ICAEW Switzerland - Impact Investing event - FRORIEP Julie Wynne

Bridging the Expectation Gap between the
private and not-for-profit sector
Foundations in Switzerland
Julie Wynne
Partner, Froriep
6 February 2018 | Page 1

I. Introduction
II. Organisation
III. Tax treatment
IV. Anti-Money Laundering Regulations
V. Family Foundations
VI. Conclusion
1 March 2018 | Page 2

I. INTRODUCTION
 13,172 charitable foundations registered in Switzerland as of end 2016, more than 50% of
them have been established in the past 20 years. 349 new foundations established in 2016
 A foundation is established by the endowment of assets for a particular purpose (art. 80ff
CC):
 the intention to establish a foundation
 a purpose
 assets
 an organization.
 Established by public deed or testamentary provision
 The foundation has no members.
 Great flexibility for the organization of the foundation in the Articles of Association and
internal regulations

I. INTRODUCTION

II. ORGANISATION
 Swiss foundations law allows for great flexibility in respect of organization
 Freedom to determine the purpose of the foundation: public benefit, solely private or mixed
purpose
 Organizational rules provided for in the Foundation's Articles of Association.
 Two compulsory bodies: (i) the Foundation Board and (ii) the auditors.

II. ORGANISATION
a. Foundation Board
 Governing body of the foundation, which manages its activities and affairs
 Minimum of three Board members
 At least one Board member must be Swiss or EU/EFTA national and domiciled in
Switzerland.
 Initial Foundation Board usually appointed by the founder
 By-laws can also provide that third-party institutions have the power to appoint one or more
Board members.
 Ad hoc committees / advisory boards / executive bodies can be established

II. ORGANISATION
b. Auditors
 Accounts should be prepared according to commercial standards (balance sheet; profit &
loss accounts) and submitted annually to the Supervisory Authority.
 General obligation to appoint an independent auditor for a limited audit, unless:
 Ordinary full audit required if the Foundation exceeds two of the following values in
two consecutive business years:
 total assets of CHF 10 million;
 revenue of CHF 20 million;
 an annual average of 50 full-time fee-earners
 Opting-out with the approval of the Supervisory Authority when:
 the foundation does not solicit public funding and
 its total balance sheet for two successive years amounts to less than CHF
200,000.

II. ORGANISATION
c. Supervision
 Placed under the supervision of Swiss public authorities which can be federal or cantonal
depending on the nature and the scope of the Foundation’s purpose:
 Cantonal Supervisory Authority for foundations with activities on a local and
cantonal level
 Federal Supervisory Authority for foundations with activities on a national or
international level
 Ecclesiastical and family foundations are not subject to supervision
 The Supervisory Authority
 acts at its own initiative or further to a complaint
 monitors the Foundation to ensure that it carries out its activities in accordance
with its purpose, the will of the founder and complies with the law
 reviews the audited annual accounts and the annual report of the Foundation
 can sanction any committed misconduct.

II. ORGANISATION AND PURPOSE
d. Liabilities
 Foundation: As a legal person, the foundation is liable towards third
parties with its own assets.
 Foundation Board:
 The Board members are liable internally (towards the foundation). So if the foundation
suffers any damages, it can sue the Board members if they have breached any of their
due diligence duties or made any unlawful acts;
 The Board members and other officers are also personally liable towards third parties
for their wrongful acts.

III. TAX TREATMENT
a. General
 Same taxation as corporations.
 Corporate income tax is levied on the federal, cantonal and municipal level at a variable
rate depending on taxable income, the maximum tax rate on profit being, in Geneva, of
about 22%.
 Capital tax is levied on the cantonal and municipal level at variable rate depending on
taxable capital, the maximum tax rate being, in Geneva, of about 0.95%.
 Subject to VAT
 VAT exemption is not possible.
 If the foundation benefits from tax exemption
 the minimum annual turnover that gives rise to VAT is CHF 150,000.
 below this amount a not-for-profit foundation is not subject to VAT.

III. TAX TREATMENT
b. Tax exemption
 Charitable foundations can apply for tax exemption based on their public interest purpose.
 Conditions for the tax exemption:
 The foundation must serve a public interest purpose, e.g. charitable, humanitarian,
healthcare, ecological, educational, scientific and cultural purposes. The number of
beneficiaries of must not be limited.
 It must actually carry out its public interest purpose.
 It must not have an economic purpose. However the foundation may have commercial
activities as long as they are secondary to the activities for the public benefit and any
revenue therefrom shall be used to serve the public benefit purpose of the foundation.
 The members of the Foundation Board shall as a rule not be compensated.
 In the case of the foundation being dissolved, the assets should be allotted to a not-for-
profit entity pursuing similar public interest purposes and benefiting from the tax
exemption.
 The assets cannot be returned to the founders, nor be used to their own profit.

III. TAX TREATMENT
c. Donors
 Contributions from foreign tax residents are not subject to Swiss gift tax but to the taxes in
their country of residence.
 Transnational Giving Europe (http://www.transnationalgiving.eu): European network
which offers the possibility for a foreign donor to benefit from tax deductibility for a gift
to a Swiss foundation.
 Lifetime gifts made by individuals to tax-exempt organisations with seat in Switzerland are
deductible from the income up to 20% of the income less the statutory deductions (on a
federal level and on the cantonal level in Geneva). The same applies to gifts made by legal
entities to charities.
 Testamentary gifts are not subject to estate taxes if made to charities with seat in
Switzerland and which have been granted with a tax exemption due to their public purpose.

