D1 Economic burden on a founder resident in Germany in the event of a transfer of assets to a private-benefit foundation in Liechtenstein
The endowment of assets on the occasion of the establishment of a private-benefit Liechtenstein foundation by a founder resident in Germany can lead, among other things, to charges on the founder for German income tax, value added tax and inheritance tax / gift tax. The founder does not receive any special expenses or donations deduction for the donation of assets.
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German income tax
If the founder transfers individual assets from his private assets to the private-benefit foundation, this transaction falls within the private sphere and is generally not subject to income tax for the founder. Since the founder transfers his assets free of charge, no taxable sale transaction is established.
The transfer of individual assets from the business assets, on the other hand, leads to a taxable current withdrawal profit in the amount of the difference between the book value and the going-concern value.
German inheritance and gift tax
The assets of the private-benefit Liechtenstein foundation established upon death and inter vivos are subject to inheritance or gift tax.
The German resident founder of a private-benefit Liechtenstein foundation benefits in Germany from the special inheritance tax privilege through the tax class privilege and the exemption regulations for privileged business assets, provided that
- the foundation disposes freely of the assets under civil law,
- the founder does not have comprehensive powers of control over the assets of the foundation,
- the private-benefit Liechtenstein foundation is non-transparent and structured like a German family foundation, i.e. according to its articles of association, the founder, his relatives and their descendants are entitled to more than half of the benefits or accruals.
Tax debtor. The Liechtenstein Foundation is the tax debtor in the case of acquisition upon death. In the case of a gift inter vivos, the foundation and the founder are jointly and severally liable.
Asset valuation. The valuation is based on the German Valuation Act. Business assets (e.g. sole proprietorships and participations of co-entrepreneurs in partnerships), real property, shares in corporations or agricultural and forestry operations are valued at their fair market value. A special valuation discount of 10 percent applies to real estate that is rented out for residential purposes.
Gift tax class privilege. In Germany, the gratuitous transfer of assets to a non-charitable foundation falls into the unfavourable German tax class III, since the foundation, as a legal entity, cannot be related to the founder. The tax rates in tax class III are 30 to 50 percent.
However, the family foundation has a special position: In the case of a German family foundation, the kinship relationship that exists between the most remote beneficiary according to the foundation deed and the testator or donor is taken as the basis for determining the tax class when the assets are endowed in the course of the establishment. This also includes a person who is not yet a direct beneficiary at the time of the establishment of the foundation but only becomes a beneficiary in the succession of generations.
If, for example, the spouse, partner, children, stepchildren, descendants of children, great-grandchildren and other descendants are appointed as the most distant beneficiaries, the favourable German tax class I is used as a basis.
The gift tax class privilege affects both the determination of the tax rate and the application of the personal allowance and, in principle, also benefits the German founder when transferring assets to a private-benefit Liechtenstein foundation.
Subsequent foundations also benefit from the gift tax class privilege provided that the possibility of a subsequent foundation is provided for in the articles.
Tax exemption regulations for business assets benefiting from tax relief
The German Inheritance Tax Act / Gift Tax Act provides for exemption regulations for preferential corporate assets. These regulations also apply to founders resident in Germany in the case of asset transfers to a private-benefit Liechtenstein foundation.
These essentially include:
- domestic agricultural and forestry assets and corresponding agricultural and forestry assets serving a permanent establishment within the European Union or the European Economic Area;
- domestic business assets, in particular commercial operations, partial operations and co-entrepreneurial shares and corresponding business assets serving a permanent establishment in the EU or the European Economic Area;
- Shares in corporations with their registered office in the EU or the European Economic Area, if a shareholding of more than 25 percent exists.
The acquirer of tax-privileged business assets is granted two models. In the case of the standard exemption (without application), an exemption discount of 85 percent is initially granted:
- The inheritance or gift tax on 85 percent of the beneficiary business assets is initially deferred and then waived on a pro rata basis for each year if the business is successfully continued as a going concern within the meaning of the Inheritance Tax Act.
