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The Cantonal Tax Office of Zurich is creating more flexibility
for tax-exempt foundations in connection with foreign activities,
impact investments, and the compensation of foundation bodies.
In connection with the goal set by the Government Council of the
Canton of Zurich in 2023 of increasing the appeal of the Canton of
Zurich as a location for foundations, a joint press release issued
by the Department for Finance and Economic Affairs of the Canton of
Zurich on 9 February 2024 states that the Zurich Cantonal Tax
Office is improving the tax law requirements for tax-exempt
foundations. This change in practice is intended to introduce
(more) flexibility, particularly in the case of a foundation’s
activities abroad, impact investments and the compensation of
members of a foundation’s governing bodies, marking a welcome
and long-awaited innovation.
Tax exemption for foundations
Tax exemption for foundations A foundation is essentially
granted a tax exemption if it pursues a public or charitable
purpose and meets the following conditions:
- exclusive use of funds for charitable purposes
- irrevocability of the commitment to the purpose
- actual activity or fulfilment of the purpose
Charitable purposes include activities that are in the (Swiss)
public interest or promote the common good, for example through
activities in ecological, humanitarian or scientific fields, that
are altruistic and do not involve commercial competition with the
aim of making a profit (maintaining competitive neutrality).
The criterion of maintaining competitive neutrality is examined
particularly critically by the tax authorities, and applications
for tax exemptions have so far not been granted at all or have only
been granted very cautiously if there was a chance that a
commercially competitive situation could arise. This has not only
prevented or hampered impact investments but also, to some extent,
asset management.
In addition, opportunities for activities abroad were severely
limited, restricting the scope of action for many foundations.
Activities abroad In principle, charitable activities in connection
with a tax exemption must be pursued within Switzerland. However,
in view of Switzerland’s long-standing humanitarian tradition,
a tax exemption has already been possible for activities abroad,
provided that the charitable activity was carried out in developing
countries or emerging markets and involved one of the following
activities:
- development aid;
- refugee aid;
- cultural promotion;
- activities in the field of knowledge and research provided a
transfer of knowledge took place between Switzerland and the other
country.
In addition, for special categories of activities relating to
climate protection, species conservation, humanitarian aid and
peace promotion, which constitute global challenges, a tax
exemption could be granted irrespective of the location of the
activity, provided that these activities were in the Swiss public
interest.
Moreover, taking into account the aforementioned
conditions, stricter requirements regarding the documentation
of activities abroad were applied in order to ensure the promotion
of Switzerland’s overall interests despite the absence of
monitoring mechanisms, and thus to justify the outflow of
funds to other countries. When supporting organisations abroad, for
example a tax exemption decision issued by the state of domicile
had to be submitted. In practice, the tax authorities sometimes
went even further and made an exemption for foreign activities
generally subject to the existence of a foreign tax
exemption.
According to the joint press release from the Department for
Finance and Economic Affairs of the Canton of Zurich published
on 9 February 2024, charitable activities abroad will now be judged
by the same standards as activities in Switzerland, which is
intended to make the Canton of Zurich more attractive to
internationally active charitable foundations.
This decision by the Canton of Zurich is highly
commendable, firstly because many foundations have a strong
interest in operating internationally even outside developing
countries and emerging markets, and secondly because certain
activities that lie in the public interest of Switzerland can be
pursued more effectively and efficiently at global level rather
than at national level alone. It is to be hoped that the Zurich
Cantonal Tax Office will implement the announced change in practice
in an effective manner. It can be expected and is understandable
that stricter documentation requirements in terms of traceability
and transparency will continue to be imposed for activities
abroad.
«IT IS EXPECTED THAT THERE WILL BE A SIGNIFICANT
LIBERALIZATION OF THE REQUIREMENTS FOR TAX EXEMPTION
REQUESTS.»
Business-related support models
According to the practice specification issued by the Zurich
Cantonal Tax Office, the support activities of tax-exempt
foundations should no longer be limited to à-fonds-perdu
contributions and loans but should also allow e.g. impact
investments. Impact investing is subject to two conditions:
the investments must be made in an area in which there is not
yet a market, i.e. where there is no competition with
non-tax-exempt investors, and the returns generated by the
foundation must in turn be used for charitable purposes. It remains
to be seen whether, for example, investments in non-tax-exempt
start-ups, which engage in an activity of general interest or the
financing of research projects by non-tax-exempt companies, which
serve the general interest, will be eligible for a tax exemption
from the perspective of the Zurich Cantonal Tax Office and how much
flexibility or, if need be, restraint will be applied when
examining tax exemption applications. It is to be hoped that
the previously very cautious practice in the context of impact
investments will be relaxed.
