Germany P+P Pöllath + Partners Dr Andreas Richter & Dr Anna Katharina Gollan

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Germany

Germany
P+P Pöllath + Partners
Dr Andreas Richter & Dr Anna Katharina Gollan

1.    BACKGROUND
1.1   History of charitable activity
The first charitable organisations in Germany were established as
foundations in the Middle Ages. They were under the control of the church’s
administration. During the 13th century the appearance of foundations
independent of the church, administrated by laymen and supervised by
public authorities, increased. They pursued religious and social purposes
by providing hospitals and hostels. During the 17th and 18th century the
purposes followed by the foundations became more secular and focused,
for example, on education and science. For a long period of time, private
foundations have been seen very critically. Charitable purposes were
considered to be an original function of the state. Therefore, private
foundations were subject to a very strict public regulation. In Prussia private
foundations could be liquidated by the government without further ado.
Private foundations reached their prime-age before the First World War.
Particularly industrialists supported art and science by donations and
foundations. Since 2002 the foundation laws of the federal states have been
revised. Today, they emphasise the will of the founder and the discretion of
the board of directors.
   In the middle of the 19th century people were allowed to unite themselves
in associations without any public authorisation and to pursue charitable,
benevolent, sociable, scientific and artistic purposes.
   Today, charitable organisations have become some of the major economic
forces and most significant contributors to social life and its improvement.
These organisations serve important human needs, ranging from supporting
the arts to combating poverty. As of 2007 the sector has been strengthened
by an improved donation law allowing the deduction of a considerable part
of contributions to charities.
   In Germany the tradition of charitable giving is both long-living and
considerable in size. However, the charitable sector is also quite complex,
including very different types of institutions. This results from the fact that
the sector is almost clearly divided into two parts, which has hindered the
development of a unified sector identity. One part of the sector is comprised
of organisations active in areas such as culture, recreation and sports, and
the environment, which show a remarkable degree of civic participation
and rely heavily on membership dues and volunteer input in financing
their activities. The other part consists of charitable organisations primarily
active in the health and social services fields, which are an integral part

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of the German welfare state and where the principle of subsidiarity is
most forcefully in place. Health and social service organisations are highly
professionalised, thus perceived as less civic, and rely primarily on income
from social insurance payments and direct state subsidies.

1.2   Current size of the sector and activities undertaken
Today, there are about 19,000 foundations, about 20,000 charitable
corporations and about 600,000 associations, which leads to the fact that
the charitable sector has become a significant economic and social factor in
Germany. As to its size and its increase, the German charitable sector is on
average in an international comparison, it has an unique structure of income.
With 64.3 per cent as opposed to the international average of 42.7 per cent,
the public financing bears the biggest portion of the costs, while the receipts
of donors are at the lowest level from an European point of view. However,
in comparison with 2009, an increase in the amount of donations can be
observed. In 2010 the volume of donations rose about nine per cent up to €2.3
billion.

1.3   Charity law as tax law
In Germany ‘charity’, or Gemeinnützigkeit, as a legal term is not legally
defined and has relevance only in tax law. Especially there is no separate
body of law for charities. The regulation of charities is characterised by
the General Fiscal Code (Abgabenordnung or AO) and the special tax rules.
Under the heading of ‘tax-privileged purposes’ (steuerbegünstigte Zwecke) the
General Fiscal Code clarifies the concept of charity (Gemeinnützigkeit) in 18
paragraphs – ss. 51-68 AO.
   In contrast, there are no special rules for the variety of charitable
(ie, tax exempt) legal forms in the law of foundations, associations
and corporations. While there is no uniform ‘tax law for charities’, the
recognition that an organisation is pursuing charitable purposes is reflected
in the individual tax laws. Examples are s. 5 (1) no. 9 Corporate Income Tax
Act (Körperschaftsteuergesetz or KStG) and s. 13 (1) no. 16b Inheritance and
Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz or ErbStG).

2.    SOURCES OF CHARITY AND NON-PROFIT LAW
All special tax laws relate to the Abgabenordnung as the basic legal reference
for the definition of tax-exempt status.

2.1   Requirements of the qualification as charities
The Abgabenordnung gives the main requirements that have to be fulfilled
to be eligible for tax relief, including the organisation’s purpose and its
fulfilment.

2.1.1 Requirements with respect to the organisation’s purpose
‘Charity’ in terms of the Abgabenordnung requires to pursue ‘public benefit
purposes’ (gemeinnützige Zwecke), ‘benevolent purposes’ (mildtätige Zwecke),
or ‘religious purposes’ (kirchliche Zwecke).

