OLG of Düsseldorf: Managing director responsible for orderly payment of social security contributions

http://www.grprainer.com/en/legal-advice/company-law/directors-liability.html In its ruling of September 16, 2014 (I-21 U 38/14), the OLG of Düsseldorf clarified that the managing director of a GmbH (Gesellschaft mit beschränkter Haftung) [German limited liability company] is responsible for the orderly payment of social security contributions.

GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London conclude: One of a GmbH managing director’s tasks is to ensure the orderly payment of social security contributions for employees. If social security contributions are withheld, then the managing director is liable to pay compensation.

The fact that the payment of social security contributions within the company may be organised differently or delegated to employees does not absolve the managing director from this responsibility. This has been confirmed by the ruling of the OLG Düsseldorf (I-21 U 38/14). The Twenty-First Civil Chamber of the OLG clarified that the managing director of a GmbH is still responsible for the orderly payment of social security contributions by virtue of his position within the company and the general competence conferred on him by law if this task has been assigned otherwise. The Court stated that under such circumstances the managing director would still need to fulfil his supervisory obligation. Should evidence emerge suggesting the task is not being carried out correctly, the managing director has to intervene.

This particularly applies in the event of an obvious financial crisis within a company. The OLG Düsseldorf went on to state that the managing director would then be obligated to make sure that payment obligations are met, which would entail him personally examining whether the contributions have in fact been disbursed.

It is especially important in times of crisis that measures be taken to ensure that employee contributions to social security are also paid. If necessary, this would require the deferral of other payments or even a reduction in wages.

The case demonstrates that executive bodies and managing directors alike can easily find themselves subject to personal liability in crisis situations. They are essentially tasked with managing the business for the benefit of the company. If in doing so they breach their obligations, which include, inter alia, ensuring the orderly payment of social security contributions, they may be faced with damages claims arising from within the company (internal liability) as well as those raised by third parties (external liability).

That being said, it is also possible for the managing director’s liability risk to be reduced by way of a contract, which is why lawyers who are experienced in the field of company law ought to be consulted when drafting contracts.


Inheritance tax: Sole heir must personally occupy inherited apartment

http://www.grprainer.com/en/legal-advice/law-of-succession.html Following a ruling of the Fiscal Court of Hessen, an heir to a co-ownership share in an apartment is not spared from inheritance tax if he does not personally occupy the apartment.

GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London conclude: In order for the heir to a property to be exempt from inheritance tax, it is necessary for him to personally occupy the apartment after the death of the testator and for the apartment to be the centre of family life. Even permitting one’s own mother to occupy the apartment free of charge is not sufficient to receive an exemption from inheritance tax. That was the ruling of the Fiscal Court of Hessen dated March 24, 2015 (Az.: 1 K 118/15).

In the case in question, the sole heir raised a claim for exemption from inheritance tax. She became the sole heir following the death of her father because her mother, who had been appointed as heiress in the will, rejected the inheritance. The estate included an apartment which the mother continued to occupy free of charge. The daughter made a claim for tax exemption in her inheritance tax declaration pursuant to sec. 13 para. 1 no. 4 of the Inheritance Tax Act (Erbschaftssteuergesetz) for the fifty per cent co-ownership share in the apartment. She justified this by saying that the apartment continued to be used as the family home by her mother and that the latter also did not have to pay rent, claiming that this represented owner occupancy of the apartment.

The competent tax office did not recognise this as owner occupancy and thus did not grant exemption from inheritance tax. The Fiscal Court of Hessen rejected the claim as well, stating that even if the claimant inherited only “half” of the apartment, exemption from inheritance tax would only have been possible if the apartment were the centre of family life for the heiress. The Court mentioned in its reasoning that regular visits and overnight stays with the mother or waiving rental income were not sufficient for this purpose. An appeal is allowed.

The case is another example of why an estate ought to be very carefully arranged and how the repudiation of an inheritance can give rise to a financial burden for subsequent heirs. Lawyers who are competent in the field of inheritance law can advise on these issues and ensure that the estate, up to a certain amount, is largely spared from tax.


Liability of managers: D&O insurance policies on the increase

http://www.grprainer.com/en/legal-advice/company-law/do-insurance.html Executive boards, supervisory boards and managing directors are living dangerously. If the wrong decisions are made, they may be required to stand good for the loss or damage with their private assets.

GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London – http://www.grprainer.com/en conclude: A company’s executive bodies are liable in the event of negligent mistakes with their private assets for the resulting loss or damage. They are liable not only for their own mistakes but also those of the employees.

