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2008; 37; 709 originally published onlineNonprofit and Voluntary Sector QuarterlyAnita Dehne, Peter Friedrich, Chang Woon Nam and Rüdiger Parsche

Taxation of Nonprofit Associations in an International Comparison

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709

Nonprofit and VoluntarySector Quarterly

Volume 37 Number 4December 2008 709-729

© 2008 Association for Researchon Nonprofit Organizations and

Voluntary Action10.1177/0899764008315545

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Taxation of NonprofitAssociations in an InternationalComparisonAnita DehneIfo Institute for Economic ResearchPeter FriedrichUniversity of Federal Armed Forces MunichChang Woon NamRüdiger ParscheIfo Institute for Economic Research

The objective of this study is an investigation of tax regulations for nonprofit associa-tions (NPAs) in EU countries, Japan, and the United States. Following a brief descrip-tion of qualification principles for NPAs, treatment of business units, or liability issues,a particular focus is put on a comparison of regulations concerning the taxation of cur-rent profits, inheritance, and gift taxes and the tax treatment of contributions and mem-bership fees. In general, a strong similarity among the examined developed countriescan be found for the different aspects considered, but significant differences also exist.

Keywords: nonprofit association; taxation; international comparison

The nonprofit sector has grown steadily in most developed countries during thepast decades and is becoming increasingly more complex at the same time. One

of the most crucial factors in its expansion is the scheme of collective finance andprivate provision of key welfare state services. Such development has in turn stimu-lated academic and political interest in examining the economic significance andefficiency of the nonprofit sector, accompanied by the search for internal and exter-nal factors that determine such characteristics (Burger & Veldheer, 2001; Marcuello& Salas, 2001; Rose-Ackermann, 1996; Salamon & Anheir, 1996).

Most notably, conventional theory of voluntary provision of public goods sug-gests that if people are concerned with the total amount of a public service offered,they will treat government spending on such goods and services as substitutes fortheir own donations1 to the provision of similar services (Duncan, 2004; Romano &Yildirim, 2001; Simmons & Emanuele, 2004). In this context, a number of studiesrelated to the economics of nonprofit associations (NPAs) have examined the publicgoods crowding-out questions in various ways. In their theoretical research, Warr(1983) and Roberts (1987) predicted that a complete crowding out is likely to occur(e.g., one dollar of government subsidies will displace one dollar of donations) if

Research Note



710 Nonprofit and Voluntary Sector Quarterly

donors are pure altruists—that is, if their only concern is for the total amount ofpublic goods available. “As a result, a [‘pure’] public goods philanthropist prefers to‘free-ride’ off the gifts of others, that is, enjoy the supply of a public good withouthaving to pay for it” (Duncan, 2004, p. 2160).

Emphasizing the fact that donors have additional motives such as warm-gloweffects, Andreoni (1990) and Duncan (1999) argued for a fractional crowding-outbetween government spending on public goods and private donations. “The warm-glow utility specification introduces [a donor’s personal satisfaction derived fromhis] own contribution into the utility function, so that he gets utility not only fromthe total provision of public goods but also from his own contribution” (Romano &Yildirim, 2001, p. 424). Such a warm-glow private consumption model suggests that“one philanthropist’s gift does not necessarily affect the enjoyment others receivefrom giving. Consequently, a warm-glow philanthropist cannot free-ride off the giftof others” (Duncan, 2004, p. 2160). In this case government spending on publicgoods does not necessarily crowd out private donations one for one, although somedegree of crowding out is still likely (Simmons & Emanuele, 2004).2

On the other hand, the studies including Schiff (1985) and Brown (1997) as wellas Hughes and Luksetich (1999) demonstrate the possibilities of emerging crowding-in effects (see also Brooks, 2003). According to their main logic, an increase in gov-ernment spending on public goods can stimulate an increase in private donationsbecause donors assess the increased spending as a signal that their donations wouldnow be more effective and generate a higher marginal product. This basic crowding-in idea is also linked with the so-called impact philanthropy hypothesis that revealsthe negative gift externalities. According to this behavioral approach,

Rather than free-riding off the gifts of others, or being unaffected by them, giving byothers can reduce . . . charitable fulfillments of an impact philanthropist [whosedonation is motivated by his or her desire to personally make a difference, since, forexample, he or she] cannot enjoy saving children if other philanthropists save themfirst. (Duncan, 2004, p. 2160)

There are large numbers of prior publications that deal with the strengths and lim-itations of various nonprofit organizational forms, their financial and administrativeaspects, and the regulation of their activities (Rose-Ackermann, 1996). Yet, theessence of this form of institution is that a nonprofit association may not lawfullypay its profit to owners or indeed to anyone associated with the organization. Alongwith this restriction, however, there is a variety of tax and subsidy benefits that influ-ence a nonprofit’s actions (Weisbrod, 1988). For this reason, many recent discussionsof NPAs have centered on their tax advantage status (Glaeser & Shleifer, 2001;Weisbrod, 1988). In particular, a large number of empirical estimations show thatdonations and other types of charitable gifts are strongly responsive to these tax sub-sidies (Gruber, 2004; Wu, 2004).



Those tax subsidies applied to NPAs not only help to overcome free-rider tenden-cies but also affect the behavior of warm-glow and impact philanthropists whileincreasing organizational revenues in two ways.

First, the deductibility of donations on the donor’s individual income tax return stimu-lates giving because it reduces the after-tax cost to the donor. Second, the various taxsubsidies to the [nonprofit] organization increase the amount of output that a donor canbuy for any given donation. Both have the effect of rewarding people if they reveal—even partially—their willingness to pay for particular collective goods. (Weisbrod,1988, p. 29)

In these theoretical contexts one can also easily postulate that citizens’ voluntaryand charitable activities or their financial contributions help to relieve public budgetsbecause activities taken over by NPAs often mean that the government does not needto provide these collective goods and services. In times of tight public budgets, theactivities of civil society, namely, political, cultural, and social activities of the pop-ulation, gain importance. In addition to the positive externalities of these activities(Gruber, 2004), European policy makers aim to give stronger support to the provi-sion of several public goods and services by NPAs for this reason (Sargeant & Lee,2004). In particular, tax regulations are to be designed in such a way that the com-mitment of the population increases or is less strongly hindered.

