Tax-Exempt Foundations

Death of Aldi Founder Renews Debate Over Fairness of Germany's Inheritance Taxes

Nortorf, Germany
Nortorf, a rural town in north Germany's Holstein district near Denmark, is the home of the Markus Stiftung, the charity of the deceased Aldi co-founder Theo Albrecht.
  • Why it matters

    Why it matters

    Current rules might make it easier for Germany’s wealthiest to dodge appropriate taxation.

  • Facts

    Facts

    • Some Social Democrats seek changes to increase inheritance tax revenues.
    • Foundations set up by the founders of Aldi have reignited the tax debate.
    • Most experts say the current model doesn’t make it possible to avoid taxes.
  • Audio

    Audio

  • Pdf

The recent death of Karl Albrecht, co-founder of the German discount grocery chain Aldi, has fired up the debate in the center-left Social Democratic Party (SPD) about the inheritance tax.

“Up to now, the rules have offered the super-rich, in particular, numerous loopholes to avoid appropriate taxation,” said the party’s Joachim Poss.

Thorsten Schäfer-Gümbel, deputy to SPD party chairman Sigmar Gabriel, told Handelsblatt: “We will insist that, in a reform of the inheritance tax, there be a close inspection of the present strategies involving foundations.” He fears foundations serve as a way to avoid inheritance taxes.

The most prosperous members of society cannot be allowed to leave the financing of social programs to employees, craftsmen and the middle class,” he said.

The background for their displeasure: Decades ago, Mr. Albrecht and his brother Theo brought their respective firms Aldi-Süd and Aldi-Nord under the umbrella of foundations.

No inheritance taxes from Aldi’s corporate assets were paid following their deaths.  Theo died four years ago and Karl passed away last month.

“Up to now, the rules have offered the super-rich, in particular, numerous loopholes to avoid appropriate taxation.”

SPD's Joachim Poss

But many tax experts contradict the impression that family foundations set up by business entrepreneurs in Germany serve the purpose of avoiding taxes.

“In principle the German family foundation is not suitable for minimizing taxes,” said Carl-Josef Husken, a tax consultant at Ernst & Young. “Whether the entrepreneur sets up a German foundation or gives his firm directly to his child, that is one and the same with regard to the gift and inheritance tax,” he said. Officials from two state financial ministries told the Handelsblatt they agreed.

When anyone turns over corporate assets to a foundation, an inheritance and gift tax is due just as if he or she had transferred the fortune to heirs. The foundation must pay a substitute inheritance and gift tax every 30 years. The firm itself pays corporate income and business taxes on earnings just like any other limited liability company. Those benefiting from foundations ― most often children and grandchildren ― have to pay taxes on capital returns.

“The entrepreneurs are concerned with guaranteeing their life’s work and preserving their company over the long term,” said Mirko Nagel in explaining the motive for setting up foundations. He advises clients of the Weberbank about successions. Often owners don’t trust their children to lead the firms or they don’t want family controversies to arise in the first place. An entrepreneur can specify exactly how much offspring receive from the company’s earnings and what requirements they must meet.

 

Foundations
More than 50% of German foundations support social and community programs. Source: DPA

 

“Family foundations are subject to the substitute inheritance and gift tax. In this respect, I see no immediate need for action,” said Ralph Brinkhaus, the vice-chairman of the Union (the alliance of the Germany’s two main conservative parties).

The Social Democrats’ Nils Schmid, finance minister of the southern German state of Baden-Württemberg, also doesn’t want to take up arms against foundations. “Family foundations are an instrument for regulating the succession at a company and can guarantee the preservation of a large number of jobs,” he said.

“In principle the German family foundation is not suitable for minimizing taxes.”

Carl-Josef Husken, Tax Consultant with Ernst & Young

Like all companies, however, family foundations also profit from rules limiting the tax liability of corporate assets. The Federal Constitutional Court will decide this autumn whether the rules are too generous. If judges say they are — and the course of the main proceedings in July makes that seem likely ― then they might require changes to the inheritance tax.

Many Social Democrats would like to use such changes to increase inheritance tax revenues. “In the next 10 years, a record amount of wealth will be bequeathed; things can’t stay the way they are, with annual revenues of €4 billion,” said Ralf Stegner, a vice-chairman of Social Democrats. He cites the problem, however, that according to the coalition agreement with the Union, there are not supposed to be increased revenues.

Last week, Social Democratic leader Mr. Gabriel, who is also Germany’s vice chancellor and economy minister, said he opposed all calls for change coming from his party. He told the Bild newspaper: “In the reordering of the inheritance tax, one thing must be avoided above all: a higher taxation rate on the corporate assets of family firms.”

Mr. Schäfer-Gümbel and Mr. Stegner agreed with the formula of tax privileges in return for job preservation. “But we must prohibit tax structuring (taking legal measures to minimize taxes),” said Mr. Stegner. And, in any case, he hoped “the Conservatives will also be able to pass over this bridge.”

Tax structurings occur most frequently in the division between company equity and other assets, according to many tax officials. They said that before an inheritance occurs, larger companies set up several subsidiaries in order to take advantage of the provision that up to 50 percent of company equity can consist of non-productive assets. But ever since the tax loophole “Cash GmbH” was prohibited by legislation a year ago, two thirds of the structurings have disappeared, the officials estimated.

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!