Germany is a federal civil law country with two primary forms for not-for-profit, nongovernmental organizations (NPOs):
associations and
foundations.
Although the corporate form, specifically the GmbH, is used in Germany to create not-for-profit entities,it is unlikely that an NPO formed as a corporation would seek to be qualified as the equivalent of a U.S. public charity because it has shared ownership.
Other forms of NPOs, which remain outside the focus of this note due to their limited interaction with foreign grantmakers, include institutions (Anstalten), foundations under church law and public law, and cooperatives (Genossenschaften, which are formed and regulated under the Genossenschaftsgesetz).
B. Tax laws
German tax law generally exempts from income tax only those NPOs that exclusively pursue directly public benefit purposes. The General Fiscal Law (Abgabenordnung) in Articles 52-54 describes those public benefit purposes, and the implementing laws further define them.
Germany also subjects certain sales of goods and services to a Value Added Tax. Many types of public benefit activities are exempt from the VAT, including health-related, educational, cultural, and scientific activities. If an activity is subject to VAT, that fact may need to be taken into account in determining the size of a grant. German NPOs pay VAT when they buy goods and services. As they generally cannot pass it on to their consumers (no economic activity or VAT-exempt activity), they are in this respect treated as the final consumer. They cannot recover VAT paid on goods or services purchased.
II. Applicable Laws
German Constitution (Grundgesetz-GG), Article 9. (German)
German Federal Civil Code (Bürgerliches Gesetzbuch or BGB), Second Title, Legal Entities, Chapters I (associations), II (foundations), & III (public law juridical entities). (German)
Laws on foundations of the following German Bundesländer (states):
Law on Associations (Vereinsgesetz) of 1964. (German)
General Fiscal Law (Abgabenordnung) of 1976, as amended, Part III (tax-privileged purposes). (German)
General Fiscal Law implementing rules (Anwendungserlass zur Abgabenordnung BStBl I S. 630).
Corporate Income Tax Law (Köperschaftssteuergesetz, BGBl. I. S. 817) of 1999, as amended, sections 5(9) (exempt organizations) & 9 (deductions for donors).
Corporate Income Tax implementing rules (Körperschaftseuer-Richtlinie).
Local business tax (Gewerbesteuer) – a tax imposed by the municipalities
Income Tax Law (Einkommensteuergesetz, BGBl. I S. 821) of 1997, as amended, Article 10b (tax incentives for individual donors). (German)
Income Tax Law implementing rules, Einkommensteuer-Durchführungsverordnung (BGBl. I S. 717) &Einkommensteuer-Richtlinien.
Inheritance and Gift Tax Law of 1997 (Erbschaftsteuer- und Schenkungsteuergesetz BGBl. I S. 378), Articles 13 & 29 (tax exemptions).
Value Added Tax Law (Umsatzsteuergesetz) of 1999, sec. 4. (German)
III. Relevant Legal Forms
A. General Legal Forms
Under German law, many types of legal entities, including associations, foundations, and corporations, can be used to create NPOs. The principal legal forms used to create NPOs are associations and foundations. German NPOs are governed both by federal law and the laws of the Länder (states).
Only the federal lawdetermines whether an organization receives tax benefits.
Associations
An association is a membership organization whose members have come together to permanently pursue a common purpose. Associations can exist without legal personality (see Article 54 BGB).
Non-economic associations (nichtwirtschaftliche Vereine / Idealvereine), whose main aim and activity must not involve the conduct of business, receive legal personality upon registration at the local court. 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 state can, in limited cases, also grant legal personality to a different type of association that mainly conducts business (Wirtschaftlicher Verein).
Associations are regulated by Articles 21–80 of the BGB and by the Associations Law (Vereinsgesetz). Both public benefit and mutual benefit associations are permitted.
