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Foundations - Tax law and auditing

Family foundation, charitable foundation, civil foundation, foundation with legal capacity, consumer foundation,...

Do you want to transfer your assets to a charitable foundation? Or do you want to establish a foundation that will ensure the preservation of your assets - a family foundation? Does a new foundation have tax advantages? What is important when establishing a foundation and what does it cost? Do foundations serve to avoid taxes? How do charitable and private-benefit foundations differ?

 

In 2021, 863 new foundations were established - of which 473 were tax-privileged foundations.  There are currently a total of 24,650 legally capable foundations under civil law in Germany. Over 80 percent of foundations are established with less than one million euros in capital. The best-known foundation is the "Stiftung Warentest", a non-profit consumer organization. The objectives of foundations can be non-profit or asset preservation.

Foundations can be management companies with a holding character: Assets are preserved and are withdrawn from heirs. The founders "subject" their assets to a defined purpose with the foundation. This does not have to be general benefit, but can also be the desire to permanently preserve the "life's work" or to protect a company from hostile takeover attempts. Foundations can also fulfill a dual purpose and additionally engage in charitable activities. 

 

Are foundations subject to tax?

The distinction between charitable and private-benefit is crucial. 92 percent of foundations with legal capacity are committed to the common good. 8 percent are private-benefit foundations that benefit the interests of families. Only charitable foundations are tax-privileged; they are exempt from tax. The foundation supervisory authority and the tax office ensure that income is used only for the charitable purposes defined in the articles of association and that the basic capital is maintained.

 

A charitable foundation may distribute up to one-third of its income to the founder or his children: Section 58 (6) of the German Tax Code. In this way, it honors and maintains the founder and his next of kin in a justifiable manner. Avhtung: This must be unequivocally permitted in the foundation statutes. 

 

Founders often separate their assets: those that are to be used for their heirs and those that are to be used for the common good of the people. In doing so, founders contribute only part of their assets to the charitable foundation - the rest remains in their private assets. Or they set up two foundations: one charitable and one private-benefit. 

 

In the case of a private-benefit foundation, a defined group of people receives funding. If it is relatives who receive this benefit, it is a family foundation. They are often established by companies or wealthy individuals. Family foundations are particularly suitable for business succession and succession planning - but also for asset protection.

 

Tax and family foundation 

The income of the family foundation is taxed by the tax office at 15 percent corporate income tax, solidarity surcharge and, if applicable, trade tax. 25 percent final withholding tax is due on distributions. Nevertheless, there are permissible rules for positive structuring and asset accumulation - e.g. in current taxation. With the family foundation, the provision for descendants and assets can be secured. Transferred assets are secured, as liability claims or other claims are not allowed to use the foundation's assets. See also asset protection.

 

Inheritance tax/gift tax is due on a family foundation at the time the foundation is established. Exemption amounts are minimal, but it is interesting in the case of business productive assets. By cleverly structuring the inheritance tax, one can use the family foundation to reduce taxes. Contributing assets that generate income to a family foundation and paying attention to optimal tax structuring - is a decision that makes sense in the long term.

Foundation models

Charitable foundation
Approximately 95% of all foundations are non-profit. Examples include education, research and science or child and youth welfare. As a general rule, the foundation must not conflict with the common good. The most popular legal forms are the legally capable foundation under civil law and the trust foundation. Other legal forms are the foundation limited liability company and the foundation association. Once you have made a binding decision in favor of a foundation, you part with your assets forever. The foundation invests the assets transferred to it securely and profitably. The surpluses are used to fulfill the charitable purposes you have defined.

 

Family foundation
Family foundations serve to preserve family assets and provide economic security for the founding family. In contrast to other foundations, family foundations pursue a private-benefit purpose and not a charitable purpose. This distinguishes the family foundation from the charitable foundation, whose purpose serves the general public good. In the case of the family foundation, the assets are transferred to the foundation, which henceforth acts as the owner of the assets. 


Consumption foundation
Consumption foundations can consume not only their income, but also the foundation assets themselves, for foundation purposes. As soon as the assets have been used up, the foundation ends. Consumable foundations are not bound to the common good. They can pursue charitable, tax-supported purposes - but they do not have to. Personal purposes can be, for example, the education of offspring.

