date | theme

6 December 2018 | Holding GmbH: Advantages / Profit distribution / Sale / Design

30. October 2020 | Avoid travel tax: set up a family foundation and transfer GmbH shares

16. March 2021 | Establishment of a holding company: What advantages do you benefit from?

13. May 2021 | When is a holding worthwhile and what costs are associated with it?

12. April 2022 | Foundation holding as an alternative to GmbH holding (this contribution)

A foundation holding company is a foundation that acts as a holding company and serves as asset management. In particular, they are used to hold and manage company shares. The foundation holding company has the advantage over a GmbH holding company that it is not a commercial company. Although a foundation holding company can develop commercial activity, which then leads to the occurrence of trade tax. However, if you avoid a commercial activity in a foundation holding company, which should be absent from pure asset management anyway, then you can also save about 15 % trade tax compared to the GmbH holding company. In addition, a foundation holding company represents a long-term solution in the regulation of company succession. In addition, it also offers all the advantages that you can expect from a family foundation, including sound asset protection. The establishment of a foundation holding company also makes it possible to move abroad without incurring an exit tax.

Anyone who runs several companies as an entrepreneur must have already thought about uniting them all under one roof. In fact, centralized asset management of multiple companies offers multiple benefits. For example, the offsetting of profits and losses of different companies within the framework of an organization is possible. But also the risk minimization by the consequences of a potential liability with the respective company assets are an advantage of a holding company in the room.

Most holding companies are established in the legal form of a GmbH. This also has many advantages. For example, the taxation of dividends received by a holding company through the distribution of profits of its subsidiaries is very favourable at 1,5 %. This is also called the box privilege. Nevertheless, alternative legal forms for a holding company are also conceivable. For example, the double-storey holding company likes to use a GmbH & Co. KG as a legal form for the parent company.

Here we would like to present another alternative to GmbH holding. In doing so, we consider what special features a foundation can have in the function of a holding company. We are particularly interested in the tax advantages. But we also want to analyze all other aspects of foundation holding.

There are no special legal requirements for a holding company. Its legal framework thus depends solely on the general tax and other regulations. In whatever legal form a holding company may be, you must always look into the relevant laws in order to find out about the regulations applicable in a certain situation. This applies in particular to provisions relating to asset management.

However, since we want to talk about a foundation holding, a few words are appropriate about the legal bases concerning foundations. § 80 BGB is particularly important for this, because it contains the regulations for state recognition as a prerequisite for the establishment of a foundation with legal capacity. Only through state recognition, which is granted by the foundation authority of the respective federal state in which the foundation is to have its seat, can a foundation with legal capacity be created. In addition, there are also other regulations relating to the establishment of a foundation and many other aspects. However, the tax treatment of a foundation is subject to the Corporate Tax Act. After all, a foundation is a private-law corporation.

A foundation holding company is a legal entity governed by private law which is engaged in the management of the assets transferred to it. The assets under management consist of company participations. In doing so, it basically operates the same kind of asset management that any other holding company would provide. Nevertheless, there are some peculiarities based on their unique legal form.

Just setting up a foundation holding company is a special act. Finally, this requires foundation business as well as state recognition by the competent foundation authority. The foundation business also requires the creation of a statute for the foundation holding company. This is in particular the purpose of regulating the amount of assets – in this case, the shares in the company that the foundation holding company is to have at its disposal and the composition of the management board of the foundation holding company. If you want to lead the foundation holding in the sense of a family foundation, you must of course also determine the destinataries accordingly. But other purposes also come into consideration for a foundation holding. In this, the founders are completely free in their decision.

This brings us to the next function, which takes over a foundation holding. Because with a foundation holding, the founder has the opportunity to regulate the company succession over generations. While in the case of a GmbH holding company the participation in it is at some point transferred to a successor without being able to exercise influence on the decisions of the successor with regard to the treatment of the holding holding, a foundation holding company is a legal personality which is only subject to the specifications of its founder according to the statutes drafted by him. Even the founder has no influence on their fate after the establishment of the foundation.

On the one hand, this means that a founder gives up part of his assets in the foundation business in favor of a henceforth independent institution. On the other hand, an entity arises in which only the purpose and will determined by the founder in the statutes is decisive. Control over the Foundation is the responsibility of the Foundation Board from this point on. This is solely obligated to the purpose of the Foundation as defined in the Statute. In doing so, he must adhere to the specifications laid down there, such as the means that can or should be used to achieve the purpose.

As you could already clearly see, the foundation holding company may on the one hand fulfill the same function as any other holding company. However, it performs its function in a completely different way than, for example, a GmbH holding company. This, of course, has other consequences.

In the field of taxes, it is even an advantage that the foundation holding company can claim over a GmbH holding company. Because the foundation holding company is usually not a commercial enterprise within the meaning of the Commercial Code, the trade tax is of no relevance to them. Only if it actually generates commercial income in addition to pure asset management, also trade tax is incurred for the foundation holding company. But that's easy to avoid. If the foundation holding company is actually planning to generate commercial income, it simply establishes an operating subsidiary for this purpose.