Foundations
A foundation in the sense of the Articles 80-88 BGB (Stiftungen bürgerlichen Rechts) is a legal entity whose assets are used to pursue a specific purpose laid down by the founder. The current Federal legislation in the BGB, which was modified in 2002 (Law to Modernize the Foundation Law, July 15, 2002 - Gesetz zur Modernisierung des Stiftungsrechts), is not extensive. Foundations are more extensively regulated by the laws of the 16 states (Länder). German law permits both public benefit and private purpose foundations.
A foundation in the sense of the 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 authority must recognize the foundation if the legal requirements are met, the purpose can be pursued permanently, and the purpose does not contravene the general interest. The law does not specify a minimum capital for the establishment of a foundation, but the authorities normally require at least € 50,000.
Non-autonomous foundations without legal personality are called nicht rechtsfähige or unselbständige Stiftung. Their establishment is subject to the general rules on contract law of the BGB governing the contract between the founder and the trustee, which can be compared to a common law trust. Other legal forms of organizations such as associations, stock companies, and limited liability companies (e.g., the GmbH, described below), are allowed to bear the name “Stiftung” (so-called “Ersatzformen”).
German law permits corporations to establish foundations, and it is thus possible that a corporate U.S. grantmaker with operations in Germany may wish to set up its own foundation (as a legal entity or non-autonomous foundation) under German law.
Corporations
NPOs may also take the corporate form, specifically the limited-liability company Gesellschaft mit beschränkter Haftung or GmbH (registered and regulated under a special law). The GmbH is a commercial company in corporate form with legal personality. It has stock, which originates from its shareholders. The GmbH is solely liable for the debts of the company. It is unlikely that an NPO formed as a corporation would seek to qualify as an equivalent of the U.S. public charity, however, because of its share ownership.
B. Public Benefit Status
U.S. grantmakers need to examine whether an organization qualifies for tax benefits in order to determine whether it can be considered the equivalent of a U.S. public charity.
As indicated, a foundation or association can be formed for mutual benefit, private benefit, or public benefit purposes. The definition of “public benefit” is found in tax legislation. The “General Fiscal Law” (Abgabenordnung or AO) provides definitions, which are then used in such special tax laws as the Income Tax, the Corporate Income Tax, and the Inheritance and Gift Tax. Accordingly, one must refer to the AO in order to determine what qualifies as a public benefit purpose. In addition, the AO sets forth special requirements for organizations carrying out public benefit purposes, which are also relevant for the inquiry into public charity equivalency.
The AO defines three types of purposes as being of public benefit:
General public benefit (Gemeinnützige, Article 52);
Charitable or benevolent (Mildtätige, Article 53); and
Church-related (Kirchliche, Article 54).
According to the first section of Article 51, an organization pursues general public benefit purposes (gemeinnützige Zwecke) if “its activities aim to support the general public materially, intellectually, or morally.” The beneficiaries must not be limited to a closed circle of people, such as members of one family or employees in one corporation. The second section lists a series of purposes that are regarded as supporting the general public if the requirements of section one are met. The list, which is not exclusive, includes the following categories: science and research, education, arts and culture, religion, international understanding, development aid, preservation of the environment and cultural heritage, support of youth or the aged, public health, amateur sports (including chess), support of democracy, and care of soldiers and reservists. The complete listing can be found in Article 52 of the AO; additional explanations are found in the regulations of the Anwendungserlass zur AO (the AEAO from 2002).
An organization pursues charitable or benevolent purposes (mildtätige Zwecke) under Article 53 AO if it aims to support and help people in need either because of their economic situation or because of their physical, psychological, or mental situation.
According to Article 54 AO, the church-related category of purposes (kirchliche Zwecke) includes the support of public law religious communities, construction of houses of worship, spiritual development, religious education, etc.
