Obtaining and keeping tax-privileged status

The parents' association of a primary school has raised €90,000 over three years from donations, dues and its summer fair, and parked the money in a savings account for a playground that will come one day. The treasurer calls it prudence. The tax office sees nothing forbidden at first, because the association stays below €100,000 of annual receipts. A larger association with the same savings book would have put its exemption at risk.

Three privileged purposes and the benefit of the general public

Sections 51 to 68 of the Fiscal Code (Abgabenordnung, AO) govern when a body receives tax privileges. It covers corporations, associations of persons and pools of assets within the meaning of the Corporation Tax Act: the registered association as much as the foundation or the non-profit GmbH. Under section 51, departments of an association are not separate taxpayers.

Only three groups of purposes qualify, which the law calls tax-privileged purposes together: public-benefit, charitable and church purposes. Each group has its own provision, and a body may pursue several groups at once if its statutes name all of them.

Under section 52(1), an activity serves the public benefit if it selflessly advances the general public in material, intellectual or moral respects. The key word is general public. An association whose services reach only a closed circle, such as one family or the staff of one company, does not advance the general public.

The same applies if the circle of beneficiaries can only ever be small because of geographic or professional criteria. An association whose statutes support only the residents of a single housing estate therefore raises the same question as a relief fund for the employees of one firm. Merely passing money on to a public body is not enough either.

Section 52(2) lists in 27 numbers what is to be recognised as advancing the general public. The list runs from science and research through youth and elderly care, art and culture, environmental and climate protection, animal welfare and sport to civic engagement, the upkeep of cemeteries and housing for people in need.

For sport, the text makes clear that chess and e-sport count as sport. Number 23 groups purposes often seen as leisure clubs: animal and plant breeding, allotments, customs and carnival, amateur radio, community wireless networks, model flying and dog sports. They too serve the public benefit, with consequences for the deduction of dues that a separate course covers.

If a purpose fits no number but advances the general public in the same way, sentence 2 allows it to be declared of public benefit. Each federal state designates a tax authority for that decision. It is an exception; anyone drafting statutes is better off wording the purpose in the terms of a matching number from the start.

Under section 53, a body acts charitably if it selflessly supports people who depend on the help of others because of their physical, mental or emotional condition. A second group are the economically needy, whose income stays within a multiple of the social assistance standard rate: four times, or five times for single people and single parents.

Anyone receiving benefits under Books Two or Twelve of the Social Code or housing benefit is deemed economically needy without further checks; the benefit notice serves as proof. The third group are people whose situation has become an emergency for special reasons, in particular disasters that the Federal Ministry of Finance or a state has formally declared.

Under section 54, a purpose is a church purpose if it supports a religious community that is a public-law corporation. The law gives examples: places of worship, services, religious instruction, the training of clergy. For a religious community without that status, the church purpose is ruled out; what remains possible is the advancement of religion under section 52(2) number 2.

Two limits apply to all three groups. If the purpose is pursued abroad, section 51(2) requires that people resident in Germany are supported or that the activity also enhances the standing of the Federal Republic. Under subsection 3, a body is excluded if it supports anti-constitutional activities or acts against international understanding.

Selfless, exclusive, direct

A privileged purpose is not enough. The body must pursue it in a particular way, and the law describes that way with three adverbs, each with a provision of its own. Missing any one of them forfeits the privilege, however worthy the purpose may be.

Under section 55, the body acts selflessly if it does not primarily pursue its own economic ends, meaning no commercial or other profit-making ends. An association may engage in business, but that business must not be its real driving force. Subsection 1 turns this into five concrete duties that every set of statutes and every cash audit should know.

• Earmarking of funds: funds may only be used for the purposes in the statutes; members receive neither profit shares nor, as members, any other benefit, and political parties may be supported neither directly nor indirectly.
• Repayment on leaving: members get back at most their paid-in capital shares and the fair value of their contributions in kind.
• No favouritism: no one may be favoured through expenses alien to the purpose or through disproportionately high pay.
• Asset lock: on dissolution or loss of purpose, the remaining assets go to tax-privileged purposes.
• Timely use of funds: funds must in principle be spent promptly on the statutory purposes, subject to the exceptions of section 62 and for small bodies.

The third duty is the one associations breach most often in practice. A board may be paid, but not disproportionately. A member may sell the association a car, but not at an inflated price. An anniversary gift to all members paid from the association's funds is a benefit to members and therefore harmful.

Under section 56, exclusively means that the body pursues only its tax-privileged statutory purposes. A sports club whose statutes also list advancing the business interests of its sponsors pursues a further, non-privileged purpose. Business activities used as a means of funding are something else; they are not a statutory purpose.

Under section 57, directly means that the body carries out the purposes itself. It may use auxiliaries if, given their legal and factual relationship, their work can be seen as the body's own, as with a care service tightly bound by contract. An umbrella body of tax-privileged bodies is treated like one that acts directly.

Section 57 knows two further routes. Under subsection 3, planned cooperation with at least one other tax-privileged body is enough if the statutes provide for it. Under subsection 4, a holding body also acts directly if it exclusively holds and manages shares in tax-privileged companies.

