €. /. Carrying amount 800.000 € = 0 € capital gain.

If the transfer occurs while uncovering the hidden reserves, a withdrawal profit is obtained in the operation of 700.000 € (see above). As a result, the donor has to tax 700.000 with a tax-free rate, without a corresponding flow of liquidity opposing him.

You have the choice!

Therefore, the transfer of whole enterprises or part-enterprises to a non-profit foundation should always take place without uncovering the hidden reserves.

However, this option does not exist for the transfer of individual assets (for example, a company truck is transferred to the Foundation). This transfer must be made by uncovering the hidden reserves (withdrawal profit) and the withdrawal profit is subject to sales tax (§3 Abs..1b UStG)!

The gift tax

The foundation is an asset growth. This increase in wealth does not trigger taxation of income (private property is not tax-deductible), but taxation according to the law of inheritance / gift tax.

Taxation takes place after the deduction of small exemptions in accordance with tax class III, since the foundation does not identify any family ties with the founder. In the case of a transfer of assets of 600.000 €, 30% x 600.000 € = 180.000 € may therefore be charged for the foundation gift tax!

The land purchase tax

If it is to transfer property is also an eye on the land purchase tax.

Land transfer tax is the tax in Germany which transfers transactions of real estate subject to taxation. There is no uniform tax rate here. This differs from state to state and is approx. 4% of the transferred value.

Exemption from basic tax

If the land transfers are subject to the gift tax, they are, however, exempt from the basic income tax pursuant to § 3 No. 2 GrEStG.

However, this applies only to purely free transfer of assets. If the real estate loan is also transferred with a real estate loan, the real estate liability is deducted from the transferred liability.

Examples of taxation

You transfer a property (worth € 1 million) and the associated loans, which means that in future the foundation will also have to service the loans from the income (e.g. € 500.000).
Real estate transfer tax (500.000% 4 € 0) is levied on € 20.000.

This is due to the fact that within the scope of the gift tax consideration, only 500.000 € is also subject to taxation (1 million value./. 500.0000 € liabilities = 500.000 € asset growth).

The taxation of the charitable foundation in the founding act, on the other hand, is characterized by many reliefs, which is what the following deals with Article.

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8 responses to "Establishing a German foundation as a tax-efficient form of business: First steps"

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  2. Holger Fröse says:

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  3. Tracy Ilgner says:

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