The Income Tax Law and the Corporate Tax Law give special tax treatment to donations for “charitable, church, religious and scientific purposes (as defined above in the AO) and those public benefit purposes that are especially support-worthy.” A long list of the public benefit purposes that are “especially support-worthy” can be found in the Annex1 to Article 48 section 2 of the Regulations on the Income Tax Act (Anlage 1 zu § 48 Abs. 2 Einkommensteuerdurchführungsverordnung-EStDV). The Regulations and the Anlage deal with the definitions under Article 10 (b) of the EStG, and, by cross-reference, Article 9 (1) 2 of the KStG. Included among these are newer public benefit purposes such as environmental protection and international understanding.
In addition, the General Tax Law (AO) requires that an organization receiving tax benefits carry out its tax-privileged (public benefit, charitable, or church-related) purposes exclusively and directly (Article 51 section 1), and unselfishly (with “disinterest”) (Article 55). The organization should pursue its activities on its own (directly) but may use so-called “Hilfspersonen,” assisting legal or natural persons. The income of a tax-privileged entity must be used before the end of the following year after the income was received.
According to Article 59 AO, tax benefits are given to such an organization if the governing document or charter specifies the organization's purposes and states that they will be carried out according to the dictates of Articles 52-55 of the AO. The actual governance and activities of the organization must follow the rules laid down in the governing documents and the charter.
IV. Specific Questions Regarding Local Law
A. Inurement
The strongest prohibition of private inurement for tax-exempt organizations can be found in the tax law, specifically in the Abgabenordnung (AO). Article 55, which deals with “Unselfishness” or “Disinterestedness,” and which states the rule against inurement in several ways:
1. The assets of the organization must be used exclusively and directly to pursue its tax-exempt purposes.
2. Members of associations, shareholders, and founders of foundations and their heirs must not receive distributions from the organizations to which they belong or which they founded. Article 58 section 5, however, allows a foundation to use up to one-third of its income to support the founder and his or her close relatives, or to maintain their graves. In addition, an organization may use up to one-third of its profits to preserve the endowment.
3. No one can receive special private benefits from an organization, including through the payment of unreasonable salaries.
4. In case of dissolution, remaining assets must be used solely for tax-privileged purposes. This requirement is met if remaining assets are transferred to an organization pursuing tax-privileged purposes or to the state for tax-privileged purposes. For corporate NPOs, shareholders can receive a distribution of no more than their initial shareholding plus the lowest value of their in-kind contributions; the remaining assets must then be distributed to pursue tax-exempt purposes.
The provisions of the Civil Code/BGB and the Vereinsgesetzdo not deal with private inurement in associations, beyond stating that the assets of an association must be used to pursue its purposes.
With respect to foundations, the laws of the various Länder require that the endowment be preserved and the return used to pursue the foundation purposes.
It would be useful for a U.S. grantmaker to ensure that the governing documents of a proposed grantee specifically prohibit inurement. As the following discussion indicates, at least some aspects of German law in this regard are a bit less stringent than U.S. law requires.
B. Proprietary Interest
To be eligible for tax-exempt status, an NPO must carry out its tax-privileged purpose unselfishly, exclusively, and directly. It is, however, permissible for one-third of the income to be spent to support the founder and his or her close relatives, or to care for their graves (article. 58 Nr. 5 AO).For NPOs formed as corporations, in addition, the AO states that shareholders can receive their initial cash contribution plus the lowest value of their in-kind contributions on dissolution.
U.S. grantmakers must ensure that the proposed grantee’s founding documents specifically forbid any distributions to members, founders, etc.
C. Dissolution
If a foundation is dissolved, either voluntarily or involuntarily, the remaining assets must be used for similar purposes. The merger of foundations is also possible.
In case of dissolution of a tax-exempt organization, the remaining assets must be used solely for tax-privileged purposes. This requirement is met if remaining assets are transferred to an organization pursuing tax-privileged purposes or to the state for pursuit of tax-privileged purposes. In the case of an NPO formed as a corporation, shareholders can receive a distribution of no more than their initial shareholding plus the lowest value of their in-kind contributions; the remaining assets must then be distributed for tax-exempt purposes.
