Annual Financial Statements for Foundations in Germany
Experienced tax advisors assist with annual financial statements for foundations
In a dynamic and increasingly complex regulatory environment, it is essential that foundations in Germany prepare their annual financial statements correctly and on time. We support them in this with our many years of experience and comprehensive expertise.
Are foundations required to prepare annual financial statements?
The accounting requirements for foundations are set out in the new reference in Section 84a (1) sentence 1 of the German Civil Code (BGB) and are based on mandate law (Sections 666 and 259 BGB). Even after the foundation reform came into force on July 1, 2023, it will not be adequately regulated by either federal or state law. Sections 80 to 88 of the German Civil Code and the respective state foundation laws also form the legal basis for accounting. Unless otherwise required by law, the foundation's articles of association may contain further provisions on accounting.
What are the requirements for the annual financial statements of foundations?
A structured summary of income and expenses and, if applicable, an inventory list constitute the minimum requirements for accounting (Sections 259, 260 BGB). The BGB does not specify any particular formal or structural requirements.
Some German state foundation laws expressly require foundations to maintain proper accounts. No specific accounting method is determined.
At the end of the financial year, foundations must prepare a statement of accounts in accordance with all state foundation laws, consisting of
- an annual statement of income and expenditure together with
- a balance sheet and
- a report on the fulfillment of the foundation's purpose (activity report).
Foundations must prepare annual accounts or annual financial statements, regardless of whether specific accounting rules apply to them for a specific area.
What regulations apply to charitable foundations?
In the business sector, tax-privileged foundations that conduct business operations (taxable business operations, special-purpose operations, commercial operations) that constitute a commercial enterprise in terms of their nature and scope are subject to the commercial accounting requirements (Sections 238 et seq. of the German Commercial Code).
Furthermore, industry-specific laws or regulations may impose obligations to apply commercial law provisions or accounting standards.
It is advisable to conduct the foundation's accounting in accordance with commercial principles in the interest of uniform presentation, particularly if a foundation is subject to commercial accounting requirements (Sections 238 et seq. of the German Commercial Code) for a sub-area due to commercial law or industry-specific laws or regulations.
Insofar as the foundation is not already required to apply commercial accounting rules under commercial law, tax law requires that Sections 238 to 263 of the HGB be applied to a large extent when the limits of Section 141 of the German Fiscal Code (AO) are exceeded (original accounting obligation). Section 141 AO is of particular importance for taxable, commercial business operations of foundations that pursue tax-privileged purposes in accordance with the provisions of the German Tax Code.
Foundations should voluntarily prepare annual financial statements
Finally, it seems appropriate for foundations to organize their accounting on a voluntary basis in accordance with the principles of commercial accounting and balance sheet presentation in accordance with the accounting regulations for all merchants. This applies in particular if there are significant
- depreciable fixed assets,
- receivables,
- liabilities,
- provisions, and
- accruals
or if the foundation's activities are characterized by an irregular course of business (e.g., due to investments at irregular intervals).
The accounting of foundations has various functions.
The documentation function serves to record all business transactions in full and to provide evidence of the statutory use of funds and the preservation of assets and capital.
The information function is primarily intended to provide information to the foundation's governing bodies and the foundation supervisory authority, as well as to the founders, co-founders, donors, recipients of foundation benefits, the financial administration, and the interested public.
In order to identify any potential over-indebtedness and insolvency, the accounting serves to prove the ability to cover liabilities.
What information must be included in a foundation's annual financial statements?
The annual financial statements consist at least of the balance sheet and the profit and loss statement for foundations that prepare annual financial statements in accordance with commercial law due to legal requirements, their statutes, or the IDW recommendation. The provisions of the first section of the third book of the German Commercial Code (sections 238 to 263 HGB), which apply to all merchants, must be applied. We usually prepare the following content:
1. Balance sheet
This provides an overview of the foundation's financial position at the end of the fiscal year and consists of two main parts:
- Assets: This lists all of the foundation's assets, such as real estate, buildings, financial investments, receivables, and liquid assets.