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2.1.1.1 Public benefit purposes
According to s. 52 (1) AO, an organisation pursues public benefit purposes
if its activities are directed towards benefiting the general public materially,
culturally, or morally in a selfless manner. The law mandates that the
statutes must not limit the group of persons who benefit from the activity
too closely; for example, it must not be restricted to the members of a family
or the staff of a company.
    The law defines the objectives recognised as being of public benefit. The
catalogue is rather wide and most notably includes sports as well as some
defined ‘leisure purposes’ (s. 52 (2) 1 no. 23 AO). Additional explanations are
found in the Regulations of the General Fiscal Code (Anwendungserlass zur
Abgabenordnung or AEAO).
    The catalogue of public benefit purposes includes:
1. the promotion of science and scientific research;
2. the promotion of religion;
3. the promotion of the public health system and public health care;
      particularly the prevention and fight against contagious diseases, also
      by running hospitals in terms of s. 67 of the Abgabenordnung, and from
      animal plagues;
4. the promotion of services to underprivileged youth and elderly;
5. the promotion of art and culture;
6. the promotion of protection and preservation of monuments according
      to German state laws;
7. the promotion of education; education of the general public and
      vocational training including the student’s help;
8. the promotion of protection of the environment and landscape
      conservation according to German federal and state laws regarding the
      protection of the environment, of the protection of the coast and the
      floodwater protection;
9. the promotion of the public welfare, particularly of the purposes of the
      officially recognised groups of the voluntary welfare associations, of its
      subgroups and its connected equipments and institutions;
10. the promotion of support for persons persecuted for political, racial or
      religious reasons, refugees, expellees, repatriates, post-war repatriated
      persons from Eastern Europe, war victims, surviving dependants,
      war invalids and prisoners of war, civilian war disabled and people
      with disabilities as well as support for victims of crime; promotion of
      the memory of persecuted persons, war victims and disaster victims;
      promotion of the tracing service for missed people;
11. the promotion of lifesaving;
12. the promotion of fire, labour and disaster protection and civil defence as
      well as accident prevention;
13. the promotion of internationalism, tolerance in all fields of culture and
      the idea of international understanding;
14. the promotion of the protection of animals;
15. the promotion of foreign aid;
16. the promotion of consumer advice and protection;

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17. the promotion of care for prisoners and former prisoners;
18. the promotion of equal rights for women and men;
19. the promotion of the protection of marriage and family;
20. the promotion of crime prevention;
21. the promotion of sports, chess is considered as sport;
22. the promotion of cultural heritage and tradition;
23. the promotion of livestock breeding, plant breeding, garden plots,
    traditions and customs including carnival and Mardi Gras, the care for
    soldiers on active duty and on the reserve list, amateur radio, model
    aircraft building, and dog sports;
24. the general promotion of the democratic political system in Germany;
    this does not include efforts exclusively pursuing individual interests of
    a civic nature or which are limited to the municipal-political area;
25. the active citizenship in support of public-benefit, charitable or religious
    purposes.

2.1.1.2 Benevolent purposes
An organisation pursues benevolent purposes according to s. 53 AO if it
assists people in need. The law defines ‘people in need’ simply as those who
depend on help from others. In addition, the Abgabenordnung mandates
that the need for assistance be due to specific reasons – physical, mental or
emotional defects. Assistance to persons in need of financial help is a further
category. On account of these guidelines, the concepts of ‘public benefit’
and ‘benevolent’ may overlap.

2.1.1.3 Religious purposes
According to s. 54 AO, an organisation pursues religious purposes if its
activities are directed toward promoting, in a selfless manner, a religious
community that is a body corporate under public law. Furthermore, s. 54
(2) AO recognises individual activities that serve the interests of religious
communities, such as construction of places of worship, the training of
clergymen, and the administration of church property, as tax-privileged
objectives.

2.1.2 Requirements with respect to the fulfilment of charitable purposes
Recognition as a tax-privileged organisation does not depend solely on the
pursuit of charitable purposes in accordance with the statutes. Charitable
organisations have to pursue such purposes selflessly (selbstlos), exclusively
(ausschließlich), and directly (unmittelbar). Furthermore, a charitable
organisation is not allowed to accumulate income (Gebot der zeitnahen
Mittelverwendung) (but see paragraph 2.1.2.5 below).

2.1.2.1 Rule of selflessness
The rule of selflessness (Gebot der Selbstlosigkeit) is stipulated in s. 55 (1)
AO. The definition of ‘selflessness’ given by the legislature is based mainly
on a negative description: an organisation is not acting selflessly if its
predominant aim is profitability. An organisation’s aim is profitability if

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it promotes its own financial interests or those of its members as its prime
concern, not just incidentally. In other words, the activities of a charity must
not be directed primarily towards making a profit. Business and commercial
operations as a chief objective of the organisation are not selfless activities.
But the law gives some leeway requiring merely that profitability shall not
be the ‘predominant aim’. Furthermore, it constitutes a violation of the
selfless nature of a charitable organisation if its employees or third parties are
granted unreasonably high compensation. The salaries or payments in the
commercial sector are used as a standard in determining a reasonable level of
compensation, which means that the permissible level varies depending on
the facts of a particular case.
    According to s. 55 (1) no. 1-4 AO, a promotion or assistance is selflessly
conducted if individual commercial purposes are not primarily pursued and
the following additional requirements are met:
(i) funds of the organisation may only be used for purposes stipulated in
      the articles of association;
(ii) upon withdrawal of a member or upon dissolution or annulment of
      the organisation, the members shall not receive an amount larger than
      their respective deposited equity-interest and the real value of any
      contributed tangible asset;
(iii) the organisation shall not favour any person with disbursements that are
      not in line with the purpose of the organisation or with unreasonably
      high compensation; and
(iv) upon dissolution or annulment of the organisation or upon
      discontinuation of the organisation’s present purpose, the capital of the
      organisation, may generally only be used for tax-privileged purposes
      (principle of capital commitment).
    According to s. 55 (3) AO, the provisions regarding the members of the
organisation (paragraph 1 no. 1, 2, and 4) analogously apply to founders and
their heirs in case of foundations.

2.1.2.2 Rule of exclusiveness
Charities derive their legal recognition as ‘tax-exempt’ entities from the
recognition of the charitable nature of their objectives as stated in their
statutes. Logically, those organisations may pursue only and exclusively
these objectives, s. 56 AO. The law grants the tax concessions specifically
for the pursuit of tax-privileged objectives, so it does not accept use of the
organisation’s funds for pursuing objectives other than those stated in the
statutes. The rule of exclusiveness (Ausschließlichkeitsgrundsatz) means that
the charity must dedicate itself solely to the said objectives unless the law
permits certain exceptions. If an organisation carries out other activities, it
may lose the tax benefits altogether.

