Incorporating a Foundation
Legal and Fiscal Profile
Legal Framework – “ANTE HOC” Requirements
Does the jurisdiction have a basic legal definition and different
types of foundation?
Art. 34 of the Constitution of 1978/Constitución Española de 1978 recognises the right to establish a foundation for general interest purposes. The framework of foundations has recently changed in Spain. In December 2002, a new Foundation Act (LF) was approved, leaving behind the regulation applicable until then, the Foundation Act 30/1994. The new regulation is the Foundation Act 50/2002 (LEY 50/2002, de 26 diciembre, de Fundaciones).
Regional governments have also developed laws and by-laws in their areas of competence. Some Autonomous Communities/Comunidades Autónomas (Cataluña, Galicia, Navarra, etc) have specific legislation for foundations. The central government (except for Navarra and País Vasco) has full competence in the field of taxation.
The Act 50/2002 defines foundations in Art. 2.1 as non-profit organisations, whose assets are, according to the wish of the founders, allocated permanently to the fulfilment of general interest purposes. The common definition is “assets serving a general interest purpose”. The recently approved Foundation Act covers foreign foundations that develop activities in Spain on a regular basis if they can show that they are correctly constituted according to the law of their country of origin. In addition, these foundations are under the supervision of the State supervisory authorities (Protectorates) in the same terms as Spanish foundations.
Structural elements: legal capacity, purpose, assets,
governance, will of founder
The foundation must have assets that are allocated permanently to achieve general interest purposes defined by the founder. General interest purposes are listed in Art. 3.1 LF: social matters, education, culture, sports, health care, cooperation for development, environment, scientific research or volunteer work or any other public benefit purpose (open clause). This article stresses that foundations cannot pursue any private purpose like giving benefits to the founder or his/her family. At least 70% of the annual income must be used for the public benefit purposes of the foundation. According to Arts. 2.2 LF, a foundation is ruled by the founder’s will and the foundation’s statutes and the Law.
Minimum Incorporation Capital
The initial funds must be sufficient to allow the pursuance of the public benefit purpose of the foundation. According to Art. 12 LF 30,000 euros are presumed to be sufficient assets.
Governance of the Foundation
Governance of the foundation is entrusted to a board, which oversees the asset management and ensures the fulfilment of the purpose of the foundation. Foundations must provide for a secretary, which could be a board member. Board members may get their expenses reimbursed.
The law permits remuneration of board members who give services to the foundation other than those associated with being a board member, as long as 1) the founder has not expressly prohibited it, 2) these activities involve a significant contribution, and 3) previous authorisation has been received from the Protectorate. In addition, board members can designate other persons to act on their behalf for certain acts, as well as the existence of other organs different from those than the board of members to undertake specific activities.
Requirements for establishment: procedure, registration,
Both individuals and legal entities can set up a foundation according to Art. 8 LF. The deed can be “inter vivos” (notary deed) or “causa mortis” (form of a will). This founding document is forwarded to the registration office for approval and registration at national and regional level.
According to Art. 10 LF, the founding document has to contain the name and address of the founder, the founder’s wish to set up a foundation, the aim of the foundation, a description of the assets of the foundation, the statutes and the composition of the first board.
According to Art. 4.1 LF, foundations receive legal personality after the public deed of incorporation has been registered in the Register of Foundations. The registration authorities have to register the foundation, if the legal requirements are met. A minimum capital of 30,000 euros is presumed sufficient to establish a foundation. Nevertheless, this amount can be increased if the state supervisory authorities for foundations (the Protectorates) deem it necessary in view of a foundation’s statutory goals. If the founder wants to set up a foundation with less capital, he must then prove that this amount is sufficient to pursue its aims. 25 % of the initial assets must be paid in the moment of establishment. The other 75% must be paid with the following five years.
Board members are encouraged to register the foundation and the deed of incorporation within six months according to Art. 13 LF. Otherwise, the foundation authorities can start a procedure to nominate new board members.
According to the new Foundation Act 50/2002, the National Register of Foundations will create a new section that will deal with co-ordinating the names included in the national and regional registers. For the first time it will include the regulation of public sector foundations.