- Liabilities: This includes the foundation's capital and liabilities, including provisions, liabilities to banks, and other debts.
2. Profit and loss statement
This shows the foundation's income and expenses for the fiscal year and calculates the net income or net loss for the year.
- Income: e.g., from donations, membership fees, capital investments, events, and other income
- Expenses: e.g., for personnel, administration, projects, depreciation, and other operating expenses
3. Development of reserves for charitable foundations
The application decree for the German Fiscal Code requires tax-privileged entities within the meaning of Section 51 AO to separately disclose their reserves in accordance with Section 62 AO in their tax accounting. These requirements exist independently of the accounting provisions of the German Civil Code and, where applicable, the German Commercial Code (HGB).
4. Statement of funds used for charitable foundations
Furthermore, a tax-compliant statement of funds used must be prepared to prove that funds were used in a timely manner in accordance with Section 55 (1) No. 5 of the German Fiscal Code. There are no specific requirements regarding its content. The statement of funds used for all inflows and outflows is divided into:
- Income: e.g., donations, grants, income from economic business operations
- Expenditures: e.g., project-related expenditures, administrative costs, reserve funds
5. Notes, depending on the size of the foundation and legal requirements
Regardless of size, a set of notes should be prepared for a better understanding of the balance sheet and income statement, applying commercial law provisions (Sections 284 et seq. of the German Commercial Code) accordingly.
This also ensures that the accounting and valuation methods used are traceable. In addition, the notes should include references to the capital maintenance concept or to unrecognized benefit commitments that are made subject to the availability of sufficient foundation funds.
- Explanatory notes to balance sheet items: detailed explanations of the individual items in the balance sheet
- Notes to the profit and loss statement: Information on extraordinary income or expenses, special financing transactions, etc.
- Legal and tax information: Information on the legal basis and tax characteristics of the foundation
6. Management report, depending on the size of the foundation and legal requirements
If the size criteria of Section 267 (2) or (3) HGB are met and the complexity of the activities so requires, the supplementary commercial law provisions for the annual financial statements of corporations (Sections 264 et seq. HGB) should be applied.
Section 289 HGB shall apply to the management report accordingly. In order to give a true and fair view of the foundation's activities, the course of business, including the results of operations, and the financial position of the foundation should be presented. The management report shall include:
- Economic environment: Analysis of external factors
- Course of business and results: Description of significant events and business results
- Opportunities and risks: Presentation of future opportunities and risks
7. Activity report
Under all state foundation laws, foundations must prepare an accountability report consisting of annual financial statements together with a balance sheet and a report on the fulfillment of the foundation's purpose (activity report) after the end of the fiscal year.
To increase transparency and traceability, the activity report contains further information on the foundation's activities and the decisions made by the foundation's governing bodies in the past fiscal year.
8. Audit by an auditor (for foundations subject to audit)
A foundation may be audited on various grounds. These may include state foundation laws, its articles of association, an order by the foundation supervisory authority, the audit requirement due to exceeding the size criteria of the Publicity Act (PublG), or on a voluntary basis. If the foundation is subject to audit, the auditor's report must be included in the annual financial statements. The basis for the audit of foundations is the auditing standard of the Institute of Certified Public Accountants. This report confirms that the accounting and preparation of the annual financial statements are in order.
Our tax advisory services for your foundation
Our tax advisors for foundations take care of the following for you
- tax registration for new foundations,
- submitting applications,
- register entries,
- financial accounting,
- securities accounting,
- payroll accounting,
- preparation of annual financial statements consisting of balance sheet and income statement,
- preparation of notes,
- preparation of the statement of use of funds, and
- determination of the administrative expense ratio.
Your tax advisors for the annual financial statements of foundations in Germany
The best way to contact your advisors for questions on tax law for foundations is by email (info@winheller.com) or by phone (+49 69 76 75 77 85 21).
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