Germany: Amendments Concerning Nonprofit Organizations

On 1st of March, 2013, the German Federal Council passed the Act for the advancement of volunteering (Gesetz zur Starkung des Ehrenamtes). It shall promote activities that serve the public good and limit liability for persons acting on behalf of charitable organizations.

In particular, the Act amends civil law and tax law provisions. The new provisions shall enter into force retroactively on January 1, 2013, on the day after promulgation, on January 1, 2014, respectively on January 1, 2015.

  1. Civil law amendments

The Act involves civil law amendments for associations, foundations and charitable corporations that enter into force - with one exception - the day after promulgation.

  1. Association law
  • It is legally clarified that members of the executive board of an association are not remunerated, if the articles do not otherwise provide for remuneration (Art. 27, par. 3, sentence 2 German Civil Code; as of January 1, 2015). Since, in accordance with the statutory concept of the fiscal authorities, the board members of charitable associations and foundations are not remunerated, the amendment should entail little need of adaptation for charitable organizations with regard to the articles. However, associations and foundations that plan to pay their board members a fee (including expense allowances such as meeting attendance fees) should plan to adapt their articles.
  • The limitation of liability of executive board members, who are not or only modestly remunerated, will be expanded. Thus, all statutory board members or special representatives of the association with remuneration of up to EUR 720 per year are only liable to the association and its members for willful intent or gross negligence. If they are liable to third persons they may demand indemnification from the association in absence of willful intent or gross negligence (Art. 31a German Civil Code; entering into force the day after promulgation).
  • This above-mentioned rule shall also apply to association members, because - similar to a board member - they often perform functions of the association, e.g. as an instructor (see Art. 31b German Civil Code; entering into force the day after promulgation).
  1. Foundation law
  • The remuneration provisions for the executive boards of associations, as well as the limitation of liability of the bodies of an association, also apply to foundations including family foundations (see Art. 86, sentence 1 German Civil Code).
  • The legal admissibility of spend-down foundations is legallyclarified. A spend-down foundation may use its principal - in addition to the earnings - for the furtherance of the foundation's purpose. At the same time, the prerequisites for the recognition of a spend-down foundation are substantiated. The regulatory practices of the spend-down foundations are standardized by the amendment of the respective German Civil Code provisions. They shall enter into force the day after promulgation.
  1. Limited Liability Corporation Act
  • It is legally clarified that a charitable corporation may use the abbreviation "gGmbH" for "gemeinnutzige Gesellschaft mit beschrannkter Haftung" (see Art. 4 sentence 2 of the German Limited Liability Corporation Act; entering into force the day after promulgation). In the past, the practice of the regional commercial registers differed on this question.
  1. Tax law amendments

Tax law amendments apply, in particular, to the recognition of the tax-exempt status of charitable organizations, to the liberalization of the rules regarding timely disbursement of funds and the creation of capital reserves, as well as charitable donation law.

  1. German General Fiscal Code (Abgabenordnung)
  • In order to strengthen legal certainty and improve the legal protections of tax-exempt organizations, a new procedure has been instituted for the determination of statutory prerequisites for public charity. The fiscal authorities will issue a statement regarding the compliance of the articles with the law of public benefit organizations (see para. 60a German General Fiscal Code; entering into force the day after promulgation). The interim certificate of charitable status, which has been used until now, will be replaced by a binding administrative decision.
  • With this newly created procedure, for the first time, foreign organizations can provide legal certainty to their German donors as to the deductibility of a cross-border donation, by letting the German fiscal authorities certify that their statutes comply with the German law on charitable organizations. Foreign organizations with no German income and no charitable activities in Germany should refer to the Federal Central Tax Office, which has to determine a competent authority.
  • The time period in which the charitable organization's funds must be disbursed (term for timely disbursement) is extended from one year to two years beginning from the end of the year of accrual (Art. 55 para. 1 no. 5 sentence 3 German General Fiscal Code; entering into force on January 1, 2013). This measure shall strengthen the flexibility and the planning reliability for charitable organizations.
  • The creation of the so-called free reserves shall be facilitated in the future by allowing tax-exempt organizations to make up for the omitted allocation within two years (see Art. 62. para. 1, no. 3 AO, entering into force on January 1, 2014).
  • Endowments by charitable organizations will be facilitated: In the future, they may fund other charitable organizations with the same purpose by partly or completely contributing the income from business operations, including related business income, as well as from investment management, and up to 15 per cent from their other means that must be distributed in a timely manner (especially donations), see Art. 58, no. 3 German General Fiscal Code; entering into force on January 1, 2014. The legislative bodies especially wanted to promote the funding of professorships and chairs, but this exception shall also apply to other cases, for example the funding of tax-exempt affiliated companies. The recipient itself is not allowed to fund another organization with such received funds.
  • Foundations shall be entitled to increase their capital reserves for four years as of their establishment. Thus, the time period is extended for one year (see art. 62 para. 4 German General Fiscal Code; entering into force on January 1, 2014).
  1. Donation Law

The following amendments to the law on charitable donations enter into force retroactively on January 1, 2013:

  • Spouses that are jointly assessed may deduct a donation to the capital reserves of a public charitable foundation up to EUR 2 million without providing further evidence of the origin of the means (see art. 10b para. 1a sentence 1 Income Tax Act).
  • Donations to the capital reserves of a spend-down foundation may not be deducted beyond the "normal" deduction for donations (see art. 10b, para. 1a, sentence 2 Income Tax Act).
  • The liability for the issuance of donation receipts is only applicable to willful intent or gross negligence (see art. 10b, para. 4, sentence 2 Income Tax Act)
  1. Other
  • The tax-free amounts for volunteers are raised to EUR 2,400 (so-called "instructor allowance") respectively to EUR 720 (so-called "volunteer allowance"), see art. 3 nos. 26 and 26a Income Tax Act).
  1. Summary

The Act for the advancement of volunteering improves the legal environment for charitable organizations. It remains to be seen whether the expectations connected with the newly created procedure of recognition of tax-exemption will be fulfilled.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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