Only a few of them are very large
The financial resources of incorporated foundations – of which we have approximately 20,000 in Germany – vary largely. Far from all of them are large: every fourth foundation holds assets of 100,000 euros or less. The majority (45.9% of all foundations) have between 100,000 and 1 million euros available. A good 4.5% have foundation assets of up to 100 million euros, only 0.8% can top that. As you can see, foundations are attractive even for smaller players.
Charitable and non-profit
It is with charity in mind that most German foundations are operated – a whopping 95% have declared their non-profit status. That means that many founders are entrepreneurs who set up foundations to "give back to society".
Many foundations aim to further science, often in the form of charitable foundations with no operational activities of their own. Well known examples are foundations in the art and music scene, which are often established by entrepreneurial families. Many foundations also focus on providing support to the home region of the founder.
Shaping your corporate culture
Foundations are also interesting from a business point of view. They can be used to realise many aims and objectives of the company, even commercial purposes – in that case, however, the company will not be able to take advantage of the associated tax benefits. Through foundations, facilities are established that focus on their employees. Centres that offer recreational activities are a good example here. Sport offerings immediately come to mind, but other activities such as hiking and mountaineering are also popular.
It is more and more common for companies to set up foundations as an initiative to pursue charitable goals – sometimes even in cooperation with the staff. Nature conservation is another hot topic since Germans in general are very nature-loving people. Employees have an opportunity here to make significant personal contributions and this is becoming increasingly important in today's corporate world: involvement strengthens the identification of the workforce with their company.
Some companies strive to attach a deeper meaning to the experience of identity among staff through their foundations – by shifting from "we are a community of commercial interests" to "we are a community of values". Foundations that focus on hot social topics are particularly helpful for strengthening this idealistic type of community building. "Refugee Aid", for example, is a pressing issue.
First choice for long-term solutions
The earliest foundation, which does not exist anymore but is still well-known, was Plato's legendary academy in Athens. It stayed alive well into the sixth century A.D. – for a little over 900 years. This is topped by the Bavarian Bürgerspital foundation in Wemding, which has been in existence for exactly 1,086 years. It is one of about 250 foundations in Germany which are older than 500 years and still remain true to their original purpose.
This longevity is a distinctive characteristic of foundations; no other organisation form is more likely to overcome difficult times without compromising its spirit and purpose.
Foundations as a secure base for future business development
Due to the high level of stability offered by foundations, legally transferring company ownership into a foundation presents an interesting option – especially in the case of large, branched out families and circles of owners. When it comes to strategic consistency in corporate planning, foundations are among the most effective solutions. Divergent views among family members no longer threaten the further business development of the company. In addition, setting up a foundation can be financially attractive for all members of the owner family as corporate foundations are allowed to distribute earnings in the amount specified in the foundations' statutes and as agreed upon by their Governing Boards. The more consistently the company's guiding principle is followed, the better the profit potential and the larger the potential profit distribution. The price to be paid for this is that the family has to transfer their voting rights to the foundation's restricted management team at the time of the foundation's formation. In exchange, family members can, for example, receive a yearly pension, the amount of which is based on certain criteria, in particular the profit situation.
Disputes over corporate strategy and corporate development among family members become less of an issue, and other disruptions, such as family policy-related tactics or the division of the family into competing camps, lose their breeding ground. As you can see, foundations even contribute to preserving family peace.
The future of corporate foundations
In Germany, foundations that are set up for asset management purposes are not very common yet. But compared to other countries, Germany is the exception here. In Austria, for example, less than 10% of all foundations are non-profit. Will this difference between the two German-speaking nations remain?
Approximately 2.6 trillion euros will be inherited in Germany in the next decade. The majority of foundations are set up by the bequeathers, not the recipients of the estate. It is likely, however, that the number of foundations that are established to safeguard assets and preserve family peace will increase significantly.
Commentary by Stefan Herzer
Almost 200,000 large and small companies are audited each year
From the Finance Minister's point of view, an audit is an extremely effective instrument which is used intensively. Approximately 8 million businesses are registered in the relevant register at the local tax offices. Exactly 2.4% of all taxable businesses were audited in 2014 – almost 200,000 companies. Of these, 42,300 so-called large-sized corporations (1 out of 5) were put under the microscope by auditors.
