We have often reported on the advantages of a holding company. But with a foundation, even more advantages are possible. In particular, a foundation holding company that is involved in operating companies grants many advantageous options. This includes both tax and civil law aspects, which can be achieved independently of each other. For example, the tax-free sale of real estate after the expiry of the ten-year speculative period opened in § 23 EStG or asset protection in various directions is relevant.

1. Introduction: What are the advantages of a foundation?

The most common types of companies in Germany are the individual company and the GmbH. For good reason, they have established themselves so successfully in the domestic corporate landscape. The sole proprietorship is easy to set up and flexible to manage. Compared to other legal forms, the administrative burden is often slightly lower. For this, the GmbH shines with an aspect that the sole proprietorship enviously looks at, namely the limitation of liability. But also the thesauration of profits in the GmbH opens many a significant advantage. Compared to taxation on a private level, a GmbH usually has total taxes of only 30%.

Nevertheless, there is another, much less known legal form, which combines many advantages of natural persons with those of a GmbH. Of course, we are talking about a foundation.

2. How to set up a foundation in Germany?

Unlike companies, you don't start a foundation, you build it. In addition to the different language rules, the very own character of a foundation is also expressed in the process of its creation itself. So you do not make a contribution to the capital of a company, but you make a donation to the foundation as part of a foundation business.

This is inherent in the very essence of a foundation: although it has assets, it knows no shareholders who have a direct or indirect right to them. This is why foundations are often referred to as independent assets. A foundation may exist either on a temporary or permanent basis.

The basis for the actions of a foundation is its statutes. In it, founders determine what goals the foundation they set up should pursue and how this should be done. In a charitable foundation, the goal is to promote purposes that serve the general public. In a family foundation, however, it is the financial support of family members. This support is provided by providing destination services to the beneficiaries, who are also called destinataries. The foundation finances these payments through its own income, which it usually realizes through dividends from subsidiaries or through rental income.

Equipped with these elementary peculiarities, a foundation now allows a whole series of interesting advantages both in tax and in many other respects. We now take a closer look at these in 16 steps.

3. The 16 benefits of a foundation in detail

3.1. Advantage 1 – Gift tax-free transfer of companies

Let us stay with the establishment of the foundation. Since a gift of assets usually triggers gift tax, this form of incorporation seems unfavorable at first glance. But when it comes to the transfer of operating assets, the rule or option exemption comes into consideration. If the assets exceed EUR 26 million, however, the relief needs test is suitable for saving gift tax. In any case, it is quite possible to transfer companies tax-free to a foundation. The foundation then holds and manages the company’s investments. Therefore, in this context, one often speaks of a foundation holding.

3.2. Benefits of a foundation: Advantage 2 – No disclosure of balance sheets

Business partners often have a legitimate interest in the financial situation of their respective partners. Such information can provide conclusions on how to act optimally in terms of business. For example, if you want to convey a product to another company as a service provider, you can better estimate by knowing its current financial situation how high the willingness to buy could be and with which price negotiations you will succeed.

Where can such information be obtained? As a rule, the business register provides information about this. Because there you will find the published company balance sheets. However, a foundation is not a company. It is therefore not obliged to publish its financial details. It can therefore keep its finances under wraps with the public.

3.3. Advantages of a foundation: Advantage 3 – asset protection

An operative GmbH has two fundamental advantages: on the one hand, the possibility of saving profits in the company instead of having to distribute them, and on the other hand, the limitation of liability. In particular, the latter aspect is relevant for many entrepreneurs, because in many other legal forms, liability at the private level threatens in an emergency. However, if a significant profit reserve has arisen in a GmbH and a liability occurs, then it is liable with its entire assets instead of with its share capital. So this can mean the demise of years of success.

If a GmbH as a subsidiary of a foundation holding company regularly distributes its profits to it, it minimizes the risk of losing everything in the event of liability. This is another advantage of a foundation. The foundation may be able to collect the dividend tax-free. However, this is only possible if the tax authorities succeed in proving that it operates purely as an asset manager and thus does not develop any commercial activity.

