30 years of private foundation in Austria are a good reason to look at the development of this new legal form — in the context of foundation law as well as in tax law. Ecolex therefore focuses on contributions to foundation and tax law. I myself now have an investigation of 10% of all private foundations listed in the commercial register1 so that we can not only theorize, but also provide the “private foundation” investigation object with facts and figures. The main part of this empirical study, as well as further contributions from Johannes Zollner to incorrect foundation statements and by Michael Petrits on the transfer of hidden reserves in accordance with the VwGH-e of 17.11.2022, will be published in the next issues of ecolex. ecolex 2023/158
RA Univ.-Prof. Dr. Johannes Reich-Rohrwig is a lawyer and partner at CMS Reich-Rohrwig Hainz Rechtsanwälte GmbH, Vienna, and is a member and chairman of several foundation boards.
Until the enactment of the Private Foundations Act, which came into force on September 1, 1993, it was only possible in Austria to establish a foundation under state supervision — and only for charitable purposes2. The Private Foundations Act (PSG) was intended to introduce a new type of foundation also for private-interest (“selfish”) purposes that is not subject to state supervision.
Austria was and is in competition with its legal system with those of other countries, in particular Liechtenstein and Switzerland3, where numerous Austrians had parked their assets in foundations and holding companies. The aim of the PSG was to prevent the further migration of Austrian wealth to neighboring countries and to make Austria an attractive location again. However, the attractiveness lay not so much in the fact of this legal form, but in the tax framework created for it: Because the private foundation now also offered a legal opportunity, the Gift and Inheritance Tax Act in force at the time4 to leave empty and thus escape the considerable taxation of the transfer of assets within and outside the family. In addition, there were initially numerous other tax benefits for private foundations, but these have largely been abolished in the meantime.5 However, the idea that the legislator promotes with a foundation, namely to create intergenerational cohesion of assets and in this way to take precautions against the dismantling of companies or assets that could otherwise occur on the occasion of an inheritance, was usually — hand on heart — less important than the tax advantages of a foundation, especially if the founder quickly brought the company shares into a foundation before selling the company and tax the sales proceeds was received cheaply.
Industrialists, dealers, tradesmen, real estate developers and art patrons have set up private foundations.
A first prominent case was Karl Wlaschek, who as early as 1993 transferred the Billa, Merkur and BIPA retail chains owned by him, initially held from abroad, to the Karl Wlaschek Private Foundation6 before it sold its shares to REWE a few years later. Since then, this private foundation has invested in real estate, including Vienna's inner city palace, through subsidiaries, e.g. AMISOLA Immobilien AG. In the period from 1993 to 2013, Karl Wlaschek issued their foundation deed a total of ten times, their endowment certificate a total of 19 times (!) changed.
Among the numerous private foundations involved in industrial companies, the following may be mentioned: The Herbert Liaunig Private Foundation7, involved in Liaunig Industrieholding AG; the Hilde Umdasch Private Foundation (today: H.U. Private Foundation)8, the Alfred Umdasch Private Foundation9, each holding in Umdasch Group AG (“Doka” construction formwork); the Hermann Greiner Private Foundation with a 49.99% stake in Greiner AG10; the Mitterbauer Private Foundation11 as indirect majority shareholder of MIBA AG; the Glock Private Foundation founded by Ing. Gaston Glock and Helga Glock12; the EMACS private foundation founded by Alfred Heinzel and family13, shares in Laakirchen Papier AG; the Rauch Private Foundation, 100% stake in the Rauch group of companies14 (fruit juices, etc.); the de Krassny Private Foundation15, 99.1% stake in Donau Chemie AG; WWM Private Foundation, 100% stake in Kapsch Holding GmbH16; the Pochtler Private Foundation founded by the Pochtler family17 and the FIPO Private Foundation18, 100% indirect interest in iSi Automotive Austria GmbH19; the Thomas Prinzhorn Private Foundation20 by paper industrialist Thomas Prinzhorn, 100% stake in Prinzhorn Holding GmbH; the Attila Dogudan Private Foundation21, involved in Do & Co AG; the MM Salzburg Private Foundation22, founded by Georg and Friedrich Mayr-Melnhof; the M.T. Private Foundation23, founded by Max, Alexandra and Stanislaus Turnauer with the assistance of “Dorset” Beteiligungs GmbH; the Franz Mayr-Melnhof-Saurau Private Foundation24, founded by Franz and Franz Antonius Mayr-Melnhof-Saurau and the FMMS Foundation (Liechtenstein); the Haselsteiner Family Private Foundation25, founded by Dkfm. Dr. Hans Peter Haselsteiner and family members who are involved in STRABAG SE; the Rhomberg Private Foundation founded by Ing. Walter Heinz Rhomberg and family26; the B & C private foundation27, has an indirect majority stake in Lenzing AG, AMAG Austria Metall AG and Semperit AG Holding. The M.U.S.T. private foundation founded by industrialist Mirko Kovats (A-TEC)28 lapsed into bankruptcy in 2022. The GAMBIT Private Foundation established in 2000 by former BAWAG Director General Helmut Elsner together with his wife29 It lapsed into bankruptcy in 2017 and was cancelled in 2020.
