Charitable foundations are particularly well suited to have a sustainable charitable effect - during the founder's lifetime and far beyond his death. The oldest charitable foundations in Germany, for example, were founded in the Middle Ages and still exist today. The reason for the eternal existence of foundations is that they have no shareholders or owners - unlike all other legal forms under German law. Without owners, there is basically no one who could dissolve the foundation or change its statutes. There are only the foundation's bodies with whose help a foundation acts legally (e.g. concludes contracts), i.e. usually the foundation board and a foundation council as a controlling body. In their actions, the organs are solely obliged to the founder's will, as it results from the statutes drafted by him. Should the organs ever act against the founder's will, the state foundation supervisory authority can intervene and remind the organs of their obligation to serve the founder's will alone.
Foundations can further one or more charitable purposes listed in the German Tax Code (AO). These include, for example, the promotion of
- science, research, and education
- public health and public health care
- youth welfare and care for the elderly
- art and culture
- the protection and preservation of historical monuments
- nature conservation and landscape management and environmental and animal protection
- social welfare
- politically, racially or religiously persecuted persons, refugees, handicapped persons, victims of crime, war and catastrophes
- tolerance in all areas of culture and the idea of international understanding
- equality between women and men
This list is not exhaustive. In addition, there are numerous decisions of the German fiscal courts and the Federal Fiscal Court as well as various administrative directives from the fiscal authorities for the individual purposes stated in the Tax Code, which attempt to specify the purposes in more detail.
A foundation that pursues one or more of the above-mentioned charitable purposes and also fulfils all other requirements of German charitable law benefits from comprehensive tax concessions. Among the other essential requirements for recognition as a charitable foundation is, for example, that the foundation must exclusively further its charitable purposes and not, for example, additional private purposes. Under very strict conditions, however, it is permissible in exceptional cases for charitable foundations to distribute up to one third of their income to the founder and his closest relatives without losing their charitable status.
If all statutory conditions are met, charitable foundations enjoy the following tax advantages:
- No corporate income tax and no trade tax in the three accounting spheres of a charitable foundation: ideal sphere, asset management, and related trade or business (this is different for commercial activities that do not serve the realization of the foundation's charitable purposes)
- A reduced VAT rate applies to many sales of charitable foundations
- No property tax
Incidentally, the tax benefits are even more extensive than those of other charitable legal entities (e.g., associations, and nonprofit limited liability companies). The legislator explicitly wants to encourage taxpayers to donate part of their assets to foundations for charitable purposes. German law thus expressly takes a different approach than foreign legal systems.
Example USA: In the USA, for example, large foundation assets have since long been the subject of criticism. Wealthy founders are assumed to be able to pursue the purposes they personally enjoy by means of a charitable foundation, thus circumventing the democratically legitimate legislator, who would possibly prioritize other purposes. So called private foundations therefore receive less favorable tax treatment in the USA than publicly funded charities. This is not the case under German law.
The founders themselves also enjoy tax benefits when they donate: Donations to charitable foundations are tax-deductible to the same extent as donations to other charitable organisations, i.e. they reduce the donor's payable income tax. In addition, there is a special deduction option that is only relevant for foundations and does not apply to other legal forms: Large donations that flow directly into the assets of the foundation, the income from which is used by the foundation to achieve its purposes, are tax deductible beyond the normal deduction limits up to an amount of 1 million euros (or even 2 million Euros in the case of joint taxation of life partners/spouses).
What does that mean in specific terms?
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Not only high net-worth individuals establish charitable foundations. Business companies do as well. The motives are certainly different. Private individuals often set up foundations for very personal reasons, e.g. because they have dedicated themselves professionally to science and research, have to deal with a bereavement within their family circle or have experienced serious illnesses or are interested in music, art and culture. For companies donating is often closely related to a desired positive public image of the company. Many companies fulfil their corporate social responsibility by making a charitable contribution through a foundation they have set up. Doing good in the name of the foundation, which regularly bears the same brand name as the business company, naturally also has a positive effect on the company.
Charitable associations, in turn, often use foundations as a vehicle for addressing potential major donors. Successful major donor fundraising requires the legal form of a foundation. As seen above, German tax law offers special privileges for donations to charitable foundations, which would not be granted in the case of a large donation directly to the association. The foundation of an association is therefore regularly structured as a supporting organization. This means that the association has individual projects financed by its „own“ foundation. In this way the association ultimately benefits from the major donations and at the same time the donors enjoy the greatest possible tax advantages.
You would like to set up a charitable foundation or have other questions of a legal or tax nature regarding charitable foundations? Our attorneys and tax advisors are experts in foundation law and foundation tax law. Independent rankings confirm that our consultants are among the best advisors for nonprofit organizations and foundations in Germany. Please feel free to contact us at any time. Your main contacts are Attorney Uwe Müller as well as Qualified Lawyer and Certified Foundation Consultant Alexander Vielwerth. Please feel free to contact us - by e-mail (email@example.com) or by phone (+49 (0)69 76 75 77 80). We look forward to your message and your questions.
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