The main objective of this study is a comparative investigation of tax regulationsfor NPAs in EU countries, Japan, and the United States. A systematic internationalcomparison of such institutional settings is rather rare in this public policy area. Inaddition to a brief description of the qualification principles for NPAs, the treatmentof business units, or the liability issues, a particular focus is put on a comparison ofregulations concerning the taxation of current profits, inheritance, and gift taxes andthe income tax treatment of contributions and membership fees. In general, a strongsimilarity between the examined countries can be found for the different aspectsconsidered,3 but significant differences also exist.

General Characteristics of Nonprofit Associations

First, their general characteristics can be determined with regard to the forms,kinds, and recognition principles of NPAs or nonprofit societies.4 These societies canbe incorporated or not, whereby both forms occur in all legal systems. Incorporatedsocieties have legal identity, whereby the same capacity to acquire and hold rightsand duties does not always result. In some countries, such as in Germany, the capac-ity to acquire and hold rights and duties is virtually unlimited as long as the organi-zation acts within the framework of its statutes. In other countries the capacity toacquire and hold rights and duties can be greatly limited. For example, in somecountries explicit permission of the responsible governmental agency is necessary

Dehne et al. / International Taxation Comparison 711



(e.g., Belgium) or the society must be recognized (e.g., Italy) for it to receive giftsor donations or to own real property. The legal rules stress the nonprofit character(Bundesministerium der Finanzen, 2006).5

On the other hand, the rules with regard to founding members tend to differ. Theyextend from at least 2 founding members (e.g., Austria) to up to 20 (e.g., France andGreece). Also with respect to citizenship the rules differ: The majority of the exam-ined countries have no specific rules concerning the nationalities of the foundingmembers or other members (e.g., Germany, Denmark, France, Finland, Greece,Luxembourg, the Netherlands, and Cyprus). In other countries (e.g., Belgium,Ireland, and Sweden), on the other hand, restrictions exist with respect to the nation-alities of the members or executive boards (Friedrich, Kaltschütz, Nam, Parsche, &Wellisch, 2005).

The definition of the nonprofit character is of great importance under the aspectof fiscal promotion. There are numerous countries that have a broad definition of thenonprofit character, such as Austria, the Czech Republic, Finland, Germany, Greece,Hungary, Ireland, Japan, Luxembourg, Poland, Slovenia, Spain, the UnitedKingdom, and the United States. Here, as a rule, tax-preferential treatment is appliedto nonprofit bodies. In other countries (e.g., Belgium, Denmark, and France) onlythose NPAs that at the outset undergo a recognition procedure or governmental reg-istration enjoy such tax privileges. Such a strict selection rule aims at granting taxadvantages to only those well-qualified NPAs in a better targeted way while at thesame time reducing tax-avoiding efforts of similarly structured organizations withdifferent business motives. Foreign societies that have been registered receive thesame tax privileges as domestic societies in countries such as Belgium, Cyprus,Denmark, France, Italy, Latvia, and the Netherlands (Friedrich et al., 2005).

The delimitation to foundations derives from the fact that as a rule, for NPAs themembership of persons stands in the foreground. Foundations are legal entities thathave no members and that are supported by assets. They are managed by indepen-dent executive boards or trustees. Normally, when a foundation is established, anexamination is made as to whether the assets are sufficient for achieving the goals ofthe foundation. This underscores the central importance of assets for foundations.There are also countries, such as Finland, that do not distinguish between NPAs andfoundations (Hopt, Walz, von Hoppel, & Then, 2006).6

Extensive similarity exists in the question of insignificant commercial activity. As arule, a nonprofit association may exercise business activity without loss of tax benefitsunder the condition that the activity is included in the statutes and is considered tobe economically insignificant. At the same time, this activity must be directly linkedto the aims of the association and should not be used only for improving its generalfinancial situation. Furthermore, none of the profits may be distributed (see alsoBallou & Weisbrod, 2003). In addition, the generally applicable competition rulesmust be observed, taking into consideration the special features of the sector.




Profit-yielding commercial activity related to the purpose of the organization isaccepted in all countries without loss of tax advantages if it is actually aimed at pro-moting nonprofit performances (Bundesministerium der Finanzen, 2006). This is thecase when the commercial activity serves to realize the nonprofit purposes of theassociation and if it can only be achieved via such business activity.

The terms of liability depend on the legal form of a nonprofit association. In thecase of associations with a private-law character, the liability of the executive boardcan be regarded as problematic. Here creditors can make claims on the executiveboard members if the nonprofit association can no longer meet its payments. In con-trast, registered and officially recognized associations, as corporate entities withlegal identity, are liable for the actions of the executive board with their entire assets.Only in cases of deliberate or gross neglect on the part of the executive board, forexample, by issuing false donation certifications or by orders that donations not beemployed for the stated purpose of the association, are the members of the executiveboard privately liable for the damage they cause. This is the normal case in the exam-ined countries (Friedrich et al., 2005).

As a rule, the tax authority, the district court, a ministry, or a regional/localauthority or commission is entrusted with a copy of the statutes (often with the mem-bership list as well). Also, recognition as a nonprofit association and/or registrationin a list is combined with tax advantages, an act that is carried out by administrativeauthorities and is correspondingly examined. In Germany and the United States, thetax authority decides on the recognition of the association as a tax-privileged orga-nization. In France the Ministry of the Interior is responsible, and in Estonia the gov-ernment decides on registration (Friedrich et al., 2005).

With regard to the accounting, the rules are such that only simple accounting(cash bases of accounting) is required of NPAs in general. Recognized or speciallyregistered large associations with tax preferential treatment must submit preciserecords on their income and particularly on their expenses. Therefore, double book-keeping is frequently required of these associations to exercise a monitoring func-tion. In the case of purpose companies or business companies, separate records arenecessary. Differences exist for the regulation of the disclosure obligation. In somecountries such as Ireland or Luxembourg there is not only a disclosure obligationvis-à-vis the supervising authorities such as the revenue office, but a general disclo-sure is also prescribed (see also Hopt et al., 2006).

Taxation of Current Income of Nonprofit Associations

Regarding the taxation of current income, the corporate tax usually applies. NPAsare generally exempt from this tax within the framework of their purpose-relatedactivity (Weisbrod, 1988). As shown in Table 1, this is the common case in thecountries with a broad definition of the nonprofit character such as Denmark,




Estonia, Finland, Germany, and Greece. Some countries such as Belgium, France,Portugal, and other countries with a list for special associations only grant taxexemption to specially recognized or separately registered NPAs. There is also thecase, however, that NPAs are basically taxable but can file for exemptions (e.g.,Finland). In Belgium, instead of the corporate tax, a special tax is levied for corpo-rate bodies on real estate and capital gains (Friedrich et al., 2005).