Agricultural and forestry businesses, castles and palaces, for example, own the Esterhazy Private Foundation30, the F.E. Eisenstadt Family Private Foundation31, the Berger Waldenegg Private Foundation32, the Weinberger Private Foundation33, the Brenner-Felsach Private Foundation34, the Esterhazy Family Private Foundation35 the Czerweny-Arland Private Foundation with the Haller Castle in Graz36, as well as the Flick Private Foundation37. The Renaissance castle of Greinburg in Grein an der Donau belongs to the “Foundation of the Duke of Saxe-Coburg and Gotha Family” based in Coburg. In December 1988, Prince Karl Johannes von Schwarzenberg brought Murau Castle and its forest holdings in Murau, Bundschuh, Mitterberg, Rammingstein and many others into the “Princely Schwarzenberg Family Foundation” based in Vaduz, founded under Liechtenstein law.
In the area of trade, for example, the Fürnkranz family is a private foundation38, the Senator Karl Vitaly Private Foundation39 and the Sepp Michelfeit Private Foundation40 to name whose subsidiaries each had to stop operating their fashion houses (Fürnkranz and Carl Tlapa) or sell the furniture store and sold the properties. The Drexel family, which is indirectly involved in SPAR Österreichische Warenhandels AG, has contributed their investments to three foundations, namely the LD Private Foundation41, the JHD Private Foundation42 and the BGU Private Foundation43, Theodor Poppmeier in the THP Private Foundation44, Marie Magdalene Landgraf and family members in the Landgraf Family Private Foundation45 and Johann Urban and his children in the Urban & Urban Private Foundation46.
The real estate category includes, for example, the Detlev Neudeck Private Foundation founded by Detlev Neudeck47; the SUPERNOVA private foundation founded by Frank Albert and his minor children48; the Soravia Private Foundation49 as well as the successor foundations Erwin Soravia Private Foundation founded by their two founders, including family members and each with the assistance of a Liechtenstein foundation as a co-founder50 and Hanno Soravia Private Foundation51; the POK Pühringer Private Foundation52, which has a 100% stake in Palais Coburg in Vienna; the Lugner-Söhne Private Foundation53, which has a 90% stake in Lugner City GmbH; the Benko Family Foundation founded by Rene and Ingeborg Benko54; the Gaston and Kathrin Glock Private Foundation55.
Employee or employee participation foundations include56: The AMAG Workers Private Foundation57, First employee participation private foundation58, Vienna Airport Employee Participation Private Foundation59, voestalpine employee participation private foundation60 as well as the BKS employee participation private foundation61. STRABAG SE in turn has the “STRABAG Labour and Social Fund” private foundation62 founded.
