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Supervision of German Foundations

Hermann Falk

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Establishement of new foundations

If this trend continues the number of German foundations could grow by factor 3 or 4 within one generation.

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Soziale Zwecke32,7%

Wissenschaft und Forschung

13,3%

Bildung und Erziehung

14,9%

Kunst und Kultur14,4%

Umweltschutz3,3%

Andere gemeinnützige

Zwecke15,7%

Privatnützige Zwecke5,6%

Objectives 2006

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Basic concept

• Foundation

= organisation owning assets dedicated to a purpose. No members and shareholders. 

• Basic model

= foundation established under civil law (§§ 80 – 88 BGB) with legal personality and legal capacity. Its assets must be preserved and must suffice to promote its purpose indefinitely.

• Legal Framework

Federal Law (§§ 80 pp. BGB) and State Laws (Landesstiftungsgesetze). Fiscal Law (§§ 51 – 68 AO/ Tax Code).

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Different types

• public benefit entity self interest / non public benefit entity

• foundation with legal personality dependent foundation (~ trust)

• foundation under civil law public benefit limited liability company public benefit association

• foundation under public law

• foundation under church law

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Different types

• Different donors

such as corporate foundation, community foundation etc.

• Different segments

such as foundations for arts & culture, science & research, environment etc.

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Establishment

• Right to establishment based on the Civil Law and the constitutional freedom of property• Founder’s deed (Stiftungsgeschäft) plus Foundation Statute

• State approval (Anerkennung) by authority (Stiftungsaufsichtsbehörde)

• Quality and time depends on the specific state authority. Sometimes the process is rather lengthy and complicated, in other states customer orientated.

 

• No minimum capital (in absolute terms) required by law. It has to be proportionate to the objectives.

• Tax authority decides on tax privilege separately if only tax –exempt purposes are allowed in the Statute.

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Internal Governance

• Any Foundation needs a board (Vorstand) which can consist of one person, e.g. the founder himself. We recommend an additional body such as an advisory board (Stiftungsrat, Kuratorium etc.).

• Board members are responsibly for the foundation’s activities and are liable for damage to the foundation and its assets, caused intentionally or negligently.

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Accountability

• Civil law foundations have to present their accounts to the State authority. Minimum: Report on activities and profit & loss account.

 

• Any public benefit foundation must hand in an annual tax declaration to obtain the tax exemption.

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State Supervision

• First and foremost principle: to guard that the founder’s will is observed! Thus, the activity of the foundation board members is controlled to preserve the foundation’s existence.

• Supervision is limited to the question of legality of the administrative activities. The actual program is at the board’s own discretion.

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Information rights

The Foundation has to provide:

• Annual report on how the board met its duties to fulfil the founder’s will

• Annual account with main financial data. Recommended is a (audited) balance sheet depending on the foundation size.

• Change of board and other body members.

• Other information which is necessary to realize an efficient supervision.

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Measures of Supervision

1. Objections to certain board actions

= authority points out that certain actions breach the law or the statute

• Call to change or withdraw from this action.

• If measure can not be revoked then board is asked to consider authority‘s opinion in any future case.

2. Cancellation of board actions

• According to State law

• Action becomes invalid. Board has to wind up.

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Measures of Supervision

3. Official directives

with regard to already taken actions

• to refrain from certain intended actions.

• Or to instruct that a certain action is taken.

• If board does not obey: authority can order the substitute.

4. Administrative fine

can be imposed if official directive is not followed.

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Measures of Supervision

5. Dismissal of Board members

when relevant duties are neglected (fraud etc.)

• As an exception to the rule in case of gross negligence or inability to serve.

• Would it be sufficient to remove the person for a limited time?

• Steps:• Relevant body is asked to replace such board member within certain

dead line

• Replacement according to foundation’s statute.

6. Claim for compensation

according to State laws. In certain states a special representative is appointed to sue for damages.

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Licensing requirements

• Basic idea: measures that burden the foundation and its assets in a considerable was have to be approved by supervising authority, such as:• Taking up a loan.

• Assumption of a guarantee.

• Handing out of financial allocations free of charge and beyond the public benefit purposes.

• Selling / redistributing the assets in a way that would limit the foundation’s financial ability, e.g. > 20 %.

• Changing the Statute.

=> Legal transaction is provisionally invalid until authority has approved.

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Other Measures

Changing the Statute or Termination

• Ultima ratio in cases if purpose can not be persued anymore or if public benefit is in danger.

Fees

• All authority measures are subject to fees. However, most state laws liberate public benefit foundations from these fees.

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Legal Protection/ Redress

• Any official directive and other measure is considered as an administrative act. Thus, the foundation can object an pursue an opposition proceeding.

• Filing such an opposition has suspensive effect in principle.

• In case that the authority has neglected its official duties the foundation can demand compensation. For example: authority knows that financial danger is on the way but does not take any actions.

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Thank you very much!

Dr. Hermann FalkBundesverband Deutscher Stiftungen e.V.Mauerstraße 9310117 Berlin

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