With a family foundation you can design many aspects. On the one hand, a foundation is able to protect the assets and financially support the following generations via the asset income. On the other hand, a family foundation is also a very interesting vehicle for saving taxes. Here we want to show how we can let a family foundation rent cars to our own companies and enjoy tax benefits in more than one way. Because on the one hand you can save sales tax on the purchase. Then you can deduct the rental costs as operating expenses from the taxable profit of the companies. The family foundation pays only corporation tax, but no business tax. And when selling the cars, the family foundation may even be able to collect the profit tax-free. At the same time, the own children as destinataries can receive the benefits of the family foundation up to the amount of the basic allowance tax-free. Tax gifts wherever you look...

1. Renting cars by family foundation – Introduction

For a long time, a family foundation as well as charitable foundations were generally regarded as exotic marginal phenomena of our society. When it came to managing assets, most Germans were aware of the hidden bank depository in Switzerland or the anonymous mailbox company in Panama as an alternative. But over the last decade, priorities have shifted significantly. After all, in both cases, taxable income in Germany has often remained untaxed. As a result, there was always tax evasion, which used to be mostly unrecognized. However, the perception changed quite abruptly when the financial administration started to acquire bank data of German taxpayers in Switzerland.

Almost at the same time, media reported on tax tricks by foreign mailbox companies. Thus, awareness of such practices for legal, but above all illegal tax avoidance is raised in the general public. One consequence of this is that tax evasion lost the image of a trivial offense. Another, however, was that the search for legal alternatives to wealth growth, asset management and asset security came to the fore.

This is the reason why the family foundation has also become a recognized vehicle for asset management and tax design. For this reason, as an innovative tax consultancy firm with a focus on corporate taxation, we would like to show how versatile a family foundation can be. In our example, we will now deal specifically with a construct in which we let a family foundation rent cars to the companies of their destinataries.

2. car rental by family foundation: legal bases

However, let’s first take a look at the legal bases that always accompany a situation surrounding a family foundation. In this way, the legal bases that govern the establishment of a family foundation come to the fore. §§ 80 continue to inform us about this. Although a foundation can also be established by testamentary will, we should above all be interested in the foundation business here, because this can still contribute to their tax advantage during the lifetime of the founders. The establishment of a family foundation must be distinguished from that of a charitable foundation. Because the task of a family foundation is to provide for the destinataries named by the founder in the foundation statutes, i.e. those persons who are to receive services from the family foundation.

It is important to understand the special status of foundations in tax terms. First of all, it should be noted that a foundation is a body without owners. As a corporation, the foundation is a legal entity. Thus, it is also a taxable subject in accordance with the requirements of corporate tax law and all relevant legislation of income tax law. However, since it does not carry out an original commercial activity or a commercial activity as defined by the Corporate Income Tax Act, unless it actually operates a business, a foundation is not a tax entity in relation to business tax.

Renting cars by family foundation – our design model

3.1. To whom should the family foundation rent cars?

So let’s get to the exciting part where we discuss the tax design of our model. The core element is of course that we rent cars through a family foundation. The question now faced at this point is to whom the family foundation should rent cars to. The answer to this is that we rent them to the companies of the Destinatäre. For example, one could rent the cars as company cars for the management of such a company. In addition, the rental of cars is also eligible for provision for the employees of the company. But even in a significantly larger style, the rental of cars or other vehicles by the family foundation could be considered. It is essential here that the family foundation does not develop any commercial activity. Otherwise, a trade tax would be expected as a result.

3.2.What is the tax advantage?

But what is the tax advantage if we as eligible family members rent cars to our own company with our family foundation? At this point we should add that there are several tax advantages here.

3.2.1. Tax advantage by avoiding business tax at the Family Foundation

On the one hand, the family foundation can only tax the income with 15% corporation tax. If we had founded our own rental company for the rental, we would usually also pay business tax in about the same amount. So at this point we are already saving about 50% in taxes. By the way, this tax saving also applies if we would rent or lease a car or another vehicle through an external company. Because in the rental or leasing costs the landlord must always price in the own business taxes on this.

3.2.2. Tax advantage Operating expense deduction of rental costs

Secondly, our company can deduct the expenses it incurs when renting the cars from the family foundation as operating expenses. Of course, this reduces our taxable profit. We know very well that this also reduces the business tax of our company, but does not trigger taxation in relation to business tax at the family foundation. In principle, this is the real reason why, in the previous section, we talk about a tax reduction of around 50%.

3.2.3. Tax advantage by opting to show sales tax

Third, the family foundation can also rent cars with sales tax. To do this, she must actively submit an application to the tax office and request a VAT ID number. The tax advantage here is that she herself can reduce the costs associated with the purchase and other rental by showing the input tax. This corresponds to a tax saving of 19%. At the same time, the family foundation has to rent out its cars with sales tax. But since the rental is made to our company, which we want to assume will itself provide services subject to VAT, we treat the sales tax there as input tax. So it is not worth a cent.