2.1.2.3 Rule of directness
In addition, a charitable organisation must carry out its activities as stated
in the statutes ‘directly’ (Grundsatz der Unmittelbarkeit). According to s. 57 (1)
AO, an organisation directly pursues its tax-privileged statutory purposes if

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it serves these purposes ‘itself’. Depending on the circumstances of the case,
the requirement can still be fulfilled even if an auxiliary person (Hilfsperson),
for example an individual or another charitable or non-charitable
organisation, is in charge of pursuing the charity’s goals. In this case, all
actions undertaken by the auxiliary person are deemed to be the actions
of the charity itself. It must also be observed that such an auxiliary activity
does not itself constitute a tax privileged activity. This rule complicates the
set-up of holding structures. However, several exceptions to the principle of
directness are to be found in s. 58 AO (see paragraph 2.1.2.5 below).

2.1.2.4 Distribution requirements
According to s. 55 (1) no. 5 AO, a charitable organisation shall use its funds
in a timely manner for its tax-privileged purposes stipulated in the articles
(Grundsatz der zeitnahen Mittelverwendung). The income cash flow is the
relevant factor for calculation of the required distributions. It is irrelevant
whether the distributions are rather small compared with the fair market
value of the charities’ assets. The use of funds for the purchase or production
of assets which serve purposes stipulated in the articles is considered as the
use of funds for tax-privileged purposes. The timely use of funds requirement
is fulfilled if the funds are spent for tax-privileged purposes stipulated in
the articles of association by the end of the calendar year or the taxable
year following the receipt of the funds. However, the tax law also grants
exemptions.

2.1.2.5 Tax-neutral application of funds
The Abgabenordnung makes few exceptions to the above-mentioned
principles with respect to the fulfilment of charitable purposes. According to
s. 58 AO, the tax privilege will not be refused because:
(i) an organisation procures funds for the realisation of another
      organisation’s tax-privileged purposes. Under this provision fundraising
      vehicles forwarding funds to foreign charitable organisations may be
      accepted as tax exempt;
(ii) an organisation partly distributes its funds to another tax-privileged
      organisation, which uses these funds for tax-privileged purposes;
(iii) an entity provides its staff for tax-privileged purposes;
(iv) an organisation permits another tax-privileged entity to use its premises
      for the latter one’s tax-privileged purposes;
(v) a foundation uses a part, but not more than one-third, of its income to
      adequately support the founder or his/her next of kin, to maintain their
      graves, and to honour their memories;
(vi) an organisation completely or partly allocates its funds to reserved
      capital on a sustainable basis and to the extent that it is necessary in
      order to fulfil its tax-privileged purposes;
(vii) (a) an organisation allocates to reserved capital no more than one-
           third of its surplus (receipts minus expenditures) derived from
           asset management and no more than 10 per cent of its other funds
           required for timely use under s. 55 (1) no. 5;

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      (b) an organisation accumulates funds for the acquisition of member
          or shareholder interests to maintain the percentage of its interest
          in the association, or using funds for this purpose in the year of the
          receipt of the funds;
(viii)an organisation arranges social gatherings, which are of lesser
      significance compared with its tax-privileged activity;
(ix) a sports association promotes professional sports in addition to amateur
      sports;
(x) a foundation established by a municipality grants benefits to business
      enterprises in order to carry out its tax-privileged purposes;
(xi) an organisation adds the following funds to its capital:
      (a) death grants if the testator has not appropriated the grant for
          current expenses;
      (b) grants, which the grantor expressly specifies are intended either to
          equip an organisation with capital or to increase the capital;
      (c) grants as a result of an appeal for donations by the organisation if
          it can be ascertained from the appeal, that the donations are being
          asked for the purpose of increasing the capital;
      (d) donations in kind which are considered capital by their nature;
(xii) a foundation completely or partly contributes its surplus to its capital in
      the year of its foundation and in the following two calendar years.

2.2 Permissible activities by charities
2.2.1 Fundraising
Charities are free to arrange fundraising campaigns. Although there are
no specific regulations in this regard, it is notable that, according to the
rule of selflessness, unreasonable administration costs may endanger the
organisation’s tax-exempt status.

2.2.2 Economic activities
Organisations that pursue tax-privileged purposes may engage in economic
activities as long as commercial activities are not their principal purpose.
If the activity is necessary to pursue the charitable purpose and does not
compete with the activities of the for-profit organisations, it is not taxed
(related business income; Zweckbetrieb). For example, a school of engineering
is deemed to be a Zweckbetrieb because it generally does not compete with
for-profit organisations, garbage disposal is not deemed to be a Zweckbetrieb
because there is a market for it with competing enterprises. In contrast,
unrelated business activity (wirtschaftlicher Geschäftsbetrieb) is ordinarily
taxed if the turnover exceeds €35,000; s. 64 (3) AO. If a business activity
becomes too large, charities often outsource it into for-profit subsidiaries.

2.2.3 Political activities
Organisations pursuing tax-privileged purposes must not spend any of their
assets for the direct or indirect benefit of political parties; s. 55 (1) no. 1 sent.
3 AO. However, political education and support of democratic development
both qualify as charitable purposes. Furthermore, an organisation is allowed

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to comment on politics related to its purpose. In this respect it is also
allowed to communicate with legislators about proposed legislation without
losing its tax-exempt status.