D. Activities
1. General Activities
German foundations and associations are legal persons. As such, they are permitted to engage in all legal activities of legal persons except to the extent the laws discussed here provide otherwise.
2. Public Benefit Activities
As discussed above, a foundation or association can be formed for mutual benefit, private benefit, or public benefit purposes. The “General Fiscal Law” (Abgabenordnung or AO) provides definitions, which are then referenced in other tax laws, such as the Income Tax, the Corporate Income Tax, and the Inheritance and Gift Tax. In addition, the AO sets forth special requirements for organizations carrying out public benefit purposes, which are relevant for grantmakers conducting an equivalency determination.
3. Economic Activities
German NPOs that pursue tax-privileged purposes may engage in economic activities as long as commercial activities are not their principal purpose (AO Article 55 and Article 5 corporate income tax act KStG). If the activity is necessary to pursue the public benefit purpose and does not compete with for-profit organizations, it is not taxed (so-called “Zweckbetrieb,” according to article 65 AO). Unrelated commercial activity (so-called “wirtschaftlicher Geschäftsbetrieb”) is ordinarily taxed if the income exceeds
€ 30,000. Regulations and the tax literature have extensively explored this issue.
E. Political Activities
Organizations pursuing tax-privileged purposes must not spend any of their assets for the direct or indirect benefit of political parties (AO Article 55 section 1). Political education and support of democratic development both qualify as tax-privileged purposes.
The Anwendungserlass zur AO (AEAO) in the commentary to Article 52 AO states in section 15 that political purposes do not qualify as public benefit purposes. In the discussion of what political means, the regulation says that some activities relating to development of political opinion are acceptable. An organization is allowed to comment on politics related to its public benefit purpose. In this respect it is also allowed to communicate with legislators about proposed legislation without losing its tax-exempt status.
F. Discrimination
Various provisions of the German Constitution relate to the U.S. law requirements that a school or educational organization must not engage in racially discriminatory conduct. Article 1 says that human dignity is inviolable and Article 3 guarantees equality and non-discrimination. Article 7 permits private schools to exist. Details are found at the state level.
Constitutional rights in Germany, though formally enforceable only against the state, have strong influence in the private sector as well.
G. Control of Organization
Associations and foundations are not stock companies, so there is no possibility that private persons or entities could own them. The law does not, however, prevent other organizations or persons from controlling not-for-profit organizations. The founder (natural or legal person) of a foundation can be the only board member.
It is possible for a for-profit entity or an American grantor charity to establish and control a German association or foundation but not to own it.
V. Tax Laws
A. Tax Exemptions
All legal entities are in principle subject to corporate income tax, but they can be exempted when they pursue qualified philanthropic purposes enumerated in the AO (Arts. 52-54 Abgabenordnung).
Article 5 (1) No.9 of the Corporate Tax Law (KStG) permits all “corporations, associations, and endowments” to be exempt from the corporate income tax as long as they are organized and operated exclusively for public benefit, charitable, or church-related purposes along the lines of articles 51-68 AO. The KStG cross-references Chapter 3 of the AO, discussed above.
These purposes are public benefit purposes (gemeinnützige Zwecke, benevolent purposes (mildtätige Zwecke), and the support of the churches (kirchliche Zwecke). The foundation must carry out its tax-privileged purpose unselfishly, exclusively, and directly. The income of the assets of the organization must be used exclusively to pursue the tax-exempt purpose, except that the organization is allowed to build reserves of up to one-third of its annual income from capital investment. Besides that, newly established foundations can build up their endowments during their first three years without spending out. Without losing the tax privileges, one third of the income can be spent to support the founder and his or her close relatives or to care for their graves (Art. 58 Nr. 5 AO). The income of an NPO must be used immediately (zeitnah), which means before the end of the following year.