If in addition to the nonprofit activity a commercial, profit-yielding activity isengaged in, this is basically taxable, although within certain limits exemptions fromthe corporate tax may be granted (e.g., in France and Germany). Apart from the gen-eral commercial activity, income from renting and leasing and from capital gains canplay a special role. In many countries these profits are tax exempt, such as in Austria,the Czech Republic, Germany, Greece, Ireland, Japan, Luxembourg, Poland,Sweden, and the United Kingdom (see Table 1). On the other hand, a tax obligationexists in countries such as France (only income from French shares are tax exempt),Italy, and also Lithuania. Depending on the type of income, differentiated rules canbe applied. In addition to the so-called unrelated business income tax, sales andproperty taxes may apply in the United States.7 Income from real estate and returnson capital are subject to the special tax for corporate entities in Belgium, whereasgains on sales remain tax exempt. Finland allows a tax exemption on income fromreal estate if the income is employed for the nonprofit purpose of the society; other-wise, a reduced rate is applied. In Hungary, capital gains are tax exempt; incomefrom renting and leasing is, however, subject to taxation.

In some of the examined countries, in addition to the corporate tax, there are alsolocal business taxes or other types of local taxes that accrue to the municipalities.Inasmuch as NPAs receive preferential treatment for the corporate tax, this arrange-ment is also valid with respect to local taxes. This applies to Germany and also toFrance, Hungary, Luxembourg, and Austria (local tax).

In addition to these rules, some countries also have other types of income taxarrangement aimed at promoting nonprofit activity. The main objective of thesearrangements is to give preferential tax treatment for specific activities of peopleinvolved in NPA activity. In Germany, for example, there is the so-called standardtrainer allowance (Übungsleiterpauschale) system: Income up to €€ 1,848 is tax free forsideline activity as sports trainers, educators, social workers, artists, and caregivers ifthis activity serves the promotion of nonprofit, charitable, or religious organizations. InFrance, expenses for voluntary activities for recognized societies active in special areasreceive favorable treatment in that the costs for the purchase of goods or services for thebenefit of the association and trips with a person’s own automobile can be listed fordeductions in the tax declaration. For the use of an own automobile a deduction of €€ 0.26per km is allowed. Also in the Netherlands, costs from trips with an own automobile(0.18 €€ per km) that accrue in connection with voluntary activity are deductible. Austriaalso has a similar deduction for such travel expenses as well as additional food expen-ditures (see also Bundesministerium der Finanzen, 2006).





Table 1Taxation of Current Income (Corporate Taxation) of Nonprofit

Associations (NPAs) in an International Comparison

Country Tax Rules

Austria NPAs are exempt if they are not commercially active. Income from renting and leas-ing is not taxed. Capital gains tax is credited on the declaration of corporate tax ifincome from capital assets is part of taxable business assets. NPAs can file for a taxexemption if interest payment is included in company income.

Belgium Recognized NPAs are not taxable on their nonprofit activity. They are exempt fromthe general corporate tax in their commercial activities but subject to the IPM (taxfor corporate bodies), which is levied only on income from real estate and capitalgains. Conditions for special recognition: no profit-making goals and activity in“favored areas” (e.g., education, family assistance). Tax is not applied on sales ofreal estate that are used for social or charitable purposes.

Cyprus Income is tax exempt if it is used exclusively for the nonprofit purpose of the associ-ation. This includes investment returns and income from renting and leasing. Alsocapital, rent, and lease profits number among that. Capital gains are taxable, however.

Czech Republic Revenues are tax exempt from the main activity, inheritances or donated buildings,plots or mobile assets, and interest from current accounts. Income from advertisingand renting is taxable.

Denmark Only commercial business activity is taxed as a rule.Estonia Nonprofit purpose–related activity is tax exempt. Dividends are also tax exempt.

Other areas (including income from renting and leasing) are normally taxable.Finland Income from business and commercial activities are taxed to the rate of 26%. An

exemption is possible if the purposes are purely charitable, the activity is not limitedlocally, and no distortion of competition arises. Income from renting and leasing isgenerally tax exempt. Income from land that is not used for public/nonprofit pur-poses is subject to the reduced corporate tax rate. Capital gains are tax exempt.

France Basically freed from corporate tax (and thus also exempt from trade and sales tax inconnection with the so-called combined exemption). Exception: income from landand capital assets, 24%; income from French obligations, 10%; from French stocks,tax exempt. All NPAs are exempt from the minimum tax.

Germany Basically exempt from corporate tax; this also applies to income from renting, leasing,or capital gains. Exemptions for business activity related to the purpose of the associa-tion. Exception: income from commercial activity that exceeds €€ 30,678 a year.

Greece Income necessary for achieving the association’s purpose is tax exempt. This alsoincludes income from renting and leasing and income from stocks.

Hungary NPAs are exempt from the corporate tax for income from purpose-related activities.This includes income resulting from the pursuit of charity and voluntary activitiesand returns on investments (deposits, bonds, and dividends from Hungarian firms) aswell as other income that is used for the purpose of the association. Capital gains arenot considered as income if the source is exclusively from the pursuit of the purpose-related activity. Only income from commercial activity is taxable, including incomefrom renting, leasing of real estate that is in the possession or use of the association,income that according to organization statutes arises from activities and are explicitlyincluded in the commercial activities, and income from advertising activities.

(continued)




Table 1 (continued)

Country Tax Rules

Ireland Interest yields, dividends, donations, rentals, and income from the sale of agriculturalproducts are exempt if they are solely for the purpose of the charity. Capital gains aretax exempt if they exclusively serve the purpose of the charity. For charities that arecorporates, the types of income mentioned in connection with income tax are exemptfrom corporate tax if they exclusively benefit the purpose of the charity.

Italy Recognized NPAs are exempt from corporate tax for their nonprofit activity; addi-tional income from real estate and/or capital is taxed at the normal rate.

Japan Income of NPAs from their actual nonprofit area is basically tax exempt. For the por-tion of income from profit-oriented activities there are various reductions dependingon the type of nonprofit organization. Interest and dividend yields as well as capitalgains are only subject to corporate tax if their attainment is linked with profit-orientedactivities.