3.    LEGAL STRUCTURES
3.1   Overview
In tax law all charitable organisations are considered as Körperschaften
(corporate bodies) regardless of the organisations’ definition according to
civil law and regardless of their membership and legal capacity. Partnerships
(eg, Gesellschaften bürgerlichen Rechts, offene Handelsgesellschaften, and
Kommanditgesellschaften) are excluded from tax-exempt status. Individual
persons as receivers of donations are excluded from the mentioned tax
advantages as well.
   In the charitable sector, there are three principle organisational forms.
These predominant forms are the registered association (Verein), the
foundation (Stiftung), and the limited liability company (GmbH).
   In addition, charitable purposes can be achieved by donations in the form
of specific purpose funds, which will not by themselves act as legal persons.
In that case the funds will have to be entrusted to some other natural or
legal person. Such a trust-like device is often called a ‘non-independent
foundation’ (unselbstständige Stiftung).
   There are not just legal criteria that influence the choice of a special legal
form, but also, and sometimes dominant, subjective preferences. Especially
the foundation is associated with positive aspects as benevolence, welfare
and doing good deeds in the public view. Because of the different needs and
requirements, for example the influence of the executive director, it is not
possible to recommend a special legal form overall.
   As already mentioned, there are no specific civil legal requirements to be
fulfilled by organisations in order to obtain charitable status.

3.2   Associations
The registered association is regulated on the federal level by ss. 21 – 70 of
the German Civil Code (Bürgerliches Gesetzbuch or BGB). It is described as a
coalition of several natural or legal subjects organised in a corporative way to
act over a certain period of time in order to reach a common purpose. Both
public benefit and mutual benefit associations are permitted.
   The German Civil Code distinguishes between non-profit incorporated
associations (Idealverein) and economic associations (wirtschaftlicher Verein)
with a business purpose. However, the latter type of a registered association
is not relevant in the context of charitable organisations. The Idealverein is
by far the most predominant form for the organisation of civic activities.
There are several hundred thousands of Idealvereine in Germany. However,
larger charities often are organised as foundations (see paragraph 3.3 below)
or limited liability companies (see paragraph 3.4 below).
   The non-profit incorporated association, whose main aim and activity
must not involve the conduct of business, will acquire the status of an
independent legal subject upon registration at the federal Register of

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Association (Vereinsregister). When such an association is registered, it places
the designation ‘e.V.’ (eingetragener Verein) at the end of its name. To register,
an association must have at least seven members.
   The association has at least two institutions: The general meeting and the
management board. The establishing of a supervisory board is optional.
   The general meeting is the decision-making organ. It can change the
purpose and the statutes of the association and elect the management board.
The management board is the legal representative of the association. Its
power of representation in relation to third persons cannot be restricted.
   In Germany there is no external controlling body for associations. The
main thought behind the missing external control is the fact that the
members converge in the general meeting and make the fundamental
decisions. Besides this idea of self-control, the association as legal form is not
intended for complicated economic activities. Due to its open structure the
legal form of an association can be recommended if an organisation expects
a multitude of members and their frequent change.
   Associations can also exist without legal personality as non-incorporated
and non-registered associations (nicht rechtsfähiger Verein), s. 54 BGB. The
non-incorporated association is mainly used by political parties.

3.3    Foundations
A charity can also be established as a foundation. In Germany, there is no
legal definition for foundations in the German Civil Code. However, these
institutions are characterised by the following features: absence of any
shareholders, permanence of the object of the foundation and the need to
have endowment property.
    A foundation in the sense of the German Civil Code (ss. 80-88 BGB) has
legal personality, which it receives upon recognition by the competent
authority in the state (Bundesland) in which the foundation wants to be
headquartered. The authorities have to recognise the foundation if the
declaration of the settlor (Stiftungsgeschäft) meets certain legal requirements
(ie, certainty of name, domicile, purpose, assets, and organisational
structure), if the purpose can be pursued permanently, and if the purpose
does not contravene the general interest; ss. 80 (2), 81 (1) BGB. In most cases
it takes about two to four weeks until a foundation is recognised as such.
Prior to the recognition process the supervisory authority may be requested
if the draft articles meet the legal requirements or if there is a need for
clarification.
    Although the law does not specify a minimum capital for the
establishment of a foundation, the foundation supervisory authorities
usually require at least €50,000 to €100,000 depending on the purpose.
While the German law permits both public benefit and private purpose
foundations, it is important to note that the private purpose foundations
are not tax exempt. The federal legislation in the German Civil Code is
complemented with the individual laws of the 16 states (Bundesländer),
which deal with issues such as state supervision.
    Foundations without legal personality are called nicht-rechtsfähige or

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unselbstständige Stiftungen. Their establishment is subject to the general law
of contracts. The contract between the settlor and the trustee (individual
or legal person) can be compared with a common law trust. As they are not
registered, their total number is unknown. However, they become more
popular and are often administered by other charities which are seeking
additional funds.
   Other legal forms of organisations such as associations, stock companies
and limited liability companies are allowed to bear the name ‘Stiftung’.
However, the term ‘foundation’ in the sense of tax law with the privileges
primarily concerning tax deductibility covers only the foundation
in the sense of ss. 80 ff. BGB and the ‘non-independent foundation’
(unselbstständige Stiftung). Thus, certain tax-privileges for ‘foundations’ do
not apply to Stiftungskörperschaften.

