Transferring funds

To note when transferring funds

 

Status: April 2022

Transferring funds

Many theatre associations receive public funds to be transferred to theatre groups, artists and projects. Several things must be considered, e.g. concerning VAT, income tax, Artists’ Social Insurance Fund contributions, Artists’ Social Insurance, public funding law and non-profit purposes.

Weiterleitung von Geldern: Ein Verband beantragt Mittel aus einem öffentlichen Fördertopf und leitet sie an Theater, Gruppen, Projekt-GbRs und freie Künstler*innnen weiter
© Grafik: Panatom

Links

Income tax-free stipends:
Section 3 of the German Income Tax Act

Artists’ Social Insurance Fund contributions:
Assistance [Handlungshilfen]

Transfers under public funding law:
Section 44(3) of the German Federal Budget Code [Bundeshaushaltsordnung (BHO)]

VAT

Funding by transferring funds may represent a taxable benefit. In this case, the recipients must pay VAT if required to do so. Transferred funds are taxed if …

  • … consideration is provided or agreed. ‘Small’ consideration suffices and does not have to be proportionate to the payment.
  • … funds are used as payment for commissioned third parties.

If consideration is provided, there is no transfer of funds, but, e.g. sponsoring.

No consideration: Compliance with the ancillary provisions of German budget law

If the organisation transferring the funds and/or the funded project agrees to comply with the General Ancillary Provisions for Project Subsidies [Allgemeine Nebenbestimmungen für Zuwendungen zur Projektförderung (ANBest-P)] and the General Administrative Regulations for the German Federal Budget Code [Allgemeine Verwaltungsvorschriften zur Bundeshaushaltsordnung (VV-BHO)], this does not yet represent consideration (Section 10.2(8) of the German VAT Application Regulation [Umsatzsteuer-Anwendungserlass (UStAE)]). As long as there are no other requirements for the funding or transfer, VAT will not be charged.

(ANBest-P means General Ancillary Provisions for Project Subsidies [Allgemeine Nebenbestimmungen für Zuwendungen zur Projektförderung], VV-BHO means the General Administrative Regulations for the German Federal Budget Code [Allgemeine Verwaltungsvorschriften zur Bundeshaushaltsordnung. A judgment and further information about VAT obligations for public funding are provided on the website the law firm Laaser.)

Consideration: Emphasized name or link

If the funded project has to emphasize or provide a link to the funder on placards, flyers or on the project’s website, this represents sponsoring and the payment will be subject to VAT (Section 1.1(23) of the German VAT Application Regulation). If the obligation exceeds merely naming and including the logo of the funder, services will be exchanged.

This also applies vice versa: If the funder is granted the right to refer to the funded project or event through links or by emphasizing the funder’s name, this represents taxable consideration.

Examples:

  • Only featuring the name and logo at the bottom of a placard ► harmless!
  • Featuring the name in a large font at the top of a placard ► consideration subject to VAT!
  • Linking the funded project to the organisation ► subject to VAT!
  • Linking the organisation to the funded project ► subject to VAT!

Important: The tax office primarily looks at the conditions in the funding agreement. The recipient should not be contractually required to refer to the funder in a specific size or area or to provide links to the funder. Funders should not grant themselves rights to be named or feature links to them.

Clauses of public funding agreements (e.g. with the German Federal Government Commissioner for Culture and the Media [Beauftragte der Bundesregierung für Kultur und Medien (BKM)]) often require links and logos of the same size. Such clauses shouldn’t just be ‘passed on’ to the recipients.

 

Questions and answers:

  • This is a grey zone. If the funded project emphasizes the funder voluntarily, no VAT will be required. The tax office would have to prove that an agreement was concluded. The risk depends on each case.

    This is a grey zone. If the funded project emphasizes the funder voluntarily, no VAT will be required. The tax office would have to prove that an agreement was concluded. The risk depends on each case.

  • There are 2 possibilities: you can refer the ministry to the provisions in the German VAT Application Regulation and note that, according to the funding conditions, VAT must normally be paid by the funding recipient. Alternatively, you can insist that the competent department will discuss this with the finance ministry or will increase the funding by the required VAT.