IV. ANTI-MONEY LAUNDERING REGULATIONS
a. Article 305bis para 1 of the Criminal Code
 As of 1 January 2016, new Article 305bis para. 1 of the Criminal Code: “ Whoever carries
out an act that is aimed at frustrating the identification of the origin, the tracing or the
confiscation of assets which he knows or must assume originate from a felony, or
aggravated tax misdemanour is liable to a custodial sentence of up to three years or to a
monetary “penalty.”
 Qualified tax evasion and tax fraud will constitute a predicate offence to money laundering if
the annual amount of evaded taxes is in excess of CHF 300,000. Money laundering will
become open to prosecution in Switzerland even if the predicate offence was committed
abroad.
 No direct application of the Anti-Money Laundering Act to foundations or to their corporate
bodies as they are not financial intermediaries (Art. 2 AMLA).

b. Issues
 Two issues to consider:
 Source of funds: founder / individuals / legal entities (see SwissFoundations Rec.
n°23)
 Allocation of funds: Beneficiaries located in Switzerland / Beneficiaries located abroad
 Efforts from the Board should be restricted to what is reasonable, even if this leads to a
position in which it cannot achieve absolute certainty.
 Above and beyond the statutory compliance, the Board must also focus its examination on
whether the origin is ethically problematic. It is recommended to establish guidelines for the
treatment of assets from ethically dubious sources which specify whether such assets
should be accepted and how and for what purpose they should be used in cases of
acceptance.

c. Source of funds
 Source of funds
 Donations with unclear or anonymous source of funds (doubts on the
beneficial owner). Duty of the Board to clarify the origin of large contributions.
 Donations of assets which were potentially undeclared. The Board has no
obligation to examine whether donated assets have already been taxed and also
has no duty to refuse assets that it knows to be untaxed.
 Donations coming from a potential criminal offense. The Board shall refuse
any contribution coming from a criminat origin.

d. Allocation of funds
 Analysis of the risks: money laundering, terrorism financing, breach of economic
sanctions
 Identification of indicia:
 Incomplete or contradictory information on the beneficial owners,
 Payments in cash,
 Significant payments on the bank accounts of the management of the NGO,
 Frequent cash payments in high risk countries
 Recommendations:
 Clear identification of the beneficiaries
 Monitoring of donations and reporting
 Use of banking payment and avoiding financial intermediaries and money-
transmitters
 See example of Voluntary best practices for U.S.-based charities

V. FAMILY BUSINESSES AND THE ROLE OF FOUNDATIONS
 Family businesses = a family owns a significant share and can influence important
decisions, particularly the election of the chairman and CEO.
 As family businesses expand from their entrepreneurial beginnings, they face unique
performance and governance challenges:
 The generations that follow the founder, for example, may insist on running the
company even though they are not suited for the job.
 And as the number of family shareholders increase exponentially generation by
generation, with few actually working in the business, the commitment to carry on as
owners can’t be taken for granted.
 Less than 30% of family businesses survive into the third generation of family
ownership.

V. FAMILY BUSINESSES AND THE ROLE OF FOUNDATIONS
 Company affiliated foundations are neither regulated nor mentioned in the Swiss foundation
law but are a common feature in practice.
 Three types:
 Directly supporting foundations (Unternehmensträgerstiftung): they conduct a
commercial, manufacturing or other business in the pursuit of an economic or non-
economic purpose and are therefore directly the responsible body of the enterprise
itself (e.g. schools, foster homes);
 Holding foundations (Holdingstiftung): foundations holding a significant share in a
corporation which operates a commercial business;
 Corporate foundations (Unternehmensstiftung): foundation established by a company
to support its philanthropic activities. It derives the majority of its income from that
company.

Thank you for your attention

JULIE WYNNE
 Julie advises parties on Swiss and international estate planning. She also provides advice
in the field of wills, probate and estate administration, application of international
succession laws, including international inheritance and tax issues
 Julie advises non-profit organisations, B Corps and social enterprises for their set-up and
tax issues and assists them with mergers, reorganisations, joint ventures and other forms
of collaborative working, as well as constitutional reviews.
 In addition, she regularly provides advices on grant-making, fundraising, intellectual
property, corporate philanthropy and governance.
 Julie is a Board member of the European Social Enterprise Law Association and of B Lab
(Switzerland).
 She is a member of the Legal Advisory Board of Sustainable Finance Geneva and of the
STEP Philanthropy Advisors SIG Steering Committee.
Julie is specialised in all aspects of international estate
planning and non-profit organisations.
jwynne@froriep.ch | Geneva Office | +41 22 839 63 00

CHARITY AND SOCIAL ENTERPRISE
We act for a diverse range of charities, not-for-profit
organisations and social enterprises.
Philanthropy and social enterprise require detailed knowledge of a wide
range of legal disciplines including private client, commercial, corporate
and tax law as well as social finance. We take pride in being able to
offer the full service. With in-depth experience and expertise in these
fields and awareness of the very latest developments in the sector, our clients, donors and social
entrepreneurs, benefit from a realistic and pragmatic approach to problem-solving in this dynamic
environment.
Not-for-profit organisations and social enterprises can adopt a variety of legal structures (associations,
foundations, cooperatives, corporations). We are experienced in all of these structures and so are well able
to advise on the principles applying to each. We can carefully guide you through the formation process and
the establishment of good governance policies and practices. We also help boards understand their
fiduciary obligations and industry best practices so they can provide meaningful oversight to their
organizations.
Our Charity & Social enterprise team assists clients on a wide range of operational matters, such as
effective governance, mergers, fundraising, intellectual property, joint-ventures, as well as on all aspects of
charitable giving.
We have expertise in advising charities in an international context which includes charities undertaking
cross-border activities and foreign charities who wish to have a charitable branch in Switzerland.

ZURICH | GENEVA | ZUG | LONDON | MADRID

ICAEW Switzerland - Impact Investing event - FRORIEP Julie Wynne

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ICAEW Switzerland - Impact Investing event - FRORIEP Julie Wynne