3.4   Corporations
Last, but not least, charities may also take a corporate form, specifically
that of a limited liability company (Gesellschaft mit beschränkter Haftung
or GmbH). The GmbH is a legal person and solely liable for its obligations
towards third parties. A limited liability company may be founded for any
purpose permitted by law, s. 1 GmbHG. Therefore this legal form cannot be
used for business purposes solely, but also for charitable purposes.
   The main difference between a limited liability company of a typical
business sort and a charitable company is one of purpose and of the legally
permissible adaptations of the normal corporate structure to the tax law
requirements of non-distribution of profits. Again, there are no specific
civil law requirements to be fulfilled by charitable corporations, whereas
tax law grants privileged status only if the purpose and the organisation
are set up according to tax law’s own prescriptions. The law of this legal
form and the duties of the directors are well settled. Due to its very flexible
structure, the GmbH is often used by charitable entities. However, given the
demand of notarising the assignment of shares, the German GmbH can be
recommended if the organisation is targeted to stability in the membership.

4.    REGULATION
As a kind of preventive supervision, the association and the foundation
need the participation of a public authority in order to become established
as a legal person; they have to be registered with the commercial register
respectively approved by the supervisory authority.
   Foundations are subject to an ongoing supervision by the administrative
bodies of the 16 federal states that also decide about the recognition of a
foundation. The state supervisory authority monitors the foundation and
has the power to enforce compliance with the rules without depending on
a court’s order. As a main task, the state supervision has to ensure that the
original intention of the founder is protected. No decision of the board of
directors must contradict the founder’s intention recorded in the statutes.
However, the state supervisory authority is only allowed to examine whether
the requirements made by the foundation law and the statues are being

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fulfilled. It is not appointed to make its own decisions concerning the
administration of the foundation.
   All tax-exempt organisations – associations, foundations and charitable
corporations – are supervised by the regional tax authorities. They monitor
to see if the tax requirements are fulfilled during the whole tax assessment
period.

5.  MAIN ADVANTAGES AND DISADVANTAGES OF BEING A
CHARITY
The tax advantages of charities and not-for-profit-organisations are based
on the legislator’s decision to motivate and honour voluntary social
commitment with the instruments of taxation. By providing various and
enduring contributions to society, private organisations disburden the
state in this social area. For this reason, the government also pursues own
interests by forcing such a private engagement. Tax advantages for social
engagement can be seen as a ‘win-win-situation’ for both.
   Furthermore from an international point of view, the supporting of
social projects and not-for-profit-organisations cast a positive light on the
government and the awareness of its social responsibility.

5.1   Advantages for charities
5.1.1 Tax exemptions and reliefs
There are two significant tax benefits for organisations that pursue a
charitable purpose in an altruistic manner. First, charitable organisations pay
no Inheritance and Gift Tax and basically no Corporate Income Tax. Second,
and equally important in this context, donations and endowments can be
deducted from the taxable income of the donors.

5.1.1.1 Corporate Income Tax
S. 5 (1) no. 9 of the Corporate Income Tax Act (KStG) permits all
‘corporations, associations, and endowments’ to be exempt from the
Corporate Income Tax as long as they are organised and operated exclusively
for public benefit, benevolent, or religious purposes along the lines of
ss. 51-68 AO. This tax exemption applies to income in the ‘ideal’ sphere
of a charity (eg, membership dues or donations) or income from capital
investments (sphere of Vermögensverwaltung). By contrast, according
to s. 64 AO, income from unrelated business activities (wirtschaftlicher
Geschäftsbetrieb) is basically taxable (currently 15 per cent).
   However, income from related business activities (Zweckbetriebe) is tax
exempt. As stated in the relevant provisions of ss. 65-68 AO, the tax law
accepts as related business activities and additional tax-privileged sphere of
income among others:
• the running of homes for the elderly, orphans or young people, people
     with disabilities, etc;
• hospitals;
• schools, colleges and universities;
• museums and art institutions;

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•    workshops for the disabled; and
•    joint service businesses of charities (eg, laundries serving only charitable
     hospitals).
   In order to facilitate the handling of small unrelated business activities s.
64 (3) AO assumes that annual turnover up to €35,000 does not produce a
taxable income at all. Ultimately, this provision is comparable to a tax-free
allowance.

5.1.1.2 Inheritance and Gift Tax
Charities are exempt from Inheritance and Gift Tax provided that their tax-
exempt status lasts for at least 10 years after the inheritance or the transfer
inter vivos; s. 13 (1) no. 16b ErbStG.

5.1.1.3 Value Added Tax (VAT)
Germany generally subjects sales of goods and services to Value Added Tax
(Umsatzsteuer). However, many activities which also qualify as charitable
are exempt from VAT, including health-related, educational, cultural and
scientific activities. For the most part, charitable status is no precondition
for these exemptions. Sometimes a certificate from the state authorities is
required. Moreover, if an activity is subject to VAT, charities are allowed to
add a reduced VAT rate (seven per cent), except for the sphere of unrelated
business income where the general VAT rate (19 per cent) applies. Grants are
generally not subject to VAT.

5.1.1.4 Trade Tax
Additionally to the Corporate Income Tax (see paragraph 5.1.1.1 above)
there is another profit tax in Germany, the Trade Tax (Gewerbesteuer) with
a tax rate of another around 15 per cent. The revenue of this tax goes – in
contrast to the Corporate Income Tax revenue – to the communities though
the tax is raised as a federal tax. Basically, charities do not pay Trade Tax.
However, this tax exemption does not apply to the unrelated business
activities.

