Trustees under german law
Duties and liability risks of the trustee, contractual safeguarding in Germany
In german medium-sized businesses there are many participations in companies (mostly in GmbHs and GmbH & Co. KGs) which are not visible to third parties. In addition to sub-participations and silent partnerships, economic relationships can be concealed with a trust agreement. In the case of the trust model, the formal shareholder (trustee) forwards the economic positions from the company participation to the trustor, who is not recognizable in the external relationship. The settlor has indirect access rights to the company via the trust agreement, without being a shareholder himself.
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Legal advice on trusteeships in Germany
Trusts in partnerships and corporations are a matter for experts. Our team of specialized lawyers, certified specialists for german corporate law and tax advisors advises trustees, trustors and companies at our offices in Hamburg, Berlin, Munich, Frankfurt, Cologne and nationwide.
- Strategic advice on the extrajudicial and judicial enforcement of the settlor's and trustee's rights
- Defense of the trustee against claims of the settlor and third parties
- Planning and design of trustee structures in the context of company formations, in M&A transactions (e.g. employee pool) as well as in the context of company successions
- Tax conception of trust arrangements
Detailed information on constellations with straw men can be found here: Straw man
What is the purpose of a trustee in german practice?
In german practice, there are countless areas of application for the trustee and trust arrangements. What most trustees have in common is that they do not act for their own benefit, but for the benefit of the trustor. For example, a trustee is used in the investment sector, where he acts as the legally required custodian (KAGB) of assets for third parties. Furthermore, trusteeships are used for so-called employee shareholdings in german practice. Through a trust relationship, many individual employees are given a stake in the employer company.
In german practice, trust relationships are often used to conceal the economic backer, the trustor. Where competition, rivalry and customer protection risks threaten, a trustee who is not formally subject to a non-competition clause acts visibly. Even though fiduciary transactions with the purpose of circumventing non-competition clauses always represent a high-risk business, they are common in german practice.
The question of whether fiduciary company shareholdings of more than 25% must be reported to the transparency register is controversial (for more details on the status of the technical discussion: fiduciary relationship).
Read more about the new transparency register
What are the duties and liability risks for the trustee under german law?
A written trust agreement is usually concluded between the trustee and the settlor (see below on the question of notarization). Depending on its form, this contract regulates the rights and obligations of the trustee and settlor in detail or in less detail.
The focus of the trust agreement is the economic allocation of the shareholding held by the trustee under german company law to the trustee. In this context, the trustee must ensure that the trust agreement is disclosed to the tax office. Otherwise, for example, any profits will be allocated to the trustee for tax purposes without the trustee benefiting economically - unless there is a special agreement with the settlor. The tax recognition of the trust relationship is therefore of particular importance for the trustee. In this context, it is also important to ensure that the trust relationship is effectively established under german civil law and actually implemented.
A further essential regulatory complex of a trust agreement are the duties of the trustee concerning the manner of exercising the rights conveyed by the participation under german company law. In principle, the trustee is subject to the instructions of the settlor in all actions relating to the participation. This gives rise to a number of liability risks for the trustee. For example, as a formal shareholder, the trustee exercises the voting rights arising from the participation in the shareholders' meeting or in shareholder resolutions. When voting in the shareholders' meeting, there are also further risks, e.g. if new items are spontaneously added to the agenda in the meeting and no instructions exist with regard to these. As a formal shareholder, the trustee may otherwise be subject to fiduciary duties vis-à-vis the company and the co-partners. If the settlor's rights to issue instructions collide with fiduciary duties under german company law, there is a risk of liability for the trustee. From the trustee's point of view, it must therefore be ensured in the trust agreement that the liability relationship between the trustee and the settlor is correctly adjusted contractually and that the trustee has sufficient indemnification claims at the expense of the settlor. The contract should be drafted by an experienced lawyer.
From the trustee's point of view, any claims to remuneration should also be regulated. The mediation of the indirect shareholder position by way of a trust is a risky service which is open to appropriate remuneration.
If the trust relationship concerns a GmbH participation, the trust agreement will generally have to be notarized in Germany. It is true that there are trust participations which are not subject to notarization. From a practical point of view, however, it should be pointed out that notarization can be very helpful in the recognition of the trust relationship for tax purposes.
Termination of the trust relationship in german practice
As a rule, the trust agreement can be terminated by means of a declaration of termination without long notice periods. The trustee should ensure that the trust agreement has a secure mechanism to ensure the transfer of shares after the end of the agreement (transfer of shares to settlor or to a third party designated by the settlor).
Otherwise, in the event of inactivity on the part of the settlor, the trust relationship may be terminated and the trustee may nevertheless still be a shareholder from a civil law perspective. This can lead to increased liability risks for the trustee under geman law.