With a charitable foundation you can save above average taxes in the year of its establishment. This is especially the case if you earn exceptionally high income in an investment period and then have to tax it accordingly high. Although part of the profit can be donated for charitable, charitable or church purposes, legal restrictions apply. However, if you set up a charitable foundation, then you can set up up to EUR 2.000.000 tax as special expenses and thus significantly reduce taxes. And yet in this way you support projects that are close to your heart, sustainably and under your own control.

In special times, when the cohesion of the people in Germany is particularly important, it shows how great the willingness of the population really is. This was the case, for example, in the great storm in West Germany in 2021. But also in everyday life is often donated. Even companies support various charitable projects with their donations. Of course, to a large extent the image of the company should also receive a good impression in order to increase sales, for example. But the good cause also counts.

However, in addition to donations, there are other ways to promote charitable projects. The charitable foundation is one such option. But how exactly does a charitable foundation work? And why is a tax consultancy firm that specializes in the taxation of corporations interested in this? At least for the second question, the answer should be quite obvious, namely, because it can save taxes.

To talk about the charitable foundation, we still need a basic framework of legal knowledge. Provisions for this are contained in the Civil Code (§§ 80 ff. BGB) and in the Foundation Act. There, for example, it is regulated that there are in principle two types of foundations, namely the foundation among living people and the foundation due to death (§ 83 BGB).

In addition, one can distinguish according to the purpose of the foundation. On the one hand, one speaks of the family foundation, in which the family members of the donor benefit from the proceeds of the foundation assets. On the other hand, there is also the charitable foundation, in which the proceeds are to flow to charitable, charitable or church purposes.

How the distribution of the proceeds of a charitable foundation should take place is also regulated. For example, a charitable foundation must provide at least two-thirds of its income to charity. Only a third of them are allowed to leave. On this basis, a Board of Trustees now determines in detail to which purposes the funds flow in detail. The Board of Trustees is guided by the will of the founders, which is defined by them in the foundation statutes at the time of establishment. For this purpose, it is also possible to specify different purposes and weight them differently in their promotion.

It is still significant that in Germany the establishment of foundations requires approval. The approval is the responsibility of the federal states. Accordingly, federal states have also enacted their own, supplementary foundation laws. In addition, the approval of a foundation depends on the foundation’s assets being sufficiently large to fulfil the purpose of the foundation.

As already briefly mentioned, a charitable foundation distributes the income it generates with its foundation assets. However, it can only do this within the framework of the guidelines laid down by the founders in the foundation statutes. These requirements must in turn comply with the statutory regulations, i.e. they must be specifically charitable, charitable or church-related.

So, for example, the donation of a bell for a church tower comes into consideration, as well as the cost of producing kits of a local sports club or the promotion of scientific research projects. Even the granting of scholarships is covered. In addition, a charitable foundation can serve the preservation of monuments and other cultural objects because they offer cultural added value to the general public.

The interesting thing about a charitable foundation is that the founders can be represented on the board of the foundation. This will enable them to retain control over the use of the funds. As long as they themselves do not derive their own financial benefits, this is without hesitation from a tax point of view. So if you want to spend money on a good cause, the charitable foundation is an ideal vehicle for such benefits. In addition, a foundation that promotes charitable causes attracts more attention, so that under favorable circumstances a model is created, which will be followed by other donors in the future.

But how exactly is a charitable foundation able to provide tax benefits? To answer this question, we need to go back to the time of the establishment of the charitable foundation.

Let us assume that a successful entrepreneur, let us call him Mr. Sopranian, sells his company at particularly favorable conditions. So he makes a big profit, which he now has to make more expensive. Although he can earn the profit 40 % tax-free through the partial income procedure, in his case the still considerable remainder is 45 % in income tax. The application of the capital gains tax at a flat rate of 25 % hardly changes its situation either. Even a request for taxation at the so-called half-rate hardly meets Mr Sopranian sufficiently.

Now Mr. Sopranian is a great friend of classical opera. In the past, he has often paid money to promote opera in his hometown. Therefore, he considers how, since he has now come to a small fortune, he can transfer this at least partially as favorably as possible to the opera. Logically, this is best achieved if the taxation of his profit is optimized, i.e. he needs to pay at most low taxes.

If he donates part of it, he can at least set donation expenses as special expenses for tax purposes. However, certain restrictions are provided for in Germany. Section 10b of the EStG stipulates that donations for charitable, ecclesiastical or charitable purposes (i.e. party donations must be treated separately) may not include more than 20% of the total amount of income in order to claim it for tax purposes. Although more can be donated, this leads to the excess amount being carried forward to future investment periods. Mr. Sopranian should therefore only use the rest in one of the following years. But since he now wants to retire, he should hardly pay taxes in the next few years anyway. A donation lecture is therefore not very useful in his case.

In addition, Mr. Sopranian wants to give the opera a large amount already this year, which is more than 20% of his total income. So he is looking for tax advice from us. Our answer: He should consider setting up a charitable foundation. With such a foundation, he can transfer up to EUR 1,000,000 to the foundation as a single individual and at the same time set the amount tax-reducing as special expenses in his income tax return. For married couples, it can even be EUR 2.000.000 in total, even if only one spouse uses it. In any case, the charitable foundation would then grant financial support to the opera in accordance with a foundation statute that had been elaborated in detail beforehand, which exactly corresponds to the wishes of Mr. Sopranian.

What is more, it would still be able to do so in the future, even if the amount originally earmarked by Mr Sopranian as a donation has long since been used up. From the outset, the foundation invests part of the assets transferred to it profitably. In this way, she can ensure that the opera receives annual support. In principle, this is an unlimited obligation to provide financial support, but the amount of the grants remains undefined.

A further advantage of a charitable foundation opens up for Mr. Sopranian by the fact that he can become a member of the foundation board and thus be able to control himself in the future how the assets donated by him will be used. He can therefore have a say in determining how the money is invested, how much the opera receives annually in support, can award scholarships for particularly talented young artists or determine how much of the annual profit the foundation should reap (within the legal limits of course). However, he can also influence the composition of the Foundation Board and Board of Trustees, beyond his former retirement.

Another advantage that a charitable foundation enjoys over a family foundation is that there is no gift tax on its foundation business.

If you have a great treasure of altruism in your soul, you can certainly understand that tax designs such as the one just presented here should be used to promote favorite projects. The design works with a charitable foundation both in Germany and in EU/EEA countries. And since the legislature in any case sees the civil society promotion of charitable, charitable and ecclesiastical purposes positively, one should also use all possibilities to get the maximum benefit from it.

A great advantage of the charitable foundation, however, is that as a founder or founder you are able to control the use of the foundation assets. The foundation assets may be independent, but their use remains under their control. In fact, several different projects can be supported in this way; it depends only on the design of the foundation statutes and the equipment of the foundation assets.

Then there is another point that many founders think of when they set up a charitable foundation. They permanently associate their civil society, selfless commitment with their name. Future generations will also remember this commitment. No wonder, then, that virtually everyone associates the name Alfred Nobel with the positive aspects of his foundation rather than with the consequences that his inventions had in the military sphere.