Non-profit purposes
Taxation, activities, donations, sponsorship and volunteer flat rates
There are several myths about non-profit purposes which will be dispelled here. How each activity of a non-profit organisation is taxed, the relationship between non-profit purposes and small business entrepreneur status, the difference between donations and sponsorships and the application of trainer and volunteer flat rates will also be explained below.
Links
Use of funds of a non-profit organisation:
Application Regulation [Anwendungserlass] for Section 56 of the German Fiscal Code [Abgabenordnung (AO)]
Economic activity:
Section 14 of the German Fiscal Code
Dedicated activity:
Section 65 of the German Fiscal Code
Donations:
Section 10b of the German Income Tax Act
Sponsoring decision:
German Federal Ministry of Finance circular of 18 February1998
Trainer and volunteer flat rates:
Section 3(26) of the German Income Tax Act
Myths about non-profit purposes
Many non-profit organisations fall victim to 5 popular myths about non-profit purposes:
- Myth 1: Making a profit may cost you your non-profit status
High profit may affect funding conditions, but not your non-profit status as long as you continue to pursue non-profit purposes. - Myth 2: High account balances at the end of the year may cost you your non-profit status
Here too: Certain funding conditions may be affected, but not your non-profit status. - Myth 3: If no profit is achieved, the organisation pursues dedicated activities
The distinction between dedicated activity and economic activity does not depend on profit. - Myth 4: High income from economic activity (F&B, sponsorships, renting out spaces, etc.) will cost you your non-profit status
No, this depends on how the income is used. Permanent losses are a real problem. - Myth 5: Public grants are not taxed
Wrong! Such grants may be subject to VAT in case of consideration.
The use, not the source of funds is what matters!
Non-profit organisations may only pursue the purposes specified in their Sections of association (Section 56 of the German Fiscal Code). Generating profit does not violate this exclusivity requirement which will even be satisfied if an organisation is financed entirely through economic activity or its own assets (see Application Regulation for Section 56 of the German Fiscal Code).
Fictional example: A non-profit theatre does not charge admission and earns all of its income through its lucrative F&B services. Despite its high profit, the theatre will retain its non-profit status as long as its earnings are used for cultural purposes in the end. It could only be problem if earnings are continuously reinvested in the expansion of F&B services and the theatre’s theatre activities become a secondary purpose.
Less risky: Source of funds ►►►
►►► Riskier: Use of funds (for purposes not specified by the Sections of association)
Taxation of different activities
In their accounting, non-profit organisations must assign their income and expenses to four possible activities. Each is taxed differently:
- Creative work
- Asset management
- Dedicated activity
- (Taxable) economic activity
Regular association activity
This is the only non-entrepreneurial area. Income generated this way includes membership fees, grants, donations, and inheritances.
Regular association activities are not subject to corporate tax or VAT. However, property taxes must be paid on gifted or inherited real estate.
Asset management
Income from the asset management of a non-profit organisation includes rental or lease income, interest from capital assets, or renting advertising space on real estate property or vehicles. Such income is not subject to corporate or trade tax, but to VAT at the reduced rate of 7%.
Economic activity
Economic activity means independent sustainable activity from which revenue or economic benefits are derived (Section 14 of the German Fiscal Code). Generating or the intention to generate profit is not required. Economic activity that is not a dedicated activity is subject to full VAT. Corporate tax and, if applicable, trade tax must also be paid if annual income, including VAT, exceeds EUR 45,000 (Section 64(3) of the German Fiscal Code, until 2019: EUR 35,000).
Examples of taxable economic activity include a theatre’s F&B services, renting out the theatre for private parties, or corporate sponsorships.
Economic activity may also be established through exchanges of services—even without income in form of money. If a theatre hosts a corporate event and may freely use the company’s van in return, this will also represent economic activity.
Dedicated activity
Common examples of dedicated activity include selling tickets or having cultural associations hold fee-based theatre workshops.
Dedicated activity (Section 65 of the German Fiscal Code) serves and is necessary for the non-profit purposes specified in the articles of association and may not establish more competition than necessary to competitors with tax benefits. Whether dedicated activity is present therefore depends on the articles of association.
The German Fiscal Code (Section 68 of the German Fiscal Code) clearly lists cultural establishments, such as theatres, and cultural events, such as concerts, as dedicated activity. Non-profit theatres and cultural establishments therefore don’t have to check whether they satisfy the dedicated activity requirements when holding performances. This applies irrespective of artistic quality and, therefore, also to, e.g., German pop song events.
Dedicated activities enjoy tax benefits: no corporate or trade tax is required. However, 7% VAT must be paid for own goods and services.
No ends in themselves or permanent losses
Economic activity and asset management may not become ends in themselves where generated income is only invested into the growth of the association’s assets or business. However, permanent losses from these areas may be equally dangerous to the non-profit status.
Small business status
As small businesses, non-profit organisations are exempt from VAT (Section 19 of the German VAT Act) if total income from asset management, dedicated activity and economic activity did not exceed EUR 22,000 in the previous year and is not projected to exceed EUR 50,000 in the current year.
