Taxation of a Swiss foundation

1. General remarks

Below you will find a brief outline of the Swiss taxation of transfer of cash upon creation of a foundation and secondly the donations to an existing foundation. First, the Swiss tax impact for the contributor / donor will be shown, then the impact for the foundation will be outlined. 

2. Donations to a not tax exempt Swiss foundation


2.1 Taxation of donor 

2.1.1 Income tax for donor

Donations made to a not tax exempt Swiss foundation are in principle not income tax deductible for the donor. 

2.1.2 Gift tax for donor

Most Swiss cantons levy taxes on the transfer of assets via donation. 

These cantons treat the transfer of movable assets upon creation of a foundation (mortis causa, or inter vivos) and the donations to an existing foundation as taxable gifts under gift tax law, provided that the donor is domiciled in the concerned canton. 

However, the taxation systems, rules and rates vary from one canton to another. In general, the applicable rates and, in most cantons, the taxation as such, will depend on the degree of relationship between the donor and the recipient. Since a foundation or an association represents an unrelated party for the donor, the applicable rates are the highest and the reductions or even complete exemption for close relatives are not applicable. 

Charitable organizations may however be exempted from the Cantonal Inheritance and Gift Taxes. All cantons grant certain exemptions to organizations pursuing public utility goals, but the requirements for and conditions of such exemptions differ from one canton to another. The principle of the exemption or its extent may in particular vary depending on the type of public utility goal, the place where the organization has its seat, or the identity and domicile of the beneficiaries. 

As it is not possible to detail the situation prevailing in each of the 26 Swiss cantons and half-cantons, the rules applicable in the canton of Geneva will be described hereinafter as an example. 

The donor might become jointly liable for any gift tax payable by the not exempt Swiss foundation.

2.2 Taxation of not exempt Swiss foundation

2.2.1 Income tax for not exempt Swiss foundation

Donations to a not exempt Swiss foundation should not be subject to income taxation. 

2.2.2 Gift tax for not exempt Swiss foundation

The not exempt Swiss foundation is liable for any gift tax.

2.2.3 VAT for not exempt Swiss foundation

A frequently debated question in connection with donation to foundations is the differentiation between donations, which do not attract VAT as there is no taxable consideration in return for the donation, and other types of contributions, in particular sponsoring, where the person making a contribution to the charitable organization receives a consideration, usually in the form of publicity for the contributor. 

In case the payment of the donor must be considered a payment for a taxable service (for instance advertisement service), the Swiss foundation should charge 8% Swiss VAT provided the Swiss foundation has to register as Swiss VAT payer.

3. Donations to tax exempt Swiss foundation

3.1 Taxation of donor

3.1.1 Income tax of donor

Under Article 33 (a) of the he Federal Income Tax Act, donations made by individuals to non-profit legal entities having their registered seat in Switzerland are deductible from the taxable income of the donor, whereas the maximum deductible amount for federal tax purposes is 20% of the net taxable income. The maximum deductible amount at cantonal and municipal levels is determined by each canton. Membership contributions paid to associations in general do not qualify as donations and, therefore, are not deductible.

Under Article 59 (1) (c) of the Federal Income Tax Act, Donations made by legal entities to non-profit legal entities having their registered seat in Switzerland are deductible from the taxable net profit of the donor, whereas the maximum deductible amount for federal tax purposes is 20% of the net profit. The maximum deductible amount at cantonal and municipal levels is determined by the legislation of each canton.

3.1.2 Gift tax of donor

Full exemption from gift tax on the initial capital as well as full exemption of gift tax on contributions, gifts, bequests made by Swiss residents.

Donation by foreign resident to a Swiss based charity might trigger foreign gift tax and tax deductibility issues (to be verified).

3.2 Taxation of exempt Swiss foundation

3.2.1 Income tax for Swiss exempt foundation

Both the Federal Income Tax Act and the respective cantonal provision require for an income tax exemption that the foundation pursues activities of a charitable purpose ("Gemeinnützigkeit").
The Federal Tax Administration defines for taxation purposes the term "charitable" purpose as follows: the activities of the Foundation in question must be (i) to the general public benefit; and (ii) of a selfless nature.
The notion of general public benefit ("Allgemeininteresse") is determined by the overall public opinion. Furthermore, and more specifically, it is also required that the class of beneficiaries is open; as a consequence, benefits of the foundation must not be restricted, for instance to members of a certain family, association or profession.
An activity is considered to be of a selfless nature ("Uneigennützigkeit") if it is neither linked to the economic and personal interest of the foundation nor its involved parties. An activity is not being seen as selfless or altruistic if the organization is carrying out commercial activities unless such activity is very much subordinate to a nonprofit activity. The business activity may only have an auxiliary function and as such must not be the sole economic basis of the legal person. According to the case law of the Swiss Federal Court, a non-profit Foundation furthermore has to make sacrifices for the sake of the greater public good. This must also be reflected in the remuneration of the governing body of the non-profit foundation. The members of the governing body are generally supposed to carry out their activities on a voluntary basis and can be reimbursed only for their expenses (i.e. a meeting allowance covering all meeting expenses). The foundation however can mandate persons and pay them market fees if such activities are required under the foundation's purpose. An advisory board within a Foundation not being qualified as part of the governing bodies therefore could principally be compensated under mandate agreements.
The federal and cantonal income tax exemption needs to be pre-discussed with and confirmed by the tax authorities in writing. 

3.2.2 Gift tax for Swiss exempt foundation

Charitable organizations are exempted from the gift tax. All cantons grant certain exemptions to organizations pursuing public welfare objectives, but the requirements for and conditions of such exemptions differ from one canton to another. 

3.2.3 VAT for exempt Swiss foundation
The Swiss VAT Act contains a special rule that regulates the value-added tax (VAT) treatment of the public announcement of donations to charitable organizations or from charitable organizations.

Based on the statutory rule, donations may be publicly mentioned in neutral form by companies (including through use of the logo and original Company name) without this resulting, as was formerly the case, in VAT consequences.

A frequently debated question in connection with charitable organization was the differentiation between donations, which do not attract VAT as there is no taxable consideration in return for the donation, and other types of contributions, in particular sponsoring, where the person making a contribution to the charitable organization receives a consideration, usually in the form of publicity for the contributor. The above rules reduce uncertainties in this area.

 
4. Ongoing taxation of a tax exempt Swiss foundation

4.1 Income tax


Charitable foundations are exempt from profit and capital taxes at all levels for profits and capital that are exclusively and irrevocably dedicated to the charitable purposes.

4.2. VAT

Charitable foundations are exempted from Swiss VAT if they on Swiss territory generate an annual turnover from taxable supplies of less than CHF 150,000. The requirements for being qualified as a “charitable” are exactly the same as those for income tax purposes (see therefore above). The tax exemption granted by the competent tax authority for the corporate income taxes is also accepted for VAT purposes.

Exempted supplies shall not be included in the calculation of the CHF 150,000 threshold. Supplies that non-profit entities with political, trade union, economic, religious, patriotic, philosophical, philanthropic, ecological, sporting, cultural or civic objectives provide to their members against a contribution laid down in statutes or regulations are exempted supplies.

A non-profit entity may opt for voluntary taxation of its exempted supplies in order to deduct its input taxation. A non-profit entity, however, may opt for taxation only if it carries out a business. An entity carries out a business if that entity independently performs a professional or commercial activity with the aim of sustainably earning income from supplies. In most situations these requirements are not fulfilled by a non-profit entity.


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