Establishing a Foundation in Germany

Foundations in Germany are not defined by law. However, it can be described as an organisation set up by one or more founders who use foundation assets to fulfil a specific purpose.

In principle, only the interest income from the foundation’s assets and, in some cases, donations are used for this purpose, but not the assets as such.

Around 95 per cent of foundations in Germany pursue charitable purposes. In addition, there are also private-benefit foundations, especially family foundations, which primarily serve to provide for the members of one or more families.

Foundations appear in various legal forms and types. The best-known and most common are the legally capable foundation under civil law and the so-called trust foundation.

There should always be sufficient assets to pursue the foundation’s individual purpose. These include assets of all kinds, whether in cash, as shares in a company or in-kind.

In addition, a sufficiently definite purpose for the foundation is required. This is laid down in the foundation statutes, which provide the legal framework for the foundation.

The articles of association should also contain the name of the foundation, regulations on the foundation’s assets, the persons benefiting from the foundation (beneficiaries), and provisions on any foundation bodies and committees.

Under civil law, the legally capable foundation, also called an independent foundation, is regulated by statute under §§ 80-88 BGB. It comes into existence with the foundation transaction and recognition by the competent authority of the federal state where the foundation is to have its seat (§ 80 para. 1 BGB). In North Rhine-Westphalia, the foundation supervisory authority is the respective district government.

The prerequisite for recognising the foundation as legally capable is the written form of the foundation transaction. In it, the founder must bindingly declare to dedicate assets to fulfil a purpose specified by them.

In addition, a foundation charter is required in which the foundation’s name, seat, purpose, assets and the formation of a foundation board are regulated.

Furthermore, the foundation supervisory authority examines whether the foundation’s purpose’s permanent and sustainable fulfilment appears to be assured.

No specific amount is prescribed by law for the foundation assets so that the concrete circumstances of the individual case are examined. Often a capital of at least 50,000 to 100,000 euros is considered necessary, but this depends, among other things, on the respective federal state.

The foundation deed is finally issued with the recognition of the foundation as legally capable.

For recognition, the foundation transaction and the foundation statutes must be submitted to the competent foundation supervisory authority together with the application for recognition.

The foundation transaction may also consist of a disposition upon death (will or contract of inheritance). In this case, recognition of the foundation is applied for by the heir or executor.

If the application is not made, the foundation transaction is notified by the probate court to the competent authority for recognition (§ 83 p. 1 BGB). In principle, the abovementioned requirements must also be fulfilled in this case.

The competent tax office must recognise the foundation as pursuing charitable, benevolent or ecclesiastical purposes to benefit from tax concessions. The requirements must be fulfilled in §§ 51 ff. of the German Fiscal Code (AO). The foundation is only entitled to issue donation receipts for donations once it has been recognised as a non-profit organisation.

For this reason, the founder should only then pay the foundation’s assets into the foundation’s account and have this certified by issuing a donation receipt.

The lawyers at Schlun & Elseven Rechtsanwälte advise on all matters concerning establishing a foundation in Germany.

A foundation benefits from tax advantages if it exclusively and directly pursues charitable, benevolent or religious purposes. Which purposes are to be included is regulated in §§ 52 to 54 of the German Fiscal Code (Abgabenordnung).

For example, a foundation pursues charitable purposes if its activities aim to selflessly promote the general public in the material, spiritual or moral spheres. In this context, up to one-third of the income of a foundation may be used to maintain the founder and their next of kin if this is done appropriately (§ 58 No. 6 German Fiscal Code).

If a foundation pursues one of the above-mentioned tax-privileged purposes, it is exempt from corporation and trade tax, provided its income is not generated in the context of a taxable commercial business. In addition, it is exempt from real estate tax.

However, real estate transfer tax must be paid only in the case of the acquisition of real estate, provided that this is neither a gift nor a donation from an inheritance. No gift or inheritance tax has to be paid for donated or bequeathed assets to the foundation.

In addition, capital gains tax is refunded to the application. If a charitable foundation operates as an enterprise, it is generally subject to turnover tax. However, a reduced tax rate of seven per cent applies in principle insofar as the turnover is not achieved within the framework of a taxable commercial business.

As a rule, an independent foundation is established for the long term. Therefore, the foundation assets are irrevocably transferred. There is, therefore, no direct access to the endowed assets.

Cancellation is also generally not possible, i.e., establishing a foundation cannot usually be reversed. The same applies to a change of the foundation’s purpose, which is only possible in exceptional cases. Therefore, you should think carefully about whether you want to place your assets in a foundation permanently.

A foundation can be abolished if the purpose of the foundation can no longer be fulfilled.

Unless otherwise stipulated in the statutes, after the foundation has ceased to exist, the assets go to the federal state where the foundation’s seat is located or to another beneficiary determined by the respective state foundation law (§ 88 BGB). Therefore, what will happen to the assets in dissolution should be regulated in advance.

In addition to a foundation established for an indefinite period, establishing a limited-term trust is possible. This is a particular form of legally capable foundation under civil law. Its special feature is that it is found for a fixed period (at least ten years), and its assets are used for the purpose (§ 80 para. 2 sentence 2 BGB).

Establishing a limited-term trust makes sense if a specific goal is to be achieved that can be realised in the foreseeable future. Often after a particular retention period of a few years, the foundation capital itself can be used in addition to the investment income.

The foundation assets are then gradually used up to realise the foundation’s purpose. The limited-term trust is created under the same conditions as a regular foundation under civil law with legal capacity.

To promote a foundation purpose, establishing a foundation association or a foundation limited liability company (Stiftungs-GmbH) is also possible.

A foundation limited liability company is a non-profit limited liability company (gGmbH) with shareholders. It is entrepreneurial and pursues a charitable purpose.

It also benefits from certain tax privileges.

The advantage of a foundation GmbH is, as with the trust foundation, that it does not require state recognition and is not subject to foundation supervision. A minimum capital of 25,000 euros is required. If the contribution is made in the form of a cash contribution, only half of this amount has to be provided at the time of formation.

In contrast to a foundation, there is also no restriction to the effect that, in principle, only the investment income from the assets may be used.

The foundation association is a kind of hybrid between a foundation and an association, whereby the association acts as the administrator of the foundation’s assets.

The foundation is established per the provisions of the law on associations, and there is no foundation supervision here either. If the available capital is not yet sufficient for an independent foundation, first establishing a purpose-bound non-profit association is possible, and this can later be converted into a foundation, whereby the assets required for this are contributed through regular donations.

Our lawyers will be happy to advise you on your options for using your assets sustainably for the foundation purpose you are pursuing.