If Germany should reactivate the property tax again, then the Family Foundation in Liechtenstein plays a special role as an option for avoidance. There are two ways in which assets can be transferred to a family foundation in Liechtenstein: either by donation or by loan. A gift transfers assets permanently to the foundation in Liechtenstein, but also triggers gift tax. On the other hand, a loan enables the almost tax-free construction of further assets in Liechtenstein under the exclusion of a gift tax. However, the assets remain nominally taxable in Germany. However, the nature of assets also plays an important role. For example, financial assets or assets tied to funds and shares are much more easily transferable than real estate or corporate investments in Germany. In the latter two cases, the Family Foundation in Liechtenstein would still apply a limited property tax.

The reactivation of the wealth tax also plays an important role in the ongoing federal election campaign in 2021. Should the new federal government implement this project, many wealthy people in Germany will look for a way to protect their assets from taxation. A family foundation in Liechtenstein represents a complex solution approach with which the wealth tax in Germany could be avoided.

We dedicate our current contribution to the information on how a family foundation in Liechtenstein could contribute to avoiding the onset of potentially threatening property tax in Germany. In doing so, we also discuss how to transfer German assets to a family foundation in Liechtenstein as optimally as possible. We also explain the advantages of the options presented here.

First of all, we examine the basis on which a family foundation in Liechtenstein could act as an aid to avoid a property tax that might be vulnerable in Germany.

The key point here is that a family foundation in Liechtenstein is a legal entity, thus has its own rights and obligations, but also requires at least one natural person to conduct its business. In this respect, it resembles a corporation. But there is a significant difference to corporations, which are also legal entities. While a corporation has an ownership relationship with its shareholders, a family foundation in Liechtenstein as well as in Germany has no shareholding and therefore no shareholders. It is precisely with this approach that one can decouple the bond of a natural person to his private property, which is the basis for the accumulation of wealth tax. Or to put it another way: A wealthy private person who donates his assets to a family foundation, for example in Liechtenstein, gets rid of the tax object that is decisive in a property tax, so that the property taxation lacks the substrate to be taxed.

You deliberately choose a family foundation in Liechtenstein instead of Germany. Because a foundation based in Germany would then – we remember their duties – be taxable with their assets in this country without restriction. A family foundation in Liechtenstein, on the other hand, is subject to Liechtenstein tax law.

You may laugh at this point, but there is actually already a property tax there. So why should one choose a family foundation in Liechtenstein as a design model in order to avoid a possibly reintroduced property tax in Germany in the future, which already exists in Liechtenstein anyway? The answer is that Liechtenstein levies taxes only on natural persons. A family foundation in Liechtenstein is therefore completely excluded as a corporation.

In order to successfully avoid a future property tax in Germany with a family foundation in Liechtenstein, a differentiation must be made in terms of assets. For example, there are types of assets that, simply because the tax substrate is firmly linked to Germany, have no chance of escaping a German property tax. This applies in particular to real estate assets and investments in companies based in Germany.

On the other hand, there are also asset assets that are considered mobile because they are internationally transferable in this respect. Here we talk mainly about financial assets, but also share deposits or fund shares. But also art objects, gold stocks, assets existing in crypto currencies or valuable collections can be counted. Due to this potentially possible transfer of assets abroad, the basis for applying the wealth tax in Germany can then be elegantly leveraged.

Since the property tax in Germany depends both on the tax liability of the owner and on the type of property, we now also distinguish our approach with which we avoid property tax in Germany by means of a family foundation in Liechtenstein.

Let’s start with the relatively simple approach, the one that involves mobile assets. This can then be regularly transferred to the foundation by donation as a foundation business. Of course, there is also a gift tax in Germany. But this is the one-time tax that you should be willing to pay in order to protect the assets from the wealth tax in Germany permanently. If the mobile assets have been transferred to the family foundation in Liechtenstein, it is now available to it to build up further assets there, without being subject to a property tax.

