Loss of charity status due to failure to observe asset dedication – current developments in tax law
In its judgment of March 13, 2024 (Docket No. 13 K 1127/22 K), the Münster Fiscal Court set another accent in the law of non-profit organizations and highlighted the far-reaching tax and civil law consequences of a violation of the requirement for asset dedication. The decision emphasizes that a breach of the mandatory asset dedication under Section 55 (1) No. 4 of the Fiscal Code (AO) not only affects the present, but can have significant retroactive effects on an organization’s charitable status.
Background: The central importance of asset dedication in charity law
Legal framework
Under German tax law, charity status is tied in particular to strict requirements. One crucial principle is the so-called asset dedication. According to Section 55 (1) No. 4 AO, the statutes of a tax-privileged association or foundation must provide that—upon dissolution or loss of tax-privileged purposes—any association assets may only be used for tax-privileged purposes. This is intended to ensure that the assets, even after the institution ceases to exist, benefit the common good and that improper use is prevented.
Relevance in administrative practice
Tax authorities already pay close attention to the correct implementation of this requirement in the articles of association when granting charitable status. In practice, however, errors or ambiguities regarding asset dedication repeatedly occur in the day-to-day operations of associations—whether due to insufficient provisions in the statutes, failure to adhere to them in actual use of funds, or issues in the liquidation process and transfers of assets.
The Münster Fiscal Court’s decision: Facts and legal assessment
Description of the facts
The judgment was based on a case in which an association used its assets during its dissolution in a manner that deviated from the requirements in its statutes. The tax office interpreted this as a violation of the obligation to bind assets as per the statutes and revoked charitable status—retroactively.
Scope of the reasoning
The court made clear that compliance with the asset dedication is a mandatory requirement for the recognition of charitable status. According to the Münster Fiscal Court, a violation does not merely lead to the withdrawal of benefits as of the date of the misconduct or its discovery; instead, it has a retroactive effect—namely for all relevant assessment periods during which the requirement was not actually fulfilled. The tax benefit lapses retroactively, with all resulting consequences for any advantages that had been granted.
Of particular note is the finding that, for retroactivity to apply, it does not matter whether the association or the tax office actually knew of the violation. A subsequent correction of the statutes or delayed use of funds cannot remedy this defect. Only from the point of legally compliant rectification of the circumstances—such as by amending the statutes or proper use of funds—can charitable status be recognized again.
Tax and legal implications for affected organizations
Possibility of reclaiming benefits and liability risks
The retroactive loss of charity status poses considerable uncertainty for affected organizations. Previously granted tax privileges, such as exemption from corporation tax or the right to issue donation receipts, may cease to apply and lead to tax demands. End beneficiaries and board members may also face increased liability risks if privileged resources were used in an impermissible manner.
Relationship between articles of association and actual management
The decision underscores the obligation of associations and foundations to align both formal requirements in their rules (especially their statutes) and actual management strictly with charitable standards. Discrepancies between the formal statutes and the practical conduct require considerable correction.
Distinction: Standardized procedure and principle of proportionality
Although the Münster Fiscal Court has confirmed the retroactive consequences of a statutory violation, there remains room for a differentiated approach in individual cases, particularly if the organization has identified and promptly remedied the deficiency. In ongoing proceedings, the presumption of innocence must be observed and an individual assessment of the specific facts and legal situation is required. Nevertheless, the judgment highlights the high standards that tax-privileged institutions must maintain—not only to keep asset dedication in their statutes, but to implement it in practice.
Legal developments and potential impact on practice
The decision of the Münster Fiscal Court contributes significantly to further specifying the requirements for tax-privileged organizations. The restrictive and retroactive assessment ensures that serious legal consequences regularly threaten in the case of deficits in the statutes or violations of asset dedication. Especially given the large number of associations, foundations, and other charitable organizations, compliance with the formal and material requirements for charity status is of central importance.
Organizations that, against this background, are subjected to a review of their statutory provisions and actual practices should be aware of the significance of current jurisprudence and administrative practice.
Source
Fiscal Court Münster, Judgment dated 13.03.2024, 13 K 1127/22 K
For further questions regarding the requirements of charity law and asset dedication, for example in relation to drafting articles of association, use of funds, or the tax implications of a loss of status, the lawyers at MTR Legal Rechtsanwalt are available for consultation.
