Withdrawal of Charitable Status in Germany
The all-or-nothing principle applies
The German tax authorities have not stopped at nonprofit organizations for a long time now. Tax audits are also part of everyday life in the third sector. In view of the wealth of regulations and requirements stipulated by German nonprofit law, which must be observed by the persons involved, it is therefore easy for the charitable status to be revoked. The annoying thing is that even small mistakes can lead to the withdrawal of the charitable status according to the all-or-nothing principle that applies in Germany.
Typical errors include, for example
- Lack of proper bookkeeping and actions by those responsible that are relevant under criminal tax law
- Violation of the principle of selflessness, i.e. use of the NPO's funds for purposes outside of its articles of association (e.g. private purposes or for taxable business operations)
- Hidden profit distributions
- Issuance of donation certificates for favors
- Inappropriately high managing director salaries at charitable LLCs
- Payment of excessive remuneration to board members (without a basis in the articles of association)
- Payment of excessive fees to service providers
- Errors in the drafting of the articles of association
- Violation of the principle of exclusive use, e.g. through excessive economic or political activity
- Violation of BaFin's banking supervisory requirements, e.g. when accepting or issuing loans
Withdrawal of charitable status for several years
The tax office withdraws the charitable status for the respective year in which the nonprofit organization (NPO) made the error. In practice, this usually leads to a withdrawal of charitable status for several years, as errors that are made often extend over several years. However, if the error is rectified, it is possible to regain charitable status for the future.
No immediate revocation of the charitable status in the event of inadmissible accumulation of funds
The only exception to the all-or-nothing principle explicitly mentioned in the law, which is very important in practice, applies in the event of inadmissible accumulation of funds, i.e. in the event that an NPO does not use its funds for its charitable purposes within two years of the year in which they were received, as required by nonprofit law.
Instead of immediately withdrawing the charitable status, the tax office will then set a deadline by which the overdue funds must be used for charitable purposes. If the deadline set by the tax office is met, the charitable status will not be revoked.
Retroactive revocation of charitable status
Violations of the important principle of asset limitation, on the other hand, not only lead to the charitable status being revoked for the years in question, but even to a retroactive revocation of the charitable status for the past 10 years! Such violations therefore often result in the organization's closure. Retroactive taxation (VAT, income tax, liability for donations, etc.) often leads to the insolvency of the NPO.
Such serious violations are conceivable, for example, if the nonprofit limitation of the assets beyond the date of dissolution of the NPO is not correctly stipulated in the articles of association or if the articles of association are correct but the organization does not actually observe the asset limitation or misuses its funds to such an extent that all of its funds are withdrawn from charitable purposes and ultimately do not serve nonprofit purposes any more.
Subsequent problem I: Reclaiming subsidies
With the exception of the 10-year back-taxation described above, the withdrawal of charitable status is less dramatic for many corporations than the subsequent problems that can develop into a disaster for both the organization and those responsible.
Subsidized institutions in particular, e.g. educational institutions such as schools and kindergartens, research institutions, providers of social services and workshops for the disabled, are often threatened with the loss of state support following the withdrawal of their charitable status. This often means that the entire business model, which is absolutely dependent on grant funding, collapses: Without grants, the running costs, especially personnel costs and rents, can usually not be covered.
And that's not all: the loss of charitable status often leads to the public sector demanding the full or partial repayment of subsidies already granted for previous years. This regularly seals the insolvency of the formerly nonprofit organization if no legal and/or political solution to the problem is found.
Subsequent problem II: Personal liability
But that's not all: the withdrawal of charitable status and possible claims for repayment of grants are just the beginning in terms of the personal liability of those responsible.
For the persons involved, e.g. the board or managing director, there is much more at stake: both the tax office and the NPO itself are very likely to hold the persons involved liable for tax arrears or damages.
Incidentally, the NPO is obliged to assert these claims if it does not want to commit another misuse of funds by waiving the claim for damages and thus commit another error against German nonprofit law requirements. This obligation to take action against one's own colleagues complicates the situation considerably, both legally and emotionally. This leads to a rift between formerly good colleagues. In such cases, those NPOs that have taken out D&O insurance for their managers at an early stage, which steps in and compensates for the damage if the worst comes to the worst and thus protects those responsible for the damage from financial loss, can consider themselves lucky.
Subsequent problem III: Effects on donations
An organization whose charitable status has been revoked may no longer issue donation receipts. As most donors wish to claim their donations in their tax returns, but such donations are only deductible if they are made to nonprofit corporations, the loss of charitable status will often lead to a significant drop in donation income.
The withdrawal of charitable status may also have negative consequences for donation receipts that have already been issued. Donors may continue to rely on the donation receipts once issued - at least if they did not know or should not have known that the donation receipts were incorrect. However, the nonprofit organization itself is often liable to the tax office for at least 30 percent of the donations. This so-called donation liability then threatens both the nonprofit organization and those responsible for the NPO.
We represent your NPO vis-à-vis the tax office and grant providers
The (impending) withdrawal of charitable status is often a threat to the existence of the NPO and the people involved.
In this emotionally moving situation, we represent your organization confidently vis-à-vis the German tax authorities and grant providers and advise you on the necessary course of action. Incidentally, in the case of minor infringements compared to the size of your NPO, it may still be possible to avert the withdrawal of charitable status despite the above-mentioned all-or-nothing principle using constitutional arguments - if not in the objection proceedings, then often at least before the tax court.
In some cases, the tax authorities are also quick to recognize errors which, on closer examination, turn out to be unobjectionable actions. However, if there are indeed violations of the nonprofit rules, we will discuss with you in detail how the errors can be rectified immediately so as not to further jeopardize your charitable status, at least for the future. When dealing with grant providers, we attach particular importance to clearly identifying the reasons for the grant payment made in the past. The charitable status in the strict sense of the tax code is not always a mandatory requirement for grant funding. Claims for repayment solely because of the withdrawal of charitable status do not exist.
Discussions with the tax office: Preparation is key
One thing is clear: going into discussions with the tax office and/or grant providers unprepared and assuming that “everything can be sorted out somehow” in discussions with the authorities is almost always the wrong approach and a very dangerous one that will backfire.
It's better to talk to us in good time so that we can warn you of the risks and work with you to develop a smart strategy for the next steps.
Your attorney for the withdrawal of charitable status in Germany
Is your organization threatened with the withdrawal of its charitable status or has it already been withdrawn? Our attorneys will be happy to help you with all questions relating to problems with the tax office or the withdrawal of your charitable status in Germany.
The easiest way to contact us is by e-mail (info@winheller.com) or by phone (+49 69 76 75 77 85 24).
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