The main legal forms of not-for-profit organizations (NPOs) under German law are the (1) the formal association, (2) the formal foundation, (3) the limited liability company, (4) the informal association, and (5) the informal foundation.
Other forms of NPOs are outside the focus of this Note due to their limited interaction with foreign grantmakers. Such forms include public institutions (Anstalten des öffentlichen Rechts), foundations established under church law and public law, cooperatives (Genossenschaften, which are formed and regulated under the Genossenschaftsgesetz) and joint stock companies (Aktiengesellschaften, which are formed and regulated under the Aktiengesetz).
B. Tax laws
All NPOs can enjoy special tax privileges if they meet the specific requirements of the law governing tax-exempt organizations (Sections 51 et seq., General Tax Law (Abgabenordnung)).
II. Applicable Laws
German Constitution (Grundgesetz-GG), Article 9. (German) (English)
German Federal Civil Code (Bürgerliches Gesetzbuch or BGB), Second Title, Legal Entities, Chapters I (associations), II (foundations) & III (public law juridical entities). (German) (English)
Law on Limited Liability Companies (GmbH-Gesetz)
Civil Code (Bürgerliches Gesetzbuch, BGB), as amended, Sections21 et seq. (Associations), Sections80 et seq. (Foundations).
General Tax Code (Abgabenordnung, AO) of 1976, as amended, Section 51 et seq. (tax-privileged purposes). (German) (English)
Corporate Income Tax Law (Köperschaftssteuergesetz, BGBl. I. S. 817) of 1999, as amended, Section 5 (exempt organizations) & Section 9 (deductions for donors). (German)
Commercial Tax Law (Gewerbesteuergesetz) – a tax imposed by the municipalities, Section 3 No. 6 (exempt organizations) & Section 9 No. 5 (deductions for donors). (German)
Income Tax Law (Einkommensteuergesetz, BGBl. I S. 821) of 1997, as amended, Section 10b (tax incentives for individual donors). (German)
Inheritance and Gift Tax Law of 1997 (Erbschaftsteuer- und Schenkungsteuergesetz BGBl. I S. 378), Section 13 & 29 (tax exemptions). (German)
Value Added Tax Law (Umsatzsteuergesetz) of 1999, Section 4 (tax exemptions), Section 12 (tax relief) (German)
Laws on Foundations of the following German Bundesländer (states):
There are five main legal forms of NPOs under German law: (1) the formal association, (2) the formal foundation, (3) the limited liability company, (4) the informal association, and (5) the informal foundation.
The law regarding associations and foundations is set forth in the second Book of the Civil Code, and the Law of the Limited Liability Company is set forth in a special Law (GmbH-Gesetz).
Formal Associations (eingetragene Vereine)
A formal association is a membership organization with a general meeting of members and a board of directors, usually appointed by the general meeting of members.
In order to establish an association, (1) at least seven members have to finalize the statutes of the association, (2) the general assembly must meet and appoint the first board director, and (3) the association has to be registered by the court. The competent court has to register the association if the legal requirements are fulfilled. The most important legal requirement in practice is the prohibition against having “the object of commercial business” (Section 21, Civil Code) (see infra D(1)).An initial endowment is not necessary.
In terms of internal governance, the legislation governing associations is generally flexible. Most rules are not mandatory, and they can be modified by the articles of association. Associations must have a general meeting consisting of the members of the association and a board of directors usually elected by the general meeting. It is possible for there to be only one board director. Other organs (supervisory board) or auditors are not mandatory.
A formal foundation (Stiftung) established under Articles 80-88 of the BGB (Stiftungen bürgerlichen Rechts) is a legal person without membership whose earnings on assets are used to pursue a specific purpose set forth by the founder.
As a rule, a formal foundation may pursue any lawful purpose. There are few mandatory rules for the internal governance of a foundation. It has no membership and consequently no general meeting. It is possible to have only one board director, and the director can also be the founder. A foundation is supervised by the state supervisory authority at the provincial level (details of state supervision areregulated by the state’s foundation laws).
The following are the requirements to establish a foundation:
(1) the foundation deed, which can be issued inter vivos by a written declaration or mortis causa in the legally required form for a “last will and testament”;
(2) the draft of the foundation’s statutes;
(3) an initial endowment which is adequate for the fulfilment of the purpose;  and
(4) an approval of the state supervisory authority. This approval, however, is not discretionary; the state supervisory body must approve the formation if the legal requirements are met.
Limited Liability Companies (Gesellschaften mit beschränkter Haftung, GmbH)
The limited liability company is a commercial company with legal personality. It has stock originating from its shareholders. The shareholders are not liable for the debts of the company. NPOs often choose this legal form when their purpose includes the delivery of services without remuneration. It is established when the shareholders have finalized the statutes of the company, appoint a first board director, provide a minimum capital of at least 25,000 euro (approximately $30,000) and the company has been registered by a court.
