Tax-exempt: five key questions

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.