    There are 2 possibilities: you can refer the ministry to the provisions in the German VAT Application Regulation and note that, according to the funding conditions, VAT must normally be paid by the funding recipient. Alternatively, you can insist that the competent department will discuss this with the finance ministry or will increase the funding by the required VAT.

Tip: To ensure that new funding agreements do not establish an exchange of services that is subject to VAT, you may obtain ‘binding information’ [verbindliche Auskunft] from the tax office. Although this is not free, it will provide a rule you can refer to.

Note: If the organisation transferring the funds retains an administrative fee, the tax office may consider the deducted amount to constitute a fee of the organisation that is subject to VAT. The organisation may thereby exceed the revenue limit of the small business provision. German tax law has not yet decided how to treat administrative fees.

Income tax

Organisations and associations transferring funds do not have to pay corporate taxes for this. However, unless they are non-profit, funding recipients must pay income taxes or corporate taxes for project funding received.

Exempt from income taxes are stipends (Section 3 of the German Income Tax Act).

  • Under Section 3(11) of the German Income Tax Act, public funding used directly for the advancement of art is not taxed. This includes funding to purchase materials and refunds, but not funding for living expenses or specific artistic services.
  • Under Section 3(44) of the German Income Tax Act, publicly-funded stipends for artistic training and further education are income tax-free.

Whether public funding for the advancement of research may be considered an income tax-exempt stipend has not yet been decided.

Artists’ Social Insurance Fund [Künstlersozialkasse] contributions

For provided or transferred funds, funders must pay Artists’ Social Insurance fund contributions if payments require consideration from the funded artists, i.e., if the transferring organisation uses the artistic services for its own purposes.

The Artists’ Social Insurance Fund does not only consider, e.g. an organisation securing the rights to a theatre performance, to constitute such own purposes. Like for VAT, emphasized references to the funder are also deemed use for own purposes due to which Artists’ Social Insurance Fund contributions must be paid for such funding.

According to the ‘Assistance’ of the Artists’ Social Insurance Fund for contribution obligations when funding public culture, references are only not emphasized if:

  • The naming of all funders on a frontpage, placard or inside or back of a publication takes up no more than 10% of the space visible at a glance.
  • Individual names are significantly smaller than 5%.
  • The message of the placard is clearly legible before the reference to the funders. The name of the funding recipient is emphasized significantly over the names of the funders.

Note: These conditions are only required by the Artists’ Social Insurance Fund and have not yet been confirmed by a social court.

Artists’ Social Insurance

Project funding in form of stipends not subject to income taxation is not deemed income from artistic work by the Artists’ Social Insurance Fund. This is why such stipends are not considered for the minimum income threshold of EUR 3,900 per calendar year and is required for this insurance. (This threshold does not apply to the pandemic years 2020 – 2022).

The German Federal Social Court ruled against this practice of the Artists’ Social Insurance Fund (German Federal Social Court, 28 November 2013 – B 3 KS 2/12 R). The opinion states,

‘Where a stipend must be attributed to income "from self-employment", i.e., if a fee is paid for services . . ., the stipend therefore represents taxable work income.’

Public funding law

German public funding law rarely causes problems in practice when transferring funds.

It is only important for approval of the funding to include the authorization to the transfer the funds, e.g. under Section 44(3) of the German Federal Budget Code for federal funding.

Non-profit purposes

If a non-profit organisation or association transfers funds for a project, this may cause legal problems. The question is whether transfers to recipients who aren’t non-profit violate the earmarking requirement: funds of non-profit organisations may only be used for non-profit purposes.

In certain cases, funding or payments by organisations are no problem for their non-profit purposes:

  • Funding may be provided to non-profit recipients for their purposes at any time (Section 58(1) of the German Fiscal Code).
  • Section 57(1) of the German Fiscal Code  allows own purposes to be achieved through ‘aides’. The organisation may also commission third parties who aren’t non-profit if the organisation itself achieves these purposes. However, this does not apply to transfers of funds.
  • The transferring organisation achieves its own purpose if it implements a funding or stipend program in accordance with its articles of association. The articles of association must require such funding and stipend programs whose implementation must achieve the purpose of the organisation and they should be transparent, e.g. by being chosen by jury.

