Tax Compliance Management Systems for Charities and Trade Organizations in Germany

Often, it is more difficult than initially expected to deal with all tax obligations. And sometimes communication with the tax authorities does not go as smoothly as planned.

Good tax compliance, in particular the establishment of a tax compliance management system (TCMS), not only helps to avoid negative surprises in terms of taxation, but also effectively serves to prevent the personal liability of those responsible. After all, the fiscal authorities in Germany are not particularly tolerant in tax matters. As a rule, tax liability directly affects the legal representatives of nonprofit organizations, i.e. typically the board of directors or the management. Those responsible must then use their private assets to account for the tax damage caused if they are not adequately insured.

Further advantages of a tax compliance management system:

• Minimization of tax risks and protection of the nonprofit, tax-exempt status
• More efficient and therefore more cost-effective processes in the fulfilment of tax obligations, such as the preparation of tax returns and annual financial statements
• Clear responsibilities of all persons involved

A tax compliance management system (TCMS), similar to an "ordinary" compliance management system, aims to ensure that the responsible persons and other employees in a nonprofit organization behave in accordance with the regulations - but it is specifically geared towards the tax obligations and rules to which the organization is subject.

A good tax compliance management system, just like an ordinary compliance management system, consists of seven main components:

1. Tax compliance culture, i.e. starting at management level, all other employees should also develop a common understanding of the need to comply with tax obligations.
2. Tax compliance objectives, such as
   • Ongoing identification of taxable business operations and differentiation from other tax-free spheres of a tax-exempt organization (like asset management and the promotion of the entity's charitable purposes) prior to commencement of the respective activity
   • Correct VAT treatment of sales and the provision of services in the various tax spheres of the organization and especially between group companies as well as of governmental grants and membership fees
   • Securing the tax-exempt status by observing all tax and legal requirements for nonprofit organizations
   • Appropriate compensation of the management personnel in accordance with the requirements of German nonprofit tax law
   • Timely preparation and adoption of annual financial statements and submission of tax returns
   • Correct issue of donation receipts 
3. Tax compliance organization, i.e. those responsible for compliance with tax obligations are clearly identified, as well as the work processes they are required to follow
4. Tax compliance risks must be systematically identified and assessed
5. Tax compliance program to limit tax risks and avoid compliance violations
6. Tax compliance communication, i.e. informing all parties involved of their obligations under the tax compliance management system
7. Tax compliance monitoring and improvement, i.e. the documentation and ongoing development of the tax compliance management system

German tax law is complex. Thus, the development of a TCMS requires a lot of thought. And the scope of a tax compliance management system tailored to the individual organization depends on many factors, such as the organization's size, its structure, legal form, fields of activities, whether it is operational or only a supporting organization, etc. Last but not least, the amount of work involved also depends on the nonprofit organization's own (tax) past. The good news: After a thorough analysis of the tax risks, many of the seven points mentioned above can often be implemented with little effort.

In individual cases, for example, the issuing of a condensed tax guideline and regular training of existing staff can already fulfil the requirements of a suitable tax compliance management system. It is therefore possible for any nonprofit organization to set up a tax compliance management system with reasonable effort.

And implementing a system is also highly recommended. After all, every step towards an individual tax compliance management system helps to counter the German tax authorities with good arguments in the event of a breach of tax regulations, thus avoiding tax liability or even averting criminal tax proceedings.