Nonprofit corporations receive various tax benefits and their donors and members can also claim tax benefits. But when is charitable activity actually available, which problem areas exist and which tax benefits actually receive charitable corporations. All these questions are clarified in this article.

Various tax laws contain benefits for corporations that selflessly pursue charitable, charitable or church purposes. The purpose of these tax benefits is to recognize and promote the selfless private promotion of the common good. In language use, however, these purposes are all understood under the generic concept of charity. When a corporation pursues such a purpose is regulated in general tax law, namely in §§ 51 et seq. of the Tax Code.

According to § 52 (1) sentence 1 AO, non-profit means the promotion of the general public in the material, intellectual or moral sphere. Ultimately, however, this imprecise definition does not help. The understanding depends in particular on one’s own understanding of values. It is therefore necessary to specify the indeterminate legal concept of public utility. It is clear, however, that activities that violate the law – especially criminal laws – cannot be charitable. In addition, there is no promotion of the general public if the beneficiary group is permanently closed. Notwithstanding this, activities that benefit but also harm at the same time can still be non-profit-making. Then, however, a comprehensive weighing of goods must be made.

In order to further specify the indeterminate legal concept of charitable activities with its unclear definition, § 52 (2) sentence 1 AO contains a catalogue of charitable activities. The catalogue of § 52 (2) sentence 1 AO reproduces all charitable purposes. Nevertheless, § 52 (2) sentence 2 AO contains an opening clause, which enables the supreme tax authorities to declare non-listed activities as non-profit in individual cases.

The prerequisite of non-profit is that the corporation pursues the tax-advantaged purpose selflessly. Accordingly, it may not primarily pursue its own economic purposes or the purposes of its members. Such economic purposes may therefore at best be pursued incidentally. Thus, for example, open or hidden distributions of profits to members constitute a breach. Also harmful are grants without basis in the statutes of the corporation. This includes both direct grants and other economic advantages of all kinds which the corporation grants free of charge or at reduced prices by replacing the assets. It is therefore crucial that, apart from the membership fee, no consideration from the member is opposed.

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Nonprofit?

The beneficiary purposes must in principle be pursued directly, selflessly and exclusively. An exception to this is for support associations or donation associations. They raise funds for the realisation of charitable purposes of other bodies. The strict application of the immediacy requirement would therefore fall short here. The work-sharing realization of charitable purposes by several public-law bodies is also favored.

Nonprofitness is not limited to the German population or to the realization of purposes in Germany. If, however, the realization of the purpose abroad is in question, it is necessary according to § 51 (2) AO that unlimited taxable nationals be promoted or the activity can contribute to the promotion of the reputation of the Federal Republic of Germany abroad. § 10b (1) sentence 6 EStG also provides for the deduction of the donations paid as special expenses. This limitation is intended to prevent the extraction from escalating. Furthermore, in the context of the spatial reference point of public utility, it can always be seen that tax benefits come into conflict with the prohibition of European state aid and can therefore be contrary to EU law.

The corporation may use its funds only for its statutory purposes. In particular, the timely use of funds must be observed. Therefore, the funds must in principle be used within the two years following the year of inflow. For 2020, however, this requirement was suspended due to the Corona pandemic. Therefore, there is a more comprehensive possibility of creating reserves in 2020. In addition, the corporation may dissolve earmarked reserves in 2020 in order to mitigate the negative consequences of the Corona crisis. In addition, one third of the surplus from asset management and 10 % of the other funds to be used in a timely manner can be placed in a free reserve.

Non-profit entities are corporations within the meaning of § 1 (1) KStG, i.e. sometimes associations, foundations or even a GmbH. Public companies of a commercial nature can also pursue charitable purposes. On the other hand, natural persons or partnerships cannot obtain charitable status due to a lack of segregation of assets and institutional independence. In particular, unlike corporations, they cannot guarantee the exclusive promotion of the general interest.

Charity and leisure activities are fundamentally contradictory to each other. Accordingly, there can be no charitable nature if the corporation pursues self-interested purposes of the leisure activities of its members.