- The business must continue for at least five years.
- During these five years, the wage bill must reach at least 400 percent of the average wage bill of the previous five years of the transfer of the business.
- The administrative assets may not account for more than 50 percent of the enterprise value.
Under the exemption option, the family foundation is initially granted a 100 percent exemption from inheritance tax upon application under certain conditions. The inheritance or gift tax is initially deferred and, if the business is successfully continued, is waived pro rata for each year and completely after seven years. The requirements:
- The total wages during the seven-year period must equal 700 percent of the average wages during the five years preceding the valuation date.
- The administrative assets may not exceed 10 percent of the enterprise value.
Administrative assets essentially include
- Land given to third parties for their use;
- Shares in corporations if the direct interest in the nominal capital of these companies is 25 percent or less;
- Participations in partnerships and shares in corporations if the administrative assets of these companies exceed 50 percent;
- Securities and similar claims that do not serve the main purpose of operating a bank or insurance company;
- Works of art, art collections, scientific collections, libraries and archives, coins, precious metals and precious stones not serving the main purpose of the holding or company.
In the event of a breach of the retention periods or non-compliance with the wage totals, the tax relief will be reduced. Among other things, the sale of a business, the termination of a business or a partial sale as well as the sale or withdrawal of essential business assets, excess withdrawals or the sale of shares in corporations are considered harmful.
Value added tax. If the founder provides the private-benefit Liechtenstein foundation with cash assets, this does not trigger any turnover tax. The (gratuitous) transfer of a business or part of a business to a private-benefit Liechtenstein foundation constitutes a non-taxable sale of a business as a whole.
If individual assets are removed from the business assets and transferred to the foundation, this constitutes a gratuitous transfer of value subject to VAT.
Real Estate Transfer Tax. The gratuitous donation of real property to a private-benefit Liechtenstein foundation does not trigger real estate transfer tax. It should be noted that in the case of consideration by the foundation, such as the assumption of liabilities, real estate transfer tax is payable at a rate of 3.5 per cent.
Withdrawal taxation (external taxation of hidden reserves)
If a founder resident in Germany dedicates substantial shareholdings in a German corporation to a private-benefit Liechtenstein foundation, such a measure leads to the recognition of the hidden reserves contained in the dedicated shareholdings in the course of „exit taxation“ and triggers income tax consequences.
With a timely and skilful restructuring, an exit taxation can be avoided.
Dedications of participations in partnerships are generally income tax-neutral, as there is no disclosure of hidden reserves.
A transfer of real estate assets is also not covered by German non-tax law, since after the transfer the current income from renting and leasing and sales transactions remains covered in Germany due to the limited income or corporation tax liability of the Liechtenstein foundation.
German tax law also does not recognise hidden reserves in the case of the dedication of liquid assets.
Liechtenstein tax law does not know any tax comparable to the German exit tax.
Interest payments on donor loans
In addition to donations subject to gift tax, the founder can also grant loans to the foundation to finance the foundation.
At the founder’s level, the interest is income from capital assets and must be declared and taxed at 25% in Germany.
Liechtenstein does not withhold any withholding tax on interest paid.
Income tax addition of foundation income for the founder in Germany
1. trust-like foundation structure
The income of the foundation is added to the founder’s income for income tax purposes,
- if the founder has reserved such extensive rights within the framework of the foundation transaction that he can subsequently economically exclude the foundation and its organs from influencing the assets of the foundation,
- in the case of unrestricted reservations of rights of revocation of the foundation transaction or comprehensively reserved rights of amendment of the founder,
- in the case of foundations, by means of mandate agreements between the founder and the administrative body (trustee) bound by instructions.
2. institutional control of the managing body of the foundation by the founder and his relatives
If the majority of the beneficiaries of a Liechtenstein foundation are family members of the founder, it is the responsibility of the founder and his or her family members to prove that the beneficiaries have no rights to influence the foundation.
Failure to do so may result in an income tax addition for the founder.