GERMANY Trends and Developments Contributed by: Tanja Schienke-Ohletz, Flick Gocke Schaumburg
Tax Exemption for the Transfer of Art Under German Law Inheritance of art under German law Various aspects must be taken into account when transferring works of art and art collections. First of all, the testator often has an interest in ensuring that the works of art or art collection are preserved – ie, that the heirs do not sell the works of art individually. There should also be no dispute between the heirs. If works of art are transferred to the legal heirs as part of the succession, they form a community of heirs and can only dispose of the estate assets jointly. Individual works are generally indivisible, so that in communi - ties of heirs there are effectively only three options: physical division by allocation against compensation payment, joint administration or sale. Joint adminis - tration is particularly prone to conflict in the case of high-priced art, for example in questions of loan, res - toration, insurance or the timing of a sale. It should also be remembered that an inheritance or gift is taxable. Works of art and art collections are valued at their fair market value and subject to the general inheritance tax rates. The market value can fluctuate greatly. In the event of inheritance, however, a cut-off date value must be applied. Different expert opinions can lead to considerable discrepancies, which can cause conflict both in the distribution of the estate and in the calculation of compulsory por - tions. In addition, it may subsequently transpire that assumptions about provenance were incorrect, which can trigger warranty and contestation issues in the internal relationship between the co-heirs. As illiquid assets are being dealt with, the question arises as to how the purchasers are to finance the tax due without having to sell the works of art/art collec - tion. One trend is to transfer art collections to a charitable foundation or to donate the artworks with tax ben - efits by making them available to the general public. A significant advantage of transferring the collection to a foundation is that it is removed from the private sphere of assets. In this case, the art does not pass to the community of heirs, there is no creditor access and family conflicts are avoided. The foundation is independent, and the assets are permanently dedi -
cated to the foundation’s purpose. Breaking up the collection against the founder’s wishes is generally not possible. Dissolving the foundation is also only possible under very strict conditions. In addition, a domestic foundation with legal capacity is subject to foundation supervision. All changes or restructuring of the foundation must be approved by the founda - tion supervisory authority. This prevents the heirs from changing the foundation’s statutes or exerting influ - ence on the foundation that was not originally intend - ed by the founder. However, a foundation is also quite inflexible if changes are necessary – eg, after 30 years. Transfer of art to a domestic charitable foundation If the testator transfers works of art to a charitable foundation in the United Kingdom upon their death or during their lifetime, this is completely exempt from inheritance tax. Tax-free transfer to a charitable foundation is possible if, according to its statutes and actual management, the foundation pursues exclu - sively and directly charitable, benevolent or ecclesi - astical purposes and has its registered office in the United Kingdom. The tax exemption only applies to donations to domestic foundations; different rules apply to foundations abroad. However, it should be noted that the art may also be used directly and exclu - sively for charitable purposes. A retransfer to the founder or the founder’s heirs is excluded or would lead to high additional tax claims. If a charitable foundation loses its charitable status within ten years of the inheritance or donation, all tax benefits are retroactively forfeited. The previously tax- exempt transfer is subject to additional tax if the foun - dation’s assets are not used for tax-privileged purpos - es. In order for the foundation to retain its charitable status, it is not sufficient for the foundation to hold the art; it must also use it for charitable purposes – ie, make it available to the general public in some form (eg, through exhibitions, museum loans). In particular, the art should no longer be located in the founder’s private premises, as this is contrary to charitable use. A charitable foundation also brings a good reputation to the artworks. This strengthens the cultural impact of the collection and may be desirable from a socio- political perspective. The founder’s wishes – such as “preservation as a closed collection” – can be secured in the statutes.
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