In addition, there is another alternative that can be applied to all mobile assets except money. Instead of gifting them, you can, for example, sell shares or fund shares to the family foundation in Liechtenstein. The advantage here is that you can influence the possible taxable profit via the price. If in the end there is no or only a small tax, which would be well below an otherwise incurred gift tax, a financial advantage has been achieved. But one must also think about the financial resources of the family foundation in Liechtenstein, with which the purchase should then take place. But there can also be an alternative here, namely the loan-financed sale of mobile assets. It is only important here that one does not commit abuse of legal design possibilities according to § 42 AO by means of these methods.

If you now also wanted to transfer German real estate and shareholdings in German companies by donation to a family foundation in Liechtenstein, gift tax would first be incurred. If, however, these assets are also to be considered in the context of wealth tax in Germany, then the tax office will investigate whether the immobile assets are located in Germany. According to § 4 (1) no. 2 VStG in conjunction with § 121 BewG, this is tax-arrested as domestic assets in Germany under the currently still applicable legislation. This would then lead to the legal consequence that it would also be subject to German property tax.

A gift is therefore not a good idea to circumvent the property tax in Germany by transferring assets to a family foundation in Liechtenstein. After all, this continues to exist in Germany, albeit as a limited rather than an unlimited tax liability. Yes, you even pay gift tax on top of it without getting an advantage. In this way, we find that real estate and corporate investments are quite bulky for our goals. Nevertheless, there is one aspect in which a family foundation in Liechtenstein in connection with a German property tax can be quite helpful.

5.2.1. Family Foundation in Liechtenstein establishes GmbH & Co. KG in Germany

For this purpose, the Family Foundation in Liechtenstein is provided with liquid funds, with which it establishes a GmbH & Co. KG in Germany. In some cases, however, a GmbH may also come into question. But in the following we want to concentrate on GmbH & Co. KG.

It is important here that this company is as destitute as possible. As a private person, you then sell the immobile assets to this new GmbH & Co. KG. The newly created company receives all the necessary funds to purchase these assets as a loan from its foundation.

5.2.2. How the Family Foundation in Liechtenstein benefits from this

If profits arise from the purchased assets, then they are used to repay the loan, which, as we know, does not trigger taxation.

In addition, the loan is linked to a relatively high interest rate, which can be significantly above the market interest rate, because the GmbH & Co. KG can hardly offer any collateral at the time of the loan agreement. For this reason, the higher interest rate is also reasonable vis-à-vis the tax administration without it being able to detect a tax abuse. At the same time, however, the high interest rates of the Family Foundation in Liechtenstein still serve to increase their own assets.

And if the loan is later paid off, the profits of GmbH & Co. KG, without being subject to income taxation of their profits in Germany, can flow to the Family Foundation in Liechtenstein. There, the taxation is in all probability significantly lower than for a shareholder in Germany.

5.2.3. The advantages of GmbH & Co. KG compared to a GmbH

The advantage of a GmbH & Co. KG over a GmbH lies in the fact that the GmbH & Co. KG is a partnership. A partnership is tax transparent, so that the company itself does not pay its own income taxes. Taxes on their profits are paid by the shareholders, in our case mainly the family foundation in Liechtenstein. On the other hand, a GmbH pays corporate tax as a legal person, which would then be incurred in Germany.

For the same reason, GmbH & Co. KG has another advantage over the GmbH. Because a partnership can earn the profit tax-free when selling real estate after a ten-year speculative period. A GmbH, on the other hand, pays corporate tax on it quite regularly.

5.2.4. Disadvantage wealth tax vs. advantage wealth increase

The big disadvantage of this design model is that the immobile assets in Germany would still be subject to property tax without the family foundation in Liechtenstein being able to remedy this. But we have already explicitly stated this before: immobile assets, which are considered domestic assets in Germany, remain taxable in Germany regardless of ownership.

So where is the advantage of the family foundation in Liechtenstein if the avoidance of property tax plays no role? The tax advantage now lies in the fact that the Family Foundation in Liechtenstein can increase its own assets via the income it receives from its German GmbH & Co. KG. However, this newly created wealth is then spared by the German wealth tax. In this respect, the Family Foundation in Liechtenstein actually helps to avoid property tax, albeit indirectly.