Establishing a foundation makes it possible to permanently dedicate assets to a specific purpose. This article provides an overview of the various foundation types, the establishment process, and the tax framework.
What Is a Foundation?
A foundation is a legal entity that permanently dedicates assets to a purpose determined by the founder. Unlike associations or companies, a foundation has no members or shareholders. It is essentially an autonomous pool of assets dedicated to a specific purpose and managed by a board of directors.
Since 1 July 2023, foundation law has been comprehensively reformed in §§ 80 ff. BGB. The reform replaced the previously scattered state foundation laws with uniform federal legislation.
Types of Foundations
Foundation Under Civil Law with Legal Capacity
The classic form of foundation acquires legal capacity through recognition by the competent state authority (foundation supervisory body). It requires:
- A foundation charter (articles of association)
- Sufficient assets for the permanent fulfilment of the purpose (in practice, generally at least 50,000 to 100,000 euros, depending on the federal state and the foundation's purpose)
- A permissible foundation purpose
Trust Foundation (Foundation Without Legal Capacity)
In the case of a trust foundation, the founder transfers assets to a trustee (often another foundation or legal entity), who manages them in accordance with the founder's instructions. It does not require official recognition and can be established with less capital.
Family Foundation
A family foundation serves the welfare of one or more families. It can be established either as a foundation with legal capacity or as a trust foundation. Family foundations are subject to special tax regulations, in particular the substitute inheritance tax.
Charitable Foundation
Foundations that exclusively and directly pursue tax-privileged purposes (charitable, benevolent, or ecclesiastical) enjoy tax advantages.
The Establishment Process
1. Foundation Charter (Articles of Association)
The foundation charter contains the articles of association with the following mandatory contents:
- Name of the foundation
- Registered office of the foundation
- Foundation purpose
- Asset endowment
- Governing bodies and their composition
- Rules on the use of foundation assets and income
2. Establishment During Lifetime or Upon Death
A foundation can be established during the founder's lifetime (inter vivos foundation charter) or by testamentary disposition (will or inheritance contract).
In the case of establishment during lifetime, the founder transfers the assets to the foundation. The foundation comes into existence upon recognition by the foundation authority.
In the case of establishment upon death, the foundation comes into existence after the founder's death. The probate court communicates the disposition to the competent court or authority.
3. Recognition
A foundation with legal capacity requires recognition by the competent state authority. This authority examines in particular:
- The permissibility of the foundation purpose
- The sustainability of purpose fulfilment with the available assets
- The proper form of the articles of association
Tax Framework
Charitable Foundations
Charitable foundations are exempt from corporation tax and trade tax insofar as they pursue their statutory purposes. Donations to charitable foundations are tax-deductible for the founder or donor:
- Tax deduction for donations: Contributions to charitable foundations are deductible as special expenses (up to 20 percent of total income).
- Special expense deduction upon foundation establishment: When establishing a charitable foundation and making additional endowments, up to 1,000,000 euros may additionally be deducted as special expenses within ten years (§ 10b Abs. 1a EStG).
- Inheritance and gift tax: Contributions to charitable foundations are exempt from inheritance and gift tax.
Family Foundations
Family foundations do not enjoy charitable tax privileges. They are subject to:
- Corporation tax on their income
- Substitute inheritance tax: Every 30 years, a substitute inheritance tax is levied that simulates the transfer of assets to the next generation (§ 1 Abs. 1 Nr. 4 ErbStG). The tax rate is based on tax class I.
Expendable Foundation
The reformed foundation law expressly permits the establishment of expendable foundations that may use up their assets within a specified period (at least ten years) for the foundation's purpose.
Ongoing Administration and Foundation Supervision
Foundations with legal capacity are subject to foundation supervision. This body reviews the proper management of the foundation's assets and compliance with the foundation purpose. Foundations must regularly render account and submit annual financial statements or activity reports.
Foundation and Business Succession
Transferring a business to a foundation can be an instrument for succession planning:
- Securing the continuation of the business across generations
- Avoiding fragmentation through inheritance division
- Tax advantages in the case of charitable structuring
- Combining family and public welfare interests through dual foundation models
Costs of Foundation Establishment
Costs vary depending on complexity. For the notarial certification of the foundation charter and the recognition procedure, founders should expect costs in the four-figure range. Official recognition itself is free of charge in most federal states.
