The German law of foundations is not a separate, unified legal field. There is not one single “foundations code” or „foundations tax act“. Instead, the regulations that govern foundations and how they are taxed are scattered among 16 state laws, the German Civil Code and several federal tax codes. Thus, it should come as no surprise that there are a number of different types of foundations. We will be glad to help you find the type of foundation that best suits your requirements.
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The most frequently encountered form of a foundation is the charitable foundation. A charitable foundation generally pursues community-welfare goals. For many years, such foundations have enjoyed enormous tax advantages of various different kinds. The founder determines the specific charitable goals that the foundation shall pursue. Once the goals are set out in the bylaws, the foundation will pursue them even after the founder's death.
The idea of placing one's wealth, or a part of it, at society's service resonates with more and more people every day. Often, the founder is motivated to give something back to society, after profiting from it for decades, for instance as a successful businessperson. By founding a charitable foundation, many businesspeople are able to make a successful transition into retirement. During the founder's business career, the company profited from the founder´s expertise and experience. In retirement, the maximization of personal and company profits is no longer the founder´s primary goal. His current activity is rather oriented to the maximization of benefit to the community and the personal satisfaction gained from doing good. Frequently, the recognition the founder enjoys for his good works is also an important motivation.
Even a charitable foundation can, to a certain extent, provide for the founder and his family members. Provided that the legal requirements for this are met, this can be done without jeopardizing the tax exemption of the charitable foundation. However, if the focus of the activity is to support one or more families, the charitable foundation is not the right legal form. Indeed, about 5% of German foundations advance not community, but private-welfare goals. The most important sub-class of these non-charitable foundations is the family foundation, which is essentially designed to serve the interests of one or more families. The family foundation is a popular tool for asset and business succession planning for high net-worth individuals (HNWI) and entrepreneurs.
Corporate foundations are also permitted. These involve foundations that are organized to operate a company themselves or to have a significant stake in a business company. Whether they are charitable depends on the facts and circumstances of the case.
Unlike an independent foundation, which is a separate legal entity itself and subject to rights and duties, the trust foundation is not a separate legal entity. A trust foundation is created when the founder's assets are conveyed to a trustee or an existing foundation or charity, which then invest them and use them for a purpose to be determined by the founder. Unlike an independent foundation it is not subject to government oversight. Another advantage of a trust foundation is that it can be set up with a very small amount of capital of e.g. 10,000 or 20,000 euros. However, it must be considered that the income resulting from such a small capital will hardly be sufficient to meaningfully fulfil the purposes of the foundation. This is the reason why the establishment of an independent foundation usually requires a significantly higher capital investment (charitable foundations: approx. 200,000 euros; family foundations: approx. 1 million euros). It is possible for the founder to initially endow the foundation with a smaller amount only, in order to later transfer further assets to the foundation, e.g. in case of death.
The creation of a trust foundation is usually faster and easier than setting up an independent foundation. However, when large asset amounts are involved, an independent foundation may be more useful. In the case of trust foundations, it is necessary to carefully evaluate the interests of the trustee:
- Is it possible that the trustee specializes exclusively in the administration of trust foundations, and is therefore incorrectly advising against the establishment of an independent foundation due to a conflict of interests?
- Is the administrative cost structure transparent?
- Can the trust foundation realize all of the founder's goals, or will the trustee have to amend the bylaws or seek the assistance of another trustee?
A foundation is generally intended to exist forever. Some German foundations are already hundreds of years old. The goals of a typical foundation are usually realized through revenue generated by the foundation's capital. Lately, however, German law has opened up the possibility of capital-distributing foundations, that is, foundations that do not rely solely on their investment revenues, but also use up their capital, so that after a certain time, the foundation will cease to exist when its assets are fully used. The decision whether a capital-distributing foundation is the right vehicle for the founder's goals requires a case-by-case analysis.
While German law offers an excellent legal and tax framework for charitable foundations, in cases of international tax planning and optimization it may be useful for HNWI to also consider foreign jurisdictions when establishing a (family) foundation. Foundations created according to Swiss or Austrian law or the law of Liechtenstein would be the most common alternatives to setting up a German family foundation. The decision whether to go beyond Germany's borders and, if so, which country to choose, requires a careful weighing of all benefits and disadvantages. In particular, tax consequences must be carefully analyzed when considering a foreign foundation
If you are looking for advice regarding which type of foundation best suits your intentions, our team of experienced lawyers and tax advisors is here to assist. No matter what type of foundation you want to set up: We will take the time to get to know you, your goals, intentions and all other circumstances that cause you to set up a foundation. This helps us give you the right suggestions and recommendations and realize your founding project competently from A to Z. Feel free to contact either
Uwe Müller and Boris Piekarek and their teams will be happy to answer your questions regarding German foundations and the German foundations (tax) law. Just send us an e-mail (firstname.lastname@example.org) or give us a call (+49 (0)69 76 75 77 80).