The Bundesfinanzhof (BFH) had to deal with the question of whether and, if necessary, under what conditions a donation deduction according to § 10b EStG is to be refused because of the non-remuneration of the donation if the charitable foundation grants the donor an interest-bearing loan in the amount of the donation in close connection with the donation. Thus, the donor actually receives the donation amount back. We explain what standards the BFH established.

1. Reduce tax by deducting donations

According to § 10b (1) EStG, donations and membership contributions to certain institutions for the promotion of tax-advantaged purposes can be deducted as special expenses.

In addition to the required voluntary nature, the term donation is immanent that the taxpayer must act free of charge. In the first place, it is not free of charge if the taxable person receives a consideration from the recipient or from persons close to him. In exceptional cases, however, the supreme court case-law has also denied unpaid status from the point of view that the grant to the recipient is directly and causally linked to an advantage granted by a third party, which does not have to be of an economic nature.

The Federal Fiscal Court had to deal with the question of whether and, if necessary, under what conditions a donation deduction according to § 10b EStG is to be refused because of the non-remuneration of the donation, if the foundation grants the donor an interest-bearing loan in the amount of the donation in close connection with the donation. Thus, the donor actually receives the donation amount back.

With the decision, the BFH once again had the opportunity to comment on the concept of non-remuneration of a donation in connection with the granting of a loan to the donor. BFH has worked out in detail when the granting of a loan by the grantee to the grantee can constitute a consideration for the grantee.

2nd item: Donation paid and loans received

The plaintiff founded a foundation with legal capacity in 2011. This was recognized in the same year by the tax office as a non-profit. The basic assets were set at EUR 50,000. It could be increased at any time by grants. The board of the foundation consisted of two members, the plaintiff and his partner. The plaintiff was appointed for life. He was chairman of the board with the right to vote in the event of a tie.

On 19.12.2011 and 29.12.2011, the plaintiff transferred to the Foundation an amount of EUR 200,000 each with the purpose of “deposit asset stock”. For this purpose, the foundation issued a grant confirmation, which the plaintiff signed.

On 27.12.2011, the plaintiff and the foundation, represented by the plaintiff, concluded two loan agreements. Subsequently, the Foundation granted the plaintiff two loans of EUR 200,000 each, which were to be remunerated at 3.5% annually. In addition, they were to be used for the acquisition of real estate and finally repaid on 01.01.2022. However, early repayment by the plaintiff was permissible. The loan amounts flowed to the plaintiff on 27.12.2011 and on 02.01.2012.

As collateral, the plaintiff had to grant the foundation land debts in real estate still to be acquired. Until the registration of the land liabilities, the foundation was secured by assignment of the applicant’s participation in eight closed-end funds as well as claims under two life insurance contracts. Ultimately, two basic debts of 150,000 euros each were registered for the foundation on real estate of the plaintiff. The plaintiff stated that the Foundation had released the transitional guarantees granted after the registration of the two land debts on 09.10.2013.

After conducting an external audit, the tax office took the view that the payments to the foundation could not be deducted as donations because of the close connection with the opposite loan grants. With the amended income tax notice 2011, the tax office refused the donation deduction. Objection and complaint were unsuccessful. Consequently, the taxable person made an audit.

Legal assessment of the withdrawal of donations

3.1. Assessment by the Finance Court

The Finance Court conceded decisively that the loans were granted to the plaintiff without the bank formalities. In this, the tax court saw the advantage excluding the non-remuneration required for the deduction of donations. In the event of a dispute, the grant confirmation could not establish legitimate expectations because it had been issued by the plaintiff himself.

3.2. Assessment by the BFH

3.2.1. Referral back to FG

The BFH has annulled the judgment of the Finance Court and rejected the matter for other hearing and decision. The deduction of a payment made to a foundation as a (asset stock) donation was not excluded – without examination of further requirements – because the foundation provided the payer with an equal amount as an interest-bearing loan in close chronological connection with this transaction and promoted its tax-advantaged statutory purposes with the interest income.

3.2.2. Justification of the decision

It is the nature of a foundation to make profitable investments, including in the form of the granting of interest-bearing loans. The mere fact that such a loan is granted to the beneficiary does not necessarily exclude the non-remuneration of the beneficiary. The fact that the founder’s liquidity remained unchanged as a result of the granting of the loan also did not change this.

There is no misuse of design within the meaning of § 42 AO. It is not apparent that the legal system could in itself disapprove of the chosen arrangement. For this purpose, the BFH makes a control consideration. If the plaintiff had made the donations to the foundation and covered his loan requirements elsewhere, the plaintiff would have received the deduction of donations and would also be debtors of loans, which he would have to interest and repay. The foundation would have to invest the funds allocated to its assets – which it would not be allowed to consume immediately to promote its statutory tax-advantaged purposes – profitably. However, the outcome of this arrangement is not different from the outcome of the arrangement chosen by the plaintiff and the foundation.

The only decisive factor is that the payment is free of charge, so the granting of the loan does not confer any advantage on the user. This presupposes that both the granting of the loan in principle and the agreed loan terms withstood an arm's length comparison. In addition, the actual implementation of the loan agreement must not cast doubt on the fact that the funds allocated are now outside capital from the point of view of the donor. The tax court had not made sufficient findings in this regard, which is why the dispute was referred back for another hearing and decision.

4. Then loans exclude the deduction of donations due to pay

The BFH continues to ensure legal certainty with regard to the question of when a loan granted by a foundation to its founder is to be regarded as an advantage excluding the necessary non-remuneration of a donation. Both the “if” and the “how” of granting loans must be taken into account.

For the externality of the “ob” of the granting of a loan as such, compliance with the usual principles for the investment of funds of the asset stock of a foundation must be observed. In this respect, the requirement of safe and economic asset management applies first and foremost. The risk and the expected return on investment must be proportionate to each other. In view of the considerable importance of the undiminished preservation of their assets for a foundation, the risks associated with any above-average high-yielding investment must be weighed against the additional income that can be achieved thereby.

Furthermore, the agreed loan terms, i.e. the “how” of granting, must stand up to an external comparison in their overall view. However, not every single detail, which may deviate from the usual conditions between foreign third parties, excludes the externality of the loan. Rather, an overall assessment must be made. For example, criteria such as the civil validity of the loan agreement, the creditworthiness of the borrower, the collateralisation of the loan and the loan interest rate must be taken into account. In the context of such an overall evaluation, possible deviations from the foreign custom can be compensated within certain limits by opposing aspects.

It may be essential here whether the contractual opportunities and risks are distributed in an externally customary manner. Ultimately, the actual implementation of the loan agreement must not raise doubts that the funds turned to the foundation and lent back to the founder from the point of view of the donation are now external capital, i.e. the donor is finally economically burdened.

The BFH has left open in the present decision whether the donation deduction despite – imputed – Fulfillment of all objective prerequisites additionally requires a subjective characteristic of “donation motivation”.

5th Conclusion: Donation Deduction Possible Despite Loan Granting

Loans to the donor can lead to the exclusion of the non-remuneration of the donation. For this purpose, it is necessary to determine, on the one hand, whether the granting of the loan was granted in a manner customary for other purposes. On the other hand, its conditions must withstand an external comparison. In addition, the loan must have been actually carried out in accordance with the contractual agreement.

If these requirements are met, there is a balanced mutual legal transaction on its own. Then there is no room for accepting an excess share of compensation for a previous donation. Thus, the donation deduction must be allowed.