Austria is trying to free about 70 billion euros ($80 billion) of capital locked in a “golden cage” the country created a few decades ago.
The Alpine country’s trust laws allowed families a tax-friendly way to transfer wealth and keep things together. Created in 1993 to stop capital from fleeing, the Austrian trust variety known as Privatstiftung also attracted German wealth with its favorable tax rates and privacy.
Now, however, the trusts have somewhat outlived their usefulness and are seen as preventing the efficient use of capital. Trust sponsors and beneficiaries, lawyers and trustees running them, and managers of trust-owned companies complain that they spawn convoluted structures and slow down decision-making. With that in mind, the government in Vienna has sent lawmakers back to the drawing board to simplify them, a move that could spur mergers, acquisitions, share sales, breakups and takeovers.
“These companies are stuck in a golden cage,” said Klaus Vukovich, a banker at boutique investment bank Alantra in Vienna. “The family is no longer in control, managers are not empowered to make bold moves, and decision-makers at the trust are too far away from the business. If trust laws were more flexible, these companies could break free and equity capital might become available for new ventures.”
Chancellor Sebastian Kurz’s government will present its plans early next year, and include any changes in a tax reform scheduled for 2020. Options being studied include lowering the costs of dissolving trusts, allowing some family members to exit, redefining liability laws for trustees so they can take riskier decisions and giving founders a greater say.
Industry Heavyweights
Trusts have served as useful vehicles for stalwarts of Austrian and German industry, among them the Porsche-Piech family that controls Volkswagen AG; the Leitner family that built up Andritz AG; builder Strabag SE’s founder Hans-Peter Haselsteiner; gunmaker Gaston Glock and developer Rene Benko. And it’s not just for families: Bank Austria used a Privatstiftung to protect its industrial assets against takeovers.
Here’s how they work: sponsors endow their assets into a trust for a small one-time tax and can designate beneficiaries including themselves or heirs. They collect dividends or enjoy other benefits while giving up direct control of the assets. The trust is run by a board that doesn’t include the sponsors or the beneficiaries. The sponsor can recall it in some cases, but for a price: a tax rate of 27.5% -- the rate for capital gains -- creating a hurdle that’s often insurmountable.
Also, lawmakers and courts over time have chipped away at some of the trusts’ advantages while adding complications. Most importantly, the country scrapped its inheritance tax in 2008, practically removing the main raison d’etre of trusts. It has also complicated the lives of the sponsors in other ways.
Glock Case
The Glock family, for instance, has been in court disputes over the trust’s assets after company founder Gaston and his former wife divorced. Helga Glock argued that a part of the value of the business was created by her - in vain. The existence of a trust makes it more difficult for estranged wives or children since the entity no longer belongs to anyone.
Trust boards are mostly staffed by lawyers and accountants who tend to be risk averse. They are torn between their legal obligations of independence, personal liability rules and the strong will of founders used to running things their way. That can create tensions.