Cross-border transfer of funds to foreign NPOs

In our new blog series, we are looking at how foreign and internationally active non-profit organizations (NPOs) can benefit from the tax privileges NPOs in Germany have. This is part three and deals with cross-border fund transfers between NPOs.

German charity law permits the cross-border transfer of funds between non-profit organizations (NPOs) for charitable purposes. The Annual Tax Act of 2020 (BGBl. I 2020, 3096) significantly simplified the possibilities of a funds transfer. Until then, NPOs were only allowed to transfer their funds to foreign NPOs if the articles of association were expressively provided for that. Now NPOs can pass on their funds, to all intents and purposes, without any limitations and without a separate articles of association regulation for the support of charitable purposes. The articles of association only need to allow fund transfers to other NPOs if the NPO fulfils one of its purposes by the transfer of funds to other NPOs alone (“Förderkörperschaft”). Additionally, according to charity law, the recipient NPO does not need to promote the same charitable purposes anymore, as the NPO forwarding the funds. But the corporations’ responsible bodies need to consider that they are still civilly bounded to their statutory purposes. They may still not share their NPO’s funds to support just any purpose.

Transfer of funds to foreign NPOs

According to the new legal position, the transfer of funds from a NPO accredited in Germany to a foreign NPO is to be differentiated if the recipient NPO generates taxable income in Germany and is therefore subject to limited tax liability.

1. Recipient NPO without taxable income in Germany

If the foreign recipient NPO generates, as usual, no domestic income it can essentially receive unrestricted grants from German NPOs. The German NPO, however, needs to provide evidence that the funds will be used in compliance to charity law, from a German point of view. Therefore, normally only project-related grants are possible. Moreover, the German and foreign NPO should agree on reporting obligations and a right to reclaim funds, in the event of a misuse of funds.

For recipient NPOs with their registered office and place of management within the EU or the EEA (“European NPOs”), a registration in the beneficiary register (“Zuwendungsempfängerregister”), planned for 2024 may bring relief (see part two of our blog series). The tax authorities will check European NPOs before their registration to the beneficiary register, with the registration being sufficient indication that German standards have been met. In this case, non-project-related grants to a European NPO without income in Germany are possible. However, the law does not grant protection of legitimate expectation.

The newly introduced legitimate expectation under Sec. 58a German Fiscal Code (“Abgabenordnung” – AO [see below]) applies only to German and European NPOs subject to limited tax liability in Germany. Therefore, a German NPO should ask for proof of the charitable activities and the charitable usage of the transferred funds. This can be done by submitting the articles of association and the activity report as well as an agreement on reporting. Hereby, the German NPO simultaneously fulfils the acquirements of the law of association, the law of foundation and corporate law. The risk of the grants to the recipient NPO not accredited as charitable, still lies with the funding NPO.

2. Recipient NPO with limited tax liability

According to the law changed by the Annual Tax Act of 2020, transferring funds to a foreign NPO subject to limited tax liability in Germany requires the recipient NPO to be acknowledged as a charity in Germany. Therefore, even a small amount of capital income in Germany – if it triggers limited tax liability – suffices for authorization requirements.

Under the current legal situation, only European NPOs can be acknowledged as charities in Germany (see part one of this blog series). As such as the transfer of funds to NPOs from third countries with limited tax liability would be completely excluded. In a regulation – contrary to the arguably misleading wording of the law – the tax authorities recently made an interesting clarification. It stated that the transfer of funds to NPOs with limited tax liability from third countries will continue to be possible if the funds are used in a way that complies with the charitable status from a German perspective. This is the case with the transfer of funds to NPOs without limited tax liability.

Aside from this, international NPOs are able to establish their own German NPO. Additionally, they can form a partner-like cooperation with a German NPO. By cooperating in this way, each NPO would use its own grants, taking its own responsibility in the joint project. In this constellation there is no transfer of funds from one to the other NPO.

For European recipient NPOs recognized as charities in Germany, the new legitimate expectation under Sec. 58a AO apply, as for the German recipient NPOs as well. If the recipient NPO can provide evidence to the funding NPO of its recognition as a charity in Germany, the funding NPO can rely on it. Even if the recipient NPO’s charity status gets denied afterwards or the transferred grants are, without knowledge of the funding NPO, misused, it is from the charity law perspective harmless for the funding NPO. The proof can be made according to a notice of exemption of Sec. 60a AO or through corporate tax assessment (see part two of this blog series).

Recommendations

If a German NPO wants to support a foreign NPO, it should make it clear if the foreign NPO has domestic income and is subject to limited tax liability in Germany. Furthermore, the German NPO needs to ensure that the recipient NPO is recognized as a charity in Germany or at least uses the funds to support purposes that meet the ideals understood under German charity law. This is typically done through a grant agreement or conditions in the funding commitment. This obliges the recipient NPO to use the grants for the agreed purpose and to show evidence to the funding NPO after the project has been implemented. The requirements differ depending on where the recipient NPO is based and if it obtains domestic income. The following three cases are therefore possible:

• Foreign NPO from a Non-EU/EEA third country: funds may be transferred, but only on a project-related basis and with increased obligations to provide evidence.

      Recommendation: Conclude funding agreements. Alternatively, set up a German subsidiary NPO or            cooperate with partners instead of transferring funds.

• European NPO, which is not subject to limited taxation in Germany: transferring funds is permitted, but currently only if project related and with increased obligations to provide evidence; in the future, a beneficiary register (“Zuwendungsempfängerregister”) would make this easier.

      Recommendation: Conclude funding agreements.

• European NPO with limited tax liability in Germany: funds may only be passed on after accreditation as a charity within the meaning of Secs. 52 ff. of the German Fiscal Code (AO).

      Recommendation: Obtain proof of recognition as charity.

German version