Compensation of Association And Foundation Board Members in Germany
When does board compensation jeopardize charitable status?
"Can our board members actually be paid?" Sooner or later, many associations and foundations in Germany ask themselves this question. As the workload of board members increases and the responsibilities become more demanding, organizations often reach a point where they want to recognize that commitment not only with appreciation but also with financial compensation. In practice, this frequently leads to the board simply being granted a monthly "expense allowance" without anyone first checking the organization's articles of association.
This is precisely where problems begin. Whether board members may receive compensation is not determined by what the members consider appropriate, but by clear statutory requirements. Organizations that overlook these rules risk not only repayment claims but, in the case of nonprofit organizations, even the loss of their tax-exempt status.
This article explains when board compensation is permissible, the importance of the articles of association, and the key issues that charitable associations and foundations need to keep in mind. Whether otherwise permissible board compensation also triggers mandatory social security contributions is a separate legal issue. For more on that topic, see our article, “Social Security Obligations for Association Board Members in Germany.”
Starting point: board members serve without compensation
For both associations and foundations, German law starts from a clear principle: serving as a board member is a voluntary office and is generally performed without compensation. Section 27 (3), sentence 2 of the German Civil Code (BGB) establishes this rule for associations, while Section 84a (1), sentence 2 BGB applies the same principle to foundations, providing that members of an association's management board and members of a foundation's governing body serve without compensation.
However, "without compensation" does not mean that board members must bear the organization's expenses out of their own pocket. Anyone who advances funds on behalf of the organization (for example, for postage, travel expenses, or office supplies) is entitled to reimbursement of those actual expenses under Section 670 BGB. Such reimbursement of expenses does not constitute compensation; it merely reimburses costs that were actually incurred. It is therefore permissible without further requirements.
Compensation requires an explicit basis in the articles of association
The general rule that board members serve without compensation can be overridden, but only through the organization's articles of association. For associations, this follows from Section 40 BGB. For foundations, it is expressly provided for in Section 84a (1), sentence 3 BGB.
This is the key legal requirement: unless the articles of association expressly authorize board compensation, board members may not receive compensation for performing their duties as board members. A resolution adopted by the members' meeting or the foundation board alone is not sufficient to depart from the statutory rule. The authorization must be set out in the articles of association themselves.
The articles of association need only authorize compensation in principle; they do not have to specify the exact amount. The competent governing body may then determine an appropriate level of compensation.
Practical tip: Review the articles of association before looking at the budget. The question, "Can we afford it?" is secondary until you have answered the more fundamental question: “Do our articles of association actually allow it?”
Reimbursement of expenses or compensation? Understanding the difference
When determining whether a payment requires authorization in the articles of association, the decisive question is straightforward: Does the payment reimburse actual expenses that were incurred, or does it compensate board members for the time and effort they devote to their role? In the first case, it is reimbursement of expenses; in the second, it is compensation. Labels such as "expense allowance" or "volunteer allowance" merely describe different forms that one or the other may take. They do not determine the payment's legal classification.
Reimbursement of expenses
Reimbursement of expenses covers actual costs incurred on behalf of the association or foundation, such as travel expenses, telephone costs, or office supplies. Because it is not compensation, it does not require authorization in the articles of association. However, it must be supported either by appropriate documentation (such as individual receipts) or by a reasonable flat-rate reimbursement based on actual expenses. A flat-rate reimbursement remains permissible only if it reasonably reflects the expenses typically incurred. Otherwise, it is legally treated as compensation.
Compensation
Any payment that goes beyond reimbursing actual expenses and instead rewards the board member's time and services constitutes compensation. All compensation is therefore subject to the requirement that it be authorized by the articles of association. This applies regardless of whether it is paid as a flat-rate expense allowance or as what is commonly regarded as "regular" compensation. The label attached to the payment is irrelevant: if it is intended to compensate board members for their work rather than merely reimburse actual expenses, it is legally considered compensation, regardless of what it is called.
The same principle applies to the volunteer allowance (Ehrenamtspauschale). Under Section 3 No. 26a of the German Income Tax Act (EStG), payments made to individuals performing volunteer work are tax-exempt up to the statutory limit. In addition, Section 3 No. 26 EStG provides a separate tax exemption, the instructor allowance (Übungsleiterpauschale), for certain educational, caregiving, or artistic activities. These allowances are purely tax exemptions; they do not determine whether a payment is permissible under the law governing associations or foundations in Germany. Accordingly, paying a volunteer allowance to board members also requires an appropriate authorization in the articles of association.
