Taxing time for the Mittelstand
Plans to reform Germany’s inheritance tax rules are prompting the country’s entrepreneurs to consider setting up trusts to protect their assets.
Each year, about 70,000 small and medium-sized family-owned businesses from the so-called Mittelstand face succession issues. One in 10 is estimated to be forced out of business by hefty inheritance taxes, which can be up to 30% of asset values for close relatives and 50% for others.
Proposed reforms to inheritance tax laws, which must be pushed through by the end of the year, may worsen the situation.
The new regime is likely to make inheritance tax bills more uncertain. It is prompting more entrepreneurs to transfer the ownership of their businesses to tax-exempt charitable trusts, or Stiftungen.
Many large German charities – such as €823.5m Klaus Tschira Stiftung set up by one the founders of software firm SAP – are backed by entrepreneurial assets. However, a charitable trust may deploy only up to a third of its income in support of its founders and this must be deemed “appropriate” by the tax authorities. A charity also risks its tax-exempt status if it engages too intensely in commercial activities.
One option is to split the economic interest in the business from the voting rights.
The Robert Bosch Stiftung owns 92% of the capital in the industrial Bosch Group but voting rights are held by a limited partnership.
An alternative is the family trust, or familienstiftungen. Industrialist Reinhold Würth set up a series in the late 1980s, transferring shares in the Würth-Gruppe to five family foundations from which his heirs receive a return on capital but have no control over the assets.
Two years ago Dieter von Holtzbrinck transferred his 33.3% stake in the Holtzbrinck publishing group to a family trust.
Dual trust structures (Doppelstiftungsmodell)– combining a family foundation with a tax-exempt charitable trust – offer arguably the best solution. Only 20 or so have been set up, mostly to avoid inheritance tax of double-digit millions of euros.
The progress of the inheritance tax reforms will be seen as a test of the German government’s commitment to strengthen the Mittelstand. Meanwhile, trust lawyers are rubbing their hands in expectation of a flood of work.
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