German Billionaire Schwarz Seen Having Tax-Exempt Fortune
On a recent Saturday afternoon at a Lidl supermarket in London, a 500-gram slab of minced beef was on sale for 2 pounds ($3.21), half the price of the same product at a Sainsbury Local store a few blocks away.
Offering such bargains has made Dieter Schwarz a very rich man. Through his Neckarsulm, Germany-based Schwarz Group, the 73-year-old billionaire controls more than 9,800 Lidl supermarkets and 1,070 Kaufland discount stores in 26 European countries. The operation generated 63.4 billion euros ($82.3 billion) in sales last year, making it the largest closely held food retailer in Europe. Schwarz, the 34th richest person in the world, is worth $19.3 billion, according to the Bloomberg Billionaires Index.
Schwarz controls his discount empire through the Dieter Schwarz Stiftung gGmbH, a tax-exempt entity designated as a gemeinnuetzige Gesellschaft mit beschraenkter Haftung, or limited liability company with a charitable purpose.
“There are about 19,000 foundations that hold more than 100 million euros in Germany,” said Stefan Stolte, a lawyer with DSZ-MAECENATA Management GmbH, a Munich-based stiftung advisory firm. “There are far fewer that are established as a gGmbH. Both concepts are legitimate, but the use of the Schwarz model -- where little is going into the public benefit -- is looked upon very critically.”
A gGmbH is often used to protect against hostile takeovers or family members selling the company. Like all charitable foundations in Germany, it can also be used to fund sports teams and political activities. In addition, gGmbHs aren’t subject to many aspects of civil law regulation and, in rare instances, can even have their tax-exempt status removed altogether.
Stolte estimates there are 100 to 300 gGmbHs in Germany. Four of the country’s 10 richest people hold at least part of their fortunes through the structure: Schwarz and the three co- founders of Walldorf, Germany-based SAP AG (SAP), the world’s largest maker of business-management software.
Schwarz transferred his shares in Lidl and Kaufland into the Dieter Schwarz Stiftung in 1999, “to secure the existence of the company,” said Gertrud Bott, a company spokeswoman, in an e-mail. Schwarz no longer owns the shares, the gGmbH does, she said. He is credited with the fortune because he controls the shares owned by the gGmbH, according to the ranking. He declined to comment for this account.
According to filings with the German government, the Schwarz gGmbH donated almost 70 million euros from 2008 to 2010 to charitable causes, including a science center and a university campus in Heilbronn, a city in southwest Germany where he became an honorary citizen in 2007, and where he lives with his wife, Franziska.
Bott said the gGmbH has more than 30 million euros designated for charitable giving. That sum is about 0.2 percent of Schwarz’s net worth, according to data compiled by Bloomberg.
In Germany, a traditional stiftung is governed under German civil law and receives tax-exempt status by the local tax authority under German fiscal code. A gGmbH is formed under German commercial statutes, offers its creators greater funding flexibility and is not required to preserve its assets, said Anna Katharina Gollan, a legal and tax adviser at the Berlin- based law firm, Pollath & Partners.
Voting shareholders of a gGmbH can also change the causes it funds and have the ability to dissolve the entity and transfer its assets into another tax-exempt structure. Gollan said she knew of at least one case of a gGmbH eliminating its tax-exempt status.
There is no legal precedent of dissolving a gGmbH to fund commercial pursuits. Any attempt to do so, Stolte said, would result in the need for the founder to pay retroactive income, gift, inheritance and value-added taxes.
Traditional foundations and gGmbHs in Germany don’t have minimum annual giving requirements. They are required to spend any profits by the end of the fiscal year it was accrued, and are allowed to build capital reserves totaling 10 percent of annual donations or 33 percent of dividends received.
In Europe, there are several varieties of stiftungs, which are the equivalent of foundations or trusts in the U.S. In Liechtenstein and Austria, the structure exists to keep assets from flowing to other countries, Stolte said.
To achieve tax-exempt status under the fiscal code, both forms of German foundations need to show intent to pursue activities that benefit the public and their ability to execute on those goals. Similar to the U.S. tax code, any assets pledged to the foundation must be pledged irrevocably, said Stolte.
Schwarz’s father, Josef, got his start in retail in the 1930s, when he and a partner created what became grocer Lidl & Schwarz KG; their store was destroyed in World War II, according to the Kaufland website.
Schwarz’s partner left the company in 1951. Dieter Schwarz joined the family business after finishing high school, and struck out on his own more than two decades later, opening the first Lidl discount store in Ludwigshafen, Germany, in 1973.