3.4. Advantage 4 – Also asset protection, only different

Speaking of asset protection, the next advantage of a foundation is also related to this. However, this is a completely different context. To be more precise, these are actually two aspects.

If an entrepreneur falls into private insolvency, this can, depending on the legal form, lead to liability with the entire assets. This would also affect a participation in a GmbH or another legal form; They could be lost. A foundation equipped with a correspondingly far-sighted statute, on the other hand, is much better shielded from the risk of private insolvency.

My second point is that a foundation, in accordance with its statutes, makes donations to its destinataries. However, if someone from this circle falls into private insolvency, the donation paid to him or her would be seized. The original sense of destination performance would thus be thwarted. Therefore, within the framework of its statutes, a foundation may pause such payments to affected persons until the private insolvency has been pending.

3.5. Benefit 5 – Tax-free dividend

The distribution of profits by a subsidiary GmbH to its holding company regularly leads to a low tax of about 1,5 %. However, if it is a foundation holding company, one can argue that it operates purely in asset management. Although a foundation is also a corporation, it is not a corporation. Therefore, a foundation can also use almost all other types of income (with the exception of income from self-employment). With a clever argument, this circumstance can be extended compared to the Treasury in such a way that in the end neither corporation tax nor business tax is incurred at the level of the foundation.

3.6. Advantage 6 – Tax-Free Business Sale

Equally exciting is that a foundation can sell its subsidiaries tax-free. In this respect, this corresponds to the situation that a holding company is also aware of when selling a subsidiary. But here, too, the difference is that it is possible for a foundation to actually pay no taxes on the sale.

3.7. Advantages of a foundation: Advantage 7 – rental of real estate

The next big advantage that a foundation can claim for itself is also multi-layered. It's related to real estate.

As a legal person, it is open to a foundation to own real estate. Of course, they can also rent it. Logically, this process is also taxable. However, the income of a foundation is subject to corporate tax and business tax – in principle. Corporate income tax is a flat rate of 15% on the resulting income. The trade tax, on the other hand, can completely shake off the foundation via the extended land reduction according to § 9 no. 1 sentence 2 GewStG. This remains the case with a 15% tax-optimized rental.

3.8. Benefits of a Foundation: Advantage 8 – Tax-Free Real Estate Sale

However, the property of asset management is also a tax treat with regard to the possible sale of real estate. Because a foundation as a corporation does not carry out a purely commercial but an asset management activity, it can sell the property like a natural person. This means that after expiry of the ten-year speculative period according to § 23 (1) sentence 1 EStG, the sale of a property can also be realized tax-free for a foundation.

Advantage 9 – Lending to own real estate GmbH

For example, a foundation can set up a real estate GmbH as a subsidiary at the right time – i.e. after the expiry of the speculative period – and sell real estate from its own stock to it. This transfer takes place against the granting of a loan. Since such a loan should be foreign-standard, one must also calculate interest. With these financing costs, the profits of Immobilien-GmbH can be excellently reduced. In addition, there is the repayment, which also ensures that the foundation receives a tax-optimized cash flow, because repayment services are tax-free. In addition, one also benefits from the depreciation, which only reduces the profit in tax terms.

3.10. Advantage 10 – Avoidance of withholding tax (capital gains tax)

In Germany, profit distributions are subject to withholding tax, namely capital gains tax. Both natural and legal persons are subject to this tax. This means that corporations which distribute dividends to their shareholders are obliged to withhold the capital gains tax and then pay it to the treasury. However, if the recipient of a dividend can collect it tax-free, the Treasury must refund the previously received tax. If this happens regularly, you can submit an application for permanent overpayers to the competent tax office. With its consent, the limited liability company is then released from withholding tax. In our case, the foundation receives the entire dividend immediately – without having to wait for a refund and thus without delay. This increases the liquidity of the foundation.

3.11. Advantage 11 – Use of the basic allowance for children

Recurring statements by a foundation to the still minor children of donors have the advantage that they remain tax-free up to the limit of the basic allowance. Because if the children do not earn their own income, it would be disadvantageous if they left their basic allowance unused.

