The basic idea behind the structure
The exit tax applies whenever Germany loses its right to tax hidden reserves. This is precisely where the structure involving a domestic family foundation becomes relevant. If the shareholding is transferred free of charge prior to departure to a foundation under private law with legal capacity and registered in Germany, the right to tax remains entirely within Germany.
The key factor here is that the foundation is an independent legal entity subject to unlimited tax liability. Unlike in the case of a transfer abroad, there is therefore no so-called ‘unwinding’. The hidden reserves remain subject to German taxation – only the legal entity changes.
Tax-neutral transfer to the foundation
A key advantage of this arrangement is that the transfer of shares to the domestic family foundation can, in principle, be carried out in a manner that is neutral for income tax purposes. If the transfer is made free of charge and without consideration, the foundation assumes the founder’s tax status. Hidden reserves are, in principle, not realised in the process.
This established ‘footsteps theory’ is recognised and forms the basis for the fact that there is neither taxation under Section 17 of the Income Tax Act (EStG) nor an exit tax. The exit tax presupposes that German tax jurisdiction is restricted or excluded – which is precisely not the case with a domestic foundation.
Departure after transfer – without exit tax
Once the transfer has taken place, the natural person no longer holds any shares in their private assets. If they subsequently move abroad, the conditions for exit tax are no longer met. At the same time, Germany retains tax access via the foundation.
Consequently, the exit tax can in fact be avoided in these cases. It is also conceivable to structure the arrangement in the event of death, i.e. establishing the foundation by will, possibly (only) on the condition that the heirs are resident abroad.
Limitations of the arrangement
Despite this generally favorable starting point, this is not a one-size-fits-all solution. The model is only appropriate if it is used in tandem with succession planning within the family. The founder must also be aware that they relinquish ownership and, to a large extent, control over their assets. Therefore, less intrusive alternative structures aimed at avoiding exit taxation (while also addressing succession planning) should always be considered.
Integration into succession planning
The domestic family foundation really comes into its own when it is embedded within a long-term, comprehensive strategy. It is particularly well-suited to entrepreneurial families who wish to secure their assets for the long term and structure them across generations. A family foundation can be a sensible option, particularly in cross-border family structures – but also where heirs are to be afforded flexibility in their choice of residence. However, this does not apply in cases of short-term plans to move abroad or arrangements motivated purely by tax considerations.
Conclusion
Setting up a family foundation is a recognised arrangement that is becoming increasingly relevant in practice. Its key advantage lies in the fact that the transfer of shares can be tax-neutral and German tax law remains applicable. This means that the exit tax is not triggered upon a subsequent departure.
At the same time, the structure requires careful planning and a sound economic rationale. Establishing a foundation solely for tax reasons carries significant risks. If implemented correctly, however, it can be an effective tool for modern succession and wealth planning.
Key points in brief
- A domestic family foundation enables asset protection and the preservation of the business or family wealth within the family.
- It can thus help to avoid circumstances that would trigger emigration without restricting the family’s international mobility.
- In the event of inheritance, it provides flexibility, as succession can be arranged independently of the heirs’ decisions regarding their place of residence.
