The Social Bene­fits of Tax Exemptions

When it comes to taxes, foundations are a regular topic in the media. The debate is dominated by lots of assumptions and anecdotal knowledge, and nonprofit grant giving foundations, in particular, are often suspected of being used as a vehicle for tax optimisation by the super-rich. The legitimacy of tax exemption for nonprofit foundations is also under discussion.

One thing is clear: inves­t­ing in nonpro­fit foun­da­ti­ons can certainly save taxes – just like dona­ti­ons to chari­ta­ble orga­ni­sa­ti­ons or poli­ti­cal parties. As a result, the tax autho­ri­ties lose hundreds of milli­ons of francs in tax reve­nue every year. Howe­ver, the money that goes to nonpro­fit foun­da­ti­ons doesn’t simply disap­pear – some recal­cu­la­ti­ons are in order.

Tax losses are quickly offset

In 2019, Swiss­Foun­da­ti­ons, toge­ther with tax experts from PwC Switz­er­land, conduc­ted the first study to analyse the rela­ti­onship between the tax reve­nue lost by the state and the social and finan­cial bene­fits of grant giving foun­da­ti­ons. As the authors write, the study shows ‘that the gene­ral public recei­ves far more money through nonpro­fit foun­da­ti­ons than it would if the funds in ques­tion were conti­nuously taxed’. The study provi­des, for the first time in Europe, ‘compel­ling fiscal evidence that nonpro­fit foun­da­ti­ons are wort­hwhile for Swiss society.’ Depen­ding on the canton, tax losses are often offset by the funds distri­bu­ted by the foun­da­tion after just a few months. A grant giving foun­da­tion focu­ses on phil­an­thro­pic acti­vity, not tax exemp­tion. Howe­ver, the results of the study also showed that ‘tax conside­ra­ti­ons defi­ni­tely do play a role in the estab­lish­ment of foun­da­ti­ons’. Howe­ver, it is important to note, as the authors write: ‘Even if all tax opti­mi­sa­tion opti­ons were exploi­ted – which rarely happens in prac­tice – the gene­ral public would still receive far more money than they would lose as a result of the estab­lish­ment of a nonpro­fit foundation.’

‘Thanks to the tax exemp­tion, we can make the proper­ties available to the public at afforda­ble prices.’

Chris­tine Matthey, Mana­ging Direc­tor of the Ferien im Baudenk­mal Foundation

The impact of grant giving foun­da­ti­ons on civil society

The study also raises a key and, ulti­m­ately, poli­ti­cal ques­tion: ‘Does a society wish to accept that the state allows its citi­zens to decide priva­tely which aspect of the common good they wish to support?’ Deci­ding what taxes are used for is part of the demo­cra­tic process in Switz­er­land. In the case of grant giving foun­da­ti­ons, it is up to the foun­ders to decide what their money is used for. But this can have a posi­tive effect: foun­da­ti­ons are more flexi­ble than the state; foun­da­ti­ons can take risks and launch inno­va­tions that the public sector doesn’t have the money for. ‘Compared to public budgets, the sums available to foun­da­ti­ons seem like a drop in the ocean. In prac­tice, howe­ver, this drop often makes a signi­fi­cant difference.’

Tax exemp­ti­ons for foundations

It’s not just foun­ders who bene­fit from tax breaks – in Switz­er­land, nonpro­fit foun­da­ti­ons are also exempt from taxes. This makes finan­cial manage­ment easier and also means that foun­da­ti­ons have more money at their dispo­sal at the end of the day. But there are also foun­da­ti­ons that would proba­bly not exist in this form without tax-exemp­ti­ons. One of these is the Ferien im Baudenk­mal Foun­da­tion, which opera­tes at the inter­face between tourism and buil­ding preser­va­tion. Chris­tine Matthey, Mana­ging Direc­tor of the Ferien im Baudenk­mal Foun­da­tion, explains: ‘Our primary nonpro­fit mission is to protect archi­tec­tu­ral culture, ther­eby preser­ving Switzerland’s cultu­ral heri­tage.’ But there are other missi­ons besi­des: ‘We also promote local holi­days and are commit­ted to slow tourism. And a stay in a listed buil­ding allows visi­tors to connect to local and regio­nal history.’ Many of the buil­dings are loca­ted in remote, rural areas that are often affec­ted by emigra­tion. Offe­ring holi­days in listed buil­dings in these areas also provi­des a means of crea­ting added value in the region.

‘Compared to public budgets, the sums available to foun­da­ti­ons seem like a drop in the ocean.’

Swiss­Foun­da­ti­ons study: Foun­da­ti­ons – A good deal for society

Effects of tax exemption

The foundation’s work is mainly finan­ced by dona­ti­ons from grant giving foun­da­ti­ons and private indi­vi­du­als, as well as the rental income from the reno­va­ted proper­ties. ‘It sounds rather drama­tic to say that we wouldn’t be able to exist without tax exemp­tion, but it’s proba­bly not that far from the truth,’ says Chris­tine Matthey. But it’s not just about the purely finan­cial burden of taxes: ‘The foun­da­tion was recently gifted a buil­ding of great cultu­ral value. If we’d had to pay gift tax on this buil­ding, it would not only have been a drain on our budget, it would also have made our fund­rai­sing work much more diffi­cult. People want to pay for new doors and help reno­vate the roof – not just donate money for taxes.’ The tax exemp­tion also results in a direct bene­fit for society, as it means the holi­day homes can be rented out at afforda­ble prices: ‘We are proud to be able to offer houses that cost about as much per person to stay in as a youth hostel; after all, we believe our holi­days should also be afforda­ble for fami­lies,’ says the Mana­ging Direc­tor. The foun­da­tion owns eleven of the proper­ties it mana­ges. ‘The foun­da­tion has a large amount of assets from owning the proper­ties – if we had to pay taxes on them, our services would have to be much more expen­sive and would quickly become a luxury product. Thanks to the tax exemp­tion, we can make the proper­ties available to the public at afforda­ble prices.’ Howe­ver, the tax exemp­tion does not apply to all taxes; the foun­da­tion pays value-added tax and local tourist taxes. ‘We have a diffe­rent proce­dure for paying tourist taxes for almost every one of our proper­ties, which requi­res an enorm­ous amount of admi­nis­tra­tive work,’ says Chris­tine Matthey. She conti­nues: ‘If we had to pay taxes on all our proper­ties, we would proba­bly have to employ a trus­tee just for the admi­nis­tra­tive work, and our over­head costs would also rise.’

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