For German entrepreneurs, a tax-free move abroad is possible. For this purpose, a holding company is created with a foundation in Liechtenstein. The company can still remain in Germany. At the same time, we free the entrepreneur from his role as shareholder. This is a prerequisite for his or her subsequent departure abroad.

1st Holding with Foundation in Liechtenstein – Introduction

As an entrepreneur in Germany, it is difficult to move abroad. There are fiscal pitfalls everywhere. Sometimes it is the exit tax, sometimes another form of tax easing. In any case, the German Treasury is very keen that by moving abroad, the assets created in Germany that are dormant in their own company are actually taxed here. Apparently, the lesson learned by legislators following the departure of the department store king Helmut Horten in Switzerland in the early 1970s and the subsequent sale of his company, which only then remained tax-free in Germany, has been a bitter lesson. Therefore, the subsequently introduced § 6 AStG also received the nickname “lex Horten”.

Now we are tax consultants, not moral guardians. We know that German entrepreneurs, who often want to move abroad for reasons other than tax, are looking for solutions to avoid all these taxes. One must also bear in mind that tax easing takes place without taxpayers actually accruing real profit. Anyone who has hardly built up private assets as an entrepreneur or whose assets are mainly in their own company understands the threat of tax easing as a powerful obstacle. Let us now show you that it can be done differently.

Legal basis for the design model with foundation as holding company

As already mentioned, § 6 AStG is an important legal norm for avoiding the exit tax. This codifies that in Germany unrestricted taxable persons who leave their tax liability when moving abroad are to be treated tax-wise as provided for in the provisions of § 17 (1) sentence 1 EStG. So let's look at what that means. This concerns the taxation of profits from the sale of shares in limited liability companies and cooperatives. As a framework, a minimum share of 1 % will apply during the last five years before leaving. This applies to both direct and indirect holdings. However, under certain circumstances, as referred to in Section 17(6) of the EStG, taxation can take place even in the case of lower participation rates.

In other words, just because one deprives the German state of the right to the possible future taxation of such profits by moving abroad, one should simulate how such a taxation would turn out at the time of the move. The fact that no actual profit can be ascertained, but only a purely fictitious profit, is of little importance for the legislator. For us tax consultants, however, this is very much a reason to oppose. Our answer to this is the holding company with foundation in Liechtenstein, or in short a foundation holding company.

3. How we set up our holding company with foundation in Liechtenstein

Our design model starts from the following starting point. An entrepreneur in Germany has held at least 1% of a share capital company for at least five years, usually a GmbH. But this design model is also suitable for partnerships, as we will show in a moment.

3.1. Conversion of a corporation into a partnership

Now this person initiates the conversion of his corporation into a partnership. If it was previously a GmbH with only one shareholder, the conversion into a GmbH & Co. KG is the ideal solution. But also otherwise this is the preferred approach to convert a GmbH into a partnership.

3.2 Establishment of a foundation in Liechtenstein as a holding company

Subsequently, the taxable person establishes a foundation in Liechtenstein by transferring the partnership to the foundation. Since we assume that the taxpayer or taxpayers would like to continue to benefit from the company profits, she is committed to being a destinatary. Henceforth, it receives grants instead of dividends via the foundation. Because the foundation now takes the profit from the partnership. Alternatively, you can already use other people in the statutes, such as family members, relatives and acquaintances, but also non-profit institutions as grant recipients. It is important that the statutes regulate all eventualities as comprehensively as possible from the outset. Because a later statute change is at best only possible with a lot of effort.

The object of the asset with which the foundation is provided as a holding company in Liechtenstein is therefore its own company. The transfer takes place by way of a donation. Consequently, a gift tax is actually payable in Germany. However, since it is a company, the transfer of assets as beneficiary assets can be held tax-free on application according to § 13b ErbStG. According to § 13a ErbStG, some requirements must be observed, for example that the foundation continues the company for up to seven years. Indeed, given that the company is in any case used to provide the foundation with the means to pay out destination services, they should be easily fulfilled.

3.3. moving abroad

Our client is now leaving Germany. By this we mean that after moving abroad in Germany really no residence remains. This is important because the German tax liability is legally bound to a residence in Germany.

With the transfer of the company, the foundation in Liechtenstein now functions as a holding company. As a result, the taxpayer or taxpayers have left the role of shareholder. The move abroad thus remains without consequence with regard to the exit taxation. And since we converted the corporation into a partnership in Liechtenstein before the transfer to the foundation, there is no exit tax on it either. But we have also avoided the de-entanglement tax, because the partnership remains in Germany. The decisive factor here is that the important functions will continue to be carried out in Germany – including the management.

4th Holding with Foundation in Liechtenstein – Conclusion

What happens now after the implementation of the design model can be described as follows: The profits generated by the German partnership in the future are subject to income tax in Germany. According to the principle of transparency, taxation takes place at shareholder level. The shareholder is now the foundation holding company in Liechtenstein. As a corporation, however, it pays only 15% corporation tax and about the same amount of business tax. Overall, the sum of taxes is around 30%. If we compare this with the income tax of a natural person as a shareholder of a partnership, where the progression takes effect, there is a taxation at the foundation level of up to 20% points lower for high profits.

As a foundation in Liechtenstein, you also have to pay attention to corporate tax in this country. Fortunately, in Liechtenstein there is no such tax at a foundation. At this point, the foundation in Liechtenstein actually remains 70% of the profit in order to return it to its destinataries.

And what do they do so fiscally? Well, that depends entirely on where they move abroad. Thus, under ideal conditions, there may be no tax on the grants they receive from the Foundation in Liechtenstein in their new home country. However, if you want to move to a country where these payments are subject to tax, you can first move to a country that does not levy taxes on them, receive the payments tax-free there that have accumulated from the foundation's accumulated profit over a number of years, and then move back to the country where you would otherwise pay taxes on these grants. You will remain there as long as the financial resources from the previous grants are sufficient. This procedure is then repeated.

5. Why do we work with a foundation in Liechtenstein as a holding company?

Finally, one question remains to be clarified: why do we set up a foundation in Liechtenstein in our design model? After all, there are so many other alternatives.

Well, there are several points in which we get the best advantages with a foundation in Liechtenstein. On the one hand, there is the already mentioned tax exemption of the foundation on the profits taken from its partnership. Even if the Foundation were to be taxed in Liechtenstein, the double taxation agreement would still have to be borne in mind. This guarantees the right to tax the profit of the partnership to the state, the place where the company is located. So the taxation of the partnership takes place in any case only in Germany.

Secondly, Liechtenstein tax law does not contain a substitute inheritance tax. This tax would hit a German foundation every 30 years, with a fictitious inheritance taxation taking place. It may be that this aspect plays no or only a unique role for the founders due to their age. For their descendants, however, avoiding the substitute inheritance tax is quite a welcome bonus.

Thirdly, the payment of the donations from Liechtenstein does not lead to any tax consequences. Liechtenstein does not levy any withholding tax on such services that a Liechtenstein foundation distributes to its destinataries abroad.

And fourthly, foundation law in Liechtenstein is one of the most progressive internationally. For example, you can set up a family foundation in Liechtenstein that also serves charitable purposes. In Germany, on the other hand, two strictly separate foundations would have to be set up.

As you can see, we have several very good reasons to take a holding company with a foundation in Liechtenstein as the basis for our design model. It makes it possible for an entrepreneur to emigrate abroad tax-free and to collect up to 70% of the company's profits without further taxes.