GERMANY Law and Practice Contributed by: Tanja Schienke-Ohletz, Flick Gocke Schaumburg
Lifetime Gifts Key features
The partnership agreement contains provisions stipu- lating that no third parties may become shareholders, that exclusion is possible under certain conditions and that a marriage contract is required if a shareholder marries, so as not to encumber the company’s assets. German tax law provides substantial relief for busi- ness transfers if conditions are satisfied (eg, employ- ment retention requirements under ErbStG). Two main regimes exist:
Inheritance and gift tax allowances under the Inherit- ance and Gift Tax Act can be used repeatedly every ten years. The typical allowances are: • EUR400,000 per child; Gifts are a common tool in German succession plan- ning. This is because the allowances for inheritance and gift tax are identical and are available every ten years. Within these ten years, gifts/inheritances from the same persons are added together and are then subject to a higher progressive tax rate. • EUR200,000 per grandchild; and • EUR500,000 between spouses. The gift is usually made with a right of usufruct, often to provide for the donor, so that the donor still secures the income. Unlike in other jurisdictions, the right of usufruct does not mean that the gift is not completed. The advantage is that it expires in the event of inherit- ance without incurring tax. It should be noted, how- ever, that the usufructuary/donor generates income, which is then also inherited if not spent. A gift agreement may also include rights of recovery – eg, if the donee dies before the donor. The expectation of a certain level of taxation may also be subject to a right of recovery. Unrestricted rights of recovery are not recommended. Transfer of Business Interests With Retained Control There is also the option of establishing a corporation or partnership as a so-called family holding company or family pool and gifting shares in it. This allows the next generation to be involved, with the parents retain- ing control but the children participating financially. This is also possible for minors. When they reach the age of majority and continue to be involved in the company, control remains in place – eg, only all shareholders can make withdrawals at the same time.
• 85% exemption ( Regelverschonung ); and • 100% exemption ( Optionsverschonung ).
These are widely used in succession planning for Mit- telstand businesses. However, the requirements are only fulfilled if the company is not only administrat- ing assets like holding or renting real estate or capital investments. Currently, the relief for business assets is subject to a decision of the German Constitutional Court as to whether the provisions conform to German consti- tutional law for private assets (eg, whether tax relief does not apply). Limited Use of Trust Structures Unlike common law jurisdictions, Germany does not have a domestic trust regime comparable to Anglo- American trusts. Germany has not signed the Hague Convention so trusts do not exist in Germany. Thus, they cannot be used as a vehicle for succession plan- ning. Family Foundation (Familienstiftung) A family foundation is a foundation with legal capac- ity whose purpose is exclusively or predominantly to promote or secure the welfare of the members of one or more specific families. Family foundations serve the welfare of the members of one or more specific fami- lies; this can be achieved, for example, by providing for, promoting or managing assets. It should be noted that family foundations cannot be dissolved without due process and are therefore very stable. Amendments to the statutes can only be
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