In our new blog series, we are looking at how foreign and internationally active non-profit organizations (NPOs) can benefit in Germany from numerous tax privileges under the current legal situation.
Shortly, we shall take a closer look at how foreign NPOs can be recognized as charitable organizations in Germany. But what advantages do they have?
The privileges for recognized charitable NPOs include income tax exemption for non-material activities (such as with donations), surpluses from asset management, and from special-purpose operations (such as hospitals). Further, donations to NPOs are exempt from inheritance and gift tax, and a reduced VAT rate is granted on certain sales and services. Ultimately, such charitable deductions can motivate private individuals and companies to make donations.
Recognition of foreign NPOs
Under certain conditions, foreign NPOs (without a registered office or management in Germany) can benefit from these tax privileges for NPOs, which is particularly interesting if they generate income in Germany. Additionally, it is much easier for accredited NPOs to receive donations in Germany (more on this appears in part two of our blog series) and, in certain cases, donations from German NPOs to foreign NPOs are only permissible if the foreign NPO is itself recognized as a charity (part three of our blog series has more on this).
Subject to special double taxation treaty (DTA) regulations, only NPOs with their registered office and management within the EU or the EEA („European NPOs“) can benefit from such tax privileges. The precondition is that they are subject to limited tax liability in Germany, partly due to the fact they generate income from real estate property within Germany or receive profit distributions from companies with registered seat in Germany. These NPOs must meet the requirements under German charity law. The criteria for tax benefits in favor of NPOs are similar in many countries (third-party benefit, commitment of funds, prohibition of profit distribution, etc.). However, even if an NPO is accredited abroad, German charity law does not automatically recognize them. Indeed, they must meet the same strict requirements as NPOs with tax residency in Germany („German NPOs“).
Requirements under German charity law
So, what is required? An NPO’s articles of association and actual management must comply with certain requirements charities are required to fulfill. NPOs must operate altruistically, exclusively and directly pursuing charitable purposes according to the provisions of the German Fiscal Code (“Abgabenordnung“ – AO). Members or shareholders may neither receive donations nor unreasonable remunerations. In addition, the articles of association must ensure that the NPO’s funds are permanently dedicated to the pursuit of charitable purposes (“Vermögensbindungsklausel”).
In Germany, only corporate bodies such as associations, foundations and corporations – but not partnerships – can be charitable. European NPOs can be recognized as charitable only if their structure is similar to a corporation under German law (type comparison).
Approval of the statutory requirements
European NPOs generating income in Germany can have their statutory charity status approved by the German tax authorities (Sec. 60a AO). When given, this also contains an indication effect stating that the NPO is similar to a corporation under German law.
The German Model Statute
The NPO’s articles of association must contain the stipulations specified in the official model statute, with the tax authorities expecting them to be adopted almost verbatim. In many cases, foreign corporations cannot fulfil this requirement due to the legal requirements in their country of domicile. For European NPOs, a court decision has eased their situation somewhat (Tax Court Niedersachsen 4.5.2020 – 6 K 53/18; Appeal pending V R 15/20). The court stated that articles of association in a foreign language can be accepted although the wording is different from the model statute. In terms of content, however, all regulations would have to be included.
In the case in question, a lawsuit had been filed by an Austrian foundation. The tax office had refused to grant charitable status on the grounds (among others) that the articles of association did not define altruism (“Selbstlosigkeit”) in the same way as the model statutes. The tax court, however, held that a merely similar formulation of this was sufficient. This case demonstrates how strictly the tax authorities examine the wording of the articles of association. At the same time, this decision is still very much characterized, arguably, by narrow national thinking. Accreditation is therefore difficult to achieve for European NPOs.
Difficulties arise particularly with articles of association in non-German languages and divergent national recognition criteria. In practice, the dedication of assets (“Vermögensbindung”) often cause problems with the model statutes. This is because the model statutes require, in the case of termination of non-profit status, the assets to fall to an organization that continues to use them for tax-privileged purposes in accordance with German concepts on these matters.
The Federal Tax Court’s decision of March 24, 2021 (V R 35/18) suggests the tax authorities will hold a more ‘liberal’ view in the future. Accordingly, a reasonable (and also historical) interpretation of the foreign articles of association may provide sufficient indications that the purposes of the NPO are operated ‘exclusively and directly’, even if these terms are not explicitly used. In the underlying case, the lower tax court had interpreted the articles of association and founding documents (of 1555!) from a university college in England. However, the lack of a “Vermögensbindungsklausel ” only ended in being ‘harmless’ due to an exception under the old legal situation, which no longer exists today.
An NPO activity’s domestic connection
If a European NPO promotes its purposes abroad alone, an additional domestic connection is required, as in the case of German NPOs. This can be fulfilled by the fact that its activities benefit persons living in Germany or Germans abroad. It is also sufficient if the activity to contribute to Germany’s reputation abroad. In the case of German NPOs, this is presumed to be the case even if the activity is carried out only outside of the country. In the case of European NPOs, on the other hand, this must be positively established – something which is usually successful (Federal Tax Court March 22, 2018 – X R 5/16). In contrast to other countries, which sometimes link tax exemption to domestic support, the German provision is quite liberal when compared to other international models.
NPOs from third countries
NPOs from third countries currently have no way of benefiting from the tax advantages for NPOs in Germany. Their only option is to establish their own NPO in Germany, which once recognized can benefit from tax advantages (see part two of our blog series on receiving donations from German individuals/companies/NPOs).
European NPOs with German income wishing to be exempt from income tax should examine their articles of association carefully. It is crucial for the articles of association to be comparable with German model statutes. Such articles of association, which must consider the requirements of charity law of two countries, should be drawn up or adapted in close consultation with expert advisors from both countries. As a rule, there is no way around coordinating the articles of association with the tax authorities in advance.
In order to benefit from tax exemptions, foreign NPOs can also consider establishing their own German structures (such as a subsidiary). For NPOs from third countries, this is currently the only way to generate tax-exempt income in Germany.