Julia von Ah
Charitable foundations and corporate foundations
Workshop on "Charitable Foundations and Corporate Foundations" by Julia von Ah and Oliver Appenzeller on the occasion of the ISIS seminar "Structuring Private Assets by Means of Trusts or Foundations" on October 31, 2023.
Case 1: Foundation with media fund
1. facts of the case
X., 60 years old, domiciled in Switzerland, plans to establish the Y. Foundation domiciled in Switzerland pursuant to Art. 80 et seq. ZGB with an initial foundation capital of CHF 5 million. Further contributions by X. will follow. X. has inherited and is childless.
The foundation is designed as a consumption foundation with a basic life span of 25 years, extendable by a maximum of 5 years to a total of 30 years.
The purpose of the Foundation is described in Art. 2 of the Articles of Association as:
The foundation is committed to combating injustice and inequality. The foundation establishes and maintains a media fund that promotes contributions on socio-political topics.
To this end, the Foundation supports Swiss and foreign non-governmental organizations and state institutions, particularly in the areas of international development cooperation, health, education and human rights. It can also realize its own projects.
The aim of the Media Fund is to provide financial support of up to CHF 10,000 per contribution to cover research and travel costs for journalistic contributions in reporting on socio-political topics. It is envisaged that up to CHF 150,000 will be made available annually for such contributions. Journalists will be able to apply for support contributions from the foundation. The foundation board will decide on applications for contributions. The topics of such contributions should be within the scope of the Foundation's purpose. The aim is to ensure that professional research and writing is also done on topics that are currently outside the scope of daily reporting but are nevertheless important from a humanitarian perspective and deserve attention.
The Y. Foundation is seeking full tax exemption qua non-profit status. Does the operation of the media fund contradict one of the requirements of non-profit status, or can it set up and operate the media fund as intended?
Case 2: Foundation receives 100% stake in Personal HoldCo
1. facts of the case
X., a resident of Switzerland, is single, in his early 70s, and very wealthy. He holds part of his investments in a personal holding company, Z. AG, domiciled in Switzerland. Its chairman of the board of directors is X. A., a former asset manager residing in Luxembourg, is the second member of the two-member board of directors and advises Z. AG on its asset investment strategy.
Z. AG holds free float shares in about twenty listed domestic and mainly foreign corporations; in addition, it has invested as limited partner in more than twenty foreign fund of funds and holds several participations (between 5 and 40% capital shares) in primarily foreign startups and former startups and also grants loans to the latter. X. is a board member of most of the investments in which he holds an equity interest of 10% or more or has granted major loans. The NAV of all investments together amounts to more than CHF 200 million. Z. AG is fully self-financed.
X. is childless and would like to transfer the 100% shareholding in Z. AG during his lifetime into a non-profit foundation to be newly established, Y. Charity, domiciled in Switzerland, during his lifetime, in order to increase the foundation's assets and to ensure that the foundation can make annual donations to support charitable institutions and facilities, particularly those active in the charitable, humanitarian, scientific, social and medical fields.
X. is to become Chairman of the Board of Trustees, A. his deputy and responsible for the investment strategy of the foundation, and B., a lawyer by profession, is to become the third member of the Board of Trustees and is to take care of corporate governance and compliance tasks, among other things. The Board of Trustees is also to sit on the boards of the existing holdings.
- Does the 100% capital participation in Z. AG preclude the subjective tax exemption due to the pursuit of charitable purposes?
- Variant: What if, in addition to the basic issue, the foundation itself would like to do direct impact investing and invest directly in startups (e.g. in the area of Rett syndrome research or certain sustainability topics)?
- A. and B. demand a board of trustees compensation of CHF 12,000 p.a. each and reimbursement of expenses based on actual receipts, as they perform several management tasks because there is no separate managing director. X. wants to waive compensation for himself. Does the compensation conflict with the subjective tax exemption due to the pursuit of charitable purposes?
- Alternative to question 3: A. does not sit on the Board of Trustees, but remains solely on the Board of Directors of Z. AG. B. becomes the only member of the Board of Trustees alongside X. He receives a lump sum of CHF 5,000 for his work on the Board. He receives a lump sum of CHF 5,000 for his work on the board of trustees. In addition, he is to review all applications for grants that arrive almost daily on a commission basis at an hourly rate of CHF 300 and contact the applicants or reject them. In addition, he is to review all applications for grants that arrive almost daily on an hourly basis and to contact the applicants or reject them, to be in regular contact with the supported institutions, to check the controlling of the correct use of funds with the recipients of grants, to prepare the annual budget for grants, to look after all legal matters of the foundation or, if necessary, to coordinate with external specialists and to perform other management tasks, since the foundation does not employ a managing director. The maximum number of hours per year is set at 100 h (i.e. cost ceiling at CHF 30,000). The president of the foundation board wants to limit himself as far as possible to representation tasks and his formal duties.