It is also possible to establish a not-for-profit company because the shareholders are free to decide upon the purpose of the limited liability company, which can be a not-for-profit purpose, such as a charitable or public benefit purpose.
The shareholders who establish a charitable limited liability company must convene in the general meeting and appoint a board director to lead the (non-profit) limited liability company and represent it in external relations determined by the shareholders. The general meeting supervises the activities of the board director and is empowered to dismiss him or her.
In practice, charitable limited liability companies are mainly used as a subsidiary company of an association or a foundation in order to carry out economic activities by the subsidiary company.
Theoretically, a Business Company (Aktiengesellschaft) can be used as an NPO under the same conditions, but in practice this is very seldom because it is easier to establish a limited liability company.
Informal Foundations (unselbständige Stiftungen)
The informal foundation is not explicitly regulated by law. It is regarded as a specific kind of a gift contract (under several conditions) between the founder and another person who, as a so-called “Rechtsträger”, is responsible for the informal foundation.
In order to establish an informal foundation the participation of a public authority is not needed. In addition, an initial endowment is not needed and the informal foundation is not under the review of the state supervisory authority.
However, according to a local expert, the lack of legal personality of the informal foundation means that issues can arise regarding the legal capacity and the separation of assets between the institutions and its organs (members, directors).
Informal Associations (nicht-eingetragene Vereine)
An informal association is treated like a partnership. Traditionally, an informal association was believed to have no legal personality, but now the prevailing view is that the informal association has legal personality (Section 54, Civil Code).
B. Public Benefit Status
All of the legal forms of NPOs described in this Note generally can be established for any lawful purpose. There is no specific legal form for charitable or public benefit organizations under German law.
A special regime for public benefit organizations can, however, be found under German tax law: Every NPO can enjoy special tax privileges if it meets the specific requirements in Sections 51 et seq. of the General Tax Law (Abgabenordnung, AO). This includes the promotion of a public benefit purpose and a number of further requirements regarding the usage of funds.
The General Tax Law contains an exhaustive catalogue of purposes that are regarded as public benefit purposes (Section 52, para 2). Since 2007 the catalogue is generally closed and includes the promotion of the following purposes: (1) science, (2) religion, (3) public health care, (4) youths and older persons, (5) arts and culture, (6) historical preservation, (7) education, (8) environmental protection, (9) public welfare, (10) victims, handicapped people, and political persecuted people, (11) lifeguards, (12) prevention of injuries, (13) international understanding and tolerance, (14) animal protection, (15) development aid, (16) consumer protection, (17) rehabilitation of prisoners, (18) emancipation of genders, (19) marriage and family, (20) prevention of crimes, (21) sports (including chess), (22) local history and geography, (23) animal husbandry, plant breeding, allotments, traditional customs (including Carnival), troop entertainment, amateur radio, model airplane and dog sports, (24) the democratic political system in Germany, and (25) civic commitment for public benefit purposes.
Additional purposes can be added by a specific administrative procedure, but the interest of the public must be promoted (Section 52, para. 1). This means that the potential beneficiaries must not be restricted by private criteria (such as limiting beneficiaries to family members). The assistance of people in need is also (Section 53) and the support of religious organizations (Section 54) are also accepted as public benefit purposes.
Tax-exempt organization are required to observe: (1) a duty of loyalty, including a prohibition of private distributions to members or board members and a prohibition of excessive salaries or excessive compensation to any party, (2) a rule of timely disbursement, and (3) the rule that a tax-exempt organization must not “in the first line promote its interests or the economic interests of its members” (Section 55). 
IV. Specific Questions Regarding Local Law
The prohibition on private inurement is specified for tax-exempt organizations that meet the requirements for tax privileges in the General Tax Law:
The assets of the organization must be used exclusively to pursue the public benefit purpose (Section 56). Consequently the members of associations, shareholders of companies, and founders of foundations and their heirs must not receive distributions from the organizations to which they belong or which they founded (Section 55, para. 1). Additionally, there is a prohibition on receiving a private benefit from a tax-exempt organization, including excessive salaries or providing inadequate consideration in transactions (Section 55, para. 1). There is only one exemption to this rule: A foundation is allowed to use up to one-third of its income to support the founder and his or her close relatives adequately, or to maintain their graves (Section 58)
B. Proprietary Interest
A tax-exempt organization has to promote its public benefit exclusively and private distributions to members, shareholders, the founder, or third parties are generally prohibited (Section 56). Foundations may, however, spend up to one-third of their income to support the founder and his or her close relatives, or to care for their graves and the remembrance of the founder (Section 58).