Latvia Income from charity and voluntary activities is tax exempt. Other areas are normallytaxable.

Lithuania Since 2005 only income from purpose-oriented activities are tax exempt, whereasthose from commercial activities are taxable. Annual income of up to LTL 1 million(ca. €€ 290,000) receives a tax exemption for LTL 25,000 (ca. €€ 7,240); the rest is taxedat a rate of 15%. Income of more than LTL 1 million (ca. €€ 290,000) is subject in totalto a tax rate of 15%. Included in income are gains from renting and leasing, capitalgains, and investment income.

Luxembourg Freed from corporate taxes (including income from renting and leasing as capitalgains and investment income); exception: income from commercial business unit.

Malta Particularly recognized associations with idealistic purposes are exempt from incometax. For other nonprofit organizations, income is taxed normally (staggered rates) ifrevenue from membership fees is less than half of total income.

Netherlands Special NPAs are generally exempt from corporate tax, otherwise up to annual incomeof €€ 7,500 or total income of up to €€ 37,500 for the past 4 years as long as income isexclusively for the benefit of the nonprofit purposes. Investments are not subject totaxation. If there is an exemption from corporate tax, a reimbursement of the with-holding tax on dividends can be applied for by an association resident in theNetherlands.

Poland Income (including revenue from renting and leasing) that is used for the nonprofitpurpose is tax exempt. Also investments in government bonds as well as other specificbonds remain tax exempt if the resulting revenue is used for the registered nonprofitactivities.

Portugal NPAs are tax exempt. The condition for exemption is recognition by the tax authori-ties in the form of a decree published in the legal gazette.

Slovakia NPAs are exempt within the framework of their actual purpose. Gains from commer-cial activities are fully taxable. Capital gains and investment income are taxable ifthey are not in accord with the nonprofit purpose, but NPAs can deduct SKK 300,000(ca. €€ 8,000) from the basis of tax assessment.

Slovenia Only the commercial activity of NPAs is subject to the corporate tax at a rate of 25%.This also includes capital gains and investment income if these are in connection withfor-profit activities.

(continued)



Income Tax Treatment of Donations and Membership Fees

Income tax regulations regarding tax deductions for charitable contributions dif-fer considerably from one country to another (Table 2). In countries like Austria, theCzech Republic, Germany, Hungary, Italy, Poland, the United Kingdom, Japan, andthe United States, tax deductions are granted to those donors contributing to abroadly defined group of qualified NPAs (see also Glaeser & Shleifer, 2001).8 Forthe income tax deduction of donors other countries require that the recipient associ-ations be active in specific welfare fields or hold a certain special status in the sensethat they are particularly recognized and/or registered. These countries includeBelgium, Denmark, Estonia, France, Latvia, the Netherlands, Portugal, and Spain(see also Marcuello & Salas, 2001).

Finland allows no preferential income tax treatment for donations made by pri-vate persons; only corporate donors may receive tax deductions for contributions.Ireland has a similar regulation: A private person can only make a donation from hisor her taxable income, but the charity9 may be reimbursed for the income tax paid.In the case of donations of corporate entities, however, a deduction in the amount ofthe contributions can be made from the corporate tax due. In Sweden there is nopreferential treatment of donors as a rule (Mennel & Förster, 2004).

In general, the relevant income tax rules are particularly restrictive for the contri-butions to foreign NPAs. In Italy, Lithuania, and the Netherlands only the donationsto domestically recognized or registered foreign associations receive tax deductions(see also Raiffeisenverband Südtirol, 2000). Austria is the only country that grants


Table 1 (continued)

Country Tax Rules

Spain NPAs are tax exempt for activities that are in accord with the purposes of theirstatutes. If income from commercial activity does not correspond with the non-profit purpose, a reduced tax rate of 10% applies.

Sweden NPAs are exempt within the framework of their actual purpose. Capital gainsare not taxed.

United Kingdom Charities are exempt if the income is used exclusively for charitable purposes.Capital gains as well as income from renting and leasing are exempt if the rev-enue is used only for charitable purposes.

United States NPAs are exempt at the federal level for the so-called activity-related income(but not as a rule for unrelated commercial income).

Source: European Commission Taxes in Europe Database; International Bureau of Fiscal Documentation;International Center for Not-for-Profit Law (ICNL); Mennel and Förster (2004); Hopt, Walz, von Hoppel,and Then (2006); Friedrich, Kaltschütz, Nam, Parsche, and Wellisch (2005); various relevant tax docu-ment released by national authorities including the Internal Revenue Service (IRS) and the CharityCommission.




Table 2Income Tax Treatment of Charitable Contributions and MembershipPayments Made to Nonprofit Associations (NPAs) in an International

Comparison

Country Tax Rules

Austria Monetary and material donations (also to foreign NPAs) receive preferential taxtreatment; up to 10% of previous year profit of a corporate donor can be deductedfrom his operating costs and on top of that up to 10% of the previous year revenuesif the association pursues scientific purposes exclusively. Goods donations areassessed at the common value of the good. If an association has its seat outside theEU, a predominant domestic purpose is the condition for the deductibility of a dona-tion. Membership fees are not deductible.

Belgium For recognized associations: Donations are deductible from income tax. For privatedonors: Donation amounts are recognized from €€ 30 to a maximum of ca. €€ 300,000 or10% of the entire net income. For corporate donors: The upper limits are €€ 500,000or 5% of taxable earnings. Movable goods as donations or gifts of more than€€ 100,000 as well as real estate need permission (royal exemption). Membership feescan be set off against income or corporate tax.

Cyprus Private as well as corporate donors can fully deduct monetary donations of up toCYP 20,000 (ca. €€ 34,300) up to the amount of their annual income; amounts beyondthis are deductible at a 50% rate. Goods donations and donations to foreign associa-tions are not deductible.

Czech Republic Private donors can deduct from income CZK 1,000 (ca. €€ 34) or 2% of earnings to amaximum of 10% of the tax assessment. For corporation taxpayers, donations of atleast CZK 2,000 (ca. €€ 67) up to 5% of taxable profit are deductible.

