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The Tax Law of Foundations in Germany

Various types of foundations – various fiscal consequences

Charitable foundations enjoy numerous tax privileges, and the same is true for 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: For instance, 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.

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.

Your Legal Experts for Foundations

Your legal experts for all issues related to Private Foundations are Attorney Johannes Fein as well as Attorney Boris Piekarek. Please contact us by e-mail (info@winheller.com) or by phone (+49 (0)69 76 75 77 80).

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