Private art foundations include, for example, the Ernst Fuchs Non-Profit Private Foundation63; the Leopold Museum Private Foundation64; the Hundertwasser Foundation charitable private foundation65; the Herbert Liaunig Private Foundation as sole shareholder of HL Museumsverwaltung GmbH66; the Franz West Private Foundation67; the Hainz Collection Private Foundation68; the Essl Collection charitable private foundation69; the Essl Foundation MGE charitable private foundation70. However, the Essl Collection has met the fate from which even private foundations are not immune: As part of the insolvency-related liquidation of bauMax AG in 2011, a significant part of the Essl Collection had to be transferred to a company founded with Hans Peter Haselsteiner and was made available to ALBERTINA in Vienna on permanent loan. The Essl Museum in Klosterneuburg closed its exhibition on July 1, 2016.
36 savings banks have made use of the option of conversion into a private foundation (§ 27a PSG), just as two insurance associations were converted into private foundations UNIQA Versicherungsverein private foundation71, Collegiality Insurance Association Private Foundation72(SECTION 66 OF THE VAG 2016).
8.5% of Austrian private foundations are charitable according to their purpose in accordance with the foundation certificate; however, only 77 foundations (around 2.8%) explicitly describe themselves as charitable organizations. These include: The Austrian Architecture Foundation charitable private foundation73; the Vorarlberg State Center for the Hearing Impaired Charitable Private Foundation74; the Salzburg Foundation of the American Austrian Foundation charitable private foundation75; the FOUR PAWS — Animal Welfare Foundation — charitable private foundation76; the Carinthia University of Applied Sciences — charitable private foundation77; the CS Caritas Socialis Private Foundation78; the RED NOSE Clowndoctors International — charitable private foundation79; the neighbor in need charitable private foundation80; the European Forum Alpbach charitable private foundation81; the Monica and Paul Lester charitable private foundation82; the St. Vincent charitable private foundation of the Sisters of Charity83; the youth a world charitable private foundation 84; the Franz Klammer Foundation Private Foundation85 (with the purpose of supporting people who have been physically, mentally or emotionally injured) as well as some of the art foundations mentioned above.
Initially, there was a real boom in the number of foundations: In spring 1999, the number of foundations exceeded 1,000 for the first time; in the following two years — up to the end of 2000 — the number of foundations doubled to 2,189. After that, interest in foundations waned, which is reflected in a smaller number of new start-ups: At the end of 2001, we held 2,328, at the end of 2002 at 2,468, at the end of 2003 at 2,626, at the end of 2004 at 2,750, at the end of 2005 at 2,897, at the end of 2006 at 2,990 private foundations86.
In 2007, the number of private foundations (PS) in Austria exceeded 3,000 for the first time. PS reached its peak in 2011 with a total of 3,313 foundations87. Since then, the number of private foundations in Austria has been steadily declining; now (as of 7.2.2023) we hold 2,985 foundations88.
The reasons for the boom and decline in the number of foundations are manifold:
The initial popularity of the private foundation and thus the reason for the initial boom up to 2000 is largely based on the tax advantages of private foundations; however, the legislator has largely reversed these in the meantime89. In addition, there was the prestige that a founder who brought his “life's work” — usually a company or a corporation, an art collection or other assets — to a foundation sought to achieve in society: It was almost part of the “good form” to own an “own” foundation. As a result, the founder was able to set himself a memorial during his lifetime so that his work still had to be honored by later generations.
What are the reasons for the decline in the number of foundations?
“The initial euphoria often gave way to disillusionment”
With the loss of tax benefits, the attractiveness of foundations declined. Now, as a result of the WieReG, the anonymity of beneficiaries, who must now be disclosed in the Register of Beneficial Owners, has also been lost90.
However, the founders and their advisors also increasingly realized that the private foundation is a complicated vehicle. The founders had to realize that when the foundation was established, they were relinquishing their assets and that these were now managed independently or largely independently by the foundation board; furthermore, that the foundation board is not obliged to “dance to the tune of the beneficiaries.” In addition, the courts have declared some legal practices that founders had initially reserved in relation to the Board of Directors in the foundation certificates to be ineffective: For example, the right to dismiss the foundation board at any time91, the right to issue instructions to the Board of Trustees92 or the binding of the foundation's board to far-reaching approval requirements from the founder or an advisory board, as we know them in stock corporation law in the relationship between the supervisory board and the management board.93 Furthermore, the courts have denied an independent right of inspection of books by founders if they are not beneficiaries — unless this was set out in the foundation deed —94. Not only the founders, but also their advisors, who had written such foundation and additional certificates, were often surprised by the restriction of private autonomy enshrined in Section 9 (2) PSG as a result of case law. The courts have imposed massive restrictions on foundation governance on founders and their successors (beneficiaries). For example, founders and beneficiaries must watch largely powerlessly as a board of directors, possibly without commitment and without specific expertise, perhaps focused on maximizing their own management fee, manages the foundation's assets correctly but not very successfully and completely refuses to act as founders and beneficiaries deem appropriate, for example by giving effective successors from the founder family management positions in companies, that belong to the foundation denied95.
