What is a family foundation?

A family foundation is a special form of foundation that primarily serves the purpose of preserving and increasing a family’s assets in the long term. In contrast to charitable foundations, which are geared towards the common good, the family foundation is primarily concerned with private interests, namely the protection of family assets and the provision for family members.

Important features of a family foundation:

• Asset protection: the assets are transferred to the foundation and legally belong to the foundation, no longer to the founder or the heirs
• Long-term nature: A foundation is generally set up for an indefinite period and remains in existence for several generations
• Tax optimization: clever structuring can reduce gift and inheritance taxes as well as income taxes

Why set up a family foundation?

A family foundation offers numerous advantages, especially for wealthy families, entrepreneurs and property owners who want to protect and optimize their assets in the long term. Of course, real estate can be transferred to foundations. Here are the main reasons why you should consider a family foundation.

• Protection from inheritance disputes: Since the assets belong to the foundation and are not inherited directly, inheritance disputes can be avoided
• Tax advantages: Income generated within the foundation is usually subject to a lower tax burden. Inheritance and gift taxes can be saved
• Control over the assets: The founder can specify in the articles of association how the assets are managed and who benefits from them
• Avoidance of asset fragmentation: assets remain bundled and are not divided up by sale, inheritance or private disposal

Who establishes a family foundation?

For those who want to save taxes! Only 15% on rentals, protection against access and many other benefits, especially for your loved ones.

Now you could say, 15% on rent and protection against access, a GmbH holding company can do that too, right! But – and we’ll come to this in a moment in the functions – the transfer of assets in particular is one of the tools that families choose for foundations.

Typical founders of a family foundation are

• Entrepreneurial families: It is particularly common for entrepreneurial families to want to keep their company in the family for the long term
• Property owners: Families with large real estate assets who want to secure their property and optimize it for tax purposes
• Wealthy private individuals: Anyone who has considerable capital and wants to protect it from external risks (such as divorce or creditor access)

As a rule, it is worth setting up a family foundation with assets of at least 1 million euros. Above this threshold, the advantages associated with a foundation begin to outweigh the establishment costs and administrative expenses.

How does a family foundation work?

The process of setting up and managing a family foundation can be complex, so it is important to plan the steps carefully:

1. Advice and planning: You should first seek advice from experts – lawyers, tax advisors and foundation experts – to understand the legal and tax framework
2. Creation of a foundation charter: This charter is the “basic law” of the foundation. It defines the purpose, who is a beneficiary and how the assets are managed
3. Contribution of assets: The founder contributes his assets to the foundation. From this moment on, the assets legally belong to the foundation and no longer to the founder
4. Recognition by the foundation authorities: The foundation must be recognized by the responsible foundation authority and the tax office
5. Administration and ongoing support: The foundation’s Board of Directors manages the assets and ensures that the foundation’s purpose is fulfilled

Advantages of the family foundation at a glance

• Asset protection: No access by third parties (e.g. in the event of divorce or insolvency)
• Tax advantages: Reduction of inheritance, gift and income taxes
• Long-term wealth planning: protection and management of assets over generations
• Avoidance of inheritance disputes: Clear regulations through the foundation statutes
• Flexibility and control: The founder can customize the articles of association and thus retain control

How do you set up a family foundation?

If you are considering setting up a family foundation yourself, here is a brief overview of the necessary steps. A little tip, I have explained the whole thing in more detail here in Establishing a family foundation and here in Family foundation costs:

1. Advice from experts: get professional help from lawyers, tax advisors and foundation experts
2. Define the foundation’s purpose: What should the foundation achieve? Who should be the beneficiaries?
3. Create legal documents: The foundation statutes and other founding documents must be drawn up
4. Contribute foundation assets: Transfer real estate, capital or other assets to the foundation
5. Registration and recognition: The foundation must be recognized by the competent authorities
6. Managing a foundation: Regular review and adaptation to legal and tax changes

Conclusion: Is a family foundation right for you?

A family foundation can be a powerful tool to protect assets, plan for the long term and save taxes. However, it is not suitable for everyone and requires careful planning and advice. If you think a family foundation may be right for you or your family, get expert advice and make sure all aspects are well thought through.

You can now find out more about this on Steuern Sparen One – my experts for setting up foundations and tax optimization.

The typical sale: “asset deal”

The difference: In an asset deal in the real estate context, specific assets such as land and buildings are sold individually, whereas in a share deal the shares in the company that owns the real estate are transferred.

Simply put:

• Asset deal = property is sold
• Share deal = Immobilien GmbH is sold

A share deal means that the buyer does not acquire the property itself, but the – in this case – Immobilien GmbH. Here is a short infographic. Then back to the direct sale of the apartment building, after which I will explain more about holding companies and taxes on the sale.

