Foundation Holdings in Germany: Establishment & Benefits

A GmbH holding company can provide a tax-efficient solution for the entrepreneur, offering clarity, structure, and sustainable, healthy asset growth. However, a GmbH holding company is typically a temporary solution. A foundation holding company has several advantages over a GmbH holding company and is a permanent solution.

While tax advantages are important, entrepreneurs also seek security for themselves and their families. They ponder over what will happen to their family if the company encounters issues. Conversely, they worry about their company(ies): What will transpire if private risks such as illness, divorce, or creditor claims materialize? Will these risks impact the company and various investments?

The GmbH holding company only protects the private sphere from risks in the business environment: if an investment in the holding company becomes insolvent, if there are issues with one or more property projects or if creditors take action against an investment company or individual investments, these risks remain within the holding company. Typically, there is no access to the private sphere and the family.

A foundation holding company also provides protection in the other direction: if a creditor accesses the entrepreneur's private assets, e.g. because a claim for damages in the millions is made against him from a managerial or honorary position, it is not possible to access the holding company. The same applies to other risks, e.g. in the event of a divorce of the entrepreneur's marriage: as the entrepreneur cannot have a stake in “his” foundation (foundations have no shareholders/owners), a third party cannot “foreclose” on these non-existent shares, unlike in the case of a GmbH holding company: as the entrepreneur is a shareholder in the GmbH holding company, the shares in the holding company and therefore the entire holding company assets are available to creditors as a liability asset.

One of the biggest challenges in the life of an entrepreneur is succession planning: What should happen to my assets when I am no longer around?

The question of succession is only partially answered with the establishment of a GmbH holding company. Instead of having to distribute a large number of individual investments (shareholdings, property, portfolios, etc.) among the descendants, with a GmbH holding company the question revolves around who should receive how many shares in the holding company and when. This considerably reduces the complexity. However, the tax risks inherent in the shares remain high. If the entrepreneur passes away without detailed tax planning beforehand, there is a risk of considerable tax burdens: With assets of, for example, EUR 20 million tied up in the shares of the GmbH holding, the tax rate in the most favorable tax class I (heirs are, for example, the spouse and children) is already 27 percent. Typically, this triggers forced sales within the holding structure and taxable distributions in a considerable amount from the holding in order to fulfill the tax liability. If the entrepreneur passes away unmarried and bequeaths his estate to his partner, the tax rate would be as high as 50 percent due to the less favorable tax class III!

In contrast, the benefit of a foundation holding company is that the assets are already transferred to the foundation at the time of its establishment. Even though the entrepreneur and his family are the beneficiaries of these assets, the entrepreneur does not directly own them, as a foundation does not have any owners. The foundation is self-owned. Private risks, such as the entrepreneur's death, do not impact the foundation. There are no shares in the foundation that would need to be inherited and taxed. In other words: The inheritance tax and gift tax audit, which is still required for the GmbH holding company after establishment, is already completed with the establishment of the foundation.

During its formation, a foundation holding company needs more intensive advisory services than a GmbH holding company. This is mainly because, in the case of a foundation holding, not only income tax issues but also inheritance/gift tax issues need to be addressed - i.e., the audit needs to be conducted, which is done later for a GmbH solution. Therefore, the effort and costs for setting up a foundation holding are higher.

The foundation holding company also requires more guidance as the legal form of a foundation is usually less familiar to the entrepreneur than that of a GmbH. The fact that the entrepreneur does not hold any shares in “his” foundation and that the articles of association are less flexible than those of a GmbH are also factors that the entrepreneur needs to understand before deciding in favor of a foundation holding company.

Lastly, foundations - unlike limited liability companies - are subject to a unique tax: the so-called substitute inheritance tax (Erbersatzsteuer). Because shares in foundations do not exist and therefore cannot be transferred to descendants (subject to tax) by way of inheritance, the legislator has introduced this special type of tax. Every 30 years, it simulates an inheritance that triggers taxes. The advantage of this is that, unlike the death of the entrepreneur, the time at which inheritance tax is triggered can be predicted to the day. This gives you all the time in the world to optimize the tax situation and, in the best case scenario, avoid taxation altogether by transferring the assets to tax-privileged business assets before the cut-off date, for example.