5.1.2 Further advantages
In addition to the aspects of tax privileges not-for-profit-organisations
benefit from other privileges, eg, exemptions or reductions of some specific
dues. Furthermore the admission of an organisation as tax exempt provides
an easier access to public subsidies or the use of public buildings. Moreover,
the status as a charitable organisation is advantageous in relation to third
persons, because in legal relations it is seen as a kind of seal of approval for a
public-controlled allocation of resources.

5.2    Advantages for donors
5.2.1 Overview
The Income Tax Act (Einkommensteuergesetz or EStG) and the Corporate
Income Tax Act (Körperschaftsteuergesetz or KStG) give special tax treatment
to donations for all tax exempt purposes (as defined in the AO).

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   Individual donors and corporate donors receive similar tax benefits for
their charitable contributions. They can deduct the amount of the donations
from their pre-tax income up to 20 per cent. This kind of disinterested pay-
out is placed in s. 10b EStG and in s. 9 (1) no. 2 KStG, respectively.
   Furthermore, heirs of assets are exempt from Inheritance and Gift Tax
insofar as they donate to charities post mortem. However, they may not
reduce the Inheritance and Gift Tax and deduct the amount in their income
tax statement at the same time. Thus, they have to decide for one of the
advantages.

5.2.2 Donations
The general rule for tax benefits is that the deductibility of a donation is
limited to a maximum of 20 per cent of total income; s. 10b (1) 1 EStG, s.
9 (1) no. 2 sent. 1 KStG. In other words, instead of being taxed on 100 per
cent of his income, a donor can decide to make the maximum donation
of 20 per cent and be taxed on 80 per cent of his income. Alternatively,
an entrepreneur or a self-employed professional who produces a turnover
according to the Value Added Tax Act (Umsatzsteuergesetz or UStG) is entitled
to use another formula. These persons can deduct up to 0.4 per cent of
turnover plus wages and salaries as special expenses.

5.2.3 Endowments to charitable foundations
In 2000, the Legislature created additional statutory deductions for
donations to foundations and these possibilities were improved again in
2007. Donations to foundations thus enjoy greater tax relief than donations
to tax-privileged institutions such as associations or corporations. As already
mentioned, the term ‘foundation’ in the sense of tax law covers both the
foundation in the sense of ss. 80 ff. BGB (rechtsfähige Stiftung bürgerlichen
Rechts) and the non-independent foundation (unselbstständige Stiftung).
   In addition to the general tax deductibility an individual donor may
deduct up to €1 million if this contribution endows a charitable foundation;
s. 10b (1a) EStG. It is noteworthy that there is no similar provision in the
Corporate Income Tax Act. Thus, corporate donors do not receive additional
tax benefits for donations to foundations.
   An endowment to a foundation can be spread for income tax purposes
over a period of 10 years. So it is up to the donor to request the tax authority
to apply an amount in a given year in the most beneficial way.
   The principal justifications for such an unequal treatment based on
legal form are reasons specific to foundations. They are characterised
specifically by the absence of any members, the permanence of the object of
the foundation, the government supervision (this does not apply to non-
independent foundations) and the need to have endowment property.

5.2.4 Certificate of tax deductibility (Zuwendungsbescheinigung)
Charitable organisations are able to receive tax-deductible donations
directly and may independently confirm the receipt of the donations to
the donor on their own. Some special regulations on certifying donations

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by the recipient are to be found in s. 50 of the Regulations on the Income
Tax Act (Einkommensteuerdurchführungs­verordnung or EStDV). All charitable
organisations are entitled to hand out such donation certificates, except
charities carrying out leisure time activities, concerning for example animal
husbandry, plant cultivation, allotment gardening, traditional customs
including regional carnival, the welfare of servicemen and reservists,
amateur radio, aeromodelling and dog sports for membership fees (s. 52 (2)
no. 23 AO).
   For donations of up to €200 the tax laws provide an abbreviated system
of obtaining a deduction; in certain cases the bank receipt is sufficient proof
that a donation was made.
   Those donating in good faith may trust the certificates of deductibility
handed to them. Negligence or deliberate abuse makes the person in charge
(at the charity’s office) liable to pay a tax of 30 per cent of the amount
donated as compensation for the tax evaded, s. 10 b (4) sent. 2, 3 EStG.

5.2.5 Exemption from Inheritance and Gift Tax
Heirs of assets are exempt from Inheritance and Gift Tax if they donate the
assets wholly or partly to a charitable foundation; s. 29 (1) no. 4 ErbStG.
They have to act within 24 months of the inheritance or gift for the tax
exemption to take effect.

5.3   Disadvantages for charities
The principal disadvantage for charities is the difficulty in giving up the
charitable status. In case of an exit, the charity is subject to a subsequent
taxation for the last 10 years, which makes it practically impossible in
most cases.
   The level of remuneration of directors and other staff of charities is de
facto still under the level of for-profit-organisations of a comparable size.
However, if the remuneration is at an ‘appropriate’ level, it may approximate
the compensation of for-profit managers.

