German Non-Profit Law 101
On this page you find an introduction to German non-profit law and our services in this field. Furthermore, this page provides useful external resources to help you implement your project in Germany.
Introduction to German non-profit law
In Germany, public-benefit, charitable and religious entities can apply for the non-profit status, a tax privilege which exempts them both from paying certain taxes and allows them to charge reduced VAT rates.
Non-profit status is required for various types of public funding and business sponsorships. In addition, non-profit foundations are restricted to funding qualified individuals and other non-profit organizations.
There are no special non-profit legal persons in Germany. Rather, the status can be granted to the following types of entities:
- associations (German: “Verein”, sections 21 ff. of the German Civil Code “Bürgerliches Gesetzbuch”, https://www.gesetze-im-internet.de/englisch_bgb — please note that the official translation is from 2013 and therefore outdated)
- foundations (German: “Stiftung”, sections 80 ff. of the German Civil Code)
- several types of corporations (“Unternehmergesellschaft”, “Gesellschaft mit beschränkter Haftung”, “Aktiengesellschaft”)
Many non-profit organizations run their own projects while others limit their activities to procuring and providing funding for other organizations or serve as umbrella organizations for smaller non-profits. Larger non-profits often combine two or all of these fields into one organization.
In general, non-profit entities in Germany benefit from several advantages: many public and private funding programs accept only non-profit applicants, donations to tax-exempted nonprofits can reduce individual income tax loads and recognized non-profits are exempted from profit taxes and can apply reduced VAT rates.
There are a few threats to manage as well: all expenses need to be “appropriate”, assets may not be distributed to an entity’s principals and there are limitations on reserve formation. However, this does not mean that an entity may not be profitable. It just has to observe specific compliance rules for the tax-exempt allocation of profits.
How to form a new legal entity (association, foundation, corporation)
Under German law, all of the above entities require statutes, a board, and — with the exception of an association — a managing director. In addition, specific requirements apply to each individual legal entity (such as certain amounts of seed capital, voting provisions etc.).
In order to found a new legal entity, the assistance of a notary is mandatory. He or she certifies the act of incorporation, the memorandum of association and the appointment of the entity’s leadership. The notary assists with the necessary registration as well (trade register / register of associations / foundation oversight authorities of the states).
Corporations begin to exist as full legal entities as soon as they are registered and their registration is announced in the German Federal Gazette.
After incorporation, new entities are required to register with the tax authorities and request that their non-profit status is confirmed.
If they run a for-profit business, they need to register with the responsible municipal trade authority and all employees must be signed up for several so-called “social insurances” (pension, unemployment, disability, accidents) as well as health care.
How to obtain the non-profit status
All non-profit entities in Germany have to include certain, very specific provisions in their statutes. In particular, they have to exclusively promote one or several objectives from a list of officially recognized objectives in the German Fiscal Code (“Abgabenordnung”).
These objectives include but are not limited to the preservation of nature, education, support for the needy, promotion of art and culture, research, sports (see sections 51 ff. of the German Fiscal Code, https://www.bundesfinanzministerium.de/Content/EN/Gesetze/Laws/2017–01-01-fiscal-code.html — please note that the list of recognized purposes was updated as recently as Jan. 1, 2021, so the official English translation is not complete).
Before incorporating, any new entity should approach the tax authorities to ensure that their statutes fulfill the fiscal requirements for non-profit organizations. It should also prepare all steps of the incorporation process. In this way, it avoids additional board meetings and other administrative costs to amend already notarized statutes.
Existing entities can apply for non-profit status if both their statutes and their actual operations meet the fiscal requirements (there are certain limits on staff remuneration and other expenses). If necessary, the statutes should be adapted before handing in the application for non-profit status.
How to maintain the non-profit status
Non-profit organizations need to fulfill certain requirements in their day-to-day management (all expenses and actions must serve the statutory objectives of the organization, expenses are limited to “appropriate” levels, bookkeeping standards.)
In Germany, compliance with these requirements is verified through regular tax declarations (every 3 years and yearly if the organization does not employ a tax consultant or runs a for-profit side business.)
Renouncing or losing the non-profit status
If the non-profit status of an entity is terminated – whether by choice or because the entity violated essential non-profit regulations – the entity loses its tax privilege for the past 10 years. All tax exemptions from that period will be revoked and need to be paid in full. If public funding or other grants have been awarded, they may also have to be refunded.
Sometimes organizations chose to renounce their non-profit status for business reasons (tax requirements can be limiting), but in most cases, the loss of tax privileges is an existential threat to an organization. This scenario is one of several key liability issues for the managing director and board against which the organization should be insured (D&O insurance, organizational liability insurance.)
What we do
We counsel the third sector with a focus on civil society actors, welfare providers and social businesses and emphasize our clients’ data protection, risk management and compliance. Our specialty is non-profit law with the related tax exemption being based on one or more of three possible organizational objectives in German tax law: “public benefit”, “charity” or “religion”, each with several subdivisions.
We counsel in all relevant areas
- statute formation
- company law and labor law
- tax law
- grants, donations & sponsoring
- public funding and public-private-partnerships
- litigation
- European and German data protection regulations
… with a focus on civil society actors and social welfare organizations.
Excerpt of our services:
- NPO start-up consultancy
- strategic planning for Germany-based subsidiaries and spin-offs of international NGO’s
- international cooperations and related contracts
- staff deployment and international hires
- financing, grant contracts and grant law
- international donors, EU-funded projects (sub-contracts)
- international NPO tax law staff deployment and international hires
- restructuring, spin-offs, mergers and board law
- contract, statute, minute drafts and committee organization
- data protection law, risk and compliance management with a non-profit focus
- legal opinions on German NPO law
- executive trainings and workshops on legal & compliance topics
Our clients are
- NGO’s and associations
- charities and public authorities
- umbrella organizations
- foundations and trusts
- social entrepreneurs
What you can expect from us
An initial consultation typically serves to get to know each other, learn about the potential client’s legal needs and clarify how we can be of service.
We offer an estimate of the needed hours for any mandate and will detail the required legal course of action before we take on a new client.
We use remote solutions in our daily work, especially with but not limited to international clients.
Contact us: info@kanzlei-leu.de
External information about legal entities, founding and working in Germany
A very good overview of the legal requirements for self-employment of foreign persons in Germany is provided by the IQ project “Start a business in Germany” of the European Union.
Charting a business plan is an extremely useful preparation for the establishment of a tax-privileged company in Germany. This is essential for the formation of the legal entity, but also for the application for subsidies or loans. The “Business Plan Workbook” helps to prepare business plans according to German standards. The download is free of charge.
The requirements for start-ups in Germany are diverse. You should know the most important terms. The free “Glossary for start-up support” contains the most important terms and explains them in an understandable way.
Company start-ups are often accompanied by the integration of people from foreign countries into the German labor market. The IQ project of the European Union offers a lot of useful information for founders in this context.