$80 Billion, Locked In A 'Golden Cage' In Austria, May Now Be Set Free

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.

For Austrian Finance Minister Hartwig Loeger, the challenge will be to increase flexibility and fix unintended consequences without being criticized for making tax gifts to the wealthy.

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.

Take Ferdinand Piech, for instance. The patriarch who dominated Volkswagen for more than two decades, last year agreed to relinquish one of his last ties to the company after lashing out at his billionaire relatives as his influence waned. Now, Salzburg-domiciled trusts are playing an important role as the ultimate shareholders of the carmaker.

Yet another case is the multi-billion euro fight about B&C Privatstiftung, a trust embroiled in what it says is a "hostile takeover" attempt. A group led by investor Michael Tojner is seeking to realign B&C's board and take over its assets, including stakes in industrial companies Lenzing AG and AMAG Austria Metall AG.

Falling Numbers

As their advantages thin out, the number of trusts is falling -- declining by about 30 a year and reaching 3,111 in November. At their peak in 2011, the country had about 3,500.

"More company founders would like to dissolve the trust and take back control, but this is getting pretty expensive now with a tax rate of 27.5%," said Eduard Lechner, a professor of tax law at the University of Vienna. They may not have enough liquid funds to pay the tax bill that may run up to hundreds of millions of euros, he said.

The challenge for Finance Minister Hartwig Loeger will be to increase flexibility and fix unintended consequences without opening itself up to the criticism of making tax gifts to the wealthy. Lawmakers will also need to ensure that the law can stand the test of time.

"People need to have confidence in trust laws, and the government over the years has changed the rules too often," said Albert Birkner, a corporate lawyer at CHSH in Vienna. "Trust decisions are taken for 100 years or more, so whatever the government does, it should be in place for the long term to allow confidence in planning."