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.’
