Human physicians, i.e. doctors and dentists, as well as pharmacists are subject to strict rules by their professional law when choosing the legal form of their company. This also means that they are not allowed to set up a corporation. The only exception to this are Klinken and medical care centers (MVZ). Thus, their income from their professional activity is subject to income tax. In the amount of their fees and profits, doctors regularly play in an income league, which knows the rich tax rate of 45 %, but at least the top tax rate of 42 %. Therefore, in this article we present a design with which doctors can nevertheless use the tax advantages of a corporation. These are foundations for doctors, dentists and pharmacists.

1st Foundation for Doctors – Introduction

Doctors, dentists and other human physicians are considered “gods in white”. Nevertheless, they are subject to strict regulations of their professional law. At the same time, they tax their fees and other professional income as self-employed persons according to § 18 EStG. In addition to the tax aspect of professional activity, this is also due to the fact that their professional law prohibits them from pursuing their activity in the legal form of a limited liability company. Thus, their income taxes apply solely under the Income Tax Act. So they are subject to the income tax rate specified there. As is well known, many doctors earn above average. As a result, their taxation is often linked to the top tax rate or even the rich tax rate.

What may seem sobering at first glance, but can be changed. That is why we doctors regularly advise on such options. One of them is foundations for doctors. Because with foundations, doctors can use different methods to reduce taxes at their private level. We now want to introduce you to four such designs.

2. Establishment of foundations for doctors

If we immediately report on the four options, then one should speak briefly about the establishment of such a foundation as a prerequisite. There are various designs that can be used. Probably the most relevant in practice is the family foundation. Optionally, however, a charitable foundation is also considered. We would also like to distinguish in which country the foundation has its headquarters. We are convinced that in many cases it is better to set up a foundation in Liechtenstein than in Germany. This has many advantages over a German foundation.

Now the establishment of a foundation is in any case a measure that initially requires foundation assets. Anyone who still does not have sufficient resources as a young physician to set up a foundation can still read on, because at some point the proposals presented here may still be interesting. All those, on the other hand, who may already have sufficient assets to set up a foundation, the idea of implementing these arrangements is much closer. However, one should always bear in mind that the establishment of a foundation always means the abandonment of assets. You leave it to the administration of people you trust. In addition, the establishment of a foundation takes place via a donation and this in turn is taxable. Of course, one must also critically weigh the advantages and disadvantages.

3rd Foundation for Doctors: generating four benefits

Suppose a doctor with his or her own practice or the intention to take on such a practice, have consulted us and have already decided on a foundation. Let’s just assume that this is a family foundation in Germany. How exactly does it help our fictional clients to save taxes?

3.1. Purchase of a practice by the Foundation

The first tip is that the foundation is now buying a practice for the doctor. This means less the entire company and more the economic goods that make up the practice. So we are talking about the furniture, the medical equipment and all the other facilities and precautions that are used in practice, maybe even the property itself.

As a doctor, you can now lease the practice from the foundation. Of course, there is a certain fee for this. At the doctor’s level, this effort reduces taxable income. The remaining profit may result in the personal income tax rate being below the top tax rate. But even if it exceeds this, only a relatively small part of the income is subject to this taxation.

The Foundation now taxes its income under the Corporate Tax Act. It can make use of certain exceptions for itself. On the one hand, a foundation is a corporation, which is why it also pays corporate tax. On the other hand, the Foundation can assert for itself that its activity is limited to asset management. As a result, it evades business tax. It thus saves about 15% in taxes. Only the corporation tax remains, and it amounts to a flat rate of 15%.

What you should pay attention to is that such a lease is regularly subject to sales tax. Normally, entrepreneurs would offset this with the input tax. However, doctors and other human health professionals usually provide services that are tax-free. As a result, they lack the prerequisite for calculating the sales tax on the lease of the practice as input tax. Although one could think about the fact that the foundation only carries out its lease as a small business owner according to § 19 UStG and thus VAT-free, the prerequisite is that it then takes a maximum of up to EUR 22,000 a year in lease.