More and more companies are taking out special pecuniary damage liability insurance, so-called D&O insurance policies, for their executive personnel because of this financial risk. Die Welt reports that the number of these special third-party liability insurance policies for executive staff is rising. According to the report, the number of reported cases of loss or damage has also increased. There are two main reasons for this: expectations regarding management have risen and there is also an increasing number of intentional legal disputes, resulting e.g. from a breach of compliance guidelines, owing to the many companies conducting business across national borders.

Due to this financial risk, more and more upcoming managerial staff are attaching evermore importance to a D&O (directors and officers) insurance policy. This special kind of third-party liability insurance can cover losses or damages resulting from internal as well as external liability. In the case of smaller businesses, an insurance policy that only covers external liability, that is to say damages claims by third parties, may be sufficient under certain circumstances.

The demands made on executive personnel in companies vary, which is why D&O insurance should be equally flexibly tailored to particular needs. Among the most important aspects that ought to be borne in mind when taking out a policy are the amount of insurance cover, retroactive coverage, run-off cover and the right to choose one’s own lawyer. Given that the policies are taken out by the companies, one ought to pay special attention to aspects pertaining to internal liability, i.e. the claims by the company against its executive bodies. In order to avoid conflicts of interest, the insurance policy should be designed in such a way that it is fair to both sides.

Lawyers who are experienced in the field of company law can carefully examine the policy and enforce claims should legal disputes emerge with the insurer in the event that loss or damage occurs.


Due diligence review before corporate acquisition

http://www.grprainer.com/en/legal-advice/ma/due-diligence.html Many small and medium-sized businesses are set to be faced with a change at the helm of their companies in the coming years. This can also result in the sale of the company.

GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London – http://www.grprainer.com/en conclude: The Frankfurter Rundschau reported on a study by the German bank KfW (Kreditanstalt für Wiederaufbau) [German Reconstruction Loan Corporation] according to which change is in store at the top of around 580,000 small and medium-sized businesses in Germany in the next two years. The study shows that one in every six businesses will be affected by a change.

The preferred option is to pass on the mantle to a family member. According to figures contained in the KfW analysis, one in every five company bosses over the age of 60 is also contemplating an external successor. Since the search for an internal or external successor can prove challenging, one of the consequences will be the sale and acquisition of companies. In the case of company acquisitions or the purchase of shares in a company, a due diligence review plays an important role. Within the scope of this review, the strengths and weaknesses of the object of purchase are analysed with due diligence in order to ascertain a suitable purchase price based on the risk assessment, taking into account all of the factors which are relevant to the transaction.

Important factors in this context may include, for instance, the legal form of the company, the existing contracts with business partners, employment contracts, liabilities, the situation regarding orders, patents, copyrights or the tax implications. These need to be carefully examined and appraised in order to be able to assess the risk of the investment and determine an appropriate purchase price.

At the same time, a due diligence review ought not to be a ready-made solution with respect to which one works through a list of questions. Instead, the specific circumstances pertaining to each transaction must be carefully examined and weighted so as to arrive at a realistic appraisal of the planned transaction. Each investment has to be evaluated according to its own criteria. The scope of a due diligence review can be determined by the buyer and seller.

Corporate acquisitions and the purchase of shares in companies also have legal implications. These need to be taken into account as well. It is therefore advisable when dealing with a due diligence review to bring on board lawyers who are competent in the field of company law.


EU planning tax reforms

http://www.grprainer.com/en/legal-advice/tax-law/international-tax-law.html The European Union wants to change its tax policy. One of its aims is for businesses in future to pay tax on their profits in the state in which they are generated.

GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London – www.grprainer.com/en conclude: There are different systems of taxation in the countries within the European Union (EU). For businesses operating internationally, this means that they have to observe various different rules and laws. At the same time, the different tax systems also offer creative room for manoeuvre. Handelsblatt reported on June 16 that the EU now wishes to set up a “fair business tax regime” within the EU. A corresponding strategy document is available.

The EU’s aim is to prevent businesses from shifting their profits to tax havens within and outside of the EU. Accordingly, tax should in future be paid on profits in the country in which they are generated. Furthermore, the basis for assessing corporation tax shall also be standardised across Europe. Businesses that operate internationally are clearly going to have to brace themselves for changes, including with regard to tax structuring options.

In principle, it is not only businesses but also private individuals who have to be mindful of international tax regulations if they do not live in the country in which they work. In order to maintain an overview of things here and avoid potentially paying too much tax or unknowingly infringing tax laws, private taxpayers as well as businesses can turn to lawyers and tax advisors with a high degree of expertise in the field of international tax law. There are corresponding agreements between many countries that are designed to prevent undue double taxation of income.

