In 2023, the cantonal government of Zurich decided to implement a "foundation strategy" for Zurich and make it a more attractive location for foundations. On the basis of a professional analysis, the Zurich government introduced various measures to achieve this goal. One of the most important was to improve the tax environment for charitable foundations and associations. To this end, the cantonal tax authority has now changed its practice as follows:
An “adequate remuneration” for members of the foundation board of charitable foundations is no longer an obstacle to their tax exemption. With regard to the criterion of "adequacy" of such remuneration, the cantonal tax authority will generally rely on the opinion of the relevant foundation supervisory authority and assume that it has audited the remuneration of the members of the foundation board and considered it as adequate. The cantonal tax authority will only apply its own assessment if the renumeration appears as excessive and therefore abusive. Even in such cases, however, it will primarily obtain and rely on an opinion from the competent foundation supervisory authority.
Therefore, the foundation supervisory authority will have to develop a practice on the adequacy of remuneration of the members of the foundation board for tax-exempt charitable foundations. According to an expert opinion given to the Canton of Zurich, an adequate remuneration needs to be in line with the market practice and must be reasonable, i.e. "time and performance oriented". These criteria have to be assessed on a case-by-case basis. In general, we consider a remuneration as in line with the market as long as the foundation's funds are not used inappropriately.
In the case of non-profit associations (and other organisations) whose remuneration conditions are not assessed by an independent supervisory authority, the cantonal tax authority will examine the adequacy of remunerations itself. However, on the basis of the principle of equal treatment, it is to be expected that the cantonal tax authority will align its practice with that of the foundation supervisory authority.
Furthermore, for terms of tax exemption, foreign charitable activities of Zurich foundations will be treated in the same way as activities in Switzerland. Activities abroad are possible regardless of the type and location of the activity, provided that they appear “worthy” from a general perspective of Swiss society and the “loss” of tax revenue associated with the tax exemption can be considered reasonable. Thus, the activities abroad must be charitable and have a positive impact in or for Switzerland or must at least be perceived as “worthy” from a Swiss perspective.
Finally, entrepreneurial financing models (loans, equity investments, convertible loans) are generally considered compatible with tax exemption, even if a return of funds (repayments and interest on loans, income from equity investments, profit sharing) to the non-profit organisation is possible. However, such funds may only be used in areas where there is (as yet) no market, and pure profit-oriented third parties would refrain from similar specific investments. Moreover, any investments are only accepted within the scope of the actual funding activity.
These new tax practices are very welcome. They foster and promote a modern and efficient foundation system in Zurich. Further information can be found in the relevant press release of the Department of Economic Affairs of the Canton of Zurich.
MME's foundation law team is well prepared to answer any arising questions on these innovations. We are happy to assist you in any matters concerning foundations and look forward to hearing from you.
