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view in original language (German)In practice, the tax exemption of associations and foundations on the grounds of charitable status raises numerous demarcation issues - especially when entrepreneurial activities, the holding of participations or entrepreneurial support models come into play. Using practical case studies, Tobias Suter and Andrea Hildebrand show where the boundaries of permissible entrepreneurial activity lie, under which conditions holding foundations remain tax-exempt and how funding instruments such as shareholdings, convertible loans or impact investing are to be assessed. The tax exemption of private schools and the requirements for international grant-making foundations with multi-level activity phases are also covered. The solutions provide you with the necessary tools to confidently assess the requirements for tax exemption and avoid typical stumbling blocks in the approval and review process.
Association A was founded over 120 years ago with the purpose, established in 1994, of operating Hostel B as a social, non-profit institution and managing Hotel C. Hostel B offers affordable accommodation to people in need or those facing hardship.
Association A was granted tax-exempt status on the basis of its charitable purposes. As part of the tax-exemption proceedings, it was explained that the hotel operations were only taken up later to save the hostel, as the hostel would no longer have been viable on its own.
Approximately half of the association’s total revenue comes from the hotel operations and half from the hostel operations. The services provided by the hostel operations (primarily the provision of lodging and meals at below-cost prices) account for about 80% of the association’s total expenses. The hotel provides several substantial services for the benefit of the non-profit hostel. On the one hand, the hostel is cross-subsidized with the total profit from the hotel operations. On the other hand, the hotel makes rooms available for non-profit purposes in emergencies.
As part of a review procedure, the tax exemption of Association A was revoked on the grounds that Association A engages in a business activity that cannot be tax-exempt; specifically, the hotel operations and their revenues serve the non-profit purpose of the hostel only indirectly and are therefore not considered non-profit.
Foundation A., based in the Canton of Vaud, was established in 1919. In fact, starting with the operation of the “foyers du soldat” (soldiers’ halls), the foundation developed extensive business activities in communal catering until it became one of the largest players in this market and achieved an annual turnover of approximately CHF 300 million. The foundation had apparently been tax-exempt since its establishment, although the tax exemption was revoked effective January 1, 1999.
With the intention of restructuring its business activities and separating them from its charitable purpose, Foundation A transferred its operations in the field of institutional catering to the company D.H. SA via a transfer agreement dated March 30, 2015, retroactive to January 1, 2015. The parties agreed that the operational tasks previously performed by Foundation A would henceforth be carried out by D. SA, a subsidiary of D.H. SA. Because Foundation A held the entirety of D.H. SA’s share capital, no consideration was provided for this transfer of business.
Following an amendment to its articles of association, the purpose of this foundation since 2016 has been to promote human and social values such as respect, tolerance, solidarity, and justice; to contribute to the health and well-being of people in contact with the foundation; and, to this end, to support projects or initiatives that align with these objectives, particularly those of its founders. The articles of association also provide that the A. Foundation carries out its activities through the acquisition and management of equity interests in companies, specifically in the field of institutional catering.
On December 15, 2016, Foundation A and D.H. SA entered into a long-term loan agreement. Under this agreement, Foundation A provided D.H. SA with approximately CHF 25 million after receiving a special dividend from the company corresponding to this amount. There is no guarantee for this loan. Interest on the loan is calculated as follows: CHF 1 million at 2.5% and the remainder at 0.75%. Accordingly, the foundation receives approximately CHF 205,000 in interest income per year.
In January 2017, the foundation submitted an application for tax exemption effective from 2015.
The Y. Association, based in the Canton of Zurich, aims to support young companies that solve social and environmental problems (social entrepreneurs). It supports startups in the so-called pre-seed phase and brings investors and young companies together to foster their collaboration.
In doing so, the association organizes and conducts free or very low-cost workshops, training sessions, and roundtables with an educational and informational focus, as well as smaller and larger events to raise public awareness of impact investing on the one hand, and the crucial role of business angels (wealthy institutional private investors) and their responsibilities on the other. To this end, it hires professional coaches and speakers, whom it compensates at market rates. It also publishes specialized articles, advises impact investors on how best to support social entrepreneurs, and builds a network of external coaches. The goal is to help startups secure financing and subsequently provide them with additional support and coaching.
The association also relies on entrepreneurial support models; for example, it takes equity stakes in the startups it supports or enters into convertible loans. Furthermore, by advising so-called impact investors—that is, investors interested in socially responsible and sustainable investment opportunities—the association aims to cross-subsidize a portion of the free services provided to social entrepreneurs. In addition, the association receives financial support in the form of subsidies from the Swiss Confederation’s Commission for Technology and Innovation (CTI) for various projects. However, there is no actual public service mandate.
The board members of Association Y. pay themselves generous fees.
The association is applying for tax exemption on the basis of its charitable purpose.
The world’s largest clothing manufacturers (the founders) in the fast fashion sector intend to drive the transformation of the clothing industry by helping to curb child labor and promote more socially responsible, sustainable clothing production (hereinafter referred to as the Initiative). The Initiative will begin in Bangladesh and Vietnam, with the option to expand it to other Asian countries. The foundation will serve as the legal entity for the Initiative.
The founders will provide the foundation with an initial capital of CHF 100,000 in cash and subsequently make funds in the hundreds of millions available. The foundation’s activities are divided into two phases. The first phase is expected to last approximately six years (Seed Stage). Provided that the activities tested in the Seed Stage are promising and deemed scalable, a second phase (Steady State) will follow. The Steady State is open-ended. Consequently, the financing and, to some extent, the governance differ between the two phases.
Essentially, the foundation pursues the following objectives:
The Foundation plans to develop and implement scalable, evidence-based, and comprehensive sustainability programs. These include, among other things, promoting alternative sources of income to enable a future for the next generation outside the garment production sector. During the seed stage, the main objective is to test the sustainability programs to identify the most effective approaches for later scaling.
The foundation also intends to facilitate access to financing, loans, and grants provided by international organizations. Specifically, it will award loans and sustainability bonuses to local garment producers and intermediaries. In this context, the foundation may invest a portion of its funds alongside other investors in third-party fund structures.
Upon successful completion of the seed stage, the foundation will continue and expand its activities (so-called steady state). One of the planned activities in the Steady State involves operating a platform that facilitates the trade of textiles manufactured in accordance with defined minimum standards. It is intended to function as a procurement platform, and donors are to be granted special purchasing rights through this platform.
School A., which became International School A. in November 2017, is an association whose primary activity is operating a private school. It includes a daycare center, kindergartens, and elementary school classes.
Since November 2017, Private School A. has aimed to offer and further develop private education in Geneva in accordance with the national curriculum and to operate the aforementioned school. Although the complainant teaches the subjects prescribed by the Western Swiss curriculum, she does not follow this curriculum, as she has her own program inspired by the Swedish curriculum. Accordingly, the Geneva Department of Education has only partially approved the curriculum.
Private School A. generates profits from the collection of tuition fees, which are essentially retained. In particular, School A. does not award scholarships. Tuition fees amount to CHF 22,280 per school year at the primary level.
Private School A. is applying for tax exemption and asserts that it pursues a charitable educational purpose.
