Foundations interesting from a tax perspective - but generally not a tax shelter
Foundations present considerable advantages in terms of income, corporate, inheritance, and gift taxes. At the same time, foundations are not a classical "tax shelter". The reason is that, by establishing a foundation, the founder gives up control of his wealth. Of course, he can continue to exercise considerable influence over the foundation. He or she can, for instance, dictate goals to the foundation as he sees fit, put himself and his relatives in key positions in the foundation, and provide close relatives with claims to share in the foundations' revenues. However, once assets have been transferred to the foundation, there is generally no way to demand their return.

Various types of foundations - various tax consequences
Charitable foundations enjoy numerous tax privileges, and the same is true of the person who establishes them. Since the beginning of 2007, for example, the founder can claim donations up to 20% of his income as deductible special expenditures on his income tax. Further, he can invest € 1 million Euro in the foundation with favorable tax treatment. Married couples can generally donate double this amount. Corporations are subject to similar provisions. The Corporate and Trade Tax Codes also provide for the deductibility of donations to foundations.

Thus, the state participates to a not inconsiderable extent in the founder's good works. There are, however, some traps for the unwary: All income tax advantages apply only, for example, with respect to foundations which were established during the founder's life! These income tax advantages do not apply to legacy foundations that take effect after the founder's death.

While donations to charitable foundations confer income, corporate, and trade tax advantages and are free from gift or inheritance tax, donations to non-charitable foundations, such as family foundations, do not enjoy tax advantages. Further, family foundations are subject to a rare and little-known tax: The substitute inheritance tax. However, in certain cases, the establishment of a family foundation can nevertheless make sense in order to preserve the family's wealth over succeeding generations. Tax considerations can, in such cases, urge the creation of a family foundation that is later transformed into a charitable foundation.

Beware the final withholding tax - create your foundation by the end of 2008!
From 2009 onward, income from capital gains will be subject to a unified 25% tax, plus a solidarity surcharge and applicable church taxes. The tax has the effect of a final withholding tax. Thus, if taxes are withheld at the source, the citizen will be considered to have satisfied his tax obligations. For donors whose income comes mainly from capital gains - and this will be true of many financially successful people and potential founders - the final withholding tax can become a problem, as it can counteract the financial incentive to establish a foundation. The deductions for special expenditures have no tax-relevant effects for taxpayers who obtain mostly capital gains. The final withholding tax nullifies the deductions for special expenditures. The alternative is to waive the final withholding effect and submit to taxation at the normal rate for personal income. However, this generally leads to disadvantageous tax consequences.

As the lawmaker seems unlikely to resolve the contradiction between the final withholding tax and the special expenditure deduction before 1 January 2009, those who wish to establish a foundation should do so before the end of 2008. The old tax laws apply until that time. Donations and contributions made until that time will continue to enjoy favorable tax treatment.