Trust agreement, trustee under german law
Fiduciary participation in german companies
Contract design, formal requirements, straw man liability, transparency register, etc. in Germany
By means of a fiduciary relationship, it is possible to give a person an economic interest in a company or to transfer an economic interest in a company to that person without that person formally becoming a shareholder. This economically involved person is called trustor (Treugeber) in german practice. The trustor receives the shareholding in trust from the formal shareholder, and the trustee receives the shareholding in trust.
In the external relationship, the trustee (german: Treuhänder) acts as a shareholder, while in the internal relationship he represents the interests of the settlor. Such "Strohmanngeschäfte" can be used to conceal the true ownership structure in GmbHs, AGs and GmbH & Co. KGs can be concealed. Competitors and other third parties do not get to know about the true shareholding in Germany.
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Legal expertise in german trust agreements in corporate structures
Our team of lawyers, certified specialists for german corporate law and tax advisors at our offices in Hamburg, Berlin, Munich, Frankfurt and Cologne provide comprehensive advice on the subject of fiduciary relationships in corporate law. Our range of advice regarding trustee participations in GmbH, AG and GmbH & Co. KG shares can be found below:
- Planning and drafting of trust agreements, both for the formation of companies in Germany and for a subsequent transfer of shares
- Advising trustees, trustors, shareholders and managers on shareholder meetings and M&A transactions (e.g. MBO, manager participation, company succession)
- Adaptation and drafting of contractual documents related to trust agreements (e.g. articles of association, participation agreement, service agreements)
- Tax law advice on fiduciary participation structures
- Extrajudicial and judicial enforcement of rights in connection with trust agreements under german corporate law
In german corporate practice, there are many fiduciary participations in GmbHs, AGs or GmbH & Co. KGs. There are numerous different motives for trust arrangements:
Reasons for a trust in company shares under german law
Very often, trustee relationships in GmbH shares are established so that the economically involved backer does not become publicas a shareholder. In principle, only the trustee as a GmbH shareholder is made public via the list of shareholders or as a shareholder of a GmbH & Co. KG via the electronic commercial register, which can be viewed by anyone. The person of the settlor and the trust relationship as such are not disclosed in the commercial register. However, trust transactions that convey a shareholding of more than 25% may require an entry in the new transparency register. However, unlike the commercial register or company register, the transparency register cannot be inspected by everyone (see below).
In german practice, the trust relationship can also function as an investment pool. Many individual shareholders can be pooled under a trust relationship. This can simplify the management of the investments. For example, trust relationships in Germany can ensure employee participation in the company's success. Trust agreements can also be used for business succession when a large number of members are to participate in the family business. Investors often also participate in an investment company via trust structures.
Finally, trust relationships can also be found where non-competition clauses exist in the form of protection against competition or customer protection. By means of a trust agreement, trustors repeatedly attempt to circumvent legal or contractual prohibitions of activity. In terms of substantive law, the question always arises in this case constellation as to how high the risk of a contractual penalty, a claim for damages and a claim for injunctive relief enforceable in court by means of a temporary injunction is to be assessed. The fiduciary relationship, which is invisible to the outside world, will generally not eliminate the non-competition clause, but can in fact only circumvent it in german practice.
In Germany, fiduciary relationships are also often used within the shareholder circle, where a disruptive shareholder is subject to an exclusion obligation. In order to prevent the exclusion of this shareholder, special trust solutions are designed in which the shareholding is transferred to a (strong) trustee and the disruptive influence can be eliminated or reduced from the shareholder circle.
Such trustee relationships resolving a shareholder dispute are developed in a lengthy process.
Structure of a trust agreement in Germany
A trust relationship may arise at the time of the formation of a company or at the time of a subsequent transfer of shares. In german practice, the trust relationship can be established openly or covertly. In the case of an open trust, the co-shareholders become aware of and generally approve of the trust relationship. In contrast, in the case of a disguised trust, the existence and content of the trust agreement remain secret from the co-partners.
The trust relationship must be disclosed to the tax authorities: If the trust relationship is effectively established and actually carried out on the basis of a clear agreement, the trustor will be regarded as a shareholder by the tax authorities from a tax perspective. In this respect, profit distributions are not taxed at the trustee, but at the settlor.
