The establishment of a charitable foundation is a great need for some philanthropists. They want to make a difference, create something or give something back to society with a foundation. In Switzerland, there were around 13’600 foundations with a charitable purpose in 2022. But what constitutes a charitable foundation? Are there any tax benefits? And how do you set up a charitable foundation? You can find answers to the most important questions in this blog post.
What Exactly is a Charitable Foundation?
A foundation represents an independent asset that is made available on a permanent basis by a private individual or a company. The founder relinquishes the power of disposal over part or all of the assets and subsequently no longer has access to the assets. Within the foundation, the assets are invested safely and ideally profitably. The assets as well as any surpluses generated may be used exclusively for the previously defined purpose of the foundation. The purpose of the foundation can be freely chosen when it is established and is difficult to change thereafter. The foundation itself is a separate legal entity with its own rights and obligations.
A charitable foundation differs from a normal foundation in that its purpose is charitable. While the exact meaning of charitable work is not clearly defined by law in Switzerland, there are two criteria that form the foundation of any charitable foundation: the pursuit of altruism and non-profit orientation.
- Altruism means that the foundation must interpret its purpose for the benefit of others and not for itself. The group of beneficiaries must be formulated as openly as possible in order to ideally serve society as a whole.
- Non-profit orientation means that the focus is not on financial gain, but on achieving goals. These goals are usually social, scientific, cultural, environmental, humanitarian, or educational and are intended to effect positive change in the target group.
What financial requirements must a charitable foundation meet?
The most important prerequisite for the establishment of a foundation is an appropriate level of assets, which can be in the form of cash or also in the form of real estate or shares in a company. The founders are always personally liable for the full founding amount. The required minimum capital of CHF 50’000 does not have to be paid in directly at the time of incorporation, but the payment can also be made later. However, for the foundation to actually achieve a significant increase in assets, a much higher amount is usually required. As a rule, the establishment of a foundation is worthwhile if a foundation capital of at least CHF 5 million can be raised. For smaller assets, it is possible to donate the money to a so-called umbrella foundation. Another option is to make an earmarked donation to an existing foundation. In this way, existing structures can be utilized and the money flows directly into charitable projects.
In order to ensure the long-term operation of the foundation, the foundation’s assets should be preserved. This means that only the income from the assets is used to promote or implement charitable projects. However, there are also so-called “consumption foundations“. Here, when the foundation is established, it is explicitly stipulated that the foundation’s assets are to be used for the defined purpose. After the assets have been used up accordingly, the foundation itself is dissolved again. A specific time period can also be defined for this purpose.
Whether the foundation may only use dividend payouts to fulfill the foundation’s purpose or may also use up the foundation’s capital is determined when the foundation is established.
For an overview of the foundations in the various cantons, visit the StiftungSchweiz foundation platform – there you will find suitable grant giving organizations for every purpose.
How do I Set up a Charitable Foundation?
If you would like to establish your own foundation, the following points will give you some guidance on how to proceed:
- Foundation assets: To establish a charitable foundation, you need a minimum capital of CHF 50’000.
- Foundation purpose: The purpose of the foundation is the central point of the foundation establishment. Whether or not the work is charitable work is the determining factor for subsequent tax exemption. Formulate your foundation’s purpose clearly enough that it can serve as the foundation’s basis, yet broad enough that it does not lose relevance over the years. For the definition and formulation of the foundation’s purpose, advice from experts – usually specialized lawyers – can be helpful.
- Establishment of a foundation: The act of establishing a charitable foundation can only be done by a notarized public deed, a will or an inheritance contract.
- Entry in the commercial register: This is followed by entry in a commercial register, which gives the foundation its legal capacity. The registration is to be carried out by the bodies of the foundation.
- Accounting obligation: There is an accounting obligation for a charitable foundation.
Important Bodies, Beneficiaries & Foundation Supervision of a Charitable Foundation
As an “independent asset”, a foundation cannot act on its own, but needs bodies that implement the purpose of the foundation and act in its spirit.
The Board of Trustees is the most important body of the charitable foundation, because it is through this board that the foundation becomes capable of acting. The Board of Trustees may consist of one or more natural persons or legal entities whose task it is to implement the will of the founder.
Speaking of the Board of Trustees: are you looking for a suitable member for your board? Then the foundation board search of StiftungSchweiz will help you. Here you can find suitable people and contact them directly. Or perhaps you would like to become involved as a foundation board member yourself? Then simply create a corresponding profile.
The Board of Trustees elects the auditors, whose precise duties are defined in the foundation deed and the foundation regulations. If the foundation is not required to have an ordinary audit, it can make use of the possibility of “opting out”. A corresponding application must be submitted to the foundation supervisory authority.
Every foundation is subject to foundation supervision. The latter verifies that the activities of the foundation are in accordance with its purpose. Depending on how large the area of activity of the foundation is defined, the foundations are subject to cantonal or national foundation supervision.
The beneficiaries are those determined by the purpose of the foundation. With a charitable foundation, there are no individual people who have a clear claim to funding. It is the responsibility of the Board of Trustees (or a possible office) to identify and select the specific beneficiaries.
Under what Conditions is a Foundation Exempt from Taxes?
A charitable foundation is exempt from taxes in Switzerland. In order to achieve tax-exempt status, the relevant tax authority must recognize the non-profit status.
Since, as already mentioned, the meaning of charitable work in Switzerland is not clearly defined in law, cantonal legislatures are left a certain amount of leeway to define eligible activities in the community service sector. However, it is clearly stipulated that the foundation must act altruistically and not for profit.
A further prerequisite for tax exemption is that the charitable purpose of the foundation is pursued on a permanent basis. The foundation charter ensures that the funds are not misappropriated. In order to retain the status of tax exemption, it must be proven that the purpose of the foundation is actually fulfilled through the foundation activity.
Advantages & Challenges of a Charitable Foundation
In summary, there are various positive aspects that speak in favor of a charitable foundation. However, the effort required to establish a foundation and to manage its day-to-day operations should not be underestimated. Particularly worth mentioning here are the initial and ongoing costs (e.g. for asset management) or also the repeated proof of non-profit status (e.g. with the foundation supervisory authority).
If you would like to engage in philanthropy without having to deal with the formalities and legalities of setting up your own foundation, there are other avenues open to you. For example, you can act as a major donor to an existing charitable foundation, choose an alternative structure such as umbrella foundations, or directly support various projects that are close to your heart.
