Frequently Asked Questions

The German Civil Code (BGB) does not provide a clear definition of the term “foundation”. A foundation is an entity that uses assets to pursue a certain purpose specified by its founder. The assets, however, are preserved and only the earnings are used for the purpose. Foundations can be established in various legal forms and for any legal purpose. There are also special types of foundations that consume their assets within a fixed period of time such as the Verbrauchsstiftung (consumption foundation).

There are various reasons for establishing a foundation. The German term stiften, which derives from Stiftung (foundation), simply means using an asset for a specific purpose in perpetuity. Either because founders want to secure their commitments long term due to a specific purpose they deem important, or because they are searching for a meaningful purpose where their assets can be utilized for the long term. The legal form of the foundation offers many tax benefits and it can be used as legacy if there are none otherwise. It is often idealistic reasons, such as gratitude, attachment to a region, profession, hobby or personal concern that motivate a person to consider establishing a foundation. Feel free to talk to us about it.

There are generally two possibilities: You can establish an independent foundation (selbständige Stiftung) or a trust. Setting up an independent foundation requires the following steps:

• Establishing the act of formation (Stiftungsgeschäft)
• Establishing the bylaws of the foundation
• Submitting the request to the foundation authority
• Checking the non-profit status
• Transferring the foundation's assets

Details are regulated by sections 80 et seqq. of the German Civil Code (BGB) and the corresponding laws of the Länder. Establishing a trust, on the other hand, is quicker and easier, but is linked to other conditions.

A foundation can in principle be established upon death or during one’s lifetime. There is not a right time. Setting up a foundation during your lifetime allows you to become acquainted with its various instruments and to participate in shaping the foundation’s structure and processes. 

Yes, with the model of the Verbrauchsstiftung (consumption foundation) this is possible.

The act of formation (Stiftungsgeschäft) is a one-sided declaration that is legally binding and must be put in writing (personal signature of the founder or prepared by and executed before a notary). The act of formation must contain the founder’s binding declaration that he/she will use assets to fulfill a purpose specified by him/her. On the basis of the act of formation, the foundation shall have bylaws that govern:

• the name of the foundation
• the headquarters of the foundation
• the purpose of the foundation
• the assets of the foundation
• the formation of the foundation’s board of directors

Generally, the act of formation cannot be made subject to conditions that may affect the foundation’s existence. However, the foundation (as an independent legal entity with legal capacity) does not come into existence until it is recognized by the foundation authority.

Bylaws are written legal regulations. The bylaws of a foundation specify the founder's intentions and, in the case of a foundation with legal capacity, require approval by the state foundation authority (of the respective Land). They must contain at least the contents mentioned under point 6.

The tasks and goals of a foundation are defined in the bylaws and are legally binding. Every foundation must have bylaws. These shall contain regulations on the foundation’s name, headquarters, purpose, assets and formation of the board of directors. Provisions on the formation of the board of directors concern in particular the number of members as well as their appointment and removal. The bylaws shall also include regulations on all other bodies and their responsibilities.

After the foundation has been recognized, the bylaws of a foundation can be adjusted in special cases. All amendments have to be approved by the foundation authority, such as the Regierungspräsidium Baden-Württemberg.

The act of formation mortis causa can be a testament within the meaning of sections 2247 et seqq. and section 2265 of the German Civil Code (BGB) or a contract of inheritance within the meaning of section 2274 of the German Civil Code (BGB).

The act of formation inter vivos can be created by the founder himself/herself or by power of attorney from the founder. Multiple founders may establish a foundation together by deed or through special declarations. 

Yes. According to the foundation laws of the Länder in conjunction with the sections 80 – 84 of the German Civil Code (BGB), a foundation requires the official recognition by the foundation authority, such as the Regierungspräsidium Baden-Württemberg. Only in this way does a foundation obtain legal capacity.

There are no statutory provisions governing a minimum capital requirement for the establishment of a foundation. For a foundation with legal capacity, however, a minimum financial resource is recommended in order to be able to administer the foundation or to fulfill the foundation's purpose since the foundation cannot be sustained with the share capital, but with the earnings only. Even taking into account the period of low-interest rates, it is essential to get advice in advance on whether an independent foundation with legal capacity is the only option for the founder or whether there are other options. Smaller amounts allow for the establishment of a so-called dependent or fiduciary foundation. Its assets are managed by another institution (such as the University of Mannheim Foundation).

The body authorized to represent a foundation is the board of directors. The board of directors may appoint one or more managing directors, which shall then be authorized to represent the foundation to the extent determined by the board of directors. The board of trustees consists of full-time or honorary members and is generally the monitoring body of a foundation. More bodies are also possible. 