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Typically, as a private individual, you usually sell the apartment building directly. These are relevant for you:

1. Speculation tax
2. Three-object rule

Taxes on sale

A very quick look at taxes when selling an apartment building in Berlin:

1. Speculation tax: sell tax-free
2. 3 objects rule in Berlin
3. Asset & share deals: only 1.54% tax

Speculation tax: sell tax-free

The speculation period explained more quickly:

• Owner-occupied = 3 years
• Rented = 10 years

If you sell within the speculation period, you must – simply put – pay tax on the profits as normal, just like income from work, regardless of whether you are employed or self-employed. After the period has expired, the sale is tax-free. If you want to do a quick calculation, use my free speculation period calculator.

Tax calculation: Example

If you sell within the speculation period, you must – simply put – pay tax on the profits as normal, just like income from work, regardless of whether you are employed or self-employed. As a single person, this would typically mean a top tax rate of 42%.

Sale within the speculation period (< 10 years) as a private individual:

• Purchase 2024 = 2,100,000 euros
• Sale in 2033 = 4,100,000 euros
• Taxable profit = 2,000,000 euros
• At 42% (single person) = 840,000 euros

Sale within the speculation period (< 10 years) as a company:

• Purchase 2024 = 2,100,000 euros
• Sale in 2033 = 4,100,000 euros
• Taxable profit Berlin approx. 19.1 % (trade tax 4.1 %, corporation tax 15 %) = EUR 2,000,000
• At 19.1 % = 382,000 euros

Sale within the speculation period (> 10 years):

• Purchase 2024 = 2,100,000 euros
• Sale in 2034 = 4,100,000 euros
• Taxable profit = 2,000,000 euros
• Tax free

But you can’t buy 10 properties now, wait 3 years and take the profits from property appreciation, because:

3 objects rule in Berlin

There is also the 3-property rule. If you sell more than 3 properties in 5 years, it is commercial real estate trading.

When selling real estate, the “3-object rule” refers to the fact that private individuals in Germany can sell up to three properties within a five-year period tax-free. If a person sells more than three properties within this period, this is considered commercial real estate trading and is subject to income tax – even if they are not rented out but are owner-occupied.

After 10 years of holding, however, the sale is always tax-free.

Why does this rule exist?

Just like the speculation tax, the rule is intended to curb speculation on the real estate market and encourage the sale of real estate for residential purposes.

So how do the “big players” save on taxes?

Share deals: selling a company “instead of” real estate

One option for a tax-optimized sale is the share deal. In this case, however, the property must already have been purchased by a company (such as Immobilien GmbH) (not as an individual).

Only 1.54% tax on sale

A share deal is possible if you have the company in a holding structure. This means you only pay 1.54% tax due to the intercompany privilege(Section 8b KStG).

• Asset deal = property is sold
• Share deal = company is sold (with real estate ownership)

Let us now calculate our example again, starting with the direct sale of a property:

Sale of a property as a company (asset deal):

• Purchase 2024 = 2,100,000 euros
• Sale in 2028 = 4,100,000 euros
• Taxable profit Berlin approx. 19.1 % (trade tax 4.1 %, corporation tax 15 %) = EUR 2,000,000
• At 19.1 % = 382,000 euros

Sale of a real estate GmbH as a company (share deal):

• Purchase 2024 = 2,100,000 euros
• Sale in 2028 = 3,100,000 euros
• Taxable profit = 1,000,000 euros
• For GmbH 1.54 % = 1,540 euros

You can see how huge the difference is.

No real estate transfer tax on purchase

Let’s delve a little deeper into the subject of real estate and tax optimization!

Again, simply put:

• Sale of Immobilien GmbH below 89% = no real estate transfer tax

Why is this the case? In Germany, the sale of shares in a GmbH that owns real estate is not normally subject to real estate transfer tax as long as the shares are below a certain percentage(§ 5 GrEStG).

What are the advantages? Real estate as a capital investment must bring a profit, usually calculated by the rental yield. The land transfer tax increases the purchase price by up to 6.5%, depending on the federal state. For 1 million euros, this is a cost of 65,000 euros. This directly increases the yield by a few percent.

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Real estate & tax coaching

Real estate & tax coaching from experts and investors. I am happy to bring you together with the best:

• Real estate coaching
• Real estate tax coaching
• Contact us

Here you can find more for:

• Real estate beginners

Box privilege: save taxes when selling real estate

Nesting privilege: a term worth knowing!

Although I have been using the holding model in the real estate industry for years, I only recently came across the term “nesting privilege”. The bottom line? Only 1.54% tax on real estate sales! If you’re wondering, let me introduce you to the world of real estate holding in this short article.

The taxation of a real estate GmbH

A GmbH is subject to corporation tax, the solidarity surcharge and trade tax, which results in an effective tax rate of approximately 30%.

However, if you set up your GmbH in the context of real estate projects, you can benefit from the extended reduction in trade tax.

In this case, you only pay 15.83% tax on rental income and lease fees.

The same low tax rate also applies to the sale of real estate. However, care must be taken here to avoid falling into the category of commercial property trading. You may sell a maximum of three properties within five years, otherwise the tax rate rises to 30%.

