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August 8, 2022 | Sales tax at a self-employed foundation: how they should act in the future (this contribution)

You have a company and exchange services with a foundation whose legal entity is your company and who manages your assets. Then there is an independent foundation. This raises the question of whether you owe sales tax on the service exchange.

1st Foundations in VAT Law

1.1. What is an Independent Foundation?

The independent foundation differs from the independent foundation in that it is not a legal entity and lacks legal capacity. Therefore, it cannot itself act on the right. Rather, the founder as a trustee transfers assets for the permanent pursuit of the foundation purpose specified by him. The trustee can also be an independent foundation. The dependent foundation therefore requires a legal entity whose property is owned by the foundation’s assets and who acts in his own name for the foundation in legal transactions.

1.2. Independent foundation and VAT according to previous understanding

Until now, it was recognized that independent foundations can also be recipients of services in the sense of VAT law. They should not be entitled to deduct VAT simply because of their lack of economic activity. A sales tax body was also rejected due to the lack of financial integration of foundations. Therefore, sales tax is owed for the performance relationship.

For example, a non-profit association can advise and administer several independent foundations, which are run as functionally separate departments of the association. For these activities, the association can receive a fee from the foundation. Due to the lack of legal capacity, the Foundation cannot have its own staff. Therefore, the association concludes employment contracts with the required staff. Previously, the tax office then assessed the permanent transfer of the staff of the association to the non-legal foundation against reimbursement of expenses as a turnover taxable and subject to VAT.

2nd Independent Foundation according to a new understanding

The Finanzgericht (FG) Münster has now reversed this understanding. Accordingly, the self-employed foundations lack the quality of a legal entity and thus the possibility of being a recipient of services under VAT law. Therefore, the legal relationship between the entity and the independent foundation that is necessary for the exchange of services cannot exist. Rather, it is contradictory to determine the person of the contributor and that of the recipient according to the underlying legal relationship and to consider a dependent foundation as contributor or recipient of benefits, although it cannot be a party to such legal relationships due to lack of its own legal capacity. The income tax law fiction of the tax subjectivity of dependent foundations in § 1 (1) no. 5 KStG is therefore not transferable to VAT law.

The respective foundation business is also to be understood as a donation under conditions. The association has therefore become permanent civil owner of the respective foundation assets. Therefore, the foundation assets can also be exposed to claims of creditors of the association. According to FG Münster, the club’s administrative services are carried out only within its own company. However, internal sales between the organisational units of a single enterprise are not taxable. Nevertheless, the Finance Court has allowed the revision to the Bundesfinanzhof (BFH). Therefore, it remains to be seen how the BFH classifies services to independent foundations.

3. consequences for the independent foundation

3.1. Significance of the decision

According to the FG Münster, independent foundations cannot bear rights and obligations. Therefore, there can be no exchange of services between them and the association. Other fundamental tax decisions are also moving in this direction. Legal autonomy will therefore probably become more important in the future.

3.2. This is how an independent foundation should now act

For self-employed foundations and their foundation sponsors, it should be noted in any case that, following this decision, the BFH could also come to the conclusion that there is no exchange of services. This would have the consequence that sales tax for administrative activities and the provision of personnel by the foundation owner to the dependent foundation would have been wrongly subjected to sales tax.

If invoices with VAT ID have been created via the activity of the legal entity, no invoice corrections are required. Accounting for such internal sales with a separate tax ID do not constitute suitable invoices within the meaning of § 14c (1) sentence 1 UStG.