Whether merely ‘providing’ funds to third parties that aren’t non-profit represents use outside of the purpose of the articles of association has not yet been decided by the courts.

Questions and answers:

  • Articles of association with ‘freedom of motion’ are certainly useful. However, what you intend to do must clearly comply with the articles of association. Articles of association usually refer to stipends explicitly. However, for an organisation transferring funds, it may be useful to include both, e.g. ‘Transferring funds for stipends and projects’. The ideal phrasing depends on the case. Because there is no case law, binding information from the tax office may provide clarity.

    Articles of association with ‘freedom of motion’ are certainly useful. However, what you intend to do must clearly comply with the articles of association. Articles of association usually refer to stipends explicitly. However, for an organisation transferring funds, it may be useful to include both, e.g. ‘Transferring funds for stipends and projects’. The ideal phrasing depends on the case. Because there is no case law, binding information from the tax office may provide clarity.

  • No, this does not represent a transfer of funds. In this case, you must conclude fee agreements which may be subject to Artists’ Social Insurance Fund contributions and, possibly, VAT and for which the organisation will not receive consideration. This allows you to avoid funding.

    No, this does not represent a transfer of funds. In this case, you must conclude fee agreements which may be subject to Artists’ Social Insurance Fund contributions and, possibly, VAT and for which the organisation will not receive consideration. This allows you to avoid funding.

  • This phrasing does not appear useful for transfers of funds other than for non-profit recipients. The phrasing should be discussed with a lawyer.

    This phrasing does not appear useful for transfers of funds other than for non-profit recipients. The phrasing should be discussed with a lawyer.

  • Consideration is present if the project is commissioned by the funder. If a state association requests funding for a civil law theatre partnership which cannot request these funds because it doesn’t pursue non-profit purposes and if the association is neither the organiser nor the principal of the funded performance, this does not represent consideration. The funds are used ‘for the public’. However, the location may be important: if the cultural office of a city approves funding of a performance at a city festival, this represents consideration and a false grant. But if the performance is somewhere else, there is no exchange of services.

    Consideration is present if the project is commissioned by the funder. If a state association requests funding for a civil law theatre partnership which cannot request these funds because it doesn’t pursue non-profit purposes and if the association is neither the organiser nor the principal of the funded performance, this does not represent consideration. The funds are used ‘for the public’. However, the location may be important: if the cultural office of a city approves funding of a performance at a city festival, this represents consideration and a false grant. But if the performance is somewhere else, there is no exchange of services.

  • Two constellations are conceivable. Firstly, the workshop is a co-production with the civil law theatre partnership or one which actually contracts it. In this case, the fee is not a transfer and does not require Artists’ Social Insurance Fund contributions. Secondly, the association is not the organiser or principal and is only included on placards and flyers in small print. This is then a workshop project of the theatre, not of the association, and represents a transfer of funds. If the funds for the project of the civil law theatre partnership were approved without a jury or selection process, this may be a problem where non-profit purposes are concerned, as explained above. If the workshop complies with the purpose of the association, the best solution is for the association to act as the organiser and as the invoice recipient. If the workshop represents an artistic service, Artists’ Social Insurance Fund contributions will be charged.

    Two constellations are conceivable. Firstly, the workshop is a co-production with the civil law theatre partnership or one which actually contracts it. In this case, the fee is not a transfer and does not require Artists’ Social Insurance Fund contributions. Secondly, the association is not the organiser or principal and is only included on placards and flyers in small print. This is then a workshop project of the theatre, not of the association, and represents a transfer of funds. If the funds for the project of the civil law theatre partnership were approved without a jury or selection process, this may be a problem where non-profit purposes are concerned, as explained above. If the workshop complies with the purpose of the association, the best solution is for the association to act as the organiser and as the invoice recipient. If the workshop represents an artistic service, Artists’ Social Insurance Fund contributions will be charged.