Denmark Can be set off against tax only for recognized NPAs (list of the tax authorities).Private and corporate donors can deduct single donations of at least DKK 500 (ca.€€ 67) to a maximum of DKK 5,000 (ca. €€ 672) without claiming the first DKK 500; inaddition, contractually backed-up donations of up to 15% of capital earnings (orprofit) and up to DKK 15,000 (ca. €€ 2,015), if the 15% is below this amount.

Estonia Donations of private persons to registered associations are deductible from the taxbase up to an amount of 5% of earnings. Donations of corporate bodies to registeredassociations are tax deductible up to 3% of the current taxable earnings or 10% ofthe previous year profit. Donations to foreign associations are deductible if these areregistered and liable to tax in Estonia.

Finland The receipt of donations and membership fees is basically tax exempt. If a donationsupports the business activity, a type of “indirect” taxation occurs via the deductionof the donation amounts from depreciable capital stock. Private persons: Donationsand membership fees are not deductible. Corporate bodies: Membership fees are notdeductible. Donations in amounts of at least €€ 850 to a nonprofit association support-ing the Finnish cultural heritage with a seat in Finland can be claimed in the corpo-rate tax declaration. Donations ranged from €€ 850 to €€ 25,000 that go to an associationwith a domestic seat and that exclusively pursues scientific or artistic purposes canbe deducted from tax. If the seat of an association is abroad, the tax deduction can-not be claimed.

(continued)




Table 2 (continued)

Country Tax Rules

France Monetary and material donations of private persons to recognized NPAs can be deductedfrom income tax to an amount of 60% of the donated amount but to a maximum of 10%of taxable earnings. Also donations to foreign associations with activities in France aredeductible. Donations of enterprises are deductible from income or corporate tax of up to60% of their amount but to a maximum of 5% of turnover. If this limit is exceeded in ayear, the excess amount can be deducted in the following 5 years. Membership fees aredeductible from income tax in amounts of 50% (for recognized NPAs or those active inspecial areas: science, family, culture, etc.). Foreign associations must apply for recogni-tion of nonprofit character according to French law to attain the same rights as Frenchassociations.

Germany Donations are eligible in general for deductions to an amount of 5% of the total amountof income within the framework of income tax (special cases: increased deductible of10%). The actual value is applied to goods donations and the book value is applied tobusiness assets. Services can be recognized as voluntary donations only if there is a clearlegal claim for a reimbursement of expenses. Direct donations to foreign NPAs are notdeductible, but indirect donations can qualify. Membership fees are deductible only forselected NPAs.

Greece Private persons: Donations of up to 10% are deductible from taxable earnings; if thedonation is above €€ 2,950, 10% withholding tax is applied. Corporate bodies: Transfersvia specific public banks required. If the donation is above €€ 2,950, 10% must be paid toa public bank. Goods donations and donations to foreign associations are not deductible.

Hungary Donations of private individuals are deductible up to the amount of 30% of the tax (amaximum of ca. €€ 206 for general and ca. €€ 410 for particular NPAs; for permanent dona-tion commitments, an additional 5 percentage points). Private persons can donate 1% oftheir income tax to NPAs and a further 1% to churches. Goods donations are not recog-nized. Donations of corporations reduce the tax assessment to the full amount, in thecase of permanent commitments to an increased value of 20%. The common deductiblelimit for permanent and nonpermanent donations stands at 20% of profit before taxes.For particular NPAs, 150% of the donation is deductible and a further 20% for a perma-nent commitment. The common limit of the deduction here stands at 25% of profitbefore taxes. For corporations also material donations and services are recognized.Goods donations are assessed at book value, services at the cost price.

Ireland Monetary donations of at least €€ 250 to charities that are tax exempt for at least 3 yearsare deductible. If there is no link between donors and charities, the deduction is not lim-ited; otherwise, donations are capped at 10% of annual income. Goods donations are notdeductible. Private persons: Donation is made from net earnings after taxation but thecharity can be reimbursed for the paid income tax. Corporate bodies can take a tax bene-fit to the amount of the corporate tax that applies to the donation. Membership fees aretax exempt to a maximum of 10% of annual income. Donations to associations withseats abroad are not tax deductible.

Italy Donations are deductible from income tax. For private individuals or business partners19% of amounts up to €€ 2,065.80 are deductible. Corporations can deduct amounts of upto €€ 2,065.80 from corporate profits or 2% of profits. Donations to foreign associationswith a seat in Italy and registered in an Italian regional registry are treated as domesticassociations.

(continued)




Table 2 (continued)

Country Tax Rules

Japan Donations and membership fees are deductible from income tax. If the member or thedonor is a domestic society liable to corporate tax, a specific amount can be deductedfrom the tax assessment base. Yet, the following amounts cannot be exceeded:Deductible amount = (1/2) × (2.5% of entire annual income of the contributor + 0.25%of asset value of the contributor). Special deduction rules for donations apply forselected domestic NPAs.

Latvia Donations of private persons to registered NPAs are deductible for up to 20% of thetaxable earnings of the donor. Corporate bodies can deduct 85% of the donation sum toregistered NPAs from corporate tax. The tax deduction is at most 20% of the entire taxamount.

Lithuania Donations of private persons are deductible in amounts of up to 2% of their earnings.Corporate donations are deductible up to twice the amount of the donation but notmore than 40% of taxable earnings. Donations to foreign NPAs are only deductible ifthe association is recognized as a nonprofit in Lithuania. Goods donations and servicesare deductible at their respective procurement prices. Membership fees can also bededucted from tax.

Luxembourg Donations of private persons of more than €€ 124 or 10% of net income of up to ca.€€ 250,000 are deductible. The same rule applies to donations of enterprises. Goodsdonations are deductible at book value. Donations to NPAs abroad are not deductible,neither are membership fees.

Malta Money and material donations to recognized NPAs are exempt from income tax.Netherlands Periodic donations of private persons to recognized NPAs are fully deductible; other

donations only if they are more than €€ 60 and between 1% and 10% of taxable earnings.Donations of enterprises of at least €€ 227 are deductible to a maximum of 6% of taxableincome. Donations both of private persons and of enterprises to foreign associations aredeductible if these associations are listed with the tax authorities.

Poland Private individuals: Donations of up to PLN 350 (ca. €€ 90) are deductible from the taxassessment or up to 1% of tax can be given to a domestic nonprofit association.Corporate bodies: Up to 10% of profits can be donated and deducted from tax.Donated goods and services are assessed at their respective procurement prices.Membership fees are exempt from corporate tax for the recipient only if they are notused for a commercial activity. For donors, membership fees to domestic or foreignNPAs are not tax deductible.

