Swiss Foundation: From wallflower to high-flyer

The Swiss foundation may seem a bit "old-fashioned" and "unfashionable" to some people. But a look at the foundation landscape shows a completely different picture. Since 2000, 51.8 % of all Swiss foundations have been established (source: Der Schweizer Stiftungsreport, Volume 21, p. 6). This momentum will continue and the reasons for this are as varied as the many different areas in which Swiss foundations are active.

ecosystem foundations: Innovation ecosystems have become part of the growth strategy in many industries. This is always the case when it comes to the upstream development of an innovation and not directly to vertical value creation. Complex technology in a volatile technological environment favors the cooperation of different participants in innovation ecosystems. Innovation ecosystems are not regulated by law, and in many cases such forms of economic cooperation cannot be categorized within existing types of legal entities. Nevertheless, the following elements are essential for innovation ecosystems: (i) Individual value creation of the participants; (ii) their linking and (3) the coordination via an orchestrator. Foundations come into play as orchestrators when there is a desire to make the management of the ecosystem independent of their participants. Recently, so-called DLT-ecosystems have made headlines. These are innovation ecosystems that develop a blockchain application as a new innovation and at the same time use this development to link the ecosystem participants (tokens). Thus, essential parts of ecosystem governance can be automated (on-chain transactions). The advantages of such blockchain based transactions are also applicable for all other innovation ecosystems, which recognize the automated interaction or linking of participants as an advantage. It is therefore to be expected that innovation ecosystems will not abandon the use of foundations and the issuing of tokens in the future. For Switzerland, this development has only just begun and holds enormous potential.

Making the legal framework more flexible: With its highly developed philanthropy sector and as a location for international nonprofit organizations, Switzerland as a foundation location enjoys global significance. The Luginbühl initiative proposes the creation of institutional and legal frameworks that aim to consolidate this position in the future. The Legal Commission of the Council of States has opened a consultation on the preliminary draft and explanatory report on the Luginbühl parliamentary initiative. The consultation period lasted until 13 March 2020, and the cantons, political parties and other interested organizations were able to comment on the draft. The tax privilege for donations from the estate is welcomed by a majority and the simplifications and facilitations in the area of organizational and statutory changes are welcomed by a majority. It can be assumed that these changes will have a positive impact on the Swiss foundation location.

Taxes: As of 1 January 2021, the Federal Tax Administration, Department of Value Added Tax (FTA) will adapt its practice in the area of international development cooperation and humanitarian aid. According to the old practice, the usual VAT rules will apply to charitable foundations. Swiss service providers invoice their services to the foundation with VAT (currently 7.7%) and when purchasing services from abroad, the Swiss foundation must invoice the purchase tax (currently 7.7%). The VAT thus results in an additional final cost block for the funding foundations. The change in practice as of 1 January 2021 will have positive effects for most of the charitable foundations. In the future, grant-making foundations will not have to pay VAT (for domestic service providers) or subscription tax (for foreign service providers) on services that they receive in Germany or abroad and that are related to a specific project in a developing country. The project must meet the definition of development cooperation and humanitarian aid and may not directly or indirectly promote or support the entrepreneurial activities of the founder or a recurring donor. The change in practice thus eliminates the additional VAT costs and more funds are left over to fulfill the actual purpose of the foundation.

Corporate Foundations: The academic discussion about foundations with an economic purpose, foundations holding corporations and corporate foundations and the economic purpose of foundations in general has been concluded and the corresponding practice has become established. Both, companies and individuals have thus gained an important investment alternative for new entrepreneurial and social fields of activity. In the context of tax exemptions for corporate foundations, supervisory authorities are placing increasing emphasis on the regulatory framework for the management and supervision of corporate foundations (foundation governance) and are recognizing that corporate foundations can and should operate successfully in business. This change in perspective will have an enormously positive effect on the foundation landscape.

Foundation hubs: The cantons of Berne, Geneva, Zurich and Zug are developing in various segments into veritable foundation hubs, with an incredible pull effect on international foundation projects. Authorities in these cantons have experience in dealing with Swiss and foreign donors. The overall social potential of this pull effect has been recognized and is leading to an "it works" mentality.

All these reasons lead to a tendency towards Swiss foundations. However, through our practical activities in the field of foundations, we also see the continuing challenges for the foundation location to become more flexible. At present, a working group at MME in the fields of law and taxes is dealing with Circular Letter No. 12 of 8 July 1994, FTA, tax exemption for legal entities, the practical advice of the Swiss Tax Conference and the various cantonal regulations. Certain conditions for tax exemption should be examined from our point of view. This is especially true in the area of corporate foundations.

As the founder of a foundation or as the responsible bodies for your foundation, you have an interest in ensuring that the foundation/trust sustainably fulfils its purpose in the desired or given context, whether as a corporate foundation or inheritance planning instrument, DLT foundation/ecosystem/block chain, charitable foundation/NPO or investment foundation/employee pension plan. MME supports you in all legal areas of the foundation context: foundation law, inheritance law, block chain/financial market law, tax law, employee pension law. We provide you with all the services you need for your foundation project and foundation governance, from the conception phase and establishment to the start of operations and liquidation/ dissolution. MME has extensive knowledge and practical experience of the legal foundations, the relevant judicial and official practice and the relevant market events. We know the best practice examples and are able to embed them in a broadly based bench marking for your project. MME one for all.

September 2020 | Authors: Thomas Müller, Roland Reding

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