Important decisions, such as tax exemptions, often have to be made when setting up a foundation. This article from our Advice series provides answers to five key questions.
For a foundation, is it worth becoming tax-exempt?
A tax-exempt status clearly makes sense if a foundation generates high profits or has substantial capital. This first situation rarely occurs: often, income and expenses roughly balance each other out. However, in many cases, it’s important for a foundation to be tax-exempt because donors can deduct their contributions from their income or profit, and certain institutions can donate money only to tax-exempt foundations. In other words, the key factor often revolves around how the foundation is financed.
Where can you apply for tax exemption, and how long does it take?
The cantonal tax authorities are responsible for dealing with this; larger tax authorities have specialist departments for this task. Sometimes there are special committees, such as in canton Baselland, where the taxation committee is responsible. The application and justification need to be submitted, along with the institution’s articles of association and any regulations.
It generally takes about four weeks for an enquiry to be processed. Although the basic requirements are the same in every canton, with a circular that regulates additional details, there are differences between the cantons in terms of whether the exemption is granted.
Is there a tax exemption for every kind of tax?
No, just for income tax and capital tax, and that’s something people frequently forget. If your institution’s turnover is more than CHF 150,000, VAT registration is mandatory. Depending on the tax situation (for example, a large-scale renovation project), VAT registration can make sense, too. VAT often comes into play when services are obtained from third parties, or various tax-exempt organisations work together and input tax cannot be re-claimed due to a lack of tax liability.
The cantonal rules are different for real estate gains tax and property transfer tax, but typically the tax exemption applies only if the property is used directly for the tax-exempt purpose, not for property used as a capital investment. Similarly, value-added levies can also be incurred by tax-exempt institutions. If no capital tax is owed due to the tax exemption, some cantons also have land tax for properties that are not used directly for the tax-exempt purpose.
Gift tax and inheritance tax come into the picture primarily when donations are made to foundations outside the borders of the canton. Why? Because tax exemptions are recognised between cantons only if there is a corresponding reciprocity agreement, which is not always the case. If no such agreement exists, a considerable tax burden can be incurred.
Do the foundation’s objectives have to be limited to Switzerland?
If a foundation wants to use its money primarily abroad, this may conflict with the tax ex-emption since cantons often have strict restrictions.
Can a corporation be exempt from tax, too?
It’s not impossible for a stock corporation to be tax-exempt, but most cantons have very stringent requirements and a dividend restriction is mandatory. If a foundation successfully gains tax-exempt status, it’s worth bearing in mind the separate requirements for exemption from stamp duty, and that withholding tax is due as normal.