3.2. Foundation buys and rents individual assets to practice

The slightly reduced variant of the first proposal is particularly interesting for those doctors who already have a practice. If they now need new instruments, equipment and other furnishings, the foundation can buy them and rent them to the practice. This can also be relevant for a complex renovation. In any case, this causes costs to the doctor and income from the foundation. So while the doctor saves up to 45% in taxes on his profit through the costs, the foundation pays only 15% in corporate tax.

More than just a small bonus, the fact that the foundation can sell all the assets it has acquired tax-free after a ten-year speculative period. So even if despite depreciation still hidden reserves in these economic bags, the profit resulting from their sale remains tax-free.

As already mentioned, the VAT topic is also relevant in this design. Special attention must be paid to this when consulting with suitable tax consultants.

3.3. Loans from the Foundation to practice

If you are perhaps deterred by the sales tax, the following alternative will bring the same advantages in another way. The foundation now grants a loan. If foundations grant such loans to doctors, then certainly in return. The interest is then to be booked in practice as an expense. This therefore reduces the taxable profit. The foundation, on the other hand, pays only a relatively low tax on the interest.

A slightly more daring design by means of a loan for doctors can be entered into foundations with a shareholder loan. This option offers the advantage that instead of the interest, the foundation is now involved in the profit of the practice. The amount to which this profit participation should take place must be clarified individually. In any case, attention must be paid to a foreign standard.

3.4. Silent participation of the Foundation in practice

The step to our next design variant is only a short one here. Because the foundation can participate directly in the practice. Against a financial contribution into practice, the foundation then receives a certain percentage of its profit. On the part of medical practice, this is of course also an expense that significantly reduces the profit and thus the taxable income of the doctor. At the same time, however, the Foundation only pays a low tax of 15% on this.

Foundations for Doctors: how services are dispensed

The fact that the foundation now taxes a good part of the profit in one way or another significantly cheaper than the doctor is already a nice effect in itself. Nevertheless, the question arises as to how the doctor or her family members can benefit directly from the extra money. In this respect, the dispatch of destination lines to the destinataries is relevant. The founder determines in the foundation statutes right at the time of the foundation establishment who should belong to this group of persons. Thus, over generations, good can be provided for family members or for a good cause.

However, such destination services to the beneficiaries of the foundation are also taxable. However, they are subject to capital gains tax at a flat rate of 25 %. One advantage here is that when considering minor children, who usually have no income of their own, they can still remain tax-free up to the amount of the basic allowance through the cheaper examination. And should the children one day be ready to take over the practice, the foundation can also become a benefit bringer for them in the same way as described previously in the four design variants.

However, since a subsequent amendment of the statutes is only extremely expensive, you have to define all regulations very precisely. What should also be considered from the beginning when choosing a family foundation is that it is subject to a substitute inheritance tax, which applies every 30 years.

5th Foundation for Doctors – Conclusion

If you are now also interested in foundations for doctors and their various advantages, then you should inform yourself in detail about all aspects of this. Because it should be emphasised again very clearly that the establishment of a foundation is the abandonment of assets. In other words, the money which you transfer to the Foundation by way of a gift for its establishment henceforth belongs solely to the Foundation; It is henceforth beyond your personal control. Only the foundation decides how the assets should be invested and used. And since the foundation as a legal entity requires the representation of a natural person for its decisions, one must also weigh very carefully here.

In any case, the founder is actually excluded from the representation of the foundation, if you want to avoid that the Treasury evaluates this design as indirect abuse and taxed accordingly. The administration must therefore be left to other people who are fully trusted.

Another advantage of the design through foundations for doctors is the asset succession that is also built into it. Even if this is actually excluded, because the assets continue to belong to the foundation, future generations can also benefit from it. In this respect, the decision for a family foundation is a far-sighted determination for the benefit of all descendants. But even if there are no descendants, foundations are at the service of other purposes and beneficiaries with at least one central advantage. Because a charitable foundation allows its founders to determine for themselves what purpose the property should serve. If instead gift tax or inheritance tax were to be incurred in the transfer of assets, or the inheritance itself would fall into public hands (keyword state inheritance law), one usually has no influence on the use of these financial resources.