Even the significant strengthening of the governance of a foundation advisory board vis-à-vis the foundation board as a result of the 2011 amendment96 was misunderstood by case law and case law stubbornly continued its line of strengthening the Board of Trustees97.
In reality, it is the “control deficit” sought by case law, albeit in relation to the Board of Directors, that today scares off any reasonable person or makes it consider at least three times whether an Austrian private foundation is really the right instrument for succession planning, when — if you want to elect a foundation — there are more practicable models in the neighboring states of Liechtenstein and Switzerland98.
Other reasons for the decline in the number of private foundations include the costs associated with each foundation, in particular the board of directors, accounting and tax advice as well as the foundation auditor, and possibly also the supervisory board:
If the foundation only has “smaller” assets, the burden on the foundation is often disproportionately high in relation to its income or compared to the costs if the founder had retained and managed the assets himself. The cost burden therefore makes the foundation unattractive in many cases.
Insofar as founders had reserved the right to revoke the foundation in the foundation deed, founders made use of this right of withdrawal in a number of cases, unless the unpleasant taxation situation — the so-called “mousetrap effect”99 — makes the revocation of the foundation even more expensive than if the founder — who was now virtually “trapped” in the legal form of the foundation — allows the foundation to exist permanently.
In addition to these cases of revocation of the private foundation, the reason for the decline in the number of private foundations is that 33 private foundations have gone bankrupt since the new legal form came into existence and rejected 10 insolvency applications due to lack of cost-covering assets100 and they were deleted as having no assets101. Further foundations were liquidated due to the lapse of time or dissolved by the foundation board due to the inaccessibility of the purpose of the foundation102. Of the 4,075 private foundations founded since 1993, a total of 4,075 private foundations have been103 already (as of 7.2.2023) 1,090 foundations — i.e. a total of more than a quarter (!) of all foundations — liquidated and deleted from the commercial register. As of 7.2.2023, we therefore only have 2,985 existing private foundations, 190 of which have been dissolved and are in liquidation.
Overall, the legal form of a private foundation proves complicated in practice — both in terms of foundation and tax law issues. The authors of the foundation certificates are often overwhelmed when it comes to the appropriate drafting and the linguistically unambiguous texting of the foundation certificates or have made regulations in the foundation certificate which should actually have been regulated in the foundation deed and are therefore ineffective in the additional deed104.
And founders who are not legally trained often understand and understand the content, the regulatory mechanisms and — what the foundation governance set out in foundation certificates105 does not affect — their own opportunities for influence and participation and those of future generations.
On a case-by-case basis — if there are two or more donors — some of them, who select the advisor preparing the foundation certificates, also attempt to legally override the co-founders by writing the documents in a way that is difficult to understand.
For example, the case law has assumed abuse of rights when a co-founder abuses the right of amendment granted to him in the foundation deed to withdraw the benefit of the other co-founder — who had contributed substantially to the foundation's assets —106. Conversely, case law allowed the Board of Trustees, at its discretion, to withdraw the benefit of a co-founder who had contributed half of a very considerable foundation's assets107; this was succinctly justified by the broad discretion of the Foundation Board. ME should have correctly reviewed the exercise of discretion for its factual justification and for misuse of discretion. I feel it is necessary, derived from the constitutional principle of equality, to examine the exercise of law — in this case by the foundation board — for its factual justification as to whether the principle of equal treatment108 and the prohibition of discrimination109 be complied with, the principle of least means, the principle of least burden110, the proportionality of means and end111, appropriate consideration for the interests of the co-shareholders or, in the context of foundation law, the beneficiaries112, and the duty of loyalty, both of the institutions towards the beneficial owners (the beneficiaries) and between them. In particular, the character as a family foundation with the purpose of care should require particular consideration here113.
