Foundation and association part 2: the charitable foundation

If you want to set up a non-profit organization (NPO), sooner or later you will have to think about the right legal form and organization. To found an NPO, you can use the common legal forms from company law (GbR, GmbH, etc.).

It is important to know here: Under certain conditions, however, only certain forms of organization can be recognized as “non-profit” by the tax office and thus benefit from tax advantages. In addition to the non-profit association, which we already looked at in Part 1 of this series of articles, the non-profit foundation is another suitable legal form for establishing an NPO.

The foundation

The foundation is a popular legal form in Germany: there are more than 25,000 German foundations, of which around 90% are charitable.

Charitable foundations and charitable associations are relatively similar in terms of tax aspects. From a legal perspective, however, there are significant differences.

The civil law foundations of foundation law can be found in Sections 80 – 88 of the German Civil Code (BGB) and also in various state foundation laws. Foundation law was significantly reformed in mid-2023. Since then, a uniform federal foundation law has been in force, which has introduced new liability privileges, new framework conditions for the management of foundation assets and new regulations for the amendment of foundation statutes, among other things. There will also be a register of foundations from 01.01.2026. If state law and the new federal law conflict, federal law will take precedence in case of doubt.

Unlike an association, a foundation is an asset in the form of a legal entity. As a legally independent pool of assets in which the assets are permanently dedicated to a foundation purpose, it has legal capacity as a foundation under civil law.

However, it has neither members like an association nor shareholders like a corporation. It is represented externally and managed internally by a foundation board, which is required by law. The articles of association can also stipulate whether the foundation should also have a foundation council or supervisory board as a supervisory body for the management board.

Please note! The founder himself generally has no influence on the established foundation unless, for example, he himself is appointed to the board. Founders have lasting influence primarily through the founder’s will, which is laid down in the articles of association. The purpose of the foundation, which the founder defines, is often charitable and may not be changed once the foundation has been established. If a foundation is recognized by the state, it is difficult to dissolve it.

Foundation: Assets, charitable status and tax advantages

The foundation assets are the core of the foundation – they may not be touched, except in the case of a consumable foundation. Interest from the foundation’s assets and donations to the foundation must generally be used for the foundation’s purpose (so-called commitment of funds).

In addition, the income may also be spent on reasonable administrative costs, including the remuneration of board members. Last but not least, it is possible to make up to 30% of the income available to the founder and his family – although this is decided by the foundation’s governing bodies.

In return for the restrictions on the use of funds, however, foundations also receive tax advantages if they are recognized as charitable by the tax authorities:

• No trade tax and no corporation tax, unless income is derived from commercial business operations,
• partial exemption from property tax for own real estate if the property is used for the foundation’s purpose,
• exemption from inheritance tax/gift tax in the event of an initial or subsequent transfer of assets to the foundation,
• possibility of issuing donation receipts/grants and
• VAT reduced to 7 %.

The requirements for a foundation to be recognized as charitable by the tax authorities and to be able to claim tax benefits are governed by Sections 51 et seq. AO. The foundation must therefore fulfill charitable, benevolent or ecclesiastical purposes with its foundation purpose – and not just at the time of establishment, but permanently and sustainably. This applies not only in theory, but also in practice. The measures with which the foundation intends to promote the foundation’s purpose must also be named in the articles of association – as is the case with associations in addition to the purposes.

According to § 52 AO, charitable purposes include, among other things

• sport,
• nature conservation & animal welfare,
• art and culture,
• equal rights for women and men,
• international understanding,
• science and research,
• education and
• refugee aid.

Please note! Private charitable foundations, e.g. family foundations, are not tax-privileged, but can bring inheritance tax advantages. If the foundation does not meet the requirements for charitable status, the tax authorities can revoke its charitable status and thus withdraw the tax privileges. In particular, if a foundation uses its funds for purposes other than those intended, has excessive administrative expenses (BFH: more than 50%) or funds are not used promptly for the foundation’s purpose (Section 55 para. 1 no. 5 sentence 3 AO), this can have negative consequences for its charitable status. In addition, the formation of reserves is only permitted under strict conditions.

When is a foundation suitable for an NPO?

A foundation is the right way to set up an NPO if the founder has assets of at least EUR 1 million that can be contributed and wants to create something “for eternity”.

This is because a foundation is fundamentally designed to exist in perpetuity, regardless of the number of staff (board of directors, foundation council). This distinguishes the foundation significantly from an association, whose existence always depends on its members. If the members of an association no longer get along, it can quickly be dissolved. This risk does not exist with a foundation.

In short: the association is more suitable if you want to “get started quickly”, the foundation is suitable if you want to create a monument for eternity and can raise sufficient assets to get started. The foundation lives from its economic income (interest, dividends, etc.), the association lives from the activity of its members.

Other legal forms for charitable purposes

However, the non-profit association and the non-profit foundation are not the only legal forms that are suitable for the establishment and operation of an NPO.

Especially if the organization does not exclusively pursue charitable purposes, but is also commercially active in order to finance the charitable purposes, it may make sense to choose a hybrid legal form. An example of such a legal form is the non-profit GmbH (gGmbH) or its little sister the non-profit entrepreneurial company (gUG). Even a public limited company (AG) can be non-profit. Last but not least, a cooperative can be the right legal form for an NPO in which the members pursue social goals together.

There is also another option: setting up several companies with different legal forms can also make sense in certain constellations. For example, founding an association for the actual charitable purpose and a subsidiary (e.g. GmbH) in order to outsource certain areas and benefit from a limitation of liability.