With the destination services they can receive about EUR 20,000 tax-free every year. Although the basic allowance generously amounts to only EUR 12,000, the children can also use the parts income procedure. This means that 40% of the EUR 20,000 is tax-free anyway, namely approximately EUR 8,000. However, the remaining EUR 12,000 also remain unaffected by the income tax, because the tax office charges the basic allowance on it.

If you start with these payments directly at the birth of the child, tax-free payments totalling EUR 400,000 come together over the next 20 years of life. This per child and without complex tax designs – very simple.

3.12. Benefits of a Foundation: Advantage 12 – no Exit Tax

We have informed about this very often: a family foundation is ideally suited to avoid the exit tax. Anyone who wants to emigrate abroad as a destinate citizen and is not involved in any society, does not prevent any benefit from a foundation. This is because foundations belong to themselves. There is simply no participation of natural or legal persons in a foundation. But only if there are participations, the exit taxation applies. So destinataries can emigrate tax-free.

3.13. Advantage 13 – Granting of loans

A foundation that has saved profits can also make loans. Both the founders and destinataries, but also a subsidiary or a real estate company as borrower come into consideration. So instead of paying interest to a credit institution, the money remains in a closed circuit. Where possible, the interest costs are nevertheless regarded as taxable operating expenses. It is only important that the conditions for the loan are foreign-usual. Otherwise, an external audit threatens the discovery of a hidden profit distribution.

3.14. Advantage 14 – Sale of real estate to the Foundation

Suppose that the founders have real estate assets and have held this for at least ten years. Suppose further that the properties have increased in value. Then the founders can sell the properties to the foundation they set up – tax-free. On the one hand, this gives them the opportunity to deduct assets from the foundation to the private level via the purchase price – tax-free, as I said. Because if the foundation would pay the assets via statements, this would be an income tax-paying process.

But there are even more pluses: On the one hand, the increase in value has increased the amount of depreciation. The foundation can thus keep more money from its rental income tax-free than the founders could previously. Then also the advantage is relevant that the foundation pays corporate tax instead of income tax on the rental income. However, the corporate tax rate is significantly lower than the income tax at present 15% and in some years even only 10%. And then the foundation also has the tax privilege that it can also sell real estate tax-free after the ten-year speculative period. These are indeed many advantages of a foundation.

3.15. Advantage 15 – Avoidance of inheritance disputes

A family foundation is particularly well suited to arrange the estate – in such a way that there are no disputes over the succession of assets. You may have heard it more often: the higher an estate is, the more likely a dispute is among the potential heirs. But if, as a future testator, the property is transferred to a family foundation and its statutes are structured in such a way that descendants and other family members receive financial support in the desired amount, no one can raise legal objections. Finally, these are only destination services, the amount of which is determined by the statutes of the foundation. And none of the beneficiaries has any influence on this.

3.16. Advantage 16 – Freedoms in design

Still one of the many advantages of a foundation results in logical consequence from the previous aspect. Because anyone who can write conditions for the award of destination services in the statutes, may also regulate other points in it. For example, it can create the prerequisite that a destinatary included in the statutes receives further destination payments in full in the event of marriage only if the respective partner agrees to a marriage contract. Because in the event of a divorce, the benefits paid to the destinataire remain in his assets; Fragmentation is thus excluded.

5. Benefits of a German Foundation – Conclusion

Equipped with so many fabulous benefits, the foundation seems to be an excellent legal form. However, it also has a serious catch. Because if the foundation is based in Germany, then it is subject to the German inheritance tax. Every thirty years, the property of a family foundation based in Germany is subject to taxation according to the current rules of inheritance tax law. The legislator has recognised that a foundation would otherwise have a tax advantage if, after its establishment, it remained completely exempt from the taxation of its assets, while natural persons have to tax their assets every time they change generations. Therefore, the substitute inheritance tax simulates the inheritance tax that would affect natural persons.

After all, we are happy to advise you individually and on all relevant aspects of foundations at home and abroad. By the way, also to avoid the inheritance tax. All you need to do is contact via email or Calendly.