Case 3: Foundation with real estate holdings
1. facts of the case
Foundation P has the statutory purpose of preserving listed properties and preventing speculation. Contrary to the statutory purpose, however, the foundation only acquires older buildings in peripheral areas which do not have any monument preservation qualities and are not subject to any protection measures (e.g. flour mills, workshops, residential houses). The foundation ensures the preservation of the buildings and also partially converts them. As far as possible, the buildings are kept open to the public for viewing. Since some of the buildings are also inhabitable, they can be booked for overnight stays for a fee that covers the costs. The rest of the funding comes from donations, the sale of a brochure, and volunteer work by the foundation's board members.
Variant: Foundation P is effectively active in accordance with the statutory purpose and is the owner of listed properties (cantonally classified as worthy of protection) in a smaller old town in eastern Switzerland in a prime location. The buildings could be acquired due to an original donation by the founder and mainly thanks to interest-free loans from the founder and interest-bearing loans from third parties. The properties include business premises, restaurants and apartments, all of which are rented out. The Foundation generates annual - albeit not excessive - surpluses through rentals. The foundation has no other income. Due to the good earnings situation, it has been possible to accumulate reserves over the last few years. Furthermore, the founder holds out the prospect of a further loan. For this reason, the Foundation intends to acquire an additional property worthy of protection.
- Can the P Foundation be exempted from tax liability because of its non-profit status?
- Variant: Does anything change in the assessment?
Case 4: Company succession via a charitable foundation
1. facts of the case
A wants to step down and sell his B AG as quickly as possible. He wants to donate a large part of the proceeds to a charitable foundation. For this purpose, he establishes the Z Foundation with an initial capital of CHF 300,000, the purpose of which is to provide financial support to persons and families affected by poverty.
He has already found a successor or prospective buyer for B AG in the person of F, who has been an employee for many years. However, F does not want to take over the company alone and is therefore still looking for a business partner. A does not want to wait and sells 51% of his shares to F. He transfers the remaining 49% to Foundation Z, subject to the condition that Foundation Z must sell the shares to F's future business partner at market value.
- Does the transfer of the shares in B AG jeopardize the tax exemption of Foundation Z?
Case 5: Partial tax exemption
1. facts of the case
Foundation X is active in the field of education. It runs a wide range of courses for children, young people and adults (language courses, theater courses, craft courses, further education, etc.). The courses are all offered for a fee and the teachers are compensated at market rates.
Due to the current refugee situation, Foundation X would now also like to offer free language and specialist courses for refugees and generally for disadvantaged young people. The tax-exempt association P has in principle assured Foundation X of annual financial support for this purpose, so that the teaching staff and other expenses (rent, etc.) can be financed. However, Association P requires the tax exemption of Foundation X for these donations. In addition, the Foundation has already received various donations from private individuals.
Regrettably, the tax authority rejects the tax exemption application of Foundation X on the grounds of non-profit status.
- Why does the tax authority deny the tax exemption?
- What precautions could Foundation X take to ensure that it nevertheless receives the tax exemption and that the financial support from Association P is secured?
Case 6: Charitable foundation - grants abroad
1. facts of the case
The X. Foundation with its registered office in Switzerland has the following purpose article:
The purpose of the Foundation is to support non-profit institutions and facilities in Switzerland and abroad, especially Jewish and Israeli ones, which are active in the charitable, humanitarian, scientific, cultural, social and medical fields and which can be defined in more detail in Foundation regulations.
The X. Foundation would like to support institutions in Israel. These mainly include a hospital in Jerusalem, which is currently being expanded, or Yad Vashem, a memorial to the Holocaust and its victims in Israel, or save a child's heart in Israel, a medical project in which children with heart problems who come from developing countries where heart surgery does not exist or is not accessible to these children, are operated on in Israel and cared for until they recover.
The X. Foundation would like to make the grants directly abroad to the recipient organizations for cost and monitoring reasons, and not to a "fundraising" institution at home (e.g. Association of Swiss Friends of Yad Vashem).
- Is the X. Foundation free to make 100% of its awards abroad, or must it make a certain percentage of its awards domestically?