If a tax-privileged organization is dissolved, either voluntarily or involuntarily, the remaining assets must be used for similar purposes. The merger of foundations is also possible.
In case of dissolution of a tax-exempt organization, the remaining assets must be used solely for tax-privileged purposes. This requirement is met if remaining assets are transferred to an organization pursuing tax-privileged purposes or to the state for pursuit of tax-privileged purposes (Article 55 AO).
In the case of an NPO formed as a corporate enterprise, shareholders can receive a return of no more than their capital contribution and the fair-market value of their in-kind capital contributions; the remaining assets must then be distributed for tax-exempt purposes.
1. General Activities
German NPOs are generally permitted to engage in all lawful activities. 
2. Public Benefit Activities
A tax-exempt organization has to promote a public benefit purpose. Consequently all activities promoting this purpose are allowed.
3. Economic Activities
German NPOs may engage in economic activities. If an activity is necessary to pursue the organization’s statutory purpose and it does not compete with for-profit organizations more than necessary, profits are not taxed and VAT is reduced to 7% (so-called “Zweckbetrieb,” Section 65). Commercial activities which are not necessary to pursue the statutory purposes of the NPO are taxed at ordinary rates if the annual gross income of non-statutory commercial activities exceeds 35,000 euro (approximately $43,000) (Section 64). In addition, unrelated economic activities (with the aim to increase the assets to be used for the public benefit purpose, so-called “wirtschaftlicher Geschäftsbetrieb”) are allowed, but it is necessary that a long-term profit is generated.
E. Political Activities
Tax-exempt organizations must not spend any of their assets for the direct or indirect support of political parties (Section 55 para. 1). Thus, the support of an election campaign is not allowed. However, tax-exempt organizations are not prohibited from attempting to influence legislation if the campaign does not directly or indirectly support a political party. An organization is allowed to comment on politics related to its public benefit purpose and is allowed to communicate with legislators about proposed legislation without losing tax-exempt status.
Tax-exempt organizations have to respect the main values of the German constitution as well as international agreeements (Section 51 para. 3). In addition, the General Equal Treatment Law (Allgemeines Gleichbehandlungsgesetz AGG) since 2006 has generally prohibited discrimination because of race, gender, religion or ideology, handicap, age, or because of sexual preference.
G. Control of Organization
The limited liability company is controlled by its shareholders in the general meeting.
From a legal point of view the (formal and informal) association is controlled by its members in the general meeting. In practice, the board of directors, however, may have significant authority over decisions.
In case of the (formal and informal) foundation there is no membership. As foundation law is comparatively flexible, the articles of association of the foundation can provide for different governance models, such as a board of directors or a supervisory board with significant competences.
Associations and foundations are not companies; therefore there is no possibility that single private persons or entities can obtain ownership in a legal sense as members. The law does not, however, prevent other organizations or persons from controlling NPOs.
V. Tax Laws
A. Tax Exemptions
The Corporate Income Tax Law (Körperschaftsteuergesetz, KStG) differentiates four categories taking into consideration the different sources of the fund (Section 9, para. 1):
Non-material (“idealistic”): This includes income in the form of membership fees. This form of income is generally exempted from income tax. However, income tax is imposed on “hidden considerations”, such as membership fees paid for consideration of services or goods received (a problem of delimitation exists here).
Earnings derived from asset management (investment) (“passive earnings”): This includes returns from investment in interest-yielding bonds, shares, real estate, etc. This form of income is also generally exempted from income tax.
Earnings derived from purpose-related economic activities. This is aimed at achieving the purpose of the tax-exempt organization (“Zweckbetrieb”). This form of income is exempted from income tax as long as there is no distortion of competition. In several cases the law explicitly accepts some activities as purpose-related, independent of the question whether there is a distortion of competition (such as hospitals, youth hostels).
Earnings derived from other (not purpose-related) economic activities. This includes, for example, a tax-exempt organization holding the controlling shares of a noodle-producing company (“wirtschaftlicher Geschäftsbetrieb”). This form of income (in the example provided, share dividends) is subject to income tax. However, there is a tax-free allowance of 35,000 euro (approximately $45,000) per annum of the gross earnings.
It follows that tax-exempt organizations in Germany are subject to income taxation when the income is generated from economic activities unrelated to the purpose of the organization.
B. Deductibility of Donations
Individuals as well as corporations may deduct donations that are made to tax-exempt organizations to be used for public benefit purposes from their personal (corporate) income tax expenses and from commercial tax expenses (Section 10b, Income Tax Law; Section 9, Corporate Income Tax Law; Section 9, Commercial Tax Law).