Section 58 lists activities that are harmless despite the three principles. A body may pass funds to other tax-privileged bodies or public institutions for their privileged purposes. If that is its only way of pursuing its purpose, as with a support association, the statutes must name the passing-on of funds expressly.

Also harmless under section 58 are lending staff or premises for privileged purposes, social gatherings of minor importance, a sports club supporting paid alongside unpaid sport, and photovoltaic systems as long as they do not become the main purpose. The club party is therefore allowed, as long as it does not outweigh the youth work.

Timely use of funds and reserves

A tax-privileged body should spend its money on its purpose, not hoard it. Section 55(1) number 5 therefore requires funds to be used in principle promptly for the statutory purposes. Buying or building assets that serve the purposes also counts as use, such as a club minibus or a rehearsal room.

Use is timely if the funds are spent at the latest in the two calendar or financial years following their receipt. A donation received in 2026 must therefore be used by the end of 2028. Failing that, without forming a permitted reserve, breaches selflessness.

Small bodies are exempt from this duty altogether. Under the last sentence of number 5, the duty of timely use does not apply to bodies with annual receipts of no more than €100,000; that is the amount in the version read on 23 September 2026. What counts is total receipts, not donations alone.

For most small associations, the duty to account for every euro within two years therefore disappears. The other principles still apply: a small association too must use its funds for the statutory purposes, must not favour members and must lock its assets to privileged purposes on dissolution.

Larger bodies may form reserves under section 62 that do not count as a breach. A project reserve is allowed to the extent needed to fulfil the statutory purposes sustainably according to current planning. A replacement reserve may be built up in line with the regular depreciation of the asset to be replaced; anything more must be justified.

Without any project link, number 3 allows a free reserve. Its legal cap has two parts: at most one third of the surplus from asset management plus at most 10 percent of the other funds subject to timely use. If the cap is not used in one year, the shortfall may be made up in the following two years.

Reserves must be formed within the same period that applies to timely use. Project and replacement reserves must be released without delay once their reason ceases; the freed funds are then again subject to the two-year period. For the free reserve, subsection 2 names no such release duty.

Some inflows are outside timely use from the outset under section 62(3): inheritances without a condition for running costs, gifts the donor expressly earmarks as endowment, donations made on an appeal that visibly asks for endowment, and gifts in kind that by nature belong to the body's assets, such as a plot of land.

If a body has accumulated funds without justification, it does not have to lose its exemption at once. Under section 63(4), the tax office may set a reasonable deadline. If the body uses the funds for privileged purposes within that deadline, its management is deemed proper.

The last figure comes from section 58 number 3. A body may give another tax-privileged body funds not only for current purposes but also as endowment: surpluses from asset management and profits from business operations in whole or in part, and beyond that at most 15 percent of the other funds subject to timely use.

Statutes, determination and actual management

Under section 59, the privilege is granted only if the statutes show which purpose the body pursues, that it meets the requirements of sections 52 to 55 and that it is pursued exclusively and directly. The actual management must match. There are thus two tests: one on paper, one in practice.

Section 60 requires the purposes and the way they are pursued to be defined so precisely that the conditions can be checked from the statutes alone. The statutes must also contain the provisions of Annex 1 to the Fiscal Code, the so-called model statutes. It need not be copied in full, but its tax-relevant provisions must appear.

• § 1: the groups of purposes pursued, the specific statutory purpose and how it is carried out
• § 2: the statement that the body acts selflessly and does not primarily pursue its own economic ends
• § 3: the earmarking of funds for the statutory purposes and the ban on benefits to members
• § 4: the ban on expenses alien to the purpose and on disproportionately high pay
• § 5: the recipient of the assets on dissolution or loss of purposes, either named or with a specific privileged use

The asset lock in § 5 of the model statutes is the most delicate clause. Under section 61, the use of assets on dissolution must be defined so precisely that its privileged status can be checked from the statutes. If the clause is later amended so that it no longer suffices, it is deemed insufficient from the start.

The consequence is drastic: tax assessments may be amended for taxes that arose in the last ten calendar years before the clause was changed. One careless amendment can thus cost a whole decade of exemption retroactively. Amendments to the statutes should therefore be cleared with the tax office before the general meeting.

The statutes must meet the requirements throughout the whole assessment period for corporation and trade tax, and for other taxes at the time the tax arises. Amending the statutes in July to cure a defect does not save the current year for corporation tax.

Whether the statutes are sufficient is determined separately by the tax office under section 60a. The determination is made on the body's application or of the office's own motion at the corporation tax assessment if none exists yet. A newly founded association usually applies at once, because without it it cannot issue donation receipts.

The determination binds the taxation of the body and of its donors and members. Its binding effect ends if the underlying provisions change, and it must be revoked if the relevant circumstances change. If there is evidence before the first assessment that management breaches the statutes, the determination is refused.

The determination checks only the text. Whether the body lives by it is checked by the tax office under section 63 at assessment. Management must aim at the exclusive and direct fulfilment of the purposes, and the body proves this through proper records of its receipts and expenses. Without a cash book there is no proof.