Portugal Private individuals: Monetary or material donations to associations with social, cul-tural, environmental, scientific, technological, athletic, or educational aims can bededucted to the amount of 25%, but the amount cannot exceed 15% of tax due.Corporate bodies: Donations supporting general social activities are recognized to anamount of 0.8% of sales turnover and are included in costs at 130% for tax allowance.Donations for promoting cultural, environmental, scientific, technological, athletic, oreducational activities are recognized to an amount of 0.6% of the sales turnover and areincluded in the tax allowance at a rate of 120% or at a rate of 130% in cases of dona-tion assurances of several years.

Slovakia Private persons and corporate bodies can donate 2% of their paid income tax to a non-profit association (for the case of corporate bodies a distribution among several associ-ations is possible). For private individuals a minimum of SKK 20 (ca. €€ 0.5) isnecessary, for corporate bodies at least SKK 250 (ca. €€ 6.50) per donation.

(continued)




Table 2 (continued)

Country Tax Rules

Slovenia Private individuals: Donations are tax deductible up to 3% of earnings. Corporatebodies: Donations are deductible up to 0.3% of the enterprise’s earnings.

Spain Private individuals: 25% of the donation to organizations such as UNICEF aredeductible from income tax; 30% of the donation for major cultural-sponsoringactivity is deductible but a maximum of 15% of the tax base; 10% of a donation toNPAs can be deducted from income tax amount (also applies to membership fees).Corporate bodies: A maximum of 10% of the tax base can be deducted. If theacquisition value is known in the case of material donations, this is given as thedonation value. Otherwise a committee decides on the value of the donation,whereby the market value must not be exceeded. For donations to foreign NPAs, nolaws exist.

Sweden Cannot be deducted from tax.United Kingdom There are different forms of donations. Within the framework of payroll giving,

monthly donations are directly deducted from gross salary. The donation recipientcan only be a charity with a domestic seat. No tax-preferential treatment for dona-tions to a foreign association. A gift aid is a donation in monetary form and out oftaxable income. The receiving charity can be reimbursed for the paid income tax,however. Membership fees are deductible only if they do not carry with them theright that the facilities and services offered by the charity can be used personally.

United States Charitable contribution to a number of selected NPAs (e.g., churches, nonprofitschools and hospitals, public parks, etc.) in the form of money, material, or servicesas well as membership fees can be deducted from federal income tax. The limit is amaximum of 50% of adjusted gross yearly income. A 30% limit applies to dona-tions to veterans organizations, fraternal societies, nonprofit cemeteries, privatenonoperating foundations, and so on. A special 30% limit also applies for gift ofcapital gain property to the aforementioned 50% limit organizations, whereas the20% limit applies for the same type of gift to other qualified NPAs. If this limit isexceeded, the amount can be carried over into the following 5 years. If the (cash aswell as noncash) donation is more than $250 (ca. €€ 190), the donor needs a writtenconfirmation for tax deductions. Goods donations are usually assessed at marketvalue on the date of the donation. Yet special value determination rules apply forthe contribution of clothing and household items, vehicles, property subject to adebt, a partial interest in property, business inventory, a patent or intellectual prop-erty, and so on. For services, the accruing expenses are deductible.




the same status to NPAs from other EU countries as to domestic associations, evenif the foreign associations have no domestic base. No preferential tax treatment ofdonations made to NPAs with seats abroad is granted in Finland, Ireland,Luxembourg, and the United Kingdom. With respect to direct donations to NPAsbased abroad, German regulations are similarly restrictive as the tax rules in most ofthe countries examined, but for domestic associations with charity and voluntaryactivities abroad an indirect solution is planned: If the society’s statutes allow the useof the funds or if it is a supporting association whose statutes include activities inforeign countries, donations to such associations receive preferential tax treatment(see also Bundesministerium der Finanzen, 2006).

Membership fees paid by individuals and corporate entities to NPAs are usuallynot deductible when calculating the member’s taxable income. This is explicitly reg-ulated in Austria, Finland, Luxembourg, Poland, and Sweden, for example. However,consideration is in part possible in many countries (e.g., in Ireland, Japan, andSlovakia). Rules also exist in France and Germany that membership fees for certainspecial NPAs are at least partly tax deductible. In the United States such payments aredeductible from the federal income tax (Gruber, 2004; Mennel & Förster, 2004).

In contrast to monetary donations, the assessment of the rules relating to dona-tions of goods and services is rather problematic. In Austria, Germany, and theUnited States the market value of a donated good is usually used. Yet for donationsin the form of business property the fair-value approach is applied. On the otherhand, services can be recognized in Germany as a voluntary donation in cases of aclear legal claim for reimbursements of expenses (see Table 2).

Inheritance and Gift Taxes

The tax rules concerning bequests and gifts made by individuals and corporatebodies to NPAs also differ considerably from country to country. In principle, any-one may freely bequeath his or her property to an association completely or in part,but some countries have restrictive rules such that only associations with specialrecognition, registration, or special government approval are entitled to receive suchgifts (e.g., Italy). If the association only has a limited legal capacity to acquire andhold rights and duties, special permission is the normal case (RaiffeisenverbandSüdtirol, 2000).

As shown in Table 3, testamentary donations are not taxable in countries such asCyprus, Estonia, Italy, Latvia, Malta, Portugal, Slovakia, and Sweden (since thebeginning of 2005). In some EU member states, for example in Germany, Poland,and the United Kingdom, testamentary donations to NPAs are tax exempt for boththe recipient and the deceased (Mennel & Förster, 2004).

Domestic NPAs (to some extent only those particularly recognized) are basicallytax exempt as recipients also in Belgium, the Czech Republic, Denmark, Finland,




Greece, Hungary, Japan, Spain, and the United States (donations are tax exempt atthe federal level, and this is also possible at the state level as shown by Poterba,2001). Donations of goods and account receivables (donations in cash form) to anonprofit association are tax exempt in Austria if the use of the donation is for thestated purpose of the association. France usually levies an inheritance tax on associ-ations; the donations are tax exempt only for associations active in special areas. Inthe Netherlands, too, inheritance and gift taxes are levied, but NPAs can apply forexemptions (Friedrich et al., 2005).

