German tax law is very complex and also plays an important role in fundraising. For example, the donor can deduct his donation up to a maximum amount as a special expense in his own tax return. And indeed, saving taxes is a major driver for many taxpayers to donate to charitable organizations. While this is usually a no-brainer for donations to domestic nonprofit organizations (NPOs), it becomes more complicated for donations to foreign charities. Giving abroad will be tax-deductible for the German donor only if certain requirements are fulfilled.
The reason for the German tax authorities' reluctance to recognize donations abroad for tax purposes is obvious: German government loses its tax revenue by making donations tax-deductible. In the case of charities located in Germany, this effect is intended: After all, the recipient organizations usually use these funds to take on public benefit tasks that would otherwise be the responsibility of the government. A donation to a foreign charity, however, deprives the German state of tax revenue as the foreign NPO usually does not develop any activities in Germany. The donation just goes abroad and benefits charitable projects elsewhere in the world.
Therefore, donations to foreign NPOs can be deducted under certain requirements, only:
- Similar legal form: The legal form of the foreign organization must correspond to that of a German corporation or association. For this purpose, the German tax office compares different criteria, such as liability, management, or representation. According to these criteria, for instance, a Belgian association corresponds to a German association.
- Formal public-benefit status: The statutes and bylaws of the foreign NPO must comply with German nonprofit tax law. Therefore, the statutes must state which public-benefit purposes within the meaning of the German Fiscal Code the NPO wants to pursue and how these purposes are to be achieved. The public-benefit purposes are listed exhaustively in Section 52 of the German Fiscal Code. For instance, the advancement of the protection of animals or the nature constitutes a public-benefit purpose.
- Material public-benefit status: Likewise, the actual management of the foreign charity must follow the nonprofit provisions of the German Fiscal Code. It must be aimed at the exclusive and direct fulfillment of its public-benefit purposes and must comply with the provisions of the statutes.
- Contribution to Germany's reputation: Most foreign nonprofit organizations achieve their statutory purposes exclusively outside Germany. Therefore, German law requires that the activities of the grant recipient contributes to the reputation of the Federal Republic of Germany. However, this is not a strict requirement. For instance, it is sufficient if the donors are named publicly or if the activity report of the foreign recipient organization refers to Germany as the origin of the donations received.
The German donor is required to prove that the foreign recipient of his donation fulfills the above mentioned requirements of the German nonprofit law by submitting suitable documents to the German tax office. In particular, the following documents are suitable for this purpose:
- Statutes and bylaws,
- Activity reports,
- Statements of income and expenditure of the foreign organization,
- Records regarding the receipt of donations and their appropriate use and
- Donations receipts
In practice, it is often difficult to provide suitable documents to the tax office as most documents are either not available at all or not available in German. However, the German authorities typically require that documents in foreign languages will be translated at the taxpayer's expense, which discourages many potential donors.
International nonprofit organizations wishing to collect donations in Germany should engage a domestic law firm to prepare a legal opinion confirming the tax deductibility of the donations received from German donors. This approach has the following advantages:
- The foreign NPO can publish the legal opinion on their own website to encourage potential donors from Germany to donate.
- German donors can submit this document to their tax office in order to prove that the foreign NPO fulfills the requirements of German nonprofit tax law.
- If there are any further questions, the law firm can act as a contact for the foreign charity, German donors and the tax office.
The result: The foreign charity can collect donations from German donors which are tax-deductible for them, as if the foreign NPO was a Germany based entity. Thus, the foreign organization receives another means of fundraising, without having to establish a German subsidiary.
What does that mean in specific terms?
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The measures described above do not help with donations to organizations located in countries outside the European Union or the European Economic Area (EEA). Direct donations to these countries are never tax-deductible under German nonprofit tax law. However, these NPOs can alternatively establish a supporting organization in Germany which is a nonprofit subsidiary in Germany that collects donations on behalf of the foreign parent organization and forwards the donations to the parent organization under a grant agreement. Donations to such a supporting organization are tax deductible for German donors.
For years we have been advising and assisting foreign NPOs in all questions of national and international donation law. We are also happy to be your contact for your international fundraising projects and offer you all legal and tax consulting services from one source - our international network makes this possible.
Our services in the field of donation law are manifold and include:
- Implementation of tax compliance management systems and donation compliance management systems for NPOs that finance themselves intensively through donations
- Advice on the issuing of donation receipts
- Development of donation and fundraising concepts including foundation solutions for addressing major donors
- Tax optimization advice for donors
- Support regarding the establishment of a German nonprofit subsidiary
- Drafting of grant agreements, especially for transfers abroad, to protect the public-benefit status of the German entity and to avoid liability
- Design of statutes and bylaws
- Expert opinion on cross-border legal and tax/nonprofit issues
- Support in case of imminent liability, for example in case of misuse of funds
- Cooperation with our foreign partner law and tax firms to clarify international legal and tax issues
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