In some cases, foundation certificates make supposedly appropriate regulations in the event of incapacity or death of a founder or the minor age of a beneficiary for reasons of practicability, which are in fact nonsensical because they make it possible to discriminate against the then defenceless care-ordered founder or minor beneficiary in the future.
As is often the case, the personal relationships between the founder and the beneficiaries appointed by them may change: for example if personal relationships deteriorate, “gross ingratitude” or if their relatives behave in violation of loyalty and interest. In such cases, the founder would deprive these relatives of the benefit and/or at least the participation rights granted to them in the foundation deed, e.g. as members of an advisory board. In this respect, the reservation of the right of amendment proves appropriate. But what applies if beneficiaries only start this behavior after the death of the founder (s) or would even be indebted to the founder for special reasons? There are rarely any regulations on this in foundation certificates.
From the point of view of foundation boards, the question often also arises as to what types of transactions and investments they may now carry out without breaching their duty of care if Investment guidelines missing from the foundation deed. In some cases, foundation certificates speak explicitly of risk diversification, investment in apartment buildings or in collateral securities. Due to low interest rates, the latter have led to a largely lack of income for many foundations in recent years. The obligation to invest money in interest holders has resulted in 13% of all interest house purchases in Vienna being made by private foundations or their real estate subsidiaries in recent years114.
In many cases, the foundation deed mentions as the purpose of the foundation the “preservation” of a named company, namely the one brought in by the founder. If the foundation now owns a company or group, it is advisable that the foundation deed — in order to be open to future developments — also allows the (partial) sale or addition of further shareholders (strategic partners), at least when economically necessary or with the consent of an advisory board consisting of beneficiaries.
However, there may also be the obvious question (which is, however, very rarely regulated in foundation certificates) as to whether the foundation board may grant unsecured loans or order collateral for members of the founder family from the foundation's assets, for example if they found a company. This and, more generally, the problem of concealed contributions to beneficiaries made by the Foundation or its subsidiaries and violate the prohibition of deposit refunds, can also arise in private foundations and also entails potential liability for the Board of Directors of the Foundation115.
The provision, often made for reasons of preventing access to creditors, that beneficiaries are not entitled to contributions from the private foundation proves to be a boomerang: The beneficiaries are then dependent on the goodwill of the foundation board and become economically dependent on the foundation board, although as economic beneficiaries they should actually receive at least adequate payments from the foundation.
In some constellations, the private foundation certainly has its right. In other cases, however, it will be better for the friction-free cooperation of the next generations to provide for an asset separation with shared assets for each child116. Or at least expressly permit the establishment of sub-foundations in the foundation deed in order to enable the real division (division) of the foundation's assets among descendants in the future117.
The biggest problem with properly regulating foundation governance — particularly in family foundations — is that the future cannot be even remotely predicted. This applies both to the Foundation's environment, such as the economy in Europe or in the world, the competitive environment, new technologies, new products, war and peace or international trade wars. All of this can massively affect the future profitability and continued existence of the companies belonging to the foundation or their assets.
However, the lack of predictability of the future interests of those interested in the Foundation and the (human) relationship between the founders and their successors (beneficiaries) are just as important. Depending on whether the founder's children/grandchildren or great-grandchildren are friendly/family-oriented towards each other and “pull in the same direction” both humanly and economically, the regulations which give them stronger legal status in the foundation will be more appropriate than if their disputes threaten to paralyze the foundation board through too much participation.