 

Legally capable foundatio
A foundation with legal capacity has no owners, members or shareholders. The legally capable foundation under civil or private law is legally an independent organization, a legal entity - which has its own assets and can be the bearer of rights and obligations.

 

Ask your questions here!

Contact us to arrange an initial consultation at no charge!

 

  • Send us your request by clicking here.
  • We are also looking forward to your call: +49 69 971 231-0.

Consulting

  • Tax and legal advice on the establishment of foundations
  • Audit and support in the drafting of statutes and articles of association with a view to obtaining and maintaining non-profit status in coordination with the tax office and the foundation supervisory authority
  • Tax advice on the delimitation and allocation of activities in the various spheres (ideal area, asset management, special-purpose operation and economic business operation)
  • Advice in connection with endowments and donations
  • Advice on turnover tax, especially with regard to the application of exemption regulations
  • Support during tax audits
  • Advice on foundation law issues
  • Advice on the use of subsidies
  • Advice on the liability of board members and protective measures
  • Advice on consumer foundations
  • Advice and support for restructuring in connection with asset succession (e.g. family foundations)
  • Protection of assets against access by third parties (asset protection)
  • Replacement inheritance tax planning
  • Income tax planning for foundations as well as for beneficiaries
  • Cross-border/international fulfillment of charitable purposes
  • Restructuring and mergers of non-profit organisations
  • Advice in case of loss of non-profit status (misuse of funds or activities not in accordance with the statutes)
  • Liquidation of non-profit-making entities


*Legal advice from qualified lawyers

 

 

Ongoing support

  • Creation of reserves
  • Amendment of statutes
  • Financial and payroll accounting
  • Preparation of tax returns and annual financial statements
  • E-balances for non-profit organisations
  • Statement(s) of application of funds
  • Optimization of the accounting system
  • Review of the activity reports
     

 

Audit

  • Mandatory and voluntary audits of annual financial statements
  • Where-used list checks
  • Audit of the internal control system
  • Examination of the proper use of donations
  • Audits according to § 53 HGrG

 

Charitable or not?

Foundation’s mission is decisive!

The most common form of foundation is the charitable foundation. If a foundation pursues a charitable purpose, it is granted charitable status and associated tax benefits after being reviewed by the foundation authority and approved by the tax office. Non-profit foundations can benefit institutions such as cultural institutions or cancer aid, for example, or they can be active themselves. 

 

Private-benefit foundations, such as the family foundation, do not benefit from tax exemption. Their sole purpose is to secure assets and provide for the family and thus does not serve the common good. The donations to the family to secure their provision, do not reduce the income of the foundation and are therefore not tax-privileged. They are to be seen like distributions from corporations. You can read here how to benefit from tax advantages in spite of everything.

Small checklist for a foundation

Is a foundation the best possible solution for your personal situation or is an alternative such as a gGmbH better? 

  • Assets - are real estate, money or securities available to contribute to the foundation?
  • Foundation operation - economically feasible from the investment income of the possible property?
  • Foundation for eternity - the foundation assets are used to maintain the existence or foundation with a limited life span? Does a consumption foundation make more sense?
  • Establishment during lifetime or only upon death by will?
  • Name of the foundation?
  • Location of the foundation? Supra-regionally active foundation? Comparison of the foundation supervisory authorities and their assessment of the purpose of the foundation and the foundation statutes!
  • Beneficiaries (Destinatäre) - who is to be provided for with foundation formation?
  • Structure of the foundation? Personnel and board - only one board of directors is required - but an operative board and a supervisory body are standard for foundations with a large capital stock.
  • Foundation assets - who gets them if the foundation has to be dissolved? If the foundation's purpose has either been achieved or is no longer feasible, the foundation is dissolved. In the absence of a corresponding provision, the federal state in which the foundation's registered office is located usually receives the capital

 

Your personal contact

Lothar Boelsen

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Tel: +49 69 971 231-0

Jana Seifert

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Tel: +49 69 971 231-0

Hans Thomas Richter

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Tel: +49 69 971 231-0