“POST HOC” Requirements – Rights and Duties
Art. 24 LF permits economic activities as long as they are related to the aim of the foundation or are complementary to it. It states that when a foundation owns a majority of shares in a company it will have to inform the relevant Protectorate. Besides this, foundations have to report the acquisition or sale of shares and assets in companies, whether they are major shareholders or not.
Requirements for Amendment of Statutes
The board of the foundation can amend the statutes if this is in the interest of the foundation according to Art. 29 LF and in line with the will of the founder.
The statutes must be amended when the circumstances change in such a way that the foundation cannot achieve its general interest purpose. The board of the foundation has to change the statutes, unless the founder has foreseen the dissolution of the foundation in this specific case. Should the board not act, the supervision authority will proceed with the necessary amendments.
Any alteration will have to be communicated to the Protectorado and be registered in the register of foundations.
Supervision: which authority – what measures/sanctions?
Foundations are overseen and controlled by the Protectorados, which control that the foundation acts according to the statutes and the law. Foundations have to present to the Protectorados an annual Activity Plan. The chapter 9 of the LF foresees a Higher Council of foundations, which would be a consultative body that provides information and advice.
Foreign foundations that have activities in Spain on a regular basis are under the supervision of Protectorados.
Reporting, accountability, auditing
Foundations must present annual action plans to the appropriate administrative authority. An external audit is required to those foundations that meet two of the following circumstances:
– The total amount of the asset’s entries is over 2,400,000 euros
– The total net amount of the annual turnover is over 2,400,000 euros
– The average number of working staff is over 50.
In order to simplify the management and accountability of smaller foundations, provided they meet certain requirements, the Law authorises them to use an abbreviated formula for accounting and the annual report.
Property: estate, stock, etc., gifts
In addition to monetary gifts, the following donations can be made: property of national cultural heritage, fine art and other rights and property with measurable value that can help pursue the foundation’s aim. A company can grant financial support to a foundation, which in return publicises the involvement of the company in the foundation’s activities (so called business-foundation agreements).
The disposal of property of the endowment or assets directly linked to the aims of the foundation need to be authorised by the supervision authority. Other disposal of assets has to be communicated ex post.
Liability of the foundation and organs
Foundations have limited liability; however, a debate is still going on as to whether the property of the foundation can be seized. Board members can be the held civilly and criminally liable.
Dissolution of foundations
According to Art. 31 LF, Foundations may be dissolved if the time for which they were set up has expired, the aim is fulfilled or it has become impossible to fulfil the aim or another case foreseen in the statutes or the law has occurred. The board may decide upon dissolution. The Protectorados and in some cases the court will have to approve the dissolution. Any dissolution must be published in the foundation register. In case of dissolution remaining assets of the foundation must be transferred to foundations or private non-lucrative entities that pursue general interest purposes. Where the statutes of the foundation do not make any provision on the use of the assets in case of dissolution, the Protectorado will decide which foundation will receive the assets.
Tax Treatment for a Foundation
The general tax regime is found in the Corporate Tax Law No 43/1995. The Law on Patronage No 49/2002 dated 23 December, 2002 deals with a privileged tax regime of registered foundations that ask for it and other public benefit organisations. Registered foundations will have to inform the tax authorities that they opt for this special tax regime.
Otherwise they are taxed according to Art. 133-135 of the normal Corporate Tax Act. According to the corporate tax law, income arising from the pursuance of foundations’ purposes is tax exempt. Income derived from movable assets and income from unrelated economic activities are however not tax exempt). Non-exempt income is taxed at 25%.
Tax exemption for qualifying purposes – official exemption –
also to foreign foundations?
Registered Spanish foundations of public benefit receive a privileged tax regime upon request as well as offices of foreign foundations, which are registered in Spain if they fulfil the requirements listed in the Tax Act.
According to Art. 3 of the law on patronage 49/2002, registered foundations working in the areas of education, culture, science, sports, health care, environment, social economy etc. can receive tax exemption on their income tax, if they used at least 70% of their net income to pursue the general interest purpose of the foundation. The income must be used within a period of four years (*). They have to deliver an annual financial report and in addition have to give yearly accounts to the Protectorado. Non-tax exempted unrelated economic activities must not exceed 40% of the total revenues of the foundation. If the foundation is a major shareholder in a corporation it has to give evidence to the Ministry of Economy that the ownership helps to pursue its public benefit purpose. In case of liquidation, the assets must be used for similar purposes after dissolution.