An NPO's economic activity is not taxed so long as it is not the organization's main purpose, it is necessary to pursue the public benefit purpose, and it does not compete with for-profit organizations (so-called “Zweckbetrieb,” according to article 65 AO). Unrelated commercial activity (so-called “wirtschaftlicher Geschäftsbetrieb”) is ordinarily taxed if the income amounts to more than € 30,000.
NPOs do not lose their tax-exempt status if they pursue their purposes outside Germany.
If an organization qualifies for tax exemption under Article 5 of the corporate tax law and the AO, it will meet almost all of the requirements necessary to qualify as a public charity equivalent under U.S. law.
B. Deducibility of Donations to German NGOs by Individuals and Corporations Based in Germany
The Corporate Tax Law (Köperschaftssteuergesetz or KStG) and the Income Tax Law (Einkommensteuergesetz or EStG) allow individual as well as corporate donors to deduct contributions to certain public benefit organizations (see below).
For contributions made by individuals or corporations, a tax deduction on the taxable income is possible up to 5 percent of the yearly taxable income (or 0.2 percent of the sum of the turnover, wages, and salaries) if the recipient organization pursues qualifying purposes: general public benefit purposes, benevolent or church-related purposes as defined in the AO, or especially support-worthy general purposes as defined by the Anlage 1 zu § 48 Abs. 2 EStDV. In the specific case of donations given for the furtherance of science, benevolence, and especially support-worthy cultural purposes, the limit is 10 percent of the yearly taxable income instead of 5 percent.
Einkommensteuergesetz or EStG) and Article 9 (1) No.2 of the Corporate Tax Law (Köperschaftsteuergesetz or KStG). A carryover is permitted when a donation exceeds 25,565 euros for scientific, charitable, or special cultural purposess. If such a donation exceeds taxable income, it can be carried back one year and forward five years under the Income Tax Law, and forward six years under the Corporate Tax Law.
Individual and corporate taxpayers can deduct up to €20,450 for donations to certain foundations.
In addition, an individual donor can deduct up to € 307,000 for a donation to the endowment of a newly established foundation with qualifying purposes. The deduction can be taken in the year of donation or divided over the following nine years.
C. Gift and Inheritance Tax
Inheritance tax or gift duty at a progressive rate is levied on the transfer of property to a German foundation, except that donations to domestic foundations that pursue qualified tax-privileged purposes are exempt. This exemption also applies to donations made to foreign organizations in cases of tax reciprocity (see below). A complete exemption from inheritance tax is also given when the inheritance is passed on to a tax-privileged purpose foundation within two years after the succession. (See Article 13 section 1 No. 16 and Article 29 section 1 No. 4 of the Inheritance and Gift Tax Law of 1997.)
D. Value Added Tax (VAT)
Germany generally subjects sales of goods and services to Value Added Tax. Many typical public benefit activities are exempt from the VAT, including health-related, educational, cultural, and scientific activities. Grants are generally not subject to VAT.
E. Other Taxes
NPOs that pursue public benefit purposes as listed in the Articles 51-68 AO do not pay trade tax (Gewerbesteuer).
Wealth tax (Vermögensteuer) was abolished in 1997.
F. Double Tax Treaties
Germany and the United States have signed a double-tax treaty. (Convention between the Federal Republic of Germany and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital and to certain other Taxes, dated August 29, 1989. http://www.germany.info/relaunch/business/taxes/taxes_income_convention.html)
In addition to preventing double taxation, the treaty provides for a form of reciprocity: a tax-exempt organization of one country will also be tax-exempt in the other country, to the extent that that organization would also be tax-exempt in the second country if it were organized and active solely in that country. (Id., Article 27.)
A second treaty creates another form of tax reciprocity: property transferred to an organization pursuing public benefit purposes, which is resident in one state and tax-exempt there, shall be exempted from gift and inheritance tax by the other contracting state, if that property transfer would also be tax-exempt if made to a domestic organization. (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, inheritances, and gifts, new version dated December 21, 2000, Article 10.)
