Nonprofit organizations in Germany have been professionalizing their fundraising for years. With good reason: The risk of overlooking both legal and tax pitfalls in the financing of charitable organizations is significant.
In particular the distinction between donations and sponsoring causes difficulties time and again. The difference between a donation and a taxable sponsorship income is often made out by details, such as the link to the sponsor's website on the homepage of the nonprofit organization. The dramatic tax consequences of a wrong classification are often underestimated. The distinction between sponsoring and donation is followed by further legal questions, such as whether a donation receipt may be issued.
Some of the questions about donations and sponsoring we are frequently asked by nonprofit organizations are:
- Is the nonprofit organization still within its tax-free sphere or are the advertising activities taxable economic activities?
- Do 0, 7 or 19 percent value added tax apply?
- Is it necessary to write invoices or are ordinary donation receipts sufficient?
- Are donation receipts allowed to be issued at all or is there a risk of liability?
- How are charity events (like charity galas) to be treated for tax purposes?
- Which risks are involved in processing donations via online donation portals?
- Is a sponsorship contract (in written form) necessary?
- What tax peculiarities have to be taken into account for charity shopping?
- Are there data protection or competition law problems to be expected when dealing with donor lists?
- Does it make sense to establish a charitable foundation for marketing reasons or as a fundraising vehicle?
The above examples make it clear that the legal and tax treatment of donations and sponsorship poses considerable challenges for NPOs. We are happy to help you master these challenges.
The various possibilities of business cooperation entered into by charitable organizations harbor numerous risks with respect to German tax and nonprofit law. Before signing a contract, it is therefore essential to thoroughly examine the intended partnership. This applies both to the sponsored charitable organization as well as to the sponsor itself. On both sides, there can be undesirable tax consequences due to imprudent contractual arrangements or due to an incorrect actual execution of the contract. Those mistakes can quickly cost considerable amounts of money.
One particular challenge in the German law on donations and sponsoring is the coordination of the interests of the sponsor and the recipient organization. These can vary considerably: It can be of interest to the sponsor to structure the financial contributions as sponsoring in a way that the funds can be considered as business expenses for their company. The charitable recipient would like to receive the funds tax-free if possible, for which, however, usually a donation is the best option.
Fortunately, it is often possible to reconcile the differing interests of sponsor and recipient. Indeed, sponsoring can also be structured in such a way that the sponsor can claim the expenditure as business expenses, while the recipient organization receives the income tax-free in its tax-privileged sphere.
A minefield that is more frequently encountered in practice is "donations" by German limited liability companies (GmbH) whose shareholders are "close" to the supported organization in whatever way. The tax authorities might treat such a donation as a hidden distribution of profits. Such a hidden profit distribution would exclude the deduction of the donation on the side of the GmbH.
The classification of sponsoring in terms of value added tax also often causes problems. One specific problem is the tax base, as is the question of whether advertising services provided by nonprofit organizations are subject to the standard tax rate of 19 percent or the reduced tax rate of 7 percent. In addition, there are issues of input tax deduction, which can be extremely complicated due to the different accounting spheres of nonprofit organizations.
However, the law on sponsorship is not only complicated and prone to error; it also offers scope for creativity. Many nonprofit organizations have, for example, switched to transferring advertising rights to a third party or even their own subsidiary for a fee. Properly designed, this can result in interesting tax advantages for all parties involved. In order to be able to seize these opportunities, however, a legally and fiscally flawless sponsoring concept is required, into which the individual corporate cooperation should fit.
Compared to sponsoring, donations have the advantage that they can always be received tax-free by the organization. In addition, the donor receives a donation receipt from the charitable organization, which allows him to deduct the donation up to a maximum amount as a special expense in his own tax return.
In addition to simple monetary donations, there are so-called expense donations and donations in kind, each of which is subject to special tax regulations. In the case of donations in kind, for example, it must be clarified whether these are made from private assets or from business assets. Depending on this, the donation has a different value, which must be included in the donation receipt. By the way, membership fees to associations can also be treated like donations.
The charitable organization is responsible for ensuring that proper donation receipts are issued for donations received. If donation receipts are issued incorrectly, the charitable organization is liable within the framework of German donation law. This means that it must compensate the tax authorities in a lump sum for the tax loss that has arisen because the donor was wrongly granted a tax deduction by the tax office due to the incorrect donation receipt.
The charity must of course also use the donations received to further its statutory purposes. If it fails to do so, it may be liable for the wrongly granted donation deduction in addition to the withdrawal of its nonprofit status.
In addition, the organization is usually faced with another and much greater risk: In the highly competitive donations market, an NPO simply cannot afford to misuse donations or issue incorrect donation receipts. Otherwise there is a risk of considerable damage to its reputation. And such damage to the reputation of an organization can mean the end of the organization, as charities rely heavily on the trust of donors and the market.
NPOs are no longer limited to donations and sponsoring. Alternative forms of financing are increasingly finding their way into the German third sector. Terms such as "inheritance fundraising", "donor loans", "social entrepreneurship", "venture philanthropy", "social business" and "crowd fundraising/crowdfunding" describe, for example, promising modern approaches to attracting financiers and time commitment to charitable initiatives. They cannot always be squeezed into the traditional dress of the law governing nonprofit organizations. But what does not fit yet, can often be made to fit.
Cross-border fundraising has also been increasing for years. Not only do German fundraisers adopt experience and best practice recommendations from their colleagues abroad, but cross-border sponsoring and donations are now a matter of course.
However your organization finances itself: We are happy to help you adapt your fundraising and financing activities to the requirements of the law on nonprofit organizations and donations. This applies especially to raising funds from the mother country of fundraising, the USA.
- Counselling of donor and recipient
- Advice on the issuing of donation receipts
- Support in case of imminent liability
- Development of donation concepts including restructuring consulting with regard to foundation solutions for addressing major donors
- Implementation of (tax) compliance management systems for NPOs that finance themselves intensively through donations
- Tax optimization advice for the donor
- Corporate donations
- Cross-border legal and tax advice
- Counselling of sponsor and recipient
- Tax review of sponsoring partnerships, in particular value added tax and income tax
- Drafting and revision of sponsorship contracts in legal and fiscal terms
- Development of sponsoring concepts
- Cross-border legal and tax advice
- Implementation of (tax) compliance management systems for NPOs that finance themselves intensively through sponsoring
Whenever money flows, one thing is certain: the financing measures must be checked in advance from a legal and fiscal point of view and designed correctly. This is the only way for the nonprofit organization to plan in a long-term and financially secure manner. We will therefore be happy to check the projects you have in mind for their compatibility with the law on donations and sponsorship and, if necessary, work out alternative financing models with you and your fundraisers. In doing so, you will also benefit from our proven know-how in the field of capital market law and our expertise from legal and tax advice on numerous (online) donation platforms.
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