In order to ensure that family foundations manage the foundation's assets and the companies belonging to the foundation in a like-minded and interest-based manner, it is advisable to take measures to strengthen family cohesion. This can consist of the preparation of a “family constitution” and institutional measures by current and future beneficiaries, for example by preparing young people, the future beneficiaries, in a “kids academy” for the entrepreneurial challenges of the company/group belonging to the foundation, as well as regular information events in which the foundation board/managing directors of group companies report proactively to the beneficiaries118. The actual purpose of drawing up the family constitution is actually not so much in the text that the younger beneficiaries bring together as a result of their joint effort — these texts are often somewhat weak, indiscriminate and do not take sufficient account of future developments — but in the sense of community that emerges in the joint preparatory meetings, which leads to recognition:
At the same time, these statements also make it clear that the duration of the foundation should be well considered: Should the foundation actually exist for 100, 200 or 300 years or forever? The experiences from companies that are handed over to the fourth or fifth generation are not too positive: The interests of those involved then diverge too much. The forces are too centrifugal here. And many of the companies disappear from the market after a few decades, are bought out by others or go under.
When you discuss this question with donors — and this is certainly what a consultant should do when setting up the foundation — two schools of thought emerge: The founders think — unrealistically in my opinion — that their life's work would last forever. The other founders understand the likely developments and recognize that nothing created by humans will last forever. The foundation should therefore not be made obligated to maintain a certain minimum amount of assets, but should explicitly regulate that the purpose of the foundation's supply should prevail and that the substance of the foundation may also be attacked in order to fulfill this purpose.
“Money (= wealth) is not an end in itself, but should serve people, the beneficiaries, and not vice versa. ”
If the purpose of the pension prevails, the law also naturally limits the duration of the foundation to 100 years119, unless the final beneficiaries unanimously decide to continue the Foundation at that time.
Although the use of the legal form of a private foundation has resulted in high tax advantages in many cases, the founders should keep an eye on and prioritize the well-being of their descendants. It is about humanly correct behavior, which, in my opinion, is more important than just being “guided by vile mammon” (= tax savings) and being a servant of money, not taking into account the actual needs of one's own children and future generations.
“Succession planning certainly includes the wealthy person having discussions with his children and taking their individual interests and preferences into account, instead of tying up his family members and also their children's children for decades or centuries in a foundation structure and handing over the assets to external management of the assets. ”
The cohesion of assets in the foundation and the creation of sufficient freedom and assets for the children's own disposal do not have to be a contradiction:
In most cases, it is certainly possible to withhold parts of the assets, i.e. not to contribute them to the foundation, or to get them out of the foundation into privacy through donations, even if this is associated with taxes.
If you have the best interests of your own descendants in mind, it should be clear that everyone — including your own children — wants to lead a self-determined life in which they do not have to constantly discuss, coordinate or come to terms with others — be it the foundation board or the other beneficiaries.
Anyone who has attended the tiring meetings on foundation advisory boards or beneficiary meetings knows what I'm talking about.
In practice, there is a high level of dissatisfaction with private foundations122: Around half of the foundations have this dissatisfaction, and half of them (i.e. around 25% to 30%) even have real conflicts:
The dissatisfaction results, on the one hand, from the fact that founders have often failed to withhold private assets and transfer them to the children for their own life and disposition. In this way, the management of foundation assets — whether all or (with massive unequal treatment) only individual children may use foundation assets — takes on particular importance. In addition, the founder's descendants feel permanently incapacitated and patronized, as it is not they who are allowed to manage the foundation's assets, but a (in most cases quite) disinterested board of directors. It is obvious that this can have structural disadvantages for companies owned by the Foundation in the medium and long term. In addition, the prevention of the administration of the foundation by beneficiaries leads them to a feeling of powerlessness and of being at the mercy of a board of directors “sitting on the high horse”, which sits on and manages the money that the beneficiaries would often urgently need to satisfy elementary living needs, such as housing, starting a home or training.
“Foundation law has the effect that generations of descendants of entrepreneurs are virtually economically incapacitated and prevented from managing the foundation's assets. ”
In my opinion, the reform of private foundation law is therefore urgently needed; Paul Rizzi outlines these reform requirements123 as did Heinrich Weninger, Vice President of the Austrian Foundation Association, in a trend interview124 very excellent.
quotes:
“The framework conditions for foundations and founders have developed massively disadvantaged as a result of the fickle of the tax legislator and a surprising and excessive case law. The next touchstone will be the discussion about the introduction of a wealth tax or an inheritance tax equivalent for foundations. ”
%20(1).avif)