Foundations and especially family foundations are convincing with a number of tax advantages that can significantly accelerate long-term wealth accumulation. The tax advantages of a foundation can be used by natural persons for investments in real estate and capital assets, but also for holding entrepreneurial investments. We compare the foundation with other legal forms!

Principle 1: How a foundation is taxed

The foundation is a private-law corporation which can therefore be established by anyone and everyone. A distinction must be made here between self-owned and non-profit foundations, because the latter are completely exempt from most types of tax. However, self-interested foundations, in particular the family foundation under German or Liechtenstein law, fall under the general corporate tax liability.

Corporate income tax is a “flat tax”, which always amounts to 15 % of the taxable income of the company (§§ 8 and 23 paragraph 1 KStG). The income of the foundation is to be determined in accordance with the income tax regulations, so that, depending on the type of income, either the profit within the meaning of § 4 EStG or the surplus of income via the advertising costs is decisive for taxation.

Unlike corporations, foundations do not qualify as commercial enterprises by legal fiction (§ 2 paragraph 2 GewStG). Therefore, if they do not engage in an original commercial activity, they do not pay any business tax. For example, the foundation must also ensure that the purchase and sale of real estate is not declared a commercial real estate trade. Important for this is primarily the so-called three-object boundary.

2. tax advantages of the foundation compared with sole proprietorships and partnerships

The partnerships include individual companies and partnerships, for example GbR, OHG and KG. In their case, the tax office determines the income at the company level and attributes it to the individual shareholders within the framework of § 180 (1) AO. Depending on the participation rate, there is then a tax burden at the private level, which – depending on individual circumstances – can be up to 50%.

However, if the participation in the company is not held in private assets, but in the assets of a foundation, the profits there are subject to taxation of only 15%. Because the family foundation is not a business and therefore does not pay a business tax, which distinguishes it from a GmbH, for example.

If the focus is on asset development, the foundation can lease movable assets such as vehicles and other objects to the operating company. Profits from the rental are subject to a taxation of 15% there, at the same time § 23 EStG also applies to foundations. The family foundation can therefore sell assets such as vehicles and real estate tax-free after compliance with the holding periods (one or ten years). Items of daily use, such as a car with no value-added potential, can be sold at any time without tax burden.

If the property were operating assets of a partnership, the law would exclude a tax-free sale. The tax advantages of the foundation are therefore particularly evident in partnerships and sole proprietors if the profits are to be accrued and not paid out to the persons involved.

Tax Benefits: Foundation vs. Corporation

In order to save current corporate profits and at the same time move assets into an independent “liability cover”, the Holding GmbH often offers itself in practice as an intended savings box. However, the model also has disadvantages that make the tax advantages of a foundation relevant: