Nonprofit organizations in Germany (NPOs) are not limited to their own activities and to conducting their operational business when pursuing the purposes set out in their statutes and bylaws. According to the provisions of the German nonprofit law, NPOs may also act as supporting organizations and provide support and forward funds and grants to third parties or engage third parties as aides.
Depending on the legal qualification of the receiving organization, the requirements for forwarding funds vary. Even the administrative effort will be lower or higher depending on the specific structure. Organizations that do not want to put their German charity status at risk need a suitable contractual basis and should make absolutely sure its provisions are carefully adhered to.
NPOs may give grants to other domestic organizations or across borders to foreign corporations. When forwarding funds to domestic nonprofit organizations (i.e. foundations, associations, charitable LLCs) the following rules apply:
At the time when the funds are received, the receiving organization must mandatorily also be tax-exempt, i.e. recognized as a charity by the German tax authorities.
This is different in case of public-law corporations: Funds may be forwarded to public-law corporations even if they are not themselves tax-privileged. In practice, this mainly concerns public-law corporations that use the funds received for a charitable business (like museums or kindergartens).
In addition, the funding organization's statutes must explicitly allow the forwarding of funds. It is not required - but admissible - to specifically name the receiving organization in the funding organization's statutes. Often the name of the receiving organization is deliberately omitted. Stating it would create an unnecessary restriction for the supporting organization as, in such case, funds may no longer be forwarded to any organization except the one specifically named. Funding organizations wish to make commitments of this kind only in exceptional cases.
If the statutes and bylaws contain no provision on the giving of grants at all, the funds may only be forwarded in compliance with Section 58 No. 2 of the German Fiscal Code (Abgabenordnung; "AO"). According to that provision, a tax-exempt organization may never forward all or most of its funds. It may only do so in addition to achieving its purposes itself. Otherwise it risks losing its charitable tax-exempt status.
So-called forwarding chains (Weiterleitungsketten) are permitted. These allow the receiving organization to forward the funds received to another organization – within Germany or cross-border. In this context, it is important to ensure that, in the end, the funds are used for the supporting organization's tax-privileged purposes.
In order to ensure that the recipient organization makes proper use of the funds received, it is advisable for the supporting organization to conclude a contract with the recipient organization in which all rights and obligations are set out - including the obligation to provide regular proof of the use of funds and to reimburse the supporting organization if the funds have been misused.
Any and all of the supporting organization's assets can be used for the purpose of forwarding funds. This not only includes financial grants but also non-monetary funds. By way of example soccer balls could be given to a soccer club, which could then pass them on to a refugee facility using them to organize a soccer tournament for refugee children.
The term "funds" (within the meaning of the German law) may also include services provided for free or for a reduced fee. This may be relevant for holding companies that provide services for their tax-privileged subsidiaries.
It is quite common that domestic supporting organizations and charitable foundations forward funds to foreign organizations. When forwarding funds across borders, the receiving foreign organization does not need to be tax-exempt within the meaning of the German Fiscal Code. This makes sense as only very few foreign organizations are established in compliance with the German Fiscal Code. Instead the requirements for forwarding funds abroad are as follows:
- The foreign receiving organization must have a legal form that is comparable with a German statutory corporation. Proof of the legal form may be furnished by providing the foreign organization's articles of incorporation.
- Although the receiving organization does not need to be tax-privileged, its actual activities must hypothetically fulfill the requirements of German nonprofit tax law (control question: Would the activity be tax-exempt in Germany if it were exercised in Germany?). Evidence may be furnished by "informal proof", which may consist of project descriptions, activity reports, contracts, but also press releases or brochures.
The statutes/bylaws of the supporting organization must explicitly allow the forwarding of funds pursuant to Section 58 No. 1 AO. If these formal requirements are not fulfilled there will be no possibility of forwarding funds in accordance with Section 58 No. 2 AO to a foreign organization. In such case, any projects in other countries have to be carried out by the German supporting organization or charitable foundation acting itself or possibly with the assistance of an aide.
Tax-privileged charities may engage so-called aides (e.g. sub-contractors) to perform certain activities. An aide may be
- an individual person,
- a group of persons, or
- a legal entity.
Aides are explicitly not required to pursue any tax-privileged purposes themselves.
The most important aspect is that the activity of the aide is regarded as an activity of the charity itself. As a consequence, the charity must be authorized to give the aide instructions and to decide on the contents and scope of the aide's activity. For this purpose, the relevant powers given to the charity with regard to the aide have to be agreed in a so-called aide agreement.
Regarding the aide's tax classification, the following applies: Aides do not pursue any tax-privileged purposes themselves but the tax-privileged purposes of the organization that engages them. As a result, aides will in no case obtain a tax-exemption based on their activities as aides. In order to get a tax-privileged charitable status, aides must pursue their own tax-privileged purposes (for themselves).
What type of cooperation with other (charitable) organizations or persons may be expedient will depend on the circumstances of the individual case. Often one type or another will be clearly more suitable. Our experienced nonprofit tax attorneys will be pleased to assist you in your decision on and implementation of a planned cooperation.
You wish to give a grant to another organization or execute an aide agreement? Our experts in nonprofit law support you. Your contact partners are Attorney Uwe Müller and Attorney and Certified Foundation Consultant Alexander Vielwerth. The easiest way to reach us is by e-mail (firstname.lastname@example.org) or by phone (+49 (0)69 76 75 77 80). Please feel free to contact us any time with your questions. We are here to assist.