
Overview and main trends
Provide a brief overview of the historical background to charity law and charitable organisations in Germany.
The first charitable organisations in Germany were established as foundations in the Middle Ages, under the control of the church. During the 13th century, the appearance of foundations independent of the church increased, administered by laymen and supervised by public authorities. They pursued religious and social purposes by providing hospitals and hostels. During the 17th and 18th centuries, the foundations became more secular and focused, for example, on education and science.
Charitable objectives were considered to be an original function of the state, so private foundations were subject to very strict public regulation. Private foundations reached their prime before the First World War. In particular, industrialists supported art and science through donations and foundations. The foundation laws of the federal states have been revised since 2002. Today, they emphasise the will of the founder and the discretion of the board of directors.
In the mid-19th century, people were allowed to form associations without any public authorisation and to pursue charitable, benevolent, social, scientific and artistic purposes. Today, charitable organisations have become major economic forces and are some of the most significant contributors to social life and its improvement. These organisations serve important human needs, ranging from supporting the arts to combating poverty.
In 2007 the sector was strengthened by an improved donation law, allowing tax deductions of a considerable part of charitable contributions.
The charitable sector is quite complex, including very different institutions. It is divided into two parts, which has hindered the development of a unified sector identity. Organisations are active in:
- Areas such as culture, recreation and sports, and the environment. They show a remarkable degree of Civic participation and rely heavily on membership dues and volunteer input to finance their activities.
- Health and social services, which are an integral part of the German welfare state, where the principle of subsidiarity is strongest. Health and social service organisations are highly professionalised and perceived as less civic, relying primarily on income from social insurance payments and direct state subsidies.
Are independent charitable organisations common and significant? What is the current size and scope of the sector and the main trends?
There are about 22,200 independent foundations, about 20,000 to 40,000 charitable corporations and non-independent foundations, and about 600,000 associations. The charitable sector is therefore a significant economic and social factor in Germany.
With 64.3% as opposed to the international average of 42.7%, public financing bears the biggest portion of the costs, while receipts from donors are at the lower level in Europe. The volume of donations amounted to EUR5.3 Billion in 2016.
Legal framework
Is there a legal definition of a “charity”? What are the principal sources of law and regulations relating to charitable organisations and activities?
In Germany, charity (Gemeinnützigkeit) as a legal term is only relevant in tax law. In particular, there is no separate body of law for charities.
Charity in terms of the Fiscal Code (Abgabenordnung) (AO) means to pursue aims that benefit the public (gemeinnützige Zwecke), benevolent aims (mildtätige Zwecke), or religious aims (kirchliche Zwecke). The list of public benefit purposes includes, among others:
- The advancement of science, religion, art and culture
- Education
- Protection of the environment
- Public welfare
- Support for persons persecuted for political, racial, or religious reasons
- Internationalism
- Protection of animals
- Foreign aid
- Consumer advice
- Sport
- (Section 52(2)(1) to (25), Fiscal Code)
Recognition as a tax-privileged organisation does not depend solely on the pursuit of charitable purposes in accordance with the Fiscal Code. Charitable organisations must pursue such aims selflessly (selbstlos), exclusively (ausschließlich) and directly (unmittelbar). In addition, a charitable organisation is not allowed to accumulate income (Gebot der zeitnahen Mittelverwendung).
The rule of altruistic activity (Gebot der Selbstlosigkeit) is stipulated in section 55(1) of the Fiscal Code:
- The legislature’s definition of altruism is based mainly on a negative description: an organisation Acts altruistically if it does not primarily serve the corporation’s own economic purposes.
- A charity is subject to a non-distribution constraint: it is a violation of the altruistic nature of a charitable organisation if its employees or third parties are given unreasonably high remuneration. Salaries or payments in the commercial sector are used as a standard in determining a reasonable level of remuneration, so that the permissible level varies depending on the particular case.
- If the corporation is dissolved or liquidated, or where its former purpose ceases to apply, the corporation’s assets that exceed the members’ paid-up capital shares and the fair market value of their contributions in kind can only be used for tax-privileged purposes (dedication of assets).
Charities gain legal recognition as tax-exempt entities from recognition of the charitable nature of their objectives, as stated in their statutes. Charities can only pursue those objectives (section 56, Fiscal Code), unless the law permits certain exceptions (for example, a restricted possibility to maintain the founder and his relatives). If an organisation carries out other activities, it can lose tax benefits.
In addition, a charitable organisation must carry out its activities as stated in its statute directly (Grundsatz der Unmittelbarkeit). According to section 57(1) of the Fiscal Code, an organisation pursues its tax-privileged statutory purposes directly if it serves those purposes itself. Depending on the circumstances, the requirement can still be met even if an auxiliary person (Hilfspersonen), for example an individual or another charitable or non-charitable organisation, is in charge of pursuing the charity’s goals. In this case, all actions undertaken by the auxiliary Person are deemed to be the actions of the charity itself. Several exceptions to the principle of directness are in section 58 of the Fiscal Code, especially the possibility to procure funds for other charities.
A charitable organisation must use its funds in a timely manner for the tax-privileged purposes stipulated in its articles (Grundsatz der zeitnahen Mittelverwendung) (section 55(1)(5), Fiscal Code). This is fulfilled if the funds are disbursed for the tax-privileged purposes in its articles by the end of the second year following receipt of the funds (for example, funds received in 2018 must be spent by the end of 2020). However, the tax law also grants exemptions, especially the possibility of allocating to reserved capital (section 62, Fiscal Code).
Principal sources of law
Charities are regulated by the Fiscal Code and special tax rules. Under the heading of tax-privileged purposes (steuerbegünstigte Zwecke), the Fiscal Code clarifies the concept of charity (Gemeinnützigkeit) in sections 51 to 68.
In contrast, there are no specific rules for the variety of charitable (that is, tax-exempt) legal forms in the law relating to foundations, associations and corporations. While there is no uniform tax law for charities, the recognition that an organisation is pursuing charitable purposes is reflected in individual tax laws, for example:
- Section 5(1)(9) of the Corporate Income Tax Act (Körperschaftsteuergesetz) (KStG);
- Section 13(1)(16b) of the Inheritance and Gift Tax Act (Erbschaft- und Schenkungsteuergesetz) (ErbStG).
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Practical Law Country Q&A_Charitable organisations in Germany
This Q&A is part of the Charity Global Guide and was first published by Thomson Reuters. For a full list of jurisdictional Q&As visit practicallaw.com/charity-guide