Strengthening Zurich as a foundation location
The canton of Zurich is striving to become an international leader among foundation locations, which is why it is relaxing the conditions for tax exemption: at the beginning of 2023, the cantonal government of Zurich decided to make Zurich a more attractive location for foundations as part of a "foundation strategy". In addition to other measures, the focus is on improving the tax framework and consequently changing the tax authorities' practices.
The Zurich Cantonal Tax Office announced on February 12, 2024 that it is adjusting its practice on tax exemption due to charitable status. The change in practice now provides for the compatibility of reasonable compensation for the bodies of a charitable legal entity with the tax exemption. The charitable work of foundations with activities abroad is also to be assessed according to the same standards as domestic activities in terms of tax exemption.
In a practice note dated February 1, 2024(ZStB No. 61.1 ), the Zurich Cantonal Tax Office changed its practice as follows
Remuneration of members of the Board of Trustees and Board of Directors
In future, there will no longer be any obstacles to appropriate remuneration for members of the Board of Trustees. This is due in particular to the amended legal basis for foundations, which came into force on January 1, 2023. According to Art. 84b ZGB, foundations must disclose the remuneration of the foundation board to the supervisory authority. In this respect, the supervisory authority must ensure that the foundation assets are used for the intended purpose in accordance with Art. 84 para. 2 ZGB. In a new leaflet, the Cantonal Tax Office stipulates that the articles of association must explicitly state the remuneration of members of the foundation board and the executive board. The details are specified in a remuneration regulation, which must be submitted to the supervisory authority and, in the case of associations, to the tax office for review. In future, the cantonal tax office will only carry out its own audits if there are doubts about the appropriateness of remuneration. In doing so, it will primarily obtain an opinion from the responsible foundation supervisory authority.
The Zurich Cantonal Tax Office can therefore assume that the remuneration of the governing bodies will be reviewed by the supervisory authorities and assessed as appropriate. This appeals to the supervisory authorities to develop a new practice. As before, this should be in the light of the proper use of the foundation's assets under the premise of market conformity and appropriateness - i.e. "in line with the time and performance".
Activities abroad
In future, the foreign activities of charitable foundations will be assessed according to the same standards as domestic activities. Previously, only domestic activities and certain activities abroad - e.g. development aid - were eligible for tax exemption. This is now being relaxed. To qualify, activities abroad must be considered worthy of support from an overall Swiss perspective and have a corresponding positive impact in Switzerland.
Entrepreneurial funding models
Entrepreneurial funding models are no longer limited to À-fonds-perdu contributions and loans, even in the case of cash flows (repayments and interest on loans, income from participations, profit-sharing), as impact investments (social impact bonds and development impact bonds) are no longer an obstacle to tax exemption. It must be proven that the funding is used in areas where no market (yet) exists and therefore investments are made that profit-oriented third parties would not make. Such investments are permitted within the scope of the actual promotional activity, provided that the funds returned are used for charitable purposes.
Conclusion
The change in practice will also be applied retroactively with immediate effect for all outstanding tax exemption applications.
Tax-exempt foundations that change their deeds as a result of this change in practice can request confirmation of tax exemption. All that is required is proof that the supervisory authority agrees with the changes (remuneration, change of purpose). The same applies to tax-exempt associations. The appropriateness review covers the draft amendment to the articles of association, the remuneration regulations (actual remuneration per person by type of activity [attendance fees, expenses]) and the annual financial statements for the last three years.
Over 2,200 charitable foundations already manage a total of CHF 18 billion in the canton of Zurich, with this money flowing into many Zurich institutions, particularly in the areas of social welfare, culture and research. In this respect, foundations contribute a great deal to the attractiveness of Zurich as a business location and generate added value from an economic perspective.
This change in practice opens up scope for a contemporary and demonstratively effective foundation system in Zurich. Wicki Partners AG has many years of broad experience in advising charitable organizations. Thanks to the strategic partnership with Philalia, Wicki Partners AG is also able to provide comprehensive conceptual support and advice to cross-border charitable initiatives. We welcome this long-awaited new practice.
Balthasar Wicki will be happy to answer any questions you may have regarding these changes in practice and other matters relating to non-profit status.