6.    FORMATION PROCESS
6.1   Recognition as tax-exempt entity
In order to be considered a charity, an organisation must have a formal
status, eg, a registered or unregistered association (Verein), foundation
(Stiftung), limited liability company (GmbH), or even stock corporation
(Aktiengesellschaft or AG). Basically the process of establishing a charity
follows the regulations of the respective legal structure as determined in the
BGB, the GmbHG or the AktG.
   Moreover, to qualify for tax exemption, both the articles and the de facto
activities of the organisation must meet the requirements stipulated in
relevant tax provisions.
   According to s. 59 AO, the tax privilege is granted if the purpose of
the organisation emerges from the articles of association, the foundation
instrument, or from any other charter, provided that this purpose meets the

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requirements of ss. 52-55 AO and that it is pursued exclusively and directly1.
Moreover, the actual management (tatsächliche Geschäftsführung) has to
comply with these stipulations of the articles of association. According
to s. 60 (1) AO, the purposes stipulated in the articles of association and
the manner of their implementation must be precisely stipulated in such
a way, that it can be determined on the basis of these articles whether
the requirements for tax privileges are met (formelle Satzungsmäßigkeit).
The organisation has to make use of the template articles of association
providing the most important principles of tax exemption.
    Furthermore, the articles of association or the foundation instrument
must contain a provision for capital commitment (satzungsmäßige
Vermögensbindung). According to s. 61 (1) AO, a fiscally sufficient capital
commitment exists (compare s. 55 (1) no. 4 AO) if the purpose for which
the capital is to be used upon the organisation’s dissolution or annulment
is stipulated in the articles of association in such a way that it can be
determined on the basis of these articles whether the intended use is tax
privileged.
    The tax privileges are granted by the local tax authorities for the
assessment period. However, prior to the formation and registration of
the charity the fiscal authorities can be asked to give their opinion on the
draft articles. It can be strongly recommend to file an application for such
opinion, the more so as this opinion is free of administrative charges. As
soon as the charity is set up, it can apply for a preliminary confirmation of
the tax-exempt status including the permission to issue donation receipts
(vorläufige Bescheinigung der Gemeinnnützigkeit).
    In most cases of small organisations, the charitable status is examined by
the local tax authority every three years. The usually light public oversight
involves a routine inspection and rarely a full audit. Furthermore, changes of
the purposes and acts when dissolving the organisation have to be approved
by the tax authority in order to ensure the capital commitment. Charities
found in violation of the tax exempt provision of the relevant tax laws may
lose their tax-exempt status altogether with retrospective effect (10 years).
    The local tax authority decides in every assessment period about the type
and the extent of the tax relief. It investigates, if and to what extent offences
against the charity regulations had been made that are opposed to a tax
relief. Consequences of an offence can be the cancellation of the charitable
status for the affected period and a subsequent taxation for the last 10 years.

6.2     Example
As an example, a short overview of the process of establishing a registered
association (Verein) will be shown:
• On a first step the founders convene with the intention to establish a
    registered association.
• They determine the statutes, in which the name, the seat and the
    purpose are regulated. Furthermore the statutes contain provisions on
    contributions, access, rights and obligations of the members, election
1 See paragraphs 2.1 and 2.2 above.

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     of the management board, the general meeting and the liquidation by
     choice.
• The founding members elect the management board.
• The management board applies for registration at the competent register
     for associations which is maintained by the local civil courts. The
     register verifies if the application is in agreement with the main legal
     requirements.
• Being registered the association obtains its legal capacity. Therewith
     the association is recognised as a legal person and subject of rights and
     duties. As a consequence, the association has to bear liabilities by itself,
     the members are not responsible in person any longer.
• The association applies for an interim certificate of tax exemption with
     the local fiscal authority allowing it to issue donation receipts (vorläufige
     Bescheinigung der Gemeinnützigkeit).
   Due to the fact that there is no minimum capital need, the establishment
of a registered association is not very complex and causes only low costs.
Therefore the legal form of an association can be recommended for not-
for-profit-organisations, not depending on assets and rather focused on
volunteer input.

7.     OVERSEAS CHARITIES
There are numerous examples of charitable organisations that are active
on an international level. Considering the globalising nature of the world
today, this fact is not at all surprising.

7.1    Foreign charities operating in Germany
Generally, in order to be tax exempt in Germany, a foreign charitable
organisation has to fulfill the same preconditions as a German entity. The
European Court of Justice held in Re: Stauffer, that, where a foundation
recognised as having charitable status in one member state also satisfies
the requirements imposed for that purpose by the law of another member
state and where its object is to promote the very same interests of the
general public, which it is a matter for the national authorities of that other
state, including its courts, to determine, the authorities of that member
state cannot deny that foundation the right to equal treatment solely on
the ground that it is not established in its territory (see ECJ, 14 September
2006, C-386/04, http://curia.europa.eu). Accordingly, foreign organisations
being subject to limited tax liability may be generally tax exempt under s.
5 (2) no. 2 KStG which has been adopted as an answer to the ECJ ruling in
Re: Stauffer. However, foreign organisations applying for tax exemption in
Germany still meet practical difficulties. For example, it has not yet been
determined which tax authority is competent for the recognition of the tax
exemption of a foreign charitable organisation.
   As of 1 January 2009 an organisation which carries out the furtherance of
tax exempt purposes abroad shall either further persons resident or domiciled
in Germany or shall – among others – make a possible contribution to
the prestige of the German state abroad, s. 51 (2). These criteria should be

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generally fulfilled by a domestic entity or by a foreign entity promoting its
charitable purposes in Germany. Thus, in practice the provision becomes
only relevant if a foreign organisation is subject to limited tax liability in
Germany without carrying out charitable purposes in Germany.

7.2   Domestic charities operating abroad
‘Gemeinnützigkeit’ or the German Tax Law is not opposed to the idea of
charities operating overseas. In other words, charities do not lose the tax-
exempt status if they pursue their purposes outside Germany.