(*) Before the law revision three years.
According to Art. 6 and 7 of the law 49/2002, tax exemption on corporate income tax is granted for:
– Income from activities to support the purpose of the foundation
– Capital increase derived from inheritances and gifts (donations) given for the support of the aim of the foundation (including movable and immovable property)
– Income from movable and immovable property (dividends, rents, capital gains)
– Public grants and contributions derived from corporations to achieve the aim of the foundation (sponsorship agreements are treated like donations)
– Income from qualifying economic activities related to the public benefit purpose such as services in the area of social welfare, science and research, culture, education, training, publishing and environment
– Income coming from ancillary unrelated economic activities. Economic activities will not be considered as complementary if their net income exceeds 20% of the total income of the foundation.
– According to Art. 7.12 minor economic activities, which do not exceed 20,000 euros.
According to Art. 10 other income derived from economic activities, e.g. bank interests, is taxed at a special corporate tax rate of 10% (the general corporate tax rate is 25%).
Foreign foundations can establish a branch in Spain, but they need to register. The tax treatment in Spain only applies to the activities of this branch. However, many foreign foundations opt for the creation of a new foundation rather than setting up a branch.
Is activity abroad allowed without losing tax exemption?
Foundations registered in Spain that fall under the LF can pursue activities abroad.
Initial donations to domestic and foreign foundations, which are registered in Spain, receive the same tax treatment as later gifts. Registered foundations and associations recognised to benefit the public are qualifying recipients for donations. Foundations Donations to foundations with a special tax treatment are treated as follows:
Donations from individuals
An individual donor can deduct 25% of the value of the donation (cash or in-kind) up to a limit of 10% of the total taxable income of the donor in the form of a tax credit. Donations can include cash or any movable and immovable property.
Donations by corporations
Corporations can deduct 35% of all donations up to limit of 10% of the taxable base or 0.1% of the company’s turnover in form of a tax credit. The donation is treated, as an overhead cost (expense), which cannot exceed 10% of the taxable base before the deduction or 0.1% of the company’s turnover. If the gift is regarded as national cultural heritage property, the limit goes up to 30% or 0.3% of the company’s turnover. Donations in excess of the limit can be deducted in the following 10 years.
There is no tax credit for donations of a resident donor to a foreign foundation, which is not registered in Spain. According to Art. 21 non resident donors fall under the following regime:
1 – Non resident donors operating in Spain not through a permanent establishment will get tax credit at the rate of 25% of the donation up to a limit of 10%.
2 – Non resident donors, which operate through a permanent establishment: will be able to deduct at the rate of 35% up to a limit of 10% (the excess will be deductible in the following 10 years).
Foundations are considered as final consumers unless they carry out economic activities. They do not have the opportunity to claim VAT back.
– Cabra de Luna, M.A., “Giving to foundations in Spain: An Outline of Fiscal Benefits”, in: Social Economy and Law (SEAL), Autumn 2000, vol. 3 No.2, European Foundation Centre (editor), Brussels/Poland, 2000
– Confederación Española de Fundaciones, Manual práctico de fundaciones y de incentivos fiscales, Confederación Española de Fundaciones (editor), Madrid, 1999
– De la Cueva, A., in: The Tax Treatment of Cross-border Donations-Including the Tax Status of Charities and Foundations, Bater, P. (editor), International Bureau of Fiscal Documentation, loose-leaf, Amsterdam, 1994-2001
– Fraguas Garrido, B., “Steuerliche Privilegien sind an Voraussetzungen gebunden”, in: Deutsche Stiftungen, Bundesverband Deutscher Stiftungen e.V. (editor), 3. Ausgabe, Berlin, 2001, pp. 74-75
– Garcia-Andrade, J., La fundación: Un estudio jurídico, Escuela Libre Editorial (editor), Madrid, 1997
– Ruiz Olabuénaga, J. I., in: Foundations in Europe. Society Management and Law, Schlüter, A., Then, V. and Walkenhorst, P. (editors), London, 2001, pp.223-232
Associación Española de Fundaciones
General Castaños, 4