Becoming a founder
Foundations are a modern way of using private assets to help bring about changes in society. What appeals to the founder is the possibility to create an organization that in his or her opinion is suitable for accomplishing a purpose that is particularly dear to him or her. There are many different reasons why someone may want to establish a foundation. Founders typically mention their desire to move something, to give something back to society or that being personally affected by a disease or a social evil has challenged them to act.
For someone who has decided to use his or her private assets to form a foundation, German civil law offers a number of ways to put that plan into action.
The term “foundation” covers various forms of organization and different types. The most popular legal forms are the civil law foundation with legal personality and the trust foundation, which are described below. The term “foundation” may also refer to other forms of organization, such as a foundation with limited liability (Stiftungs-GmbH) or a foundation association.
The most popular forms of organization are the civil law foundation with legal personality and the trust foundation.
Civil law foundation with legal personality
The civil law foundation with legal personality is recognized by the Foundation Oversight Authority. To this end the founder must submit a so-called endowment transaction and a foundation charter. In the endowment transaction the founder states his or her intention to dedicate a specified amount to the foundation, and in the charter he or she determines the particulars of the foundation, such as its purpose, its number of bodies and their tasks, etc.
After the endowment transaction has been submitted to the competent oversight authority, it is examined to make sure the way the founder has conceived the foundation appears to promise that it will last. One important part of this examination is the check if the dedicated foundation assets suffice to permanently meet the foundation purpose. Since German law does not stipulate a minimum amount for an endowment fund, this is examined on a case-to-case basis. Currently, however, all monitoring authorities consider an amount of EUR 100,000 to be sufficient as a general rule.
Once it has been recognized, the civil law foundation with legal personality comes into existence and the founder is handed a foundation certificate. This only means that the first hurdle has been cleared, however, as the foundation’s not-for-profit status must yet be approved by the Inland Revenue Office. This obviously only applies if the foundation purpose is in fact non-profit, which is the case with 95% of German foundations. By contrast, there is also the private-benefit foundation, e.g. in the form of a family foundation whose purpose it is to financially support the members of a specific family. In this case the foundation cannot be recognized as non-profit and therefore does not enjoy tax privileges. To receive the coveted recognition as a not-for-profit organization, the endowment transaction, charter and foundation certificate must be submitted to the competent Inland Revenue Office. The Inland Revenue Office then checks if the foundation charter complies with the binding provisions of the German Law on Foundations and Non-profit Organizations (art. 51 et seq. Tax Code). To avoid an unpleasant surprise, it is advisable to consider the provisions of the so-called sample charter of the financial administration and to coordinate the charter with the competent Financial Supervision Authority before having it approved by the Foundation Oversight Authority. Once the Inland Revenue Office has issued the notice of assessment confirming the not-for-profit status, the foundation is exempt from corporate tax. From that point on the founder may also issue donation receipts. Therefore it is only now that the founder should deposit the endowment fund in the foundation account in return for a donation receipt; this is the only way to ensure that he or she can tax-deduct the endowment fund as a donation to the fund of a not-for-profit foundation.
A trust foundation (even one that is not independent, a so-called foundation without legal personality or fiduciary foundation) is established through a contract between the founder and the trustee (the responsible body) or per disposition by will. The founder transfers the endowment fund to the trustee, who manages it separately from his or her own assets in accordance with the provisions of the foundation charter.
Contrary to a foundation with legal personality, a trust foundation has no legal personality and can also be established with less than EUR 50,000. Therefore the legal form of the trust foundation is generally the appropriate tool for founders who want to dedicate their assets permanently to a cause without having to establish a structure in a charter which would require the self-administration of a foundation with legal personality.
A foundation trust is generally founded through a contract between the founder and a trustee (endowment transaction). Any natural or legal person can serve as trustee. The contract is typically a donation contract which is concluded with the stipulation that the trustee manage the assets transferred to him or her in accordance with the provisions of the foundation charter.
As a general rule, the law stipulates that a donation contract be notarized. However, if the endowment fund is turned over and the executory donation has been made without the contract having been notarized, this formal defect is remedied and the contract is in effect. The trust foundation has been established with the conclusion of the contract. No foundation oversight authority is required for establishing the trust foundation.
The trust foundation must apply to the competent fiscal authority for non-profit status to enjoy tax privileges and be allowed to issue receipts for donations received. Again, if the founder wants the tax deduction for the donation made, he or she must not deposit the endowment fund in the trust foundation account until the not-for-profit status has been granted and the proper notice of assessment has been issued.