Administration of dependent foundations: subject to VAT?

It is not uncommon for foundations or associations with legal capacity to manage dependent foundations in return for remuneration. In a landmark ruling, the Federal Finance Court (BFH) clarified that, under certain conditions, management fees in such constellations may be subject to VAT (BFH, ruling of 5 December 2024, ref.: V R 13/22).

Trust foundation, dependent or fiduciary foundation

A trust foundation – also known as a dependent foundation or fiduciary foundation – is a special form of foundation organisation:

It is established during the founder’s lifetime by contract between the founder and the trustee or by way of a disposition of property upon death. A characteristic feature of this type of foundation is that it does not have its own legal personality. For this reason, it must be affiliated with an organisation that has legal capacity, such as an association, a foundation or a company (bank).

The establishment of a dependent foundation usually takes place through a donation subject to conditions. The donated assets are transferred by the founder to an external trustee, who manages the assets on behalf of the foundation. 

The trustee receives appropriate remuneration for managing the dependent foundation. The amount of this remuneration and how it is structured, e.g. as a percentage of the foundation’s assets, is agreed individually between the founder and the administrator. Whether and to what extent these fees for trust administration by charitable trustees are subject to value added tax has not yet been clarified by the highest court.

Administration of trust foundations by a non-profit association

The Federal Fiscal Court dealt with a case in which a non-profit association that manages more than a dozen dependent foundations on a fiduciary basis brought an action. This fiduciary management was based on donations subject to conditions and the conclusion of trust agreements. In all cases, the (foundation) assets were to be kept separate from the association’s assets and used only for the respective foundation’s purpose. As remuneration for its management and consulting services, the association received ‘foundation contributions’ from the dependent foundations.

A dispute arose between the association and the responsible tax office over the question of whether the fiduciary management of dependent foundations constitutes a taxable service in return for payment. This would mean that VAT would have to be paid on the remuneration, i.e. the ‘foundation contributions’. The responsible tax office also took this view. The Münster Finance Court (FG) initially rejected this view, arguing that there was no exchange of services because the sponsoring association managed its own assets. It held that these were not taxable internal transactions.

The Federal Fiscal Court therefore had to clarify whether a non-profit association that manages dependent foundations on a fiduciary basis provides services that are subject to value added tax or not.

BFH: „It depends“

The BFH referred the matter back to the FG Münster: In the opinion of the court, administrative services in such a constellation may constitute taxable services to founders and are therefore subject to VAT.

This is particularly the case if the foundation’s assets are separately managed and earmarked special assets, even if the administrator becomes the owner of the assets under civil law.

In doing so, the BFH assumed that, in such a constellation, in addition to the non-taxable gift, there is an independent, remunerated agency agreement (Section 675 of the German Civil Code (BGB)). It is precisely this agreement that constitutes the legally relevant relationship for tax purposes and thus the basis for the taxable exchange of services. The consumable benefit is the asset management carried out exclusively in the interest of the founder.

In such a constellation, there is also no discernible difference compared to administration on the free market, e.g. by banks, etc. In this case, fiduciary administration is a taxable service, even if the administrator draws his remuneration from the special fund.

However, according to the Federal Fiscal Court, it is conceivable that a reduced tax rate could be applied in individual cases if the administration is carried out by non-profit associations, etc.

What are the consequences of the BFH ruling for trust foundations and their administrators?

This ruling provides greater clarity for trustees when it comes to VAT. As a result, trustees must now carefully check whether VAT is payable and whether any adjustments to the trust agreements may be necessary. Dependent foundations must expect higher administrative costs, as VAT will be added in future.