Four-fifths of back payments owed for taxes and interest can be attributed to large-sized corporations. In line with the definition used by the tax offices, these include manufacturing enterprises bringing in revenues of just 4.3 million euros per year (or more). Statistically speaking, they are thrown into the same category as global players.
Success: 1.3 million euros per auditor
According to the ruling of the Federal Court of Finance of 2 October 1991 (BSTBl I p. 220),"tax audits", which company audits are a part of, "primarily serve to ensure fair taxation via the just enforcement of tax laws". This idealistic approach deserves respect.
However, as the former director of a Company Audit department of the Free State of Bavaria, I am very familiar with the other side of the coin: as a result of the above-mentioned investigations, a staggering 17.9 billion euros were received by the federal tax authorities in 2014. 13,500 often highly motivated auditors make their rounds on behalf of the tax authorities. On average, each auditor collects more than 1.3 million euros per year for their department. Some more, some less: competition is a motivating factor.
The fact that a complete stranger gets access to internal business information as well as private matters does not go unnoticed, and the threat of criminal proceedings causes even more concern. Auditors are very aware of this. They frequently point out potential consequences under criminal tax law brought about by audit findings to taxpayers. They also like to emphasise the possibility of criminal proceedings against the company and/or its officers. These tactics can definitely lead to additional tax income.
To put pressure on companies and individuals within the framework of what is legally and ethically appropriate is completely permissible and should not reflect negatively on the auditor. However, the parties involved must be prepared for the gruff methods used by some auditors.
Fines for tax offences are on the rise
While the majority of criminal tax proceedings are not initiated based on audit findings, the number of those that are is growing. In 2014, about 90,000 criminal tax proceedings were initiated and concluded. Approximately 18% of these resulted in a penalty order or were handed over to the prosecution.
Fines imposed in connection with tax offences are also a sign of stricter sanctions against offenders. Up until 2011, fines and monetary penalties collected, including monies paid in accordance with Section 153a of the Code of Criminal Procedure (Strafprozessordnung, StPO), amounted to somewhere between 60 and 70 million euros per year. Since 2012, when tax authorities collected a record 120 million euros in fines, the 100-million-euro mark is regularly reached or exceeded.
While the total amount of fines and penalties received is more than 30% higher than it was before 2012, the number of prison sentences imposed on tax offenders actually decreased after 2009. The seriousness of tax law violations has not increased, however, a larger number of offences are prosecuted. These days, authorities are also going after the little guys, not just the big corporations. As a result, more and more companies and private individuals are on the tax authorities' radar screens.
Security – competent and professional support throughout the entire process
The line between fiscal relevance and criminal tax law relevance of audit findings is not clearly drawn. Auditors now pay more attention to this indifference than they used to. Competent and professional support throughout the entire audit process is therefore recommended – right from the start, when the audit is first announced by the authorities.
Commentary by Dr. Andreas Hofner
Satisfactory profit levels
Among other things, it is quite remarkable that the majority of SMEs consistently improves their sustainability and profitability. With perseverance and tenacity. Returns on sales were weak at times in the past but took a turn for the better a few years ago.
80% of SMEs report a good or satisfactory profit situation; one fifth of them is in the problematic range, with returns on sales below 1%. However, more than 15% of SMEs achieve returns on sales of 16.3% or more.
The average return of 7% is slightly below the previous year, but still higher than that of the 110 largest listed stock corporations who achieved a margin of 6.3%.
A sustainable future through targeted professionalisation
Our experiences in the fields of business consultancy and auditing are consistent with the results of the DSGV study. However, the efficient management of business development presents a significant challenge, not only today, but even more so in the future.
Thanks to globalisation, the effects of the global marketplace can be felt even in a sleepy village store. This means that the products of local companies suddenly are in direct competition with products from large international corporations. Things are no different in the service sector: just take a look at Amazon and local book shops.
For SMEs and the mid-sized sector this development means, on the one hand, that consistent professionalisation is key. However, on the other hand, it would be a major mistake to blindly copy the ways larger companies do business. Small companies have to do without most of what large companies can afford thanks to economies of scale. In these cases, the key question always is: What is the best plan of action? What can we do without? This is where entrepreneurial cleverness comes to light, sometimes even genius. It helps to be a genius, but it certainly is not required.
