Use of Funds Statement for NPOs in Germany
Tax-privileged organizations in Germany must generally use their funds promptly for their tax-privileged statutory purposes, subject to the legally permissible creation of reserves. This prompt use of funds is given if the funds are used for the tax-privileged statutory purposes in the two calendar or financial years following the inflow at the latest.
What counts as funds?
The application decree to the German tax code (Abgabenordnung, AO) explains that, in addition to cash or book money, all other assets and therefore also claims are to be classified as assets.
Exception to the timely use of funds
The obligation to use funds promptly does not apply to organizations with annual income of no more than EUR 45,000.
Requirement to use funds promptly for statutory purposes
Funds that are spent for statutory purposes in the tax-privilieged spheres of the charitable sphere and the special-purpose operations are deemed to be used promptly. In addition to being used to cover current expenses, use in this sense also includes the use of funds for the acquisition or production of assets that serve statutory purposes.
In asset management and/or taxable business operations, no funds that are to be used promptly may be used, but only funds that are not subject to the timely use of funds. These may, for example, be funds from permitted reserves or from the basic assets.
Per-balance consideration of the prompt use of funds
When reviewing the use of funds by the tax authorities, the focus is not on the individual donation, but on the entirety of all donations and other income or assets of the organization to be used in a timely manner in a balance analysis or global analysis.
Obligation to provide evidence through a statement of use of funds
As part of the actual management, there is an obligation to provide evidence if funds have not already been used for the statutory purposes in the year of the inflow or have been permissibly added to the assets. This is best done by means of a supplementary statement, the so-called statement of the use of funds, showing the unspent funds carried forward.
How do you prepare a statement of the use of funds?
Neither the legislator nor the tax authorities specify a concrete calculation scheme. Nevertheless, a use of funds statement must
- show the change in financial resources of a financial year for specific spheres so that any misappropriation of funds can be identified
- show the acquisition and production processes as a type of timely use of funds and disinvestments as measures for the raising of funds in a sphere specific way
- show the creation of reserves as an exception to the prompt use of funds
- show the connection to the development of tax reserves
- show the surplus funds of a financial year as the funds carried forward
- be updatable across individual financial years
Considerations on the abolition of the obligation to use funds promptly
The draft bill of the second Annual Tax Act 2024 (JStG 2024 II) of July 10, 2024, discusses the abolition of the obligation to use funds in a timely manner. § Section 55 (1) no. 5 of the German tax code is to be repealed for this purpose. It should be noted that the general principles of German nonprofit law continue to apply, i.e. in particular the principle of exclusivity in accordance with Section 56 AO.
We will keep you up to date on further developments.
Obligation currently remains unchanged!
As of today, the legal requirement to implement the timely use of funds as part of the actual management continues to apply. We know from our ongoing advice that this obligation is sometimes not observed in the actual management and that the charitable status is therefore jeopardized for each individual assessment period in which the prompt use of funds and the proof by means of a statement of use of funds is not observed.
Our consulting services for the use of funds statement for nonprofit organizations
Our experienced NPO consultants support you with
- all relevant questions regarding the timely use of funds
- the preparation of your use of funds statement
- the calculation of permissible reserves
- checking the revival of the obligation to use funds promptly in the event of divestments
- compliance with the requirements when assets change spheres
Your advisors for use of funds statements in Germany
The easiest way to reach our tax advisors for questions regarding statements on the use of funds in NPOs is by e-mail (info@winheller.com) or by phone (+49 69 76 75 77 85 21).
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