Only few countries in Europe apply the same preferential tax treatment to foreignNPAs as to domestic associations. Belgium and Austria, for example, give preferen-tial treatment for the pursuit of tax-deductible purposes also in foreign countries. InGermany, contributions to foreign NPAs are only tax free if the use for nonprofit pur-poses is guaranteed, namely, if this is certified by an authority of the foreign coun-try. On the other hand, countries such as France require of foreign NPAs that theyapply for recognition of their nonprofit character based on French law. In Greece, taxexemptions apply, subject to the principle of mutuality, also for all foreign corporateentities with regard to property to be inherited in Greece.

The donor is tax exempt in Austria, the Czech Republic, France, Greece,Hungary, Ireland, Japan, Luxembourg, and the Netherlands. In Belgium by contrast,an inheritance or gift tax is levied at the donor level, although reduced rates apply(Table 3). In the United States an unlimited deduction applies to the federal estateand gift taxes for charitable gifts not only to domestic but also foreign charities. InSpain gifts are treated as donations, namely, they can be taken into consideration toa certain extent when computing tax liabilities (Marcuello & Salas, 2001). In Finlandonly corporate bodies can receive partial tax exemption for donations.

There are currently few double taxation conventions aiming at the prevention oftax avoidance or double taxation for gift taxes. Germany has concluded such agree-ments only with Austria, Denmark, Greece, Sweden, the United Kingdom, and theUnited States (Mennel & Förster, 2004). In the case of cross-border gifts in other EUcountries, uncertainty prevails.

Conclusion

The international comparison of the taxation of NPAs has shown that the differentlegal traditions of the examined countries are quite evident. This complicates a com-parison of tax rules, especially because the legal systems behind the association regu-lations are differently constructed. In general, groups of the examined countries can beformed in which the regulations concerning NPAs are similar. The German legal tra-dition has influenced regulations in Austria, Luxembourg, and the Netherlands.Association law is similar in all Scandinavian countries. The Belgian rules are stronglyinfluenced by French law. Association law of an Anglo-Saxon background is to be





Table 3Inheritance and Gift Taxes of Nonprofit Associations (NPAs) in an

International Comparison

Country Tax Rules

Austria A linear tax rate of 2.5% is applied for inheritances, of which €€ 110 is exempt. Giftsmade by public bodies to a nonprofit association are completely tax exempt.Material and monetary gifts to a domestic nonprofit association are tax exempt ifused in accordance with the association’s purpose. The nonprofit purpose can also bepursued abroad. If a double taxation convention exists, this also applies to foreignassociations but not for inheritances. For inheritance tax a double taxation conven-tion exists between Austria and Germany, for example.

Belgium No general exemption. Inheritance tax rate for NPAs in Belgium in general: 8.8%(reduced rate; regional deviations possible). Gift tax rate for NPAs—Wallonia andBrussels: in general 8.8%, Flanders: 7%. Tax is to be paid by the donor. The sameapplies to inheritances and gifts to NPAs within the EU.

Cyprus No inheritance or gift tax obligation.Czech Republic Donations to NPAs are exempt from inheritance and gift tax.Denmark An exemption from the inheritance tax is granted only to recognized NPAs (list of

the tax authorities). For inheritance tax a double taxation convention exists betweenDenmark and Germany.

Estonia NPAs are tax exempt for all assets that they receive as heirs or legacy recipients.Gifts are treated as donations.

Finland Recipient NPAs with a seat in Finland are tax exempt. Gifts in the form of goods orrights are tax exempt. Private individuals: no exemptions. Corporate bodies:Donations to an amount of at least €€ 850 to a nonprofit association, supporting theFinnish cultural heritage with seat in Finland, are tax deductible. Gifts or donationsof €€ 850 to €€ 25,000 that go to an association that exclusively pursues scientific orartistic purposes can also be deducted from tax. Associations with seats abroad aretaxable unless there are other regulations based on international tax agreements.

France Recognized NPAs pay 35% on donation amounts below €€ 23,000 and 45% above that(normal tax rate: 60%). Only NPAs active in special fields (science, charity, culture,and higher education) are tax exempt. Foreign associations must apply for recogni-tion of the nonprofit character according to French law to attain the same rights asFrench associations.

Germany NPAs (also foreign) are tax exempt for all assets that they receive as recipients ofinheritances or estates or as beneficiaries of donations. For the donor, no tax obliga-tion results. Due to the tax exemption no problems result regarding the assessmentof property value. Normally in the case of land the gross rental method is applied,namely, the value of property is determined by applying statutory multipliers to theannual rental. Double taxation conventions currently exist with Austria, Denmark,Greece, Sweden, the United Kingdom, and the United States.

Greece NPAs with a seat in Greece (also foreign) that pursue charitable purposes, education,or purposes of national interest are exempt. Double taxation conventions exist withGermany, Italy, Spain, and the United States.

Hungary In the case of inheritances and gifts, a duty charge applies. NPAs are fully exemptfrom the charges.

(continued)




Table 3 (continued)

Country Tax Rules

Ireland If inheritances, gifts, or donations are used exclusively for the nonprofit purpose ofa charity, the tax obligation is lifted. This also applies to the transfer of materialproperty, which is assessed according to its market value. Foreign NPAs are notexempt from inheritance and gift taxes.

Italy An inheritance and gift tax no longer exists.Japan Donations for nonprofit purposes are tax exempt. Taxes to be paid abroad for inher-

itance or donations can be set off against Japanese taxes. An inheritance tax agree-ment exists only with the United States.

Latvia There is neither an inheritance nor a gift tax.Lithuania If the gift is booked as “sponsoring,” the rules for donations apply. Otherwise, gifts

and inheritances are subject to income tax if their value is double that of the so-called nontaxable amount of earnings (NTIA). Payments in kind are deductible upto LTL 250 (ca. €€ 72). For corporate bodies: The depreciated value of real estate isto be applied. Movable properties are assessed at their acquisition costs; services attheir costs. For private individuals the market value always applies. For foreignNPAs the same rules apply if they are exempt from inheritance and donation taxaccording to the law on charity and sponsoring.

Luxembourg For NPAs the tax rate for gifts and inheritances is 6%. In the case of NPAs, noinheritance or gift tax applies for the donor. For NPAs abroad no preferential treat-ment exists.

