BFH: Management of the assets of a trust foundation is taxable

Background

The plaintiff, a registered association, supported, advised and managed various foundation assets of foundations without legal capacity. In doing so, it pursued charitable purposes in accordance with its articles of association. The contracts with the founders were either structured as trust agreements or as gifts subject to conditions.

With regard to the "W" foundation, a "trust agreement for the establishment of a non-independent foundation by way of a gift subject to conditions" was concluded for an indefinite period. Despite the contradictory designation, the BFH assumed, in view of the provisions made, that this was not a gift but a trust relationship, as the plaintiff received assets which he was to manage separately from his other assets in accordance with the charitable purposes specified by the founder. The contract could be terminated by either party at the end of the year. In the event of termination, the plaintiff had to transfer the assets to a newly appointed trustee. Should the foundation be dissolved or cancelled, the assets were to be transferred to the "H" foundation, which was also managed by the plaintiff. The plaintiff received a "foundation fee" for his administrative and advisory activities.

With regard to the other foundations managed by the plaintiff, in some cases there was no provision for ordinary termination of the trust agreement. In some cases, the plaintiff set up foundations together with other founders. Moreover, the plaintiff made it possible for individuals, communities and institutions to realise charitable purposes via an "umbrella foundation" through gifts subject to conditions and through endowments. In these cases, the plaintiff withdrew his remuneration from the foundation's assets.

A dispute arose with the tax office regarding the question of whether the foundation contribution was remuneration for a supply provided by the plaintiff and therefore subject to VAT. The plaintiff argued that the foundations could not be recipients of supplies due to their lack of legal capacity. The tax court agreed with this at first instance and specified that the plaintiff was acting in relation to its own assets, meaning that there were internal supplies between the organisational units of the plaintiff's uniform company. Despite the contract concluded between the two, the plaintiff had not provided any supplies to the founder either, as the founder did not receive any consumable benefit from the plaintiff's administrative and advisory services. Any benefit could not arise for the founder, but only for the foundation's assets, and these were owned by the plaintiff.

BFH decision

The BFH ruled that there was in fact no legal relationship between the plaintiff and the foundation assets from which a supply relationship could arise, because the foundation assets were only the object, but not the recipient of the supply.

With regard to the "W" foundation, the BFH explained that the plaintiff had indeed provided supplies to the founder. Firstly, it is recognised by the highest court that a supply can also be provided in return for reimbursement of expenses. Secondly, a taxable administrative service can also be provided in relation to assets owned by the administrator if they are subject to certain conditions as special assets and must be kept separate from the administrator's assets. The required legal relationship between the plaintiff and the founder existed in the management contract, which was independent of the foundation transaction. This was also supported by the fact that the plaintiff was bound by the founder's instructions under the respective articles of association and (at least in relation to the "W" foundation) could be replaced by another service provider due to the ordinary right of termination.

Contrary to the opinion of the lower court, the founder had also received a consumable benefit. This consisted in the fact that the founder had utilised the plaintiff's knowledge in order to achieve the greatest possible success with his investment.

It is important to note the BFH’s instruction to the tax court for the second process: If, in the case of the other foundations for which too few findings had been made, assets had also been transferred within the framework of a fiduciary relationship and an additional fee had been agreed for the administrative activity as well as an ordinary right of cancellation with transfer of the assets to another trustee, the required legal relationship between the plaintiff and the founder could exist. In cases in which the plaintiff had acted as co-founder, and in the case of the "umbrella foundations", it is necessary to examine in particular whether the plaintiff had provided supplies to the founders in return for payment. Whether the plaintiff was entitled to encumber the special assets, or whether this was an unauthorised intervention in the special assets, is also relevant. Insofar as there was no supply for consideration, a supply deemed to be made for consideration or a restriction of the input VAT deduction could be considered. In the case of taxable supplies, the reduced tax rate (due to the non-profit status) must also be examined.

Practical implications

Foundations without legal capacity tend to be the exception, at least in the case of larger assets; in these cases, a foundation with legal capacity under civil law is usually chosen.

The result of this decision is not surprising. As the foundation's assets were the object of the administration and not its buyer – and could not be due to the lack of legal capacity – the mandate could only be attributed to the founder. The founder commissioned the trustee with an activity for which the trustee was remunerated. If the court had followed the plaintiff's reasoning, an untaxed final consumption would have taken place.

The BFH referred to its case law from 1981, according to which a taxable supply could also exist in relation to special assets belonging to the supplier, and drew a parallel for the separately managed foundation assets in question, since – irrespective of the ownership structure under civil law – these were "foundation assets" belonging to third parties from an economic point of view.

What is special about this decision is therefore that the founder himself could no longer derive any financial benefit from the assets and thus also from the trustee's administrative activities.

For the BFH, however, whether the recipient of the supply pursues his own financial interests in return for the payment is not important for the affirmation of a consumable benefit; it is sufficient that he has the financial interests of third parties – such as charitable interests – in mind.

Author: Nadia Schulte