Tax exemption due to non-profit status

As the concept of charitable status and the question of what is considered a charitable activity by society is constantly changing, the definition of tax exemption on the basis of charitable status is also constantly being discussed and adapted. In our latest blog post, we take a look at the requirements for tax exemption on the basis of charitable status and, in particular, highlight the latest developments in this regard in the canton of Zurich, which has significantly revised some aspects of its practice as of February 2024. We also compare the development in the canton of Zurich with the current practice in other German-speaking Swiss cantons.

Requirements for tax exemption

The following conditions are required for tax exemption on the basis of non-profit status:

1. legal entity: The taxable person must be a legal entity in order to qualify for tax exemption. This typically applies to foundations and associations.

2. general interest (non-profit status in the objective sense): In the case of legal entities with a charitable purpose, the focus is particularly on charitable, humanitarian, health-promoting, environmental, educational, scientific or cultural endeavors. The purposes pursued must be worth promoting from an overall social perspective. A broad circle of beneficiaries is required for a general interest to be assumed. A foreign activity may also be in the general interest of Switzerland, provided that it is also perceived as worthy of promotion from the perspective of society as a whole or has a positive impact on Switzerland. In connection with foreign activities, the new practice in the canton of Zurich is that the necessary transparency of the cash flow must be ensured. Other cantons such as Bern, Lucerne and Zug are reportedly already following the latest practice of the Canton of Zurich in this respect, whereby careful consideration of each individual case is paramount. In the canton of Basel-Stadt, a request to the cantonal government is currently being examined to clarify whether foreign activities can be recognized as charitable in the future, provided they are considered worthy of support throughout Switzerland (see interpellation by David Jenny from March 2024).

3. altruism (subjective): A tax exemption also requires that an institution behaves selflessly or altruistically. No profit-making purposes or other direct (economic or personal) interests of the legal entity or its members may be linked. According to the practical guidelines issued by the Swiss Tax Conference (SSK) in 2008, the members of foundation boards or association boards must work on a voluntary basis, i.e. unpaid, and thus make personal "sacrifices". The practical guidelines therefore only permit the reimbursement of actual expenses and a modest attendance fee, if any. Exceptions to this are extraordinary tasks that go beyond the scope of a normal foundation board or association board mandate and therefore justify compensation (e.g. if a lawyer on the foundation board represents the foundation in a lawsuit). The larger Swiss cantons are increasingly moving away from this strict tax practice. For example, the canton of Zurich announced in February 2024 that reasonable compensation for the bodies of the legal entity does not preclude tax exemption. The appropriateness of the remuneration is reviewed by the foundation supervisory authority in the case of a foundation and by the Zurich cantonal tax office in the case of an association. According to reports, the cantons of Berne, Lucerne and Zug already allow the bodies of tax-exempt institutions to be adequately compensated in practice. For the cantons of Zug and Lucerne in particular, however, the precise examination of the individual case plays a decisive role. In addition, the interpellation addressed to the cantonal government of Basel-Stadt also seeks clarification in this matter (see 2. General interest).

4. exclusive use of funds: The activities of the legal entity must serve exclusively charitable purposes, whereby self-interests or profit-oriented endeavors are not permitted. In this regard, the Zurich tax office clarified in its latest practice adjustment of February 2024 that entrepreneurial funding models via loans or so-called "impact investments" do not per se preclude tax exemption, even if a return of funds to the charitable institution is not excluded. According to the new practice of the Canton of Zurich, the prerequisite for this is that such activities are carried out in markets without existing competition. In addition, the funds generated from these activities must in turn be used entirely and exclusively to support the charitable purpose of the foundation. This practice is also reportedly followed in the cantons of Berne, Lucerne and Zug, while implementation in Basel-Stadt is dependent on the forthcoming response from the cantonal government.

5. irrevocability: the funds, profit and capital must be used permanently and exclusively for tax-exempt purposes. A reversion of the funds to founders or association members is not permitted. Irrevocability must be enshrined in the articles of association.

6 Actual activity: The charitable purpose must be actively implemented; a mere mention in the articles of association is not sufficient. This also means that an application for tax exemption must always be supported by evidence of active activity.

‍Supplements for the tax exemption application

Before submitting an application, you should check with the relevant cantonal tax office to find out exactly which documents are required. These usually include

• A written overview of the fulfilment of the tax exemption requirements,
• An activity concept incl. budget,
• Annual reports and financial statements for the last three years (if any),
• Regulations for organization and expenses.

For associations, the articles of association and the minutes of the founding meeting must also be submitted. For foundations, the publicly certified foundation deed and an extract from the commercial register.

‍Conclusion

Swiss tax law allows legal entities with a charitable purpose to be exempt from profit and capital tax under certain conditions. In practice, the cantons are tending to make the previously strict requirements more flexible. For example, the canton of Zurich only relaxed its tax practice on the tax exemption of charitable foundations and associations in February 2024. A trend that can also be seen in the cantons of Bern, Lucerne and Zug. The expectation is that the latest developments could also serve as a model for other cantons and that the SSK guidelines from 2008 will also be adapted as a result. Such an adjustment would be particularly welcome from the point of view of legal certainty.

It is crucial for charitable organizations to familiarize themselves in detail with the specific requirements and differences in practice in the respective cantons. Experience has shown that it is advisable to proactively contact the cantonal tax authorities where the association or foundation is to be based in advance of setting up a foundation or association. This makes it possible to take any concerns of the tax authorities into account at an early stage in the final drafting of the foundation deed, the articles of association or the regulations.