3.2.4. Tax advantage through depreciation of cars

Fourthly, we must also consider that the regular depreciation of rented cars at the level of the family foundation can lead to tax advantages. Since we rent cars with the family foundation and generate income for them, she is also entitled to a depreciation for wear and tear. As a rule, this is based on a linear depreciation over a useful life of six years. If the family foundation holds the cars it rents over this period, the book value at the end of the depreciation period falls to EUR 0.

3.2.5. Tax advantage when selling cars

Nevertheless, cars are still worth something. If the family foundation now wants to sell cars that are at least partially written off, it can demand a market price for them. This added value, which is above the book value, must be taxed as a corporation actually as book profit. But the family foundation is not a corporation with shareholders, but an independent asset. Therefore, in this respect, it is instead subject to the rules of income tax law.

Article 22(2) of the EStG provides for the taxation of private sale transactions, with reference to Article 23 of the EStG. In this context, no taxation shall be imposed on income from private sales of movable property of everyday use. In fact, cars count as objects of everyday use in this regard.

However, there is still a limitation. Because if you could previously generate income with such an object, then the capital gains remain taxable until the expiration of a ten-year blocking period. But here the focus is on the meaning of the word income. Because income in tax law is understood only positive income. So if the family foundation does not make a profit from renting cars, then there is no taxation on the capital gains. However, by depreciating the cars over their useful life, we have also noticed a loss in value. If the annual rental income thus remains below the annual depreciation rate, then no positive income can be found at the family foundation. Ergo, the family foundation can sell the previously rented cars tax-free!

4. Renting cars with the Family Foundation: further optimization options

4.1. Renting cars by family foundation: Profit optimization with high-quality cars

The fifth point of the previous chapter invites especially to tax design. Because if we assume that the family foundation intends to rent high-priced cars with low value loss, then the tax-free profit from the sale increases again significantly. At the same time, the Family Foundation generates high depreciation rates in each depreciation period. So it can claim correspondingly high rental fees in this way without risking positive income. These high rental costs are advantageous as operating expenses but also for the own company of the Destinatäre; We have already recorded this.

Even more advantageous is the sale of cars, which after their purchase by the family foundation even increase in their real value instead of falling. Because then an actual profit arises, because the selling price is then above the acquisition costs. Nevertheless, the profit remains tax-free, provided that the aforementioned conditions are observed. However, since this is rarely the case with new cars, one should perhaps consider rising classic cars in demand. A Shelby Mustang is certainly an attractive company car for one or the other entrepreneur, right?

4.2. Renting cars by family foundation: tax optimization with electric cars

In addition, the cars we rent out to our own companies via the family foundation can also be used as company cars. If we prefer electric cars, then you can also pay a lot of taxes compared to cars with conventional drive. This is because taxation of private use is favoured by tax. Thus, you pay only half or even only a quarter of the actually incurred taxes (§ 6 paragraph 1 number 4 EStG).

4.3. Tax advantage by using the basic allowance of children receiving benefits

An indirect tax optimization should also be considered here. Because if the family foundation pays benefits to its own children as destinataries, then these incomes of the children remain tax-free up to the amount of the basic allowance. Assuming that a newborn already receives such benefits, the current basic allowance of approximately EUR 10,000 in tax savings of over EUR 180,000 comes together with adulthood at the age of 18. Even for every child. But you have to build the foundation in the year of the birth of the child in order to take full advantage of the basic allowance.

Of course, the family foundation must also be able to provide services on this scale. If, however, the depreciation rate of the cars we rent to our company via family foundation is used to generate rental income of approximately the same amount, then this should be quite realistic. If, for example, we let cars with an initial cost of EUR 60,000 from the family foundation to our company, then you can earn EUR 10,000 annually in rental income tax-free with a period of use of six years. These can then be paid tax-free to the child or spent for certain purposes.

5th Car rental through the Family Foundation: Conclusion

Now let’s come to the conclusion. We see that a family foundation helps save taxes in more than one way if we let them rent cars to their own companies. This also works if the family foundation leases more than just a car or other vehicles to the companies of the destinataries. However, we must ensure that no commercial activity is created in this way. Otherwise, this leads to a taxation of rental income with business tax.

But the many tax advantages that can be achieved by renting cars through a family foundation are only a side effect. Because the real purpose of a family foundation is another. Family foundations primarily serve to make wealth independent for the benefit of family members, over generations. A family foundation thus assumes the task of providing financial support for family members. To achieve this, the Family Foundation manages the assets transferred to them with the aim of generating income, which then finances the services to the destinataries.

By the way, it should be mentioned here that gift tax is incurred in the foundation business. For this reason alone, the family foundation is not a design model with which you can achieve tax advantages primarily by renting cars. Rather, the gift tax would probably more than outweigh the tax advantage of the rental. Thus, the rental of cars by a family foundation is just another plus on a long list of advantages that a family foundation can distinguish.