The trust agreement must precisely regulate the distribution of interests between the trustee and the settlor. Detailed regulations with regard to various individual questions are very important so that the discrepancy between civil law ownership and economic allocation is properly adjusted. In german practice, the trustee is obliged to pass on the profits received to the settlor and to vote in shareholders' meetings in accordance with the settlor's instructions. To be on the safe side, the settlor is often also given a voting proxy. In german practice, the trustee usually receives claims against the settlor for remuneration, reimbursement of expenses and indemnification (liability, costs). Special agreements are made in favor of the trustor regarding termination of the trust relationship and, if applicable, regarding a non-competition clause.
When establishing a trust relationship in Germany, care must be taken to ensure that the trust does not collide with the restrictions on disposal in the partnership agreement (transfer restrictions). Otherwise, there is a risk - possibly after years - of a court dispute and the realization that the trust relationship has never become effective under german civil law. In that case, even sought-after tax allocations will be denied with possibly high financial consequences. Not infrequently, a violation of restrictions on alienation (by concluding a trust agreement) also leads to expulsion from the company.
Requirements for the form of a trust agreement under german law
In german practice, the conclusion of trust agreements will very often have to be notarized if the trust relationship relates to GmbH shares. Notarization is required in the case of an assignment of GmbH business shares (Section 15 (3) GmbHG). Thus, the conclusion of a trust agreement and the reassignment of the shares upon termination of the trust relationship will also be subject to notarial certification in Germany. In principle, notarization of the trust relationship can be dispensed with if the trustee is involved in the formation of the GmbH; the trust agreement was thus concluded before the formation of the GmbH. However, it must be taken into account that the risks of the tax recognition of trust relationships can be reduced with a notarial certification.
Trust relationships in KG company shares (GmbH & Co. KG) are in principle not subject to any notarial certification obligations. However, even in the case of GmbH & Co. KG trust transactions, there are many constellations that require a visit to the notary in Germany.
In german practice, the notarial certification of trust relationships will be required both in the run-up to the formation of a GmbH and in the case of many GmbH & Co. KG participations, if only for reasons of legal certainty and tax recognition. The same applies to agreements containing obligations to establish fiduciary relationships.
The german straw man director in the liability trap
In german practice, straw man constructions are frequently found, which are associated with high liability risks for the parties involved. Whoever is appointed as a straw man managing director and shareholder in a GmbH or GmbH & Co. KG and leaves the management of the business to a non-appearing backer should be aware of the high risks.
The managing director, who is entered in the commercial register, assumes far-reaching duties and liability risks. Irrespective of whether the formal managing director is granted rights of control and intervention or whether he actually manages the business, he is responsible, among other things, for the proper payment of the company's taxes, social security contributions and duties (subject to penalties). If the company becomes involved in dishonest dealings by the backer, the straw man director is obliged to stop the illegal dealings.
Again and again, the german courts establish the civil and criminal liability even of straw men who fail to comply with the legally required control of the business. As a rule, the reference to the backer who directed and controlled the transaction does not lead to exoneration of the straw man director.
German Transparency Register: publicity for fiduciary transactions?
The shareholding of a beneficial owner of more than 25% in a company must be disclosed in the so-called transparency register if it cannot be inferred from the existing list of GmbH shareholders or the extract from the commercial register (the notification requirements have been in force since October 1, 2017). The names and surnames, date of birth, place of residence and the type and scope of the economic interest (in special cases even the nationality) are subject to disclosure in Germany.
The transparency register regulated by the Money Laundering Act (GwG) provides for fines of up to 100,000.00 EUR for simple violations. In the case of serious or repeated violations of the notification requirements, fines of millions of euros can be imposed. Finally, the refusers even face the digital pillory, as final decisions on fines can be published on the Internet.
In Germany, it is legally uncertain whether a classic trust agreement with its typical obligation under the law of obligations on the part of the trustee can establish the control required by law between the settlor and trustee. However, it can be inferred from the explanatory memorandum to the law that control based on the law of obligations is also sufficient and can trigger the obligation to notify the public register, which is subject to a fine. Until the matter is clarified by the german courts, fiduciary shareholdings should be reported to the Transparency Register at any rate if this is to exclude the risk of a fine.
The transparency register is not open to the public. The rights of third parties to inspect the register are restricted by german law. Only those who can demonstrate a special interest in inspection in connection with the fight against money laundering and terrorist financing may inspect the register - this is our interpretation of the law. In addition to supervisory, law enforcement and tax authorities, NGOs and journalists will probably be able to inspect data in connection with their research. Many details of the new law will have to be clarified by the courts in the coming years.
Here you will find answers to questions about the german transparency register for managing directors and shareholders: Transparency register