While most German foundations are charitable and either conduct their own operative business or run funding projects, private-benefit foundations are organized not for charitable but for private purposes. The most common type of non-charitable foundations is the family foundation. It is mainly designed to serve the interests of one or more families. This means that family foundations are foundations whose beneficiaries have family ties with the founder. Around 5% of all foundations set up in Germany are family foundations. High net-worth individuals (HNWI) and entrepreneurs mainly appreciate the tax advantages and the flexibility of family foundations. Family foundations allow to develop tailor-made asset succession concepts and to effectively protect assets from third-party access (asset protection).
In many cases, family foundations are established as part of a comprehensive succession concept: Setting up a foundation is usually a perfect way to implement tax-efficient asset successions in respect of both, private assets and shares in business companies. As an instrument of company successions, family foundations serve to continue the founder's company or – more often – to hold the shares in the company. In such cases, the foundation is also called a corporate foundation.
One of the great advantages of arrangements involving corporate foundations is that the founder´s business assets worth many millions of euros can be transferred to them at very favorable tax rates or even completely free of gift tax. At the same time, the entrepreneur's family members will be provided for by regular distributions from the foundation, for example. In this way, the founder's company is maintained beyond his death and the beneficiaries are still financially secure.
In the context of such company successions, it is usual to set up several foundations at once, e.g. one family foundation/corporate foundation for every beneficiary (e.g. one foundation per child). In order to avoid an unnecessary additional administrative burden, the bodies of the different foundations may be composed of the same members. One and the same director may, for example, head several foundations.
In addition, mixed foundation models are conceivable. In this case, the family foundation is complemented by one or more charitable foundations which provide even additional tax advantages (e.g. in the field of gift tax and inheritance tax). The founder specifies the charitable purposes to be promoted by such foundation. This so called double foundation model provides for the splitting of control and distribution rights into two (or more) foundations: While the charitable foundation receives the majority of the shares in an asset (e.g. a company) for tax reasons and pursues charitable goals, the family foundation holds the majority of the voting rights and receives the majority of the distributions from the foundation. In this way, it retains control over the corporate strategy and fulfils its purpose of supporting the family financially.
Also the succession of private assets to the next generations, i.e. the transfer of assets not relating to any substantial interest in business companies (like publicly traded stocks, investment funds shares, other portfolio assets, cash, real property, art, etc.), can be accomplished through family foundation solutions. In such private cases family foundations are attractive because they provide assurance that the property (e.g. the family's real property) is protected from fragmentation in case of succession. Instead, the family foundation allows to lastingly preserve the property as one unit. In addition, there may be interesting tax advantages like, for example, the low corporate income tax rate for private foundations of 15,825% only as long as no trade or business is conducted by the foundation.
Family foundation solutions are ideally suited for real estate owners in Germany. This holds true especially for real property a German taxpayer can sell free of taxes after 10 years of ownership. In such cases, the real estate assets may be sold (free of tax) to a family foundation. This allows the founder to increase his liquidity and use it for any kind of investments. The foundation, in turn, which will finance the real estate purchase from its own capital or through a bank loan, or a mix of both, can in most cases benefit from higher depreciation and basically pays only 15.825% corporate income tax incl. solidarity surcharge on the rentals received. Rental income received by the founder, on the contrary, would be subject to the founder's personal income tax rate which is often the maximum tax rate (so called “wealth tax”) plus solidarity surcharge (i.e. up to 47.475%).
Besides, real property owned by a family foundation may be sold again free of taxes after a holding period of 10 years. But even an earlier sale causes only a relatively low tax burden of only 15.825% (corporate income tax and solidarity surcharge).
Family foundations have neither owners nor shareholders. While shares in a German limited liability company (GmbH) are owned by the shareholders, which means that creditors can enforce in the shares, founders own no shares in "their" foundation. As a result, the foundation's assets are protected against any third-party claims - at least if the transfer to the foundation was performed early on and certain contestation periods (4 to 10 years) have expired. Family foundation solutions offer the perfect asset protection to entrepreneurs, who are exposed to financial risks relating to their company and are concerned that one day they might be liable with their private assets.
The transfer of assets to a family foundation is, as such, subject to German inheritance tax and/or gift tax. However, the founder can benefit from a wide range of tax advantages, including certain tax allowances. To this end, the contract by which the assets are transferred to the foundation must be carefully drafted. For example, if, at the time of the founding act, the founder already undertakes to transfer other assets to the family foundation at a later time (which needs to be mentioned in the contract), the assets transferred later can also benefit from tax allowances under the inheritance and gift tax law.
In case of large fortunes exceeding the tax allowances, our structuring advice will focus on identifying business assets. Under various circumstances, the transfer of business assets to family foundations may be tax-exempt (so-called "tax-privileged assets"). In this context, it may be advisable to set up several family foundations at once so as to be able to benefit from the statutory amount of 26 million euros several times. In this way, assets in the three-digit million range can be transferred tax-free or almost tax-free.
Like other business corporations, family foundations are subject to corporate income tax. In contrast to German limited liability companies, trade tax (generally around 15%) will not apply automatically but only if the family foundation actually engages in trade or business activities. If, instead, the family foundation only provides asset management, the final tax burden on the family foundation will remain 15.825% (corporate income tax and solidarity surcharge). Compared with other legal structures, this tax rate is extremely attractive.
Besides, the family foundation is subject to a tax that does not apply to other legal structures: the substitute inheritance and gift tax (Erbersatzsteuer). Every 30 years, a succession is assumed to take place with respect of the foundation's assets. However, a clever tax structuring will help reduce the tax burden to a reasonable amount or exclude it altogether.
If you are interested in setting up a family foundation in Germany, hastily action is not adequate. A sustainable succession solution that is sure to be legally compliant and tax-optimized will always require that we take every care to ensure that your personal family situation and your total assets are given sufficient consideration. In the second step we then develop a tax and legal concept tailored to your specific needs, including the articles of association and the founding act.
Do you have questions on family foundations, on how to set up a family foundation, or on how to set up a foundation in general? You wish to set up a family foundation for protecting your assets (asset protection), increasing your liquidity, for tax-related reasons, or for organizing a structured transfer of all of your assets to the next generations? You have urgent questions in your capacity as a foundation director? Your contacts are
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