To avoid using “Schwarzmarkt,” which means black market in German, Schwarz purchased the rights to the Lidl name for 1,000 Deutsche Mark, about $500 at the time, according to the company. Schwarz modeled his Lidl stores after the discount supermarkets Aldi Sued and Aldi Nord, which sell a limited assortment of goods at low prices. Aldi Sued is owned by Karl Albrecht, Germany’s richest man.
Schwarz inherited his father’s stores after he died in 1977. He opened the first Kaufland hypermarket -- similar to a Wal-Mart store in the U.S. in size and prices -- in Neckarsulm seven years later. The Schwarz Group opened the first Lidl stores outside Germany in 1988.
Schwarz stepped down from day-to-day management and split his retail empire in 1999. According to an organizational chart provided by Bott, 99.9 percent of Schwarz’s economic interests in Lidl and Kaufland were transferred to the Dieter Schwarz Stiftung gGmbH, while all of the companies’ voting rights went to the Schwarz Unternehmenstreuhand KG, a Neckarsulm-based decision-making body, also known as the SUT.
The structure separates economic and operational control, according to Dr. Hedda Hoffmann-Steudner, the head of the legal department at Berlin-based Bundesverband Deutscher Stiftungen. The legal construct became popular in the 1990s to safeguard companies from hostile takeovers and family members who might sell them after their founder died.
“Dieter Schwarz chose it because he wanted to keep his whole company in neutral hands,” said Hoffmann-Steudner. “If he dies, the whole complex of the two companies can continue without being centered on him as the main leader.”
The SUT’s eight board members, headed by Klaus Gehrig, control the Schwarz Group’s business decisions. The gGmbH has six voting shareholders who preside over the entity’s charitable activities.
Three years before the company’s restructuring, Schwarz gave power of attorney over his fortune to Hermann-Josef Hoffmann, according to a 1996 notarized document. Hoffmann, 56, represents the Dieter Schwarz TV-Vermoegensverwaltung GmbH -- Schwarz’s asset management vehicle -- on the boards of the gGmbH and the SUT. It is “responsible for the execution of the will and becomes operative after the death of Dieter Schwarz,” according to Bott.
Decisions regarding control over the gGmbH cannot be made without Hoffmann’s consent, according to its statute and shareholders list. Schwarz is also on the gGmbH’s board, representing another stiftung that carries his name. Unlike the gGmbH, this entity does not have a charitable designation.
Schwarz is an honorary member of the SUT and has veto power over its investments. The SUT decides how much money goes to the gGmbH, according to Bott. It can also determine how much Schwarz gets paid. The company didn’t respond to questions sent in an e- mail from Bloomberg News regarding Schwarz’s compensation.
There’s no legal minimum amount that an operating company is required to distribute to the gGmbH, according to Hoffmann- Steudner. Bott declined to comment on how much money the SUT has given to the gGmbH since 1999.
The fact that there is no minimum-giving requirement could lead to people abusing gGmbHs, Hoffmann-Steudner said. She advocates that donations to a gGmbH should be proportional to a company’s profitability.
“There was some discussion about whether or not these kinds of foundations were legal at all,” said Stolte. “They are legal, but I think there is an ethical problem when you have this foundation that is seen as providing a public benefit but in legal form it is really established to protect the company from takeover and inheritance taxes.”
Klaus Tschira, 71, who founded SAP in 1972 along with four other partners, including billionaires Hasso Plattner, 68, and Dietmar Hopp, 72, gave the majority of his stake in the company to the Klaus Tschira Stiftung in 1995. The Heidelberg-based gGmbH has donated about 200 million euros to science, math and technology causes since its inception, according to its spokeswoman, Renate Ries.
According to a February 2011 filing with the U.S. Securities and Exchange Commission, Tschira controls the voting rights as well as dispositive powers over the SAP shares that are held by his gGmbH foundation. Tschira said he doesn’t own the SAP shares he pledged to his foundation, and that they will remain designated for public benefit.
Plattner and Hopp also hold shares in gGmbHs. In 1996, Plattner, Hopp and another founding partner, Hans-Werner Hector, transferred 38 percent of their holdings into foundations established by each and a trust managed by Hector. Reports at the time stated that the move was aimed at maintaining the company’s independence “beyond the generation of its founders.”
In an October 5 e-mail to Bloomberg News, Tschira said there are various ways a gGmbH might fund charitable causes under German law.
“The list of tax-exempt purposes is indeed long, but that does not mean a stiftung may pursue any of them at will,” he said in an e-mail. “If you claim to fund art, it’s OK to pay an artist or an orchestra but it would most probably be not allowed to fund a dance band. Likewise, political education is OK -- you could even agitate against the neo-Nazis under the cover of education for democracy, but funding specific parties would not be allowable.”
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