Tax assurance in the establishment and management of foundations and other non-profit organisations
Tax legislation for foundation law and the charity law is confusing and quite complicated ...
Provisions for taxation of foundations and other non-profit organisations are found in numerous tax laws; this makes it difficult to consistently comply with all requirements. The authoritative provisions result from the tax code (e.g. for tax-privileged institutions, mainly from charity law), but also from inheritance and gift tax law, income tax law (e.g. tax accounting law as regulated there and – for tax-privileged institutions – donations law), the real property tax law, trade tax law, corporate income tax law and VAT law. In certain situations, provisions pursuant to other tax laws may also apply –
for example, pursuant to real estate transfer tax law or tax conversion law.
... and frequently ambiguous
At the time of creating a foundation, the primary objective is to draft statutes that reflect the donor’s will, while at the same time choosing legally permissible wording. Following this, in daily business, permanent attention must be paid to complying with the requirements of tax law. However, these requirements are often tempered or even overridden by statutory exceptions or those granted by tax authorities, which can make consistent compliance with tax rules significantly more difficult. At the end of the day, the bodies of a foundation (particularly the board) are permanently in the rather difficult position of having to consistently comply with provisions that are ambiguous in many cases.
What is decisive is adhering to formalities and complying with requirements
For example, to establish a tax-privileged foundation or civil society (with legal capacity or dependent) without jeopardising the status as a charity in daily practice, it is necessary:
- To comply with all the formal tax legislation requirements imposed on the statutes at the time of foundation (as per Annex 1 to §60 of the Fiscal Code of Germany),
- Possibly seek the approval of the responsible tax authorities for the intended wording of the statutes and
- Implement all provisions of non-profit law in the practical work of the foundation’s bodies at all times.
Here, it is particularly important to
- Permanently ensure compliance of the actual activities of the foundation with the purposes defined in the foundation’s statutes
- In the case of economic activities (in the scope of asset management or in special-purpose enterprises or taxable commercial businesses), to make a comprehensible distinction between the foundation’s ideal purposes and show this demarcation as precisely as possible in accounting – for example, through separate determination of income or surpluses,
- In the case of dependent foundations, to word the necessary contractual agreements between the foundation and the supporting body, and ensure its subsequent and permanent implementation,
- Strictly observe and document the formal regulations of beneficiary law (in particular donations law), which are particularly strict due to the different various options under the German income tax act (EStG) for tax-deductible donations to foundations in particular.
- Use means of maintenance for caring for the founder and his/her next of kin and honouring the founder’s memory only as per the statutes and in line with the provisions of non-profit law.
The tax services of our Industry Expertise Centre for Foundations and Non-Profit Organisations
Our Industry Expertise Centre for Foundations and Non-Profit Organisations offers consultancy and support
- In establishing foundations and civil societies with legal capacity or dependent (fiduciary) foundations and civil societies,
- In wording statutes and coordinating them with the appropriate tax authorities,
- In implementing the pertinent tax regulations, especially with regard to orderly record-keeping,
- In preparing the required (tax) statements (corporate income tax, trade tax and VAT returns and possibly declarations of public interest)
- In preparing any annual tax accounts (incl. the potentially required electronic tax accounts; ‘e-balance sheet’) or surplus revenue statements and – for tax-privileged foundations – disposition statements,
- In coordination with the financial authorities on the tax effect of special circumstances – both at the planning stage (by means of ‘applications for binding statements’) and in the on-going assessment process or tax audits,
- In implementing documentation requirements under beneficiary law and, in particular, under donation law, for tax-privileged institutions,
- In special tax issues on various types of taxes that can be relevant for foundations in individual cases – for example, with respect to substitutional tax on family trusts.
Consultancy from specialists and multidisciplinary teams
Our specialists and our interdisciplinary team, consisting of auditors, tax consultants, lawyers and business consultants, have extensive experience in all matters relating to foundations with legal capacity and dependent foundations, and other non-profit organisations. We advise you professionally and support you in any necessary coordination with the tax authorities. In close consultation with you, we explore your options and develop appropriate solutions tailored to your individual requirements.