Practical tip: What matters is not the name of the payment, but its purpose. If an organization pays a monthly flat-rate amount that, in reality, compensates board members for their services, it is legally considered compensation, even if the bank transfer describes it as an “expense allowance.”
Additional requirements for charitable associations and foundations
For nonprofit organizations, there is a second layer of legal requirements: the tax-exemption rules contained in the German Fiscal Code (AO). At this level, the issue is no longer merely whether a payment is legally permissible, but whether it could jeopardize the organization's charitable status.
Under Section 55 AO, the funds of a tax-exempt entity must be used exclusively for its statutory purposes. No individual may receive disproportionately high compensation. For board compensation, this has two important consequences.
- First, the German tax authorities require an explicit authorization in the articles of association from a tax law perspective as well, including for payments made under the volunteer allowance. If board members are compensated without such authorization, the tax authorities generally regard this as an improper use of charitable funds, which may endanger the organization's charitable status.
- Second, the amount of compensation must be reasonable. The benchmark is what would ordinarily be paid for a comparable position under similar circumstances, the so-called arm's-length standard. If compensation significantly exceeds that level, the organization risks the payment being treated as an excessive benefit, with potentially serious consequences for its charitable status.
This is particularly significant for foundations. Foundation assets are legally dedicated to the founder's intended purposes, and the foundation supervisory authority monitors whether those assets are managed economically and used in accordance with those purposes. Generous board compensation without a proper legal basis can therefore quickly attract regulatory scrutiny.
For more information, see our articles on appropriate compensation in associations and foundations and executive compensation in a nonprofit limited liability company (gGmbH).
Typical real-world scenarios
- The "hidden" expense allowance
A charitable association has been paying its chairperson a monthly "expense allowance" of EUR 100 for years, even though its articles of association are silent on board compensation. Legally, this constitutes compensation without the required authorization in the articles of association. It is therefore impermissible under association law and also creates a risk under nonprofit law. The association should discontinue the payments and first amend its articles of association. - Board members wearing two hats
The association's treasurer also handles the day-to-day bookkeeping, while another board member conducts training sessions. As a general rule, activities performed outside the scope of a person's duties as a board member may be compensated. However, the German tax authorities apply strict standards to charitable associations. To avoid disputes, organizations should also adopt a clear provision in their articles of association and maintain a strict separation between board duties and separately compensated activities. - Professionalizing the organization
A growing foundation or a large association intends to compensate its board members at market rates because the role has effectively evolved into a full-time executive management position. This is possible, but only if the articles of association authorize such compensation, the amount is reasonable, and it is clear which governing body has the authority to determine the compensation. Board members may not set their own compensation.
Legal consequences and risks: what is at stake
If compensation is paid without authorization in the articles of association, several consequences may arise, potentially in combination:
- Invalidity and repayment claims:
A compensation agreement entered into without authorization under the articles of association violates the statutory principle that board service is generally unpaid. An employment agreement based on such an arrangement may be invalid, and payments already made may be subject to repayment claims, for example, by a newly appointed board. - Personal liability and potential criminal liability:
Board members who authorize or cause improper payments may face personal liability. Depending on the circumstances, they may even face allegations of breach of trust under Section 266 of the German Criminal Code (StGB). - Loss of charitiable status:
For nonprofit organizations, improper or excessive compensation may result in the loss of tax benefits, potentially leading to significant additional tax liabilities.
- Loss of statutory liability protection:
Volunteer and minimally compensated governing body members are generally liable to the organization only in cases of intentional misconduct or gross negligence (Section 31a BGB for associations; for foundations through Section 84a (3) BGB). Anyone who receives compensation beyond the statutory limits loses this statutory liability protection unless the articles of association expressly provide otherwise. - Conflict of interest:
No one may decide on their own compensation. In an association, the members' meeting is generally responsible for making this decision; in a foundation, the responsible body is the one designated in the articles of association. If no such body exists, particular care is required, and consultation with the foundation supervisory authority may be necessary.