The allowance is limited to 20% of the yearly income or – for enterprises – 4% of the sum of gross revenue and salaries per annum. Donations exceeding the deductible limits may be carried forward to subsequent fiscal years.
Since 2000 there has been a specific tax benefit for donations to foundations (with or without legal personality) if the donation was made by an individual person (not by a company). Apart from the 20% limit, an initial or subsequent donation to the endowment of a foundation up to one million euro (approximately $1.2 million) can be deducted from the personal income tax over ten years.
The recipient tax-exempt organization has to be either a German organization or a foreign organization based in in one of the EU member states, or in one of the states of the EEC (European Economic Community including Norway, Iceland and Liechtenstein), which meets all the requirements for the tax-exemption under German law. Originally only donations to German organizations could qualify, but because of the decision of the European Court of Justice (ECJ) in the Persche Case (27.1.2009 C-318/07), the German law had to be amended in 2010.
C. Gift and Inheritance Tax
Inheritance tax or a gift duty is levied at a progressive rate on the transfer of property to a German foundation, except when the donation is to pursue qualifying tax-privileged purposes. This exemption also applies to donations made to foreign organizations in cases of tax reciprocity. A complete exemption from inheritance tax is also given when the inheritance is passed on to a tax-privileged purpose foundation within two years after the succession. (Article 13, Section 1 and Article 29 Section 1 of the Inheritance and Gift Tax Law of 1997.)
D. Value Added Tax (VAT)
Germany generally subjects the sale of goods and services to Value Added Tax (VAT). There are certain exemptions and reductions.
The delivery of certain goods or services in the not-for-profit sector is generally exempt from the VAT (independent from the fact whether the supplier is a tax-exempt organization or not) (Section 4, VAT Law (Umsatzsteuergesetz)). Examples are hospitals (Section 4, No. 16, VAT Law), cultural institutions (theatre, opera, zoos, etc., Section 4, No. 20, VAT Law), private schools and educational institutions (Section 4, No. 21, VAT Law), lectures, classes, and other scientific or educational events (Section 4, No. 22, VAT Law).
reduced VAT rate of 7% (instead of 19%) is applied to taxable remunerations for the delivery of goods and services from a tax-exempt organization, as long as they are not to be regarded as unrelated economic activities (wirtschaftlicher Geschäftsbetrieb; Section 12, No. 8, VAT Law).
E. Other Taxes
Tax-exempt organizations generally do not have to pay commercial tax (Gewerbesteuer) (Section 3, No. 6 Commercial Tax Law). Only in the case of unrelated economic activities (wirtschaftlicher Geschäftsbetrieb), will there be a partial taxation in order to avoid distortion of competition.
Wealth tax (Vermögensteuer) was abolished in 1997.
F. Double Tax Treaties
Germany and the United States have signed a double-tax treaty.  Under Article 27(1) of this convention, a German organization which operates “exclusively for religious, charitable, scientific, educational, or public purposes”, will be exempt from U.S. income tax if it is recognized as tax-exempt in Germany and the items of income would be exempted from U.S. tax if the charity were a U.S. charity. This benefit is not subject to the “limitation of benefits” for non-profit organizations under Article 28(2)(d) of the Treaty. Under Article 27(2), there are reciprocal provisions relating to German income tax on U.S. public benefit organizations. None of the provisions in the convention allow a donor of one country to deduct from income a contribution made to a tax-exempt organization of the other country.
An exemption comparable to the aforementioned exemption also exists under Article 10(2) of the U.S.-Germany Estate and Gift Tax Treaty with regards to Gift and Inheritance Tax. 
 According to the wording of the law, the permanent and sustainable promotion of the foundation’s purpose must appear to be guaranteed (Section 80 para. 2, Civil Code). Thus, there may be subsequent donations that increase the endowment. In practice, an initial endowment of at least 100,000 euro (approximately $130,000) will generally be regarded as sufficient.
 There is only one exception: a formal association is not allowed to have “the object of commercial business” (Section 21, Civil Code).
 Other requirements are that in case of liquidation, the remaining assets have to be spent to another tax-exempt organization and that a tax-exempt organization must promote the purpose directly. However, there are several exemptions from that rule (e.g. for grant-making organizations). There are also some formal requirements: the statutes of a tax-exempt organization have to refer to some of the fundamental rules of the tax law requirements (e.g., in case of liquidation, the remaining assets will be transferred to another tax-exempt organization (Sections 60, 61).
 Convention between the Federal Republic of Germany and the United States of America for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital and to certain other taxes; in consideration of the protocol amending the convention signed on June 1, 2006
 For more information, see the Convention between the Federal Republic of Germany and the United States of America for the Avoidance of Double Taxation with respect to taxes on estates, inheritances, and gifts. The newest version is dated December 21, 2000.