Malta There is neither an inheritance nor a gift tax.Netherlands Domestic NPAs are exempt for inheritances up to €€ 8,602 and for gifts up to €€ 4,143;

otherwise, a reduced tax rate of 8% applies.Poland Domestic and foreign NPAs are exempt from inheritance and gifts taxes. For pri-

vate individuals, gifts or donations are deductible to a maximum of €€ 90. Corporatebodies may donate up to 10% of their profits tax free. Double taxation agreementsexist with Austria, the Czech Republic, and Hungary.

Portugal NPAs are exempt from inheritance and gift taxes. The double taxation conventionbetween Portugal and Germany does not include the inheritance tax.

Slovakia There is neither an inheritance nor a gift tax.Slovenia NPAs are exempt from inheritance and gift taxes.Spain For corporate bodies, corporate tax is applied instead of inheritance or gift tax.

NPAs are exempt from corporate tax for activities in line with their statutes.Sweden Eliminated since January 1, 2005.United Kingdom No inheritance tax obligation. Gifts or donations of natural or corporate bodies in

the form of bonds and other capital investments are given preferred treatment. Notax obligation exists for charities in cases of donations in the form of bonds, build-ings, or property.

United States The federal estate and gift tax has an unlimited deduction for charitable gifts. Inaddition, almost all states have their own inheritance tax.




found in the United Kingdom, Ireland, Malta, and Cyprus. In the Eastern Europeancountries, the construction of civil society is still in progress. Here association law isbeing developed from funds and socialist organizations. Recently, many new regula-tions have been issued in these countries concerning nonprofit associations.

The tax privileges applied to NPAs that provide collective goods and services canbe justified for they not only help to overcome free-rider tendencies but also stimu-late the behavior of warm-glow and impact philanthropists while increasing theirproducts and organizational revenues. Apart from the positive employment effectscreated, the continued growth of charity and voluntary activities accompanied bygenerous financial contributions of citizens has also contributed to relieving publicbudgets because activities taken over by NPAs often mean that the government doesnot need to provide such collective goods and services.

However, countries should not provide excessive tax advantages that hinder com-petition in some NPA activities. For instance, the German Ministry of Finance doubtsthe cost-consciousness of voluntary welfare organizations in Germany and suggeststhat generous tax subsidies have been unable to induce these entities to produce thedesired level of services at reasonable prices (Bundesministerium der Finanzen,2006). Rather, their effects seem to have been detrimental to efficient resource allo-cation. A narrow legal definition of eligible nonprofit activities is an option to solvethis problem. In this context it should also be borne in mind that the status of NPAsalso needs regulation and surveillance because among others, these characteristics arecrucial prerequisites for enjoying tax and other financial privileges.

Notes

1. Donations are important for nonprofit associations (NPAs) because the collective good nature ofmuch of their output limits user fees as a source of revenue (Okten & Weisbrod, 2000). Despite the sub-stantial tax subsidy to giving in developed countries, few studies have examined the effects of corporateincome tax on contributions, and the little available evidence is inconclusive, in sharp contrast to the largesum of references on individual donations (Carroll & Joulfaian, 2005).

2. A fractional crowding-out is also most commonly encountered in empirical investigations (Brooks,2000; Kingma, 1989).

3. There is also strong agreement in the regulations related to sales turnover tax in the EU. This canbe traced back to the Sixth VAT Directive (Sixth Directive 77/388/EEC of May 17, 1977). According toArticle 13, Part A, Paragraph 1 of this directive, member states are obliged to grant exemption from VATfor “certain activities that benefit the general common welfare.” This includes many activities engaged inby NPAs in fulfilling their purposes such as hospital and medical care, services closely linked with socialwelfare and social security as well as services and provision of goods combined with child and youth care,and the upbringing and education of children and adolescents. A VAT obligation does exist, however, forNPAs if their revenue comes from commercial activity, whereby the definitions and in particular theturnover limits beyond which a tax obligation sets in can vary from one country to another.

4. In the following the term society is used even though in some countries societies as commonlydefined in Germany do not exist.

5. As is the case in the United States there are also three primary legal forms of voluntary associationsin the United Kingdom: company limited by guarantee (corporate association) and trust, both with legal




identity, and unincorporated association. According to the information provided by the Internal RevenueService (IRS) in the United States and the Charity Commission in the United Kingdom, corporate asso-ciations offer membership, whereas unincorporated types are usually more suitable for groups with lowincomes, not employing staff or acquiring property.

6. There are private and public foundations in the United States. Public foundations are mostly com-munity foundations. Private foundations are further classified into the operating and nonoperating types.The private operating foundations use the bulk of their resources to provide charitable services or runcharitable programs of their own. In general they do not raise funds from the public. The nonoperatingtypes are also tax-exempt, grant-making entities that solely provide financial supports to other charitableorganizations. Also in Austria, for example, the differentiation between private and public foundationsexists. Compared to the case with public foundations, however, private entities offer different tax deduc-tions for gifts and donors and enjoy less generous income tax privileges (Hopt, Walz, von Hoppel, &Then, 2006; Mennel & Förster, 2004).

7. In addition, private foundations pay excise tax in the United States.8. In the United States, income tax subsidies to charities and NPAs vary across states because

(a) Some states have no state income tax system, (b) tax rates vary across the states that dohave income taxes, both on average and in terms of the progressivity of tax rate schedules, and(c) states differ in their treatment of charitable contribution. In terms of the last factor, anumber of states follow the federal definition of income, so that charitable contributions [i.e.,donations] are fully deductible for itemizers; others ask the taxpayer to explicitly report (anddeduct) their federally itemized amounts from their state taxable income; and a final set ofstates does not allow a deduction for charitable contributions. (Gruber, 2004, pp. 2642-2643)

9. In Irish law, the term charity includes all NPAs.

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Anita Dehne is a PhD candidate at the Ludwig Maximilian University Munich and a junior researcher atthe Department of Public Finance of the Ifo Institute for Economic Research. Her major research fieldsare income taxation and budget analysis.

Peter Friedrich is the professor for public economics at the University of Federal Armed Forces Munich.He has carried out a huge number of studies on public finance and administration as well as regionalscience.




Chang Woon Nam is a senior researcher at the Department of Public Finance of the Ifo Institute forEconomic Research. His major research interests are corporate taxation and regional science.

Rüdiger Parsche is a senior researcher at the Department of Public Finance of the Ifo Institute forEconomic Research. He is a well-known expert on the issues of VAT taxation, tax revenue analyses, andfiscal federalism.




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