Foundations, Trusts and Family Offices

Family foundations in Germany: what they are

Family foundations in Germany are legal entities without members, established with assets to pursue a purpose defined by the founder for the long term, typically to preserve a family business or family wealth and to support the members of the founder's family. Under the Civil Code, a foundation is a legal person without members endowed with assets for the permanent and sustainable fulfilment of a purpose specified by the founder (§ 80(1) BGB).

It is generally established for an indefinite period, but can also be established for a fixed period. Once recognised by the competent foundation authority of the federal state, the foundation is independent of its founder and its beneficiaries: no one owns it, and its assets are bound to its purpose.

This independence makes the foundation attractive for succession in family businesses. It can hold the shares of the company and prevent their fragmentation among a growing number of heirs, protect the company against family disputes and ensure continuity of governance across generations. Family foundations can also be combined with charitable foundations, creating a "double foundation" structure in which the charitable foundation holds most of the capital and the family foundation holds most of the voting rights. The reform of foundation law consolidated the civil law rules in §§ 80 ff. BGB and harmonised them across the federal states.

This page explains the civil law framework, governance, tax treatment of German family foundations including the substitute inheritance tax, charitable foundations, foreign trusts and foundations from a German tax perspective, family offices and holding structures, and family constitutions. It is written for entrepreneurs, family shareholders, family office managers and their advisers. For succession in general, see succession planning.

Civil law framework and governance

A foundation is established by a foundation transaction, which contains the founder's declaration to dedicate assets to a purpose and the foundation's statutes, and by recognition by the foundation authority of the state in which it will have its seat. The statutes must set out the name, seat, purpose, assets and the composition of the board. The board represents the foundation and manages its affairs; additional bodies such as a supervisory board, an advisory board or a family council are common in family foundations. State foundation supervision for private family foundations is often limited or excluded, depending on the law of the state concerned, while charitable foundations are supervised more closely.

The founder's will is the guiding principle. Once established, the purpose and the statutes can be changed only within the limits set by law and the statutes, so the founder must think carefully about future developments: what happens if the family business is sold, if family branches disagree, or if the assets no longer suffice to fulfil the purpose.

Statutes can provide mechanisms for such changes, for example by allowing the board with the consent of a family body to adjust the purpose within defined limits. Since the reform, the BGB distinguishes between assets that must be preserved and assets that may be consumed, and allows foundations established for a limited time that consume their assets.

Foundation or alternative structures

Family foundations are not the only way to keep a family business together. A family holding company with strict transfer restrictions, a family pool binding voting rights, or a limited partnership with a professional general partner can achieve similar goals while leaving ownership with family members. The foundation's distinctive feature is that the assets no longer belong to anyone in the family, which provides strong protection against fragmentation and against claims by individual family members, but also means that family members cannot sell or pledge their share. Founders should weigh this permanence against flexibility, and consider whether the foundation should hold all or only part of the business, for example a controlling block of voting rights.

Asset protection and creditors

Assets transferred to a foundation are no longer available to the founder's personal creditors, which can provide protection against business and personal risks. However, transfers made in a crisis can be challenged by the founder's creditors or an insolvency administrator, and gifts to a foundation are taken into account for compulsory portion claims of the founder's children for ten years on a sliding scale. Asset protection should therefore be an additional benefit of a well-planned structure rather than its main purpose.

Tax treatment of family foundations

A German family foundation is subject to corporate income tax on its income, like a corporation. Dividends and capital gains from shares in corporations are therefore largely exempt at foundation level under the participation exemption, which makes the foundation an efficient holding vehicle for a family company held as a corporation. Distributions to family members are taxed as investment income of the recipients. The foundation itself is not subject to trade tax unless it carries on a commercial business, so the structure of its holdings and any operating activities should be planned with trade tax in mind. Where the foundation holds a partnership interest, the partnership's profits are taxed at the level of the foundation as a corporate partner.

The endowment of the foundation is subject to inheritance or gift tax. The tax class depends on the relationship between the founder and the most distant beneficiary under the statutes (§ 15(2) ErbStG), so a foundation for the founder's children and grandchildren benefits from tax class I. Business-asset relief can apply to endowments of business assets if its conditions are met, but foundations do not have personal allowances in the same way as natural persons.

The most distinctive feature is the substitute inheritance tax (Erbersatzsteuer): the assets of a foundation established essentially in the interest of a family are taxed every 30 years, as if they passed to two children (§ 1(1) no. 4 ErbStG). Business-asset relief can reduce this tax as well, and the tax can be paid in 30 equal annual instalments (§ 24 ErbStG).

Charitable foundations and double foundations

Charitable foundations are exempt from corporate income tax and trade tax, and endowments to them are generally exempt from inheritance and gift tax and deductible for income tax purposes within limits.