VAT-exempt revenue, such as from a theatre certified under Section 4(20)(a) of the German VAT Act or from classes of a non-profit organisation, is not counted.
Donations and sponsorships
For tax purposes, a donation may not require anything return (Section 10b of the German Income Tax Act). Donation receipts therefore cannot be issued for posters purchased ‘for a donation’, a ‘contribution to a donation’ at the entrance or props auctioned ‘to support the association’.
Donations must also be carefully distinguished from sponsorships. For details, see the ‘Sponsorship decision’ [Sponsoring-Erlass] (German Federal Ministry of Finance circular of 18 February 1998), according to which charitable contributions (benefits in kind or payments) are only donations if no more than thanks, emphasis or links are provided in return. If a non-profit organisation actively advertises, emphasises the name (e.g., at the top of placards) of or provides links to a donor, this represents sponsorship and economic activity. The same applies if donors may use the name or images of a non-profit theatre in their own marketing campaigns.
Example:
Advertisement vehicle
A non-profit cultural establishment is given a vehicle from a company which, in return, may use the vehicle for advertisement. This is not a donation, but income from asset management! Because this income also includes the regular price of the vehicle, the establishment may lose its small business status.
Donations are always assigned to regular association activity, sponsorships to asset management or an economic activity. Because they don’t serve non-profit purposes, sponsorships cannot be assigned to dedicated activity.
Important: Donors may provide donations and sponsorships. However, both must be distinct contractually.
Donations for something in return are not permitted
A non-profit theatre is provided space or equipment free of charge from a company to whom the theatre may issue a donation receipt in return. This is only permitted if the company waives the rent to which it would have been entitled, e.g., under a contract (donation for a waiver). Providing use or a service is not a contribution eligible for tax benefits (Section 10a(3) of the German Income Tax Act).
Careful with crowdfunding
Income from crowdfunding should not be posted uniformly, but assigned based on the rewards and purpose specified by the articles of association. Using a theatre association’s crowdfunding campaign as an example:
- EUR 10 – Thank you card: donation, regular association activity
- EUR 50 – Participation in a theatre workshop: consideration, dedicated activity
- EUR 100 – 4 tickets: consideration, dedicated activity
- EUR 1,000 – Private party at the theatre: consideration, economic activity
Trainer and volunteer flat rates
Non-profit organisations may pay volunteers flat rates that are tax-free and not subject to social security contributions. Such flat rates allow wages to be increased without contributions for additional work.
- A trainer flat rate of up to EUR 3,000 may be paid per calendar year, including for part-time artistic work, such as of musicians or actors, or for training work (Section 3(26) of the German Income Tax Act).
- A tax-free volunteer flat rate of up to EUR 840 per calendar year may be paid for other volunteer work, such as cleaning work or accounting assistance (Section 3(26a) of the German Income Tax Act).
The following requirements apply:
- Volunteer work must be performed as part of the association’s regular or dedicated activity. The volunteer flat rate may not be paid for helping out with the sale of food and drinks or finding sponsors.
- Trainer work may be performed for no more than 14 hours per week on average per year. Payment for part-time and main work must also be clearly distinguished contractually. Trainer work may not be related to one’s main profession or offered by one’s employer.
To meet these requirements, the part-time work may also be carried out as part of one’s main work and both may be performed for one’s employer.
Example:
A theatre association’s accountant can’t also prepare the annual financial statement for the volunteer flat rate. But the accountant may perform in a pantomime show and be paid the trainer flat rate or maintain the association’s website—or manage the accounting of another cultural association—for the volunteer flat rate.
Questions and answers:
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Can a theatre company form a registered association that organises guest performances for which it rents space from the theatre?
Yes. Cultural events may be a purpose specified in the articles of association and, as an independent legal person, the association may rent space from the theatre.
Yes. Cultural events may be a purpose specified in the articles of association and, as an independent legal person, the association may rent space from the theatre.
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Is there anything to note about income tax for benefits in kind, such as food and gas, if your employer is a non-profit organisation?
No, the same income tax provisions apply as for other employers. However, benefits may not be provided to members because such practices are contrary to non-profit purposes. Only ‘appropriate rewards’ of up to EUR 60 per year and member are tolerated. If events fail to cover their costs because members are regularly given free admission or discounts, it could be a problem. Free admission for members should therefore require something in return, such as on-call service.
No, the same income tax provisions apply as for other employers. However, benefits may not be provided to members because such practices are contrary to non-profit purposes. Only ‘appropriate rewards’ of up to EUR 60 per year and member are tolerated. If events fail to cover their costs because members are regularly given free admission or discounts, it could be a problem. Free admission for members should therefore require something in return, such as on-call service.
Be careful with benefits outside of the purpose of your articles of association
A non-profit organiser who allows a company to set up a food stand free of charge may be accused of providing benefits outside of the purpose of his articles of association. The same applies if a cooperative partnership, such as non-profit association, provides space to a for-profit theatre for free.
In such cases, consideration, reimbursement, or contributions should be agreed. However, a non-profit organisation providing its resources free of charge for the purposes of its articles of association isn’t a problem.