Equity ratio and corporate independence
Certain aspects of contemporary professionalism in SMEs pretty much apply across the board, as they are independent of the market and the strategy of the respective company.
For example: if you have an adequate supply of capital, you sleep better at night and thus are probably more productive. Also, you can create long-term, sustainable strategies, which in turn allow you to identify solutions in a timely and reliable manner and avoid costly mishaps. The level of equity available therefore plays a key role in the corporate management of a company.
Limited equity capital is the Achilles' heel of SMEs, however, it is a noticeable trend that many of them are consistently working on improving their equity position. According to DSGV expert Sebastian Kral, SMEs have increased their equity ratio from 3% at the turn of the millennium to currently 25.5%. Various indicators suggest that SMEs will continue on their course to corporate independence. Entrepreneurs bank on long-term strategies. This gives us cause for optimism for the future of SMEs
Planning and controlling
Just as important, however, is ensuring transparency in all matters that may have an impact on the cash flow and profitability of the company. In this area, some SMEs have not kept up with the enormous progress made by larger companies, especially since the 1990s. These companies often underestimate the great opportunities offered by modern planning, controlling and monitoring systems. Having a precise overview of where and when costs arise would allow them to make concrete improvements – very efficiently and right away, when it matters most. Where complete cost transparency is lacking, individual errors may turn into undesirable developments which require more widespread solutions in the future. When it comes to the quality of planning and mapping company processes in numbers, forward-looking medium-sized businesses must be at the same level as large corporations.
Broadening the sales horizon
Nowadays, the systematic expansion of the sales horizon is also an important topic for SMEs. Higher sales mean enhanced profitability. For the mid-sized sector this is a critical issue since expanding the sales horizon also often entails a geographical expansion of the sales market and that may require the following: an export offensive.
For local providers, export activities are typically limited to nearby regions or states in the beginning. How can this best be achieved? The most efficient solution for many companies is the Internet.
In the consumer goods area, foreign transactions can be carried out completely virtually, while on-site activities are still required in many cases in the business-to-business sector, in particular in the manufacturing industry. However, the development of new markets can be greatly facilitated by partners and outsourcing solutions. Hiring permanent staff with international experience, contacts abroad and a passion for other cultures can be somewhat time consuming, but is critical from a strategic perspective.
Corporate culture motivates employees
A critical element for medium-sized businesses in many cases is the corporate culture. Employees who strongly identify with their company usually work more diligently, quickly, and more creatively than employees who have an ambivalent relationship with their employer. Medium-sized enterprises must maintain lean structures. The high flexibility and efficiency of motivated employees are the secret to the prowess of medium-sized companies.
Please note: SME and the mid-sized sector
There is no binding definition for the German term "Mittelstand" (mid-sized sector). The term primarily refers to the corporate philosophy and certain qualitative characteristics, e.g., the fact that assets, company management and corporate liability are in the hands of a single person, a family or an interconnected group of people.
The European Union bases its definition on the American terminology; the term "Mittelstand" in the German sense does not really exist there. Therefore, the EU adapted the term "SME/Small- and Medium-Sized Enterprises" – "KMU/Kleine und Mittelgroße Unternehmen" in German – for which it uses the 50/250 rule as the definitional upper limit: a maximum of 50 million euros in annual turnover and a maximum of 250 employees.
The Institut für Mittelstandsforschung (an entrepreneurial research institute) in Bonn uses the same turnover threshold but limits employees to 500.
When talking about medium-sized businesses and the mid-sized sector, Acconsis uses the definition of the Kreditanstalt für Wiederaufbau, KfW (a German government-owned development bank): the world's largest national development bank limits medium-sized businesses to an annual turnover of 500 million euros and a maximum of 500 employees – ten times and two times, respectively, the upper limit of the EU values.
The tax offices, however, use a completely different definition for their corporate registers. According to them, trade companies with an annual turnover of at least 7.3 million euros and manufacturing enterprises with an annual turnover of just 4.3 million euros are considered "large companies".
Commentary by Wolfgang Stamnitz