Notwithstanding this, the legislature now also titles leisure hobbies and leisure clubs as non-profit-making in accordance with § 52 (2) no. 23 AO. Therefore, dog sports have the same rank as art and culture. However, sports clubs are also considered to be non-profit-making in accordance with § 52 (2) number 21 AO. Sport is, however, a prime example of the border area between the promotion of the general public, non-profit-making leisure activities and harm to the common good. Therefore, charitable status should be denied in particular if the membership fees and admission fees are so high that the general public does not have access to the association. The latter comes into consideration, for example, at a golf club.

The political activity is not covered by §§ 52 ff. Politically, there are bodies that want to influence the political decision-making and shaping of public opinion. Its financing is subject to special tax rules, such as § 30g EStG or § 10b paragraph 2 EStG. Influence on political decision-making must not be outsourced to non-profit associations. In particular, however, § 52 (2) no. 7 (Volksbildung) and no. 24 (Promotion of the democratic state) have a direct political connection and above all also include political education. Other charitable purposes also pursue highly political purposes. However, the targeted pursuit of daily political interests must never come first. Otherwise, the activity no longer falls under the charitable nature.

The prerequisites of public utility are determined separately. This gives rise to certain advantages. On the one hand, legal certainty exists before the issue of the first corporate tax ruling. In addition, the corporation can appeal the refusal of the finding and bring an action for commitments. This determination is a prerequisite for issuing grant certificates. Furthermore, it has binding effect for the corporate tax assessment and for the recognition of the donor’s deduction. Nevertheless, the tax office can also eliminate the finding. However, this is only possible with effect for the calendar year following the announcement of the repeal.

The corporations regularly maintain an economic business operation as an ancillary purpose, for example, to raise funds for the charitable activity. § 14 AO defines economic operations as independent, sustainable activities which generate income or other economic benefits and which go beyond the scope of mere asset management. However, this does not require a profit intention. Nevertheless, the economic activity of a non-profit corporation is only taxable if it exceeds the limits of tax-damaging asset management and an amount of 35.oo euros according to § 64 (3) AO.

Furthermore, the corporation does not lose its tax benefits comprehensively, but only in terms of economic business operations. Consequently, the corporation loses its charitable status as a whole only when the economic activity pushes the pursuit of the charitable purpose into the background. Accordingly, fundraising must always be subordinate to the charitable purpose.

Within the framework of the public-benefit operation, economic operations are included which serve to realize the statutory, public-benefit purpose of the corporation, which can only be realized by such a business operation. In addition, the distortions of competition occurring in this case must be unavoidable in order to fulfil tax-advantaged purposes. Therefore, distortions of competition are only acceptable to the extent that this is indispensable for the purpose.

It is therefore to be divided into 4 areas: the non-profit sector, the non-tax-damaging asset management, the tax-charged economic business operation and the non-tax-charged special purpose operation.

For charitable corporations, various tax benefits apply.

According to § 5 (1) no. 9 KStG, corporations are exempt from income tax more precisely than corporate tax. Accordingly, charitable, charitable or church corporation tax entities do not owe corporate tax. Consequently, they do not have to submit tax returns. Only the formalized review of the tax advantage every three years takes place.

If a corporation was initially taxable but then enters into the tax exemption, it must draw up a final balance sheet at partial values in accordance with § 13 (1), (4) KStG. As a result, it must pay tax on the hidden reserves that arose during the period of tax liability. Only the assets serving the tax-advantaged charitable purposes can be continued with book values. This also applies at the end of the tax exemption. This results in a lower copy volume.

Also, the contributions to the charitable corporation according to § 13 (1) no. 16, 17 ErbStG are not subject to inheritance tax and gift tax.

In addition, the property of a non-profit corporation is tax-free under § 3 (1) no. 3, 4 GrStG if the property is used directly for the tax-advantaged purpose.

Furthermore, charitable corporations are also exempt from trade tax.

Numerous sales of the non-profit corporation are also exempt from VAT pursuant to § 4 no. 16, 18, 22 UStG. The other transactions – outside the economic business operation – are subject to the reduced tax rate according to § 12 paragraph 2 no. 8 UStG. If the taxable turnover in the preceding calendar year amounts to a maximum of 35,000 euros, the deductible input tax can be set at 7% of the taxable turnover in accordance with § 23a UStG. This can be considered for the corporation if it is cheaper or easier than the actual input tax amounts.