A charitable foundation may use up to one third of its income to support the founder and his or her closest relatives in an appropriate manner without losing its tax privileges (§ 58 no. 6 AO). In a double foundation, the charitable foundation holds most of the economic interest in the family company, reducing inheritance tax, while a family foundation holds a small capital interest with most of the voting rights, securing the family's influence. Such structures require careful drafting to satisfy the tax rules on the charitable foundation's independence and the use of its funds.

Foreign trusts and foundations from a German perspective

German law does not recognise the common-law trust as such, but German tax law contains specific rules for transfers to and from foreign trusts and foundations. Transfers of assets to a trust or a foreign foundation are subject to gift or inheritance tax as transfers to an asset pool (Vermögensmasse) (§ 3(2) no. 1 and § 7(1) no. 8 ErbStG), and distributions and the dissolution can trigger further tax.

Income and assets of a foreign family foundation with its seat and management outside Germany are attributed to the founder if resident in Germany, or otherwise to resident beneficiaries entitled to income or assets (§ 15(1) AStG), subject to exceptions for foundations in EU or EEA states where the founder and beneficiaries have no legal or actual control and information is exchanged.

Families with members in several countries often have trusts established under common-law systems or foundations in other European jurisdictions. When a beneficiary or settlor moves to Germany, or when a German family considers a foreign structure, the German tax consequences should be analysed in advance, including reporting obligations. Foreign structures intended to avoid German tax are generally ineffective under these rules and can create additional burdens. See our page on international tax.

Transparency and reporting

Foundations, including family foundations, must report their beneficial owners to the transparency register under the Money Laundering Act, which for foundations generally includes the founder, board members and beneficiaries. Foreign trusts and similar arrangements with a trustee in Germany, or acquiring German real estate, are also subject to registration. Banks and other obliged entities will request information on the structure when the foundation opens accounts or makes investments. Families with privacy concerns should take these transparency obligations into account when choosing between structures.

Family offices and holding structures

A family office manages the wealth of one or more families: investment management, accounting and reporting, tax compliance, real estate, philanthropy and often the administration of family governance. Single family offices are usually organised as a GmbH or a GmbH & Co. KG owned by the family or the family holding company. Regulatory questions arise where the family office manages assets for persons outside the family, invests through pooled vehicles or provides investment advice: depending on the structure, the activity may require a licence under the Banking Act, the Investment Firms Act or the Capital Investment Code. Our pages on financial regulation and investment funds explain the licensing triggers.

Family holding structures combine the family company and other assets.

A family GmbH & Co. KG with asset management activities is transparent for income tax purposes and offers flexible governance; a family holding GmbH benefits from the participation exemption on dividends and capital gains but faces a second level of taxation on distributions to individuals. Family pools, in which family members bind their voting rights and transfer restrictions in a pooling agreement, can be combined with both. The choice should take into account inheritance tax relief, trade tax, real estate transfer tax and future exits. In practice, larger families often combine several of these elements: a family foundation or holding company at the top, an operating group below, and separate vehicles for real estate, liquid investments and philanthropy, each with its own governance and reporting lines to the family office.

Family constitutions

Many business families adopt a family constitution (Familienverfassung), a document setting out the family's values, its relationship to the business, rules for family members working in the company, education of the next generation, conflict resolution and the structure of family bodies such as a family council or family assembly. The family constitution is usually not legally binding in itself, but its key rules are implemented in the articles, the shareholder agreement or the foundation statutes. See our insight on family business governance and family constitutions.

Philanthropy and impact

Many families combine wealth preservation with philanthropy. Besides establishing an independent charitable foundation, families can set up a trust foundation (Treuhandstiftung) administered by an existing institution, make endowments to existing foundations, or establish a charitable GmbH, which offers more flexibility in governance and is often used for operational projects. Donations and endowments are deductible within statutory limits, and the charitable entity's activities must strictly follow its purpose and the rules on timely use of funds. A family office can coordinate philanthropic activities with the family's investment strategy, including impact investments, provided that the charitable entities' assets are managed in their own interest.

Family offices also play a role in preparing the next generation: education programmes, internships in the family company and gradual involvement in family bodies help future owners to take on responsibility. Well-designed governance documents provide the framework in which this can happen.

• Define the long-term objectives before choosing between foundation, holding and pool.
• Draft statutes that allow adaptation within defined limits.
• Model inheritance, gift and substitute inheritance tax over several generations.
• Check regulatory triggers for family office activities.

How TRW & Co helps

We advise entrepreneurs, families and family offices on family foundations in Germany and related structures. We design and establish family and charitable foundations and double foundations, draft statutes and handle recognition by the foundation authority, structure family holding companies and pools, and draft family constitutions and their implementation in corporate documents. We work with tax advisers on inheritance, gift and substitute inheritance tax and on foreign trusts and foundations, and we advise family offices on governance and regulatory questions. To discuss your family's plans, please contact us.