Foundations and associations have limited corporate income tax liability. They are required to file a corporate income tax return if and to the extent that they conduct a business, or if they are in competition with another taxable entity or natural person. The exception to this is in the event a corporate income tax exemption applies.
Conducting Business
A foundation (or association) is considered to be conducting a business if it meets all three criteria below:
- there is a sustainable organization of capital and labor;
- Who participates in economic activity; and
- intends to make a profit and that profit is reasonably foreseeable.
A sustainable organization of capital and labor exists if work is performed that is continuous (lasting) in nature and is therefore not a one-time event. This criterion is normally easily met.
If the work is not performed in a limited (private) circle, participation in economic activity is assumed.
The presence of a profit motive is tested on a factual and objective basis. There is a profit motive if, over a period of several years, profits are generally obtained from the activities performed. The entity's objective as laid down in the articles of association is not decisive and is at best of limited relevance.
The phrase "if and to the extent that an enterprise is conducted" means that each activity performed by the association and foundation must be tested separately against the aforementioned criteria. An association or foundation can therefore have untaxed (read: non-enterprise) activities in addition to taxed business activities.
Competing
If all three of the above criteria are not met, there may still be corporate income tax liability. This occurs if the activities carried out by the entity are in competition with companies liable to corporate or income tax. If the following criteria are met, the entity is considered to be in competition even if competition is not intended:
- the entity's activities are or may be at the expense of other companies' sales;
- the results of the entity are such that an individual could derive a modest livelihood from it; and
- participation in society is not incidental.
Exemption
Associations and foundations subject to corporate income tax are exempt from corporate income tax with respect to any one year, if the profit for that year does not exceed €15,000, or for the year and the preceding four years together does not exceed €75,000. In addition, the law grants a subjective exemption from tax for certain specific activities under certain conditions, such as, for example, healthcare and educational institutions that are funded from public resources.
If the above exemption does not apply, the foundation (or association) must request the Tax Office itself to issue a tax return form so that it can then use it to file the required corporate income tax return. In addition, directors' liability applies to directors of foundations (and associations) subject to corporate income tax, with the result that directors of such an entity are jointly and severally liable for corporate tax liabilities.
Conclusion
If an association or foundation runs a business or competes with other taxed entrepreneurs, it may be liable for corporate income tax unless the exemption applies. If there is corporate tax liability, tax obligations such as filing returns arise immediately. We therefore advise associations and foundations to review annually whether there may be corporate tax liability.
In conclusion
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