In order to be able to participate in business and legal transactions, a foundation needs bodies to act on its behalf. These are governed by the organization of the foundation. In theory, the entire organization of the foundation can consist of one person leading, managing and representing the foundation as the only body. However, there is usually at least one advisory and one monitoring body. The board of directors represents the foundation in and out of court. It can also consist of multiple people. This is determined by the bylaws. 

The members of the foundation’s bodies are obligated to manage the assets of the foundation wisely and economically.

Endowments are funds that go to the capital (“Grundstockvermögen”) of an independent foundation and remain there. The earnings can be used to realize the purposes of the foundation.

An independent foundation or foundation with legal capacity is primarily defined by a fund for special purposes with a legal personality. Independent foundations have a purpose, assets and are not organized in an association.

Unlike the independent foundations, dependent foundations (also called fiduciary foundation) do not have a legal personality. They are established by the founder transferring assets to an existing person, for example a legal person governed by private law, on the basis of a trust deed, provided that the assets or the person’s income will be used for a specific purpose.

This is regulated by section 80 of the German Civil Code (BGB) which stipulates:

1. For the establishment of a foundation with legal capacity, the act of formation and the recognition of the relevant authority of the Land in which the foundation is to have its headquarters is required.
2. The foundation shall be recognized as having legal capacity, if the act of formation complies with the requirements of section 81 subsection 1, the permanent and effective fulfillment of the purpose appears to be secured, and the purpose of the foundation does not pose a threat to the common good.

A trust is a fiduciary relationship that allows a trustee to hold assets on behalf of a founder and use them for one or more purposes. It is based on the bylaws of a foundation as well as on a trust deed which the founder concludes with a trustee of his/her choice. The trustee manages the assets and represents the trust in all legal acts. On the basis of the trust deed, the foundation transfers the legal ownership of assets to the trustee, who manages them separately from his own assets and in accordance with the bylaws. There are both risks and benefits associated with this type of foundation. 

Any natural person with legal capacity or legal entity, such as a private individual, a registered association, a legally independent foundation or a GmbH, can be a trustee.

Unlike an independent foundation, a trust does not have a legal personality, but is legally represented by the trustee who is also responsible for the management. Therefore, a trust is not subject to the control of legality by the Länder and does not require the recognition of the same. With regard to taxation, however, a trust is treated the same as an independent foundation.

A charitable foundation supports social projects. Organizations can apply for funding by submitting a request to a charitable foundation. A charitable foundation is different from an operating foundation.

Unlike charitable foundations, operating foundations use their funds for their own work.

The foundation supervisory authority is, among others, responsible for state control over foundations. It must ensure uniform application of the relevant foundation law from approval to dissolution of the foundation. 

All kinds of assets can go into a foundation, such as financial assets, real estate, bank balances, equity holdings, art objects and other material assets.

Since the founder permanently divests himself/herself of his/her assets by transferring them to the foundation, a foundation is an excellent instrument for preserving assets. The assets no longer belong to the founder or his/her family, but to the foundation. In order to ensure control by the desired persons, the bodies of the foundation can be staffed as needed. However, it is no longer possible to have unrestricted access to the foundation capital because a foundation is designed for eternity and it is responsible for preserving the assets.

A foundation is funded by donations, endowments and the earnings therefrom. The donations and earnings may only be used to fulfill the purpose of the foundation.

The principle of the appropriation of earnings states that the earnings must be used to fulfill the purpose of the foundation, but this does not mean that the entire earnings of the foundation's assets must be used to fulfill the foundation's purpose in the year in which they accrue. However, there are set rules for the use of funds.

The foundation is obligated to fully preserve the entrusted assets of the endowment. It provides funding from investment income only. Unlike the income from endowments, a donation is to be used for the foundation's purposes as soon as possible.

Gifts to foundations that pursue tax-advantaged purposes (e.g. scientific and charitable purposes as well as non-profit purposes considered eligible for support), in particular the initial provision of assets for the foundation and later increases through additional endowments, can be deducted from income tax, corporation tax and trade tax. 

Not only an already existing foundation but also a future foundation can be included in a last will, in accordance with the legal fiction of section 84 of the German Civil Code (BGB). This section is also referred to as the “Städel-Paragraph”.

Dependent foundations can receive a legacy or bequest as well. Since they do not have a legal personality, their trustee becomes heir or legatee who is obligated under inheritance law and/or on the basis of the trust deed to use the donated asset “for” the foundation.