4.1.1. No business tax on dividends and capital gains

This point is relevant insofar as the sale of shareholdings does not incur trade tax for the foundation holding company even if it holds less than 15 % of the subsidiary. But even in the case of dividend income from subsidiaries in which the foundation holding company holds less than 15%, trade tax plays no role. It is thus significantly better suited for asset management of shares and other securities than a GmbH holding company is. Because even if it has to pay corporate tax on dividends and other profits in this context due to a lower limit of 10 % when investing in other corporations, the foundation holding company is spared the trade tax, which is approximately the same amount. The prerequisite here again is that this does not in any way constitute a commercial activity.

4.1.2. No business tax on rental and lease

Another tax advantage is more indirect. Because the foundation holding company can also earn income from renting and leasing for the same reason as mentioned above, without a trade tax being incurred. For example, it may transfer intangible assets to its subsidiaries for remuneration. This is the case, for example, if trademark rights or patents belong to the scope of the foundation assets. On the part of the subsidiaries, these fees can be taxed as operating expenses. These costs reduce the profit, which is subject to taxation with a total of about 30 % corporation tax and business tax. The income of the foundation holding company on the transfer of the intangible assets, on the other hand, is spared by the business tax, so that only 15 % corporation tax is incurred. So you save 50% on taxes compared to a GmbH holding company.

In addition, a foundation holding company can claim a tax advantage over a GmbH holding company in real estate transactions. While a GmbH as a holding company always pays corporate tax and trade tax on the sale of a property, this looks completely different in the case of foundation holding. Since the foundation holding company can also receive other income within the meaning of the Income Tax Act when it is taxed under corporate income tax, it is open to the foundation holding company to collect the profits from the sale of real estate completely tax-free after a speculative period of either one year if no income was generated with the property sold except through the sale, or otherwise after ten years.

Since the foundation holding is an independent entity because it is no one’s property, no transfer by gift or inheritance applies to it. Consequently, there is no gift or inheritance tax in the conventional sense. However, in foundations there is the legally regulated fiction of an inheritance. Based on this, a substitute inheritance tax on the foundation’s assets applies every 30 years. Nevertheless, the foundation holding is also advantageous in this regard. On the one hand, it is difficult to rule out in the case of a property succession of natural persons that there is only one inheritance in the said period. On the other hand, the strict stipulation of the 30-year period for the generation of the substitute inheritance tax means that you have enough time to find a tax arrangement in good time before the generation of the tax to avoid the substitute inheritance tax. Because with sound tax advice this is quite feasible.

In addition, a foundation holding company helps to avoid the exit tax if you want to move abroad. Although the foundation holding company is also a corporation, which in principle qualifies it for the expense of the exit tax. However, no one has a stake in it. No one can sell it either. The reason for the departure tax is therefore completely absent.

This is different for GmbH Holding. Because the shareholder is actually involved in this. If he moves abroad, there is also an exit tax on the fictitious sales profit in Germany. Because in this way, the Federal Republic of Germany wants to avoid that the shareholder in the GmbH sells the shares past the German Treasury from abroad.

We have already pointed out the independence of the foundation holding against external influences. In fact, this is a significant advantage of the foundation holding company compared to a GmbH holding company. While after the transfer of the shareholding in a GmbH holding company to a successor, the latter always has the freedom to dispose of the GmbH holding company without restriction, including the option to sell or liquidate, the foundation holding company is spared from such and other similar influences. After all, unlike the GmbH holding company, a foundation holding company is independent. It cannot be sold or liquidated, because it does not belong to anyone.

If a founder has the company succession in mind when establishing a holding company and ensures that all his descendants will benefit from the company construct established by the founder in the future, then he should also consider the option of foundation holding. Finally, one can ensure that the asset management is continued in the sense of the founder even if the founder is no longer able to influence it. In fact, this is even the case from the time the holding foundation is established. Even from then on, their founder no longer has any influence on their further fortunes and assets. That is why it is so important that the founder regulates all eventualities in advance in the foundation statutes. After the foundation business, he no longer has any influence on the foundation.

However, this also means that the foundation holding company with all its assets transferred by the foundation business is protected from access by third parties. Claims of third parties against the founder can thus be defended.

Conversely, however, an intervention of claims of third parties on the private assets of the founder by the holding company is also excluded. But this protection also offers a GmbH holding company.

So for the foundation holding there are a number of advantages. Many of them are even fiscal in nature. Foundation holding, on the other hand, is particularly interesting when it comes to a sustainable order of corporate and asset succession. This is because the foundation holding company is able to offer unique design possibilities that can hardly be realized with other legal forms.

However, the foundation holding also has some special features that potential founders should also deal with before they decide to do so. Because the establishment of the holding foundation is accompanied by a waiver of the foundation assets, one also loses the opportunity to influence the holding foundation and its assets outside the framework of the statutes. That is why we should also think very carefully about the provisions that the Statute should contain. After all, it is the only way to take your own will in relation to the future fortunes of the company construct and its holding company. In addition, all eventualities with regard to the current and future destinataries should be regulated in the statutes. The same applies, however, to the bodies that should henceforth exercise control over the foundation holding. How do you ensure, for example, that the board always acts in the sense of the founder?

As already mentioned, the establishment of a foundation holding company requires far-sighted and complex thinking. But it also requires forward-looking tax advice. Therefore, the effort to set up a foundation holding company is certainly both time-consuming and cost-intensive than with a GmbH holding company. That too should be borne in mind. This is all the more so because this step is irreversible.