Foundations in Germany

Foundations in Germany are institutions that pursue a purpose determined by the founder with a certain amount of assets and earnings. The organisation of the foundation and its articles of association are the most important components of the foundation. They should be legally secure and concrete at the time of establishment. This enables the founder’s will to be successfully implemented. The foundation’s purpose is of particular importance for the foundation’s general activity, establishment requirements and organisation. This purpose is permanent and is laid down in the foundation transaction and the foundation statutes.

Founders can be private individuals, companies, churches, religious groups and the state. The legal form of foundations varies. They can be structured as legal entities, i.e. foundations with legal capacity under civil or public law. The establishment and organisation of foundations with legal capacity under civil law are regulated in §§ 80 ff. German Civil Code (BGB). These can participate in other legal entities, e.g. limited partnerships.

The public-law foundations are public-law corporations established by the organisation laws of the state. They are not subject to §§ 80 ff. BGB. Furthermore, foundations can be established under the sponsorship of a trustee, i.e., non-legal, dependent, fiduciary or fiduciary foundations. A contract between the founder and the trustee sets them. Unlike charitable foundations with legal capacity under civil law, (fiduciary) foundations without legal capacity are not subject to official foundation supervision by the state foundation supervisory authority and the financial authority.

Foundation organisations vary according to the foundation type and are subject to different legal requirements. Unlike the trust foundation, which, as already discussed, is established by the conclusion of a contract, establishing a foundation under civil law with legal capacity requires a foundation transaction and state recognition by the competent State foundation authority. The foundation transaction is a unilateral declaration of intent by the founder, with which he also determines the foundation’s purpose.

In addition, a foundation charter must be drawn up per § 81 BGB. These must contain the following points:

• Domicile of the foundation: The domicile of the foundation must be related to the foundation’s activities and is decisive for the recognition upon formation, the competence of the supervisory authority and the legal supervision.
• Name of the foundation: It must not violate any law. However, a link with the purpose of the foundation is not required.
• Purpose of the foundation: The purpose of the foundation is for the benefit and fulfilment of which the foundation commences business activities and influences the entire future ongoing operation of the foundation. It is decisive for all areas of regulation and should therefore be chosen and formulated with care. For this purpose, the founder may choose individual objectives, specific procedures or a broad selection of different purposes.
• Assets of the foundation: As a rule, the foundation’s assets are transferred irrevocably and perpetually by the founder, so provisions to this effect should also be made clearly and precisely. The foundation’s assets can include various asset components. In addition, the founder can determine how the assets are to be dealt with in detail. However, the provisions on assets and their investment should be as flexible as possible to react to economic and political changes in the future.
• Formation of the foundation’s board of directors: The foundation statutes must also regulate the foundation’s organisation, particularly the composition of the organs, such as the board of directors. The specifications should include the number, the powers of representation, the remuneration guidelines, and the board members’ appointment.

In addition to these content-related specifications, it is advantageous if the founder also makes provisions on whether and under what conditions amendments to the foundation statutes can be permitted. Incidentally, the competent authority must approve amendments to the articles of association.

Legal challenges in foundation law exist, in particular concerning the possible liability risks of foundation bodies. In principle, in the event of damage, the responsible governing bodies and executive board members are liable internally for their private assets, even if they have only acted with slight negligence. Concerning third parties, i.e. within the framework of external liability, there may be a liability for tortious conduct and violations of legal interests. This considerably restricts the attractiveness of voluntary work on foundation boards.

However, to promote this commitment, legal liability privileges have been created. § 31a para. 2 BGB applies to board members. According to this, board members who work unpaid or receive no more than 840 euros per year as remuneration for their work are only liable to the foundation for damage caused in the performance of their duties in the case of intent or gross negligence. Liability for slight and ordinary negligence was thus abolished. Board members who are obliged to compensate another for damage according to § 31a (1) German Civil Code (BGB) but who do not work in an honorary capacity may, according to § 31a (2) German Civil Code (BGB), demand release from this liability from the foundation. This applies as long as they did not cause the damage intentionally or through gross negligence. For other honorary board members to whom this privileged treatment of board members does not apply, liability relief can be stipulated in the foundation statutes.

Furthermore, the following aspects may pose particular legal challenges for foundations:

• Investment of the foundation’s assets: It should be noted here that the foundation’s assets serve the realisation of the foundation’s purpose and must, therefore, not be invested too riskily. At the same time, the foundation’s assets must be invested profitably to cover the ongoing administrative costs, maintain the value of the foundation’s capital and, of course, promote the foundation’s purpose. Investment decisions can also give rise to liability risks for board members.
• Distribution of areas of responsibility: The board of directors is liable as joint and several debtors without a specific allocation to certain areas of competence or tasks. If necessary, the fault may be attributed to one of the board members to the detriment of the others. For this reason, the distribution of tasks and responsibility for specific subject areas to individual board members must be regulated in the foundation statutes.
• Control by the supervisory authority and the tax office: The foundation is subject to supervision by the supervisory authority and the tax office so that the executive board must answer for its investment decisions and general management. It is advantageous to have complete documentation of the executive board’s activities and plans so there are no inconsistencies in control.

Non-charitable foundations with legal capacity are subject to the same tax liability as all other legal entities. The situation is different if the foundation pursues a charitable purpose. In this situation, considerable tax advantages can be enjoyed; there is no trade tax, corporate income tax, capital gains tax, or turnover tax. At Schlun & Elseven Rechtsanwälte, our lawyers will advise you regarding such tax advantages and how your foundation can benefit from them.