The issue of double taxation looms particularly large if income is generated in multiple countries. Which country is allowed to collect the taxes in these instances is regulated by the double taxation treaties in most cases. These deal in particular with income tax, corporation tax, taxes on investment and fiscal codes.

In addition to matters pertaining to taxation, businesses that operate abroad must also bear in mind legal aspects. Ideally, they will receive advice on these issues from one set of experienced lawyers and tax advisors who trustingly work together and also cooperate with foreign law firms.


Contract of inheritance: Clear separation necessary between friendship and the provision of care

http://www.grprainer.com/en/legal-advice/law-of-succession/contract-of-inheritance.htmlOne’s final will can be mandated in a testamentary will or contract of inheritance. Having said that, the legislature has set limits that need to be observed if the final will is to be implemented as intended.

GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London – www.grprainer.com/en conclude: People are frequently faced with care services in the last phase of their lives. However, according to a ruling of the Higher Regional Court of Frankfurt am Main dated May 12, 2015 (Az.: 21 W 67/14), a care provider or its employees cannot be readily appointed as heirs in a contract of inheritance or will.

The HRC of Frankfurt declared the contract of inheritance of a single and childless testatrix void. The woman was taken care of by an outpatient care provider until her death. She developed a friendly relationship with the managing director of the care provider, with joint excursions and lunches regularly taking place. One year prior to her death, the testatrix concluded a notarised contract of inheritance with the managing director, appointing the latter as her sole heir.

The Probate Court initially issued the managing director the certificate of inheritance, but retracted it after the Regional Government Office (Regierungspräsidium) as the supervisory authority had initiated fine proceedings against the managing director for breach of the prohibition in sec. 7 of the Hesse state law concerning care services (Hessisches Gesetz über Betreuungs- und Pflegeleistungen (HGBP)). The woman raised a legal action against this. The HRC dismissed the claim after hearing several witnesses.

The HRC stated in its reasoning that the contract of inheritance was invalid due to an infringement of sec. 7 HGBP. It went on to say that, according to this provision, managers and employees of a care giving organisation are forbidden from allowing themselves to be promised or granted money or benefits-in-kind for care services in addition to their agreed remuneration. This is meant to prevent those dependant on care from being exploited. However, it also stated that an infringement is only constituted if the appointment of heirs is linked to the fulfilment of the care contract, and there is a statutory presumption that needs to be rebutted for this purpose. The claimant was unable to do so in this case, as it was said to be impossible to discern a clear separation between the work-related relationship and the private friendship.

This example demonstrates that it can absolutely be necessary to obtain legal advice in cases involving a contract of inheritance or will. Lawyers who are versed in the field of inheritance law can make sure that the final will is implemented.


Reform of inheritance tax: Finance ministers still in disagreement

http://www.grprainer.com/en/legal-advice/company-law/business-succession.html The only thing that is clear is that inheritance tax needs to be reformed. How it ought to be reformed remains disputed. Even a meeting of the federal and state finance ministers did not deliver a breakthrough.

GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London – www.grprainer.com/en conclude: The Bundesverfassungsgericht (German Federal Constitutional Court) ruled at the end of last year that inheritance tax needs to be reformed because company heirs receive overly favourable treatment compared with private heirs. Inheritance tax must be revised by mid-2016.

Despite the Federal Finance Minister Wolfgang Schäuble announcing a new reform and introducing its key points, the discussion has not ended. Criticism has come from the business community but also from political circles. Schäuble’s plans involve, inter alia, a needs test for family businesses if they wish to be spared having to pay inheritance tax. According to these, this test will apply to succession cases from a value of 20 million euros and above. Moreover, it will be possible for up to half of the private assets of the heirs to figure in here. This threshold is one of the main points of contention. While some deem this threshold to be too low, critics from business and politics consider it to be too high, saying that it would jeopardise the existence of family businesses. On the other hand, it is important for the government to come to an arrangement that is constitutional. It was not even possible for a meeting of the federal and state finance ministers on May 7 to come to an agreement.

The legislature still has about a year to implement the reform. It is evident that company heirs will be faced with cuts, yet it remains unclear how drastic these will be given the Bundesverfassungsgericht’s clarification that it is permissible to treat company heirs favourably. A requirement for this to happen is the retention of jobs over several years. Whether and to what extent this will also apply to larger businesses is, however, still not clear.

Firms that are going to have to make arrangements for businesses succession in the foreseeable future ought to start thinking about this in good time. It is still possible for company heirs to benefit from extensive tax privileges. Even though the reform of inheritance tax has already got off the ground, the transfer of a company should be arranged in a way that is optimal from a tax perspective. Lawyers and tax advisors who are experienced in the field of tax law can support businesses in the process.



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