Reinvesting a private foundation share sale proceeds: Twelve-month reserve and acquisition costs

Section 13(4) KStG applies where a share in a corporation that was not held as business property is sold. The private foundation or, in the case of a gratuitous acquisition, its predecessor must have held at least a 1 percent interest in that share within the previous five years.

If these conditions are met, the hidden reserves realised may be deducted from the acquisition costs of a shareholding in a corporation acquired in the calendar year of the sale. The acquired shareholding must exceed 10 percent.

The rule changes the tax recording of the investment. It does not replace the review of the sale price or the decision whether the new shareholding fits the foundation purpose and careful asset management.

The first review concerns the share sold. It must have been held outside business property. The minimum 1 percent holding must have existed within the previous five years. If the foundation acquired the share gratuitously, the predecessor's holding may be relevant.

For the replacement acquisition, the acquisition event and the percentage are decisive. The statute refers to a share in a corporation acquired in the calendar year of the sale that exceeds 10 percent. A smaller purchase therefore does not by itself permit a transfer of hidden reserves.

The sale of real estate is a different legal question from the tax transfer of hidden reserves from a corporate shareholding. The article on property sales by a private foundation deals with the resolution, valuation and completion of that type of transaction.

Before deciding, the sale date, acquisition date, percentage and type of the acquired share should be recorded in one overview. This makes the calendar-year and percentage tests traceable.

Section 13(4)(2) KStG defines hidden reserves as the difference between acquisition costs and the sale proceeds. The acquisition cost and proceeds of the share sold must therefore be identified first.

If hidden reserves are transferred to the new shareholding, they reduce its acquisition costs. The reduced acquisition costs must be recorded. The reserve therefore remains part of the tax records through the new shareholding.

A simplified example shows the calculation. If the acquisition costs of the share sold are 100 and the sale proceeds are 160, the hidden reserves amount to 60. If an eligible new shareholding is acquired for 200 and the full amount is transferred, acquisition costs of 140 are recorded for that shareholding. The actual accounting must reflect the documents and the specific tax treatment.

The board should keep the calculation with the holding evidence, purchase agreement and accounting logic. A later estimate makes it harder to show which amount was transferred to which shareholding.

If no transfer of hidden reserves takes place in the calendar year of realisation, a tax-free amount may be recorded. This creates a transition position for a later acquisition, but it does not remove the other requirements of section 13(4) KStG.

The transfer must take place within twelve months from the sale of the shareholding. The starting point is therefore the specific sale date. The sale date and acquisition date should be clear from the documents.

If the tax-free amount is not transferred within that period, it must be taxed under section 22(2) KStG. The foundation should therefore include the period in its resolution and tax planning from the time of the sale.

The calendar-year rule and the twelve-month period have different functions. A purchase in the same calendar year concerns an immediate transfer. If no such purchase takes place, the reserve may be transferred within twelve months. Neither date should be inferred from the year-end accounts alone.

Section 13(4)(1) KStG excludes the acquisition of existing shares from a corporation in which the private foundation, the founder or a beneficiary is alone or jointly involved, directly or indirectly, at 20 percent or more.

The exclusion concerns a specific seller and ownership structure. It is not enough to inspect the foundation's holding alone. The founder's and a beneficiary's direct or indirect interests must also be included in the ownership chain.

The statutory wording uses 20 percent or more as the threshold. The review must therefore establish whether the interests exist separately or jointly and whether the transaction concerns existing shares from the corporation in question.

If the exclusion applies, the acquisition cannot be treated as the eligible target transaction for the transfer. The other requirements still have to be assessed independently.

The foundation board needs a complete chain of documents. This includes the original acquisition or gratuitous transfer, the percentage held, evidence of ownership during the previous five years and the agreement for the sale.

For the new shareholding, the file should state the purchase agreement, acquisition date, exact percentage, target company and whether existing shares are acquired. The direct and indirect interests of the foundation, founder and beneficiaries in the seller corporation must also be established.

The calculation should separately show acquisition costs, sale proceeds, hidden reserves, the transferred amount and the reduced acquisition costs. The evidence account must correspond with the accounting records and the foundation board's resolutions.

If the foundation deed is to be amended, that is a separate foundation-law matter. The article on the amendment reservation in the foundation deed deals with exercising such a reservation and does not replace the tax review of the shareholding.