Whether otherwise properly authorized compensation also triggers mandatory social security contributions depends on the overall circumstances of the individual's activities and is addressed separately in our article “Social Security Obligations for Association Board Members in Germany.”
Common mistakes and misconceptions regarding board compensation in Germany
"A resolution by the general meeting is sufficient."
In reality, the authorization must be included in the articles of association; a simple resolution alone is not enough.
"The volunteer allowance can always be paid."
In reality, it is also considered compensation and requires a basis in the articles of association when paid to board members.
"Reimbursement of expenses is problematic."
In reality, reimbursement of genuine, documented expenses is generally unproblematic and does not constitute compensation.
"If something is tax-exempt, it is automatically permitted."
In reality, tax exemptions and the permissibility of payments under association and foundation law are two separate issues.
"Foundations follow the same rules as associations."
In reality, associations and foundations are subject to different legal frameworks, and foundation supervisory authorities now increasingly review these matters as well.
Checklist: How to handle board compensation safely
- Review the articles of association:
Do they expressly authorize compensation for board members? If not, the articles of association should first be amended (for associations, this amendment must be filed with the register of associations). - Clarify the nature of the payment:
Does the payment reimburse actual, documented expenses (reimbursement of expenses), or does it compensate board members for their services (compensation)? Only compensation requires authorization in the articles of association and this includes flat-rate expense allowances and the volunteer allowance. Pure reimbursement of actual expenses does not. - Ensure reasonableness:
Base the amount of compensation on comparable positions and document the reasoning behind the amount determined.
- Observe decision-making authority:
Ensure that compensation is approved by the proper governing body, not by the board member who benefits from the payment. - Keep charitable status in mind:
Do the articles of association, the actual payments made, and the level of compensation align with each other? If in doubt, have the compensation arrangement reviewed by legal counsel in advance, including through a compensation assessment. - Maintain proper documentation:
Keep written records of resolutions, agreements, and supporting documentation.
How WINHELLER supports associations and foundations with legally compliant compensation of governing body members
The compensation of governing body members, in particular, involves significant legal risks and affects multiple areas of law. WINHELLER specializes in advising nonprofit organizations and combines employment law and social security law with tax law and the law governing nonprofit organizations.
We support associations and foundations from the initial decision-making process through the practical implementation of compensation models. In doing so, we consider not only the legal basis for compensation but also its interaction with liability issues, charitable status requirements, and social security obligations affecting your nonprofit organization in Germany.
Our services include, in particular:
- reviewing whether your articles of association permit board compensation and, where necessary, assisting with amendments to the articles of association
- developing compensation models tailored to your organization that comply with employment law, social security law, and nonprofit requirements
- reviewing existing compensation arrangements and board structures, including support with social security status assessments and audits conducted by the German Pension
If you would like to determine whether your board's compensation structure and articles of association comply with legal requirements, we would be pleased to provide advice tailored to your organization.
Your attorney for association and foundation board compensation in Germany
Our attorneys advise you comprehensively on legally compliant board compensation for associations and foundations, from drafting and amending articles of association and developing appropriate compensation models to addressing questions of charitable status, liability, and social security obligations. We help you avoid risks and develop sustainable solutions for your organization.
We look forward to hearing from you. The easiest way to reach us is by e-mail at info@winheller.com or by phone at +49 69 76 75 77 85 29.
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FAQ | Frequently asked questions about board compensation in Germany
May association or foundation board members receive compensation at all?
Yes, but only if the articles of association expressly permit it. Without such authorization in the articles of association, the statutory principle that board service is performed without compensation applies (Section 27 (3) BGB for associations and Section 84a (1) BGB for foundations).
Is the volunteer allowance possible without a provision in the articles of association?
Generally, not for board members. The volunteer allowance is also considered compensation and therefore requires a basis in the articles of association when paid to board members, particularly in the case of nonprofit organizations.
What is the difference between an expense allowance and reimbursement of expenses?
Reimbursement of expenses covers actual, documented costs and does not constitute compensation. A flat-rate expense allowance, by contrast, compensates board members for the time and effort they devote and is legally considered compensation. As a result, it requires authorization in the articles of association.
Can board compensation jeopardize charitable status?
Yes. If the required authorization in the articles of association is missing or if the compensation is unreasonably high, the payment may be considered an improper use of charitable funds and may result in the loss of tax benefits (Section 55 AO).