7.3 Domestic charities applying funds to foreign charities and non-
profit organisations
As a basic principle charitable organisations have to carry out their activities
as stated in the statutes ‘directly’. However, according to s. 58 (1) no. 1 AO,
tax-exempt organisations are allowed to raise funds for the realisation of
another organisation’s charitable purposes. Thus, German charities basically
are entitled to apply funds to other organisations.
   To qualify for tax exemption such so-called fundraising entities
(‘Mittelbeschaffungskörperschaften’ or ‘Förderorganisationen’) have to expressly
stipulate in their articles of association or foundation instruments the
application of funds for the realisation of one or several other organisations’
tax-privileged purposes. However, the accurate specification of the recipient’s
name is not necessary (see AEAO no. 1 to s. 58 no. 1 AO).
   Tax law requires that the recipient also be tax exempt. However,
according to s. 58 no. 1 AO this requirement only applies to organisations
subject to unlimited tax liability (unbeschränkt steuerpflichtige Körperschaften).
Thus, the procurement of funds for foreign organisations is compatible with
the provisions of the German Tax Law.
   However, the ‘Förderorganisation’ has to demonstrate adequately the
distribution of funds for charitable purposes. The German tax authorities
may require information about the activities of the foreign recipient entity.
The organisation may have to provide for instance:
• contracts the charity has concluded pursuing its purposes;
• documents, proving that the remittee has received the payment;
• descriptions on the activities of the charity;
• material on projects (press releases, prospectuses);
• an opinion of a local auditor;
• official notifications of the local authorities supporting the charity;
• notifications of the local German Embassy confirming that the
     charitable projects have been carried out.
   Moreover, it may be useful to submit any official document issued by
the local tax authorities. The documents generally have to be provided in a
German translation.

7.4   Donors giving to foreign charities
In the past, German tax law generally did not accept the establishment or
the support of a charity in a foreign country with tax-deductible domestic

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funds. This was due to the fact that the German tax authority is not able to
verify that the organisation’s activities are within its charitable purposes and,
furthermore, has no control over the future alterations in the organisation’s
purposes. Misuse of funds cannot be sanctioned according to German tax
laws. In order to overcome these restrictions a domestic charity had to be set
up and the annual proceeds of the invested capital could then be transferred
to the foreign recipients (s. 58 no. 1 AO).
   However, due to some recent rulings of the European Court of Justice, the
options to deduct cross-border gifts within the European Union have been
improved and German legislation has been amended.2
   As a first step, cross-border gifts to charitable organisations established in
other member states of the European Union or a state within the European
economic area (EEA) and being subject to limited tax liability in Germany
have become deductible, s. 10b EStG in conjunction with s. 5 (2) no. 2 KStG.
However, in practice, the German taxpayer has to prove that the foreign
organisation meets the prerequisites of Gemeinnützigkeit. Thus, the provision
has practically no impact.
   Moreover, in 2009, the European Court of Justice ruled that gifts made
by a taxpayer to charitable entities resident in another member state
must generally be deductible for tax purposes under the tax law of the
donor’s jurisdiction. The taxpayer shall have the possibility to show that
a gift made to an entity established in another member state satisfies the
requirements imposed by that legislation for the grant of such a benefit
(see ECJ, C-316/07, Persche, http://curia.europa.eu). Where a body recognised
as charitable in one member state satisfies the requirements imposed for
that purpose by the law of another member state and where its object is
the promotion of the very same general public interests, the right to equal
treatment shall not be denied solely on the ground that it is not established
in the other member state. Moreover, the need to safeguard the effectiveness
of fiscal supervision could not justify a restriction of the deductibility
of gifts. However, the tax authorities concerned can ask the taxpayer to
provide such proof as they may consider necessary to determine whether the
conditions for deducting expenditure have been met.
   Further to this ECJ ruling, in 2010 the German Parliament has adopted
provisions, enabling the deduction of cross-border gifts. Donations for
charitable, benevolent or religious purposes to EU corporate bodies
under public law shall be deductible, if individuals resident or domiciled
in Germany benefit from the entity’s activities or if the activities may
contribute to the prestige of the Federal Republic of Germany. Donations for
charitable, benevolent or religious purposes to EU tax-exempt entities shall
be deductible, if (a) the entity would be tax exempt if subject to tax liability
in Germany and if (b) the member state provides administrative assistance
(directive 77/799/EEC) and assistance as to the collection of taxes (directive
2008/55/EC), s. 10b (1) 1 no. 1 and no. 3 EStG.
   Given the increased requirements for the taxpayer’s cooperation under
the ECJ ruling and given the fact, that the procedure of recognition of
2
    See ECJ, C-386/04 (Stauffer) and C-318/07 (Persche) available under http://curia.europa.eu.

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foreign tax-exempt entities under the new s. 10b EStG is still unclear, it has
to be seen, whether the ECJ judgment and the newly-created legislative
provision will have any practical impact.
   Donations to foreign charities may be exempt from Inheritance and
Gift Tax if the country of residence of the beneficiary has entered into a
reciprocity agreement (Gegenseitigkeitserklärung) with Germany (s. 13 (1) no.
16c ErbStG). Such an agreement is contained, for example, in Article 10 of
the Convention between the Federal Republic of Germany and the United
States of America for the Avoidance of Double Taxation with respect to Taxes
on Estates, Inheritance, and Gifts. According to this agreement, property
transferred to an organisation pursuing public benefit purposes, which is
resident in one state and tax exempt there, shall be exempt from Inheritance
and Gift Tax by the other contracting state if that property transfer would
also be tax exempt when made to a domestic organisation.

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