German Federal Fiscal Court: No deduction of donations to a “pre-incorporated foundation”

In principle, donations made to the assets of a non-profit i.e. tax-exempt foundation can at the request of the taxpayer be claimed as tax-reducing special expenses in the assessment period during which the donation is made and in the following nine assessment periods up to a maximum amount of EUR 1 million. This maximum amount increases to EUR 2 million for married couples filing joint tax returns.

However, caution is advised where the foundation is still to be incorporated at the end of the year in which the deductible donation is first to be claimed with tax-reducing effect. This is because donations to the assets of a foundation with a legal personality are recognized for tax purposes only once the foundation has been recognized by the competent supervisory authority.

This was ruled by the German Federal Fiscal Court (Bundesfinanzhof – BFH) in a recent judgement handed down on 11 February 2015 (X R 36/11). In its judgement, the German Federal Fiscal Court rejected the tax recognition of a donation to the assets of a foundation which does not yet have a legal personality on the grounds that the contribution was made both before confirmation of the non-profit status of the foundation and before its recognition by the competent supervisory authority.

Although even donations to foundations which do not have a legal personality are in principle deductible for tax purposes as special expenses, this requires that the donor first of all engages a legal entity to temporarily manage the assets transferred to it and to transfer these to the foundation once it has been recognized as having a legal personality. These requirements had not been met in this case.

The German Federal Fiscal Court also rejected the recognition of a donation to a “pre-incorporated foundation” by referring, in its main argument, to the situation under civil law, i.e. the donor is not bound either under contract law or property law to his commitment to make a donation until the foundation has been recognized by the competent supervisory authority. The court argued that a “pre-incorporated foundation” could not be compared to the pre-incorporated company which arises during the incorporation of a company. Unlike the shareholders of a company, a donor was also not already obliged to transfer assets to the legal entity which is still to be incorporated before it actually comes into existence.

The German Federal Fiscal Court expressly did not decide on whether the donation to the assets is deductible for tax purposes in the following years.

Advice:

The best way to avoid this issue is to ensure that the foundation is incorporated as early as possible if the deduction of the donation for tax purposes is intended in the year in which the foundation is incorporated. If the incorporation of the foundation in the last months of the year is unavoidable, appropriate measures to secure the recognition of the donation as a tax-deductible expense, such as the use of a foundation without independent legal capacity, should be included in considerations.