The share deal offers an even more tax-efficient option for real estate sales.

Real estate holding company: Reduce the tax burden to 1.54%

By cleverly structuring your GmbH, you can reduce the tax burden on the sale of real estate to just 1.54%. A little more striking:

1.54% Taxes on sale

This concept, known as a share deal, benefits from a holding structure and the nesting privilege. Your business structure consists of two limited liability companies. One of the companies acquires the real estate, while the second limited company acts as the parent holding company. If you now want to sell your property, the holding company transfers the shares in your real estate GmbH to the buyer.

The nesting privilege comes into play here

If a corporation sells shares in another corporation, 95% of the profits remain tax-free.

This means that your effective tax rate on the profit from the sale of the property is only 1.54%.

More about GmbH & asset-managing GmbH

Learn more about the GmbH here

• GmbH: Simply explained
• Asset-managing limited liability company

Capital gains tax (KapESt) – tax on profit distribution

Tax law provides that – in addition to the income tax of any natural person with shareholder status – capital gains tax is levied on all natural persons resident in Germany who benefit from a distribution of profits. As a result, the recipient – but not the corporation – is burdened. The capital gains tax burdens both the profit income of shareholders of a GmbH and the distribution of dividends to shareholders of a stock corporation.

Other taxes for businesses:

• Corporate income tax (KSt)
• Income tax (ESt)
• Value added tax (VAT)
• Trade tax (GewSt)

If you want to learn more specifically about taxes for real estate companies, you can learn more here:

• Save taxes on real estate

Capital gains tax in detail – collection, levy & special cases

For the sake of simplicity, 25 percent of the dividend is withheld directly by the AG for share holders, similar to the way regular employers withhold wage tax (LSt) for their taxable employees. Capital gains tax – abbreviated to KESt, KapESt, KapErtSt or KapSt – is a special form of income tax levied here: Once the tax burden has been withheld, the income tax is deemed to have been paid and the income does not have to be declared in more detail – at least insofar as no other type of income applies or the special tax rate applies.

If, on the other hand, the registered office of a shareholder is abroad, the so-called withholding tax comes into effect and the provisions of the double taxation agreement (DTA) of the respective country must be taken into account. The final withholding tax is also levied on shares held as private assets within Germany.

Allowance for single persons & partners

The banks grant different options so that taxpayers can use tax-free amounts for themselves and, if necessary, distribute them. The so-called saver’s allowance is generally available to everyone and currently amounts to €801 per year for single persons and double that amount for spouses and registered partners: €1,602. The first euro above the exemption limit and all subsequent amounts are taxed as usual at 25 percent.

Which companies are subject to capital gains tax?

Most natural persons are subject to income tax. If they are also shareholders in a corporation – for example, a limited liability company (GmbH) or a stock corporation (AG) – capital gains tax also applies in many cases. The capital gains tax is also commonly referred to as the flat rate withholding tax (Abgeltungsteuer) and primarily taxes dividends and interest income at a flat rate of 25 percent. Usually, the tax office is informed automatically by the banks, similar to the way an employer pays the wage tax for his employees.

Overview of company law forms

You can find more information about the different legal forms under the following links. Starting with the sole proprietorship and the registered traders… to the various partnerships and corporations… to other companies such as the family foundation – all the essential aspects of formation, liability, tax burden and more explained simply and understandably! First of all, an overview of the individual legal forms of companies:

• Sole proprietorship (EU)
  • Freelancer
  • Small business
  • Registered traders (e. K.)
• Silent partnerships
• BGB companies / civil law partnership (GbR)
• Partnerships
  • Limited partnership (KG)
  • General partnership (OHG)
  • Limited Liability Company and Company Limited Partnership(GmbH & Co KG)
  • Limited Liability Company and Compagnie General Partnership(GmbH & Co OHG)
• Corporations
  • Stock corporation (AG)
    • AG & Co KGaA
  • Partnership limited by shares (KGaA)
  • Limited liability company (GmbH)
    • GmbH & Co KGaA
  • Entrepreneurial company / UG (limited liability)
  • European Company / Societas Europaea (SE)
    • SE & Co KGaA
• Other companies
  • Foundations / Family Foundations
  • Insurances
  • Partnerships
  • Registered associations (e. V.)
  • Registered cooperatives (e. G.)

Taxes in Germany: List

Corporation tax (KSt), income tax (ESt), capital gains tax (KapESt), turnover tax (USt), trade tax (GewSt) – who pays what? In this overview of the different types of taxes / tax forms in Germany, you will find relevant taxes for you as an individual and for your company, depending on which legal form you have chosen. In addition, after the tax list: How does the tax cycle work around monthly financial statements, annual financial statements and balance sheets? A little insight for those starting their first company. What taxes are there? Simple explanations, definitions, tax optimization, an insight into taxes.

• Taxes: List