Compensation of foundations’ governing
bodies
Pursuant to the press release of 9 February 2024, the previous
requirement imposed by the Canton of Zurich in its information
sheet from July 2018, according to which members of a
foundation’s governing bodies must essentially act on a
voluntary basis, has been lifted. In future, adequate
compensation for foundations’ governing bodies no longer
precludes a tax exemption in the Canton of Zurich. This, too, is a
positive development that will enable foundations’ governing
bodies in future to receive appropriate compensation for their
sometimes extremely time-consuming and challenging activities,
which will increase the appeal of these roles. The practice of the
supervisory authority will reveal what requirements will be placed
on the documentation of the reasonableness of remuneration in view
of a tax exemption, taking into account the size and structure of
the foundation, the effort, responsibility and expertise
involved.
Amendments to the statutes for existing
foundations
Introduction of adequate compensation for foundations’
governing bodies
Under the previous practice of the Zurich Cantonal Tax Office,
the voluntary nature of the activities of foundations’
governing bodies was to be ensured by including a clause to that
effect in the statutes. With the removal of this requirement, the
question arises as to whether the statutes of existing
foundations should be amended accordingly.
According to legal scholars, an amendment to the provision
in the statutes concerning the compensation of members of a
foundation’s governing bodies constitutes a so-called minor
amendment of the foundation charter within the meaning of
Article 86b of the Swiss Civil Code (ZGB) since it does not
fundamentally alter the essence of the foundation. This applies at
least insofar as the provision of the statutes concerning the
voluntary nature of the activity is not intended to be
irrevocable according to the (presumed) will of the founder.
Whether this is the case must be determined by interpretation, but
is likely to be the exception. For minor changes within the meaning
of Article 86b ZGB provides for a simplified procedure: the
supervisory authority, after consulting the foundation’s
supreme governing body, issues the amending order. This is subject
to the condition that the amendments to the foundation charter
are objectively justified and do not impair the rights of any third
party. These two conditions are also usually likely to be fulfilled
since, in principle, no third-party rights are impaired is
increased.
Foreign activities
If the activity of the charitable foundation was restricted by
the statutes to Swiss territory in order to obtain a tax
exemption, any expansion of this foundation activity abroad
requires an amendment to the statutes.
Since – unlike the introduction of appropriate
compensation for the foundation’s governing bodies –
this is no longer likely to be a minor amendment, it is subject to
stricter requirements. A distinction must be made between
whether or not the foundation charter provides for a reservation of
change of purpose. In the first case, the founder must submit a
proposal to the competent supervisory authority. Furthermore, the
founder’s right to file an application must not have expired,
which is the case upon their death or, in the case of legal
entities, no later than 20 years after the foundation was
established. Finally, at least 10 years must have elapsed
since the foundation was established or the last amendment
request by the founder. In the second case, i.e. where the
foundation charter does not contain such a reservation, the legal
hurdles are higher and the permissibility of a change depends upon
the specific circumstances of the individual case.
Business support models
The change in practice regarding impact investments does not, in
principle, give rise to any need for action provided that the
support activities are carried out within the scope of the
foundation’s purpose.
Conclusion The direction and measures taken by
the Zurich government and the Zurich Cantonal Tax Office to
promote foundations in the Canton of Zurich are commendable
and represent a step in the right direction. It remains to be seen
how the communicated change in practice will be implemented by the
tax authorities of the Canton of Zurich, although a significant
liberalisation of the requirements for tax exemption
applications is expected. Furthermore, it is hoped that other
cantons will follow the example of the Canton of Zurich and adapt
their practices in relation to tax-exempt foundations.
Keyfacts
01 The Cantonal Tax Office of Zurich is creating more
flexibility for tax-exempt foundations in connection with foreign
activities.
02 In the future, impact investments should be possible under
certain conditions.
03 Governing bodies of charitable foundations may now receive
appropriate compensation.
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.
#Easing #Tax #Exemption #Practice #Foundations #Canton #Zurich #Tax #Authorities
