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PHILANTHROPISTS’ INTENTIONS: THE STRATEGIC CHOICE OF LEGAL STRUCTURE

PHILANTHROPISTS’ INTENTIONS: THE STRATEGIC CHOICE OF LEGAL STRUCTURE

Initiating and conducting a philanthropic project imply strategic choices in terms of governance, durability and tax treatment, in order to give legal effect to the intentions of the founding philanthropist.

Philanthropy and economics increasingly share a project rationale, which involves defining the approach to be taken to improve the chances of achieving the stated aim. For the operational action to be effective, the philanthropist’s vision and wishes must find a legal answer by adopting the most appropriate structure.

This paper will only address legal solutions available to meet the expectations of private individuals. These solutions are nonetheless largely transposable to corporate philanthropy, except that an additional legal form is available to businesses to carry out their actions, that of the corporate foundation[1]. This structure is not, however, ideal for shareholders’ or managers’ personal projects because, while payments to the foundation have been possible since 2014[2], they are only entitled to tax relief capped at €1,500 since 1 January 2018[3].

Experience has shown that private individuals who actively engage in general-interest action all have similar concerns as regards the legal implementation of a project justifying the creation of a personal structure.

Logically, the first concern is the organisation’s governance, which they legitimately wish to control, and this raises questions about the flexibility of action or the existence of restrictive administrative controls (I). Secondly, as these projects have, by nature, a moral dimension pertaining to the values the philanthropist defends, they will often wish to secure the durability of their action after their death (II). Finally, although this is seldom a factor that incites a philanthropist to undertake a project, the tax “incentives” proposed should also be considered, since they above all help to optimise the project’s funding (III).

I PROJECT GOVERNANCE

Governance, and the control a philanthropist wishes to exercise over their project, are often decisive factors in the choice of structure.

As we are focussing here on the governance of philanthropists’ personal structures, we will only examine this aspect as regards foundations recognized as being of public utility, endowment funds and associations. For the more specific cases of sheltered foundations which, in the absence of juridical personality, benefit from organised autonomy, reference should be made to the article of this report devoted to them.

Governance is a key criterion in the choice of structure, since a clear distinction can be made between these three legal forms. Thus, a philanthropist who wants total freedom of action will only be satisfied by an endowment fund or an association, which allow bespoke governance to be defined in their articles of association (A). On the other hand, if the project is sufficiently big, then by waiving absolute control of the structure to ensure that the philanthropic aims will survive after their death, a public-utility foundation may be suitable if the philanthropist adopts the governance imposed by the standard articles defined by the Conseil d’Etat (B).

A.      BESPOKE GOVERNANCE OF ENDOWMENT FUNDS AND ASSOCIATIONS

An endowment fund and a declared association (a French non-profit organisation) are two structures having juridical personality and whose legal regime includes very few governance rules (1°). Advantage can therefore be taken of this freedom in drafting the articles to define bespoke governance in order to carry out the general interest action (2°).

1°      Few or no mandatory rules

The legal and regulatory framework governing an endowment fund imposes two mandatory obligations in terms of governance.

Firstly, the law requires that: “the endowment fund is administered by a board of directors comprising at least three members who are appointed, the first time, by the founders. The articles of association determine the membership and the conditions of appointment and re-appointment of the board of directors”[4].

The only requirement, therefore, is to appoint a board of directors having at least three members. The law then expressly refers to the freedom allowed in drafting the articles of association to define the board’s membership and the directors’ appointment. Parliamentary debates and the government’s comments clearly show that this structure was envisaged from the perspective of freedom, to encourage the development of private philanthropy and general-interest funding. The director of legal affairs for the Ministry of Economy, Finance and Industry therefore explicitly specified when presenting this new legal entity that “the founder may be a dictator”[5], which is justified by the nature of the fund, since it is a “financing instrument, not an institution“.

Secondly, as regards financial management, the articles must provide, “when the amount of the endowment exceeds one million Euros, […] for the creation of an advisory committee to the board of directors, consisting of qualified individuals external to the board and responsible for proposing investment policies and ensuring their oversight. This committee may also suggest studies and expert assessments”[6]. However, this committee only has an advisory role and its members may not interfere in the management of funds.

The regime applicable to associations is even more laconic, as no legal provision addresses governance. At the very most, associations are merely required to include “the names, occupations, addresses and nationalities of all those responsible for its administration in any capacity” in the declaration of creation made to the prefecture and to declare “all changes occurring in their administration[7].

If the association is not otherwise subject to any specific regulations applicable to its purpose, or to standard articles of association like public-utility associations, the governance bodies (members, appointment and even the names of such bodies) can be defined with complete freedom. In certain particular cases, regulations may require it to function democratically, which may restrict the freedom of the association’s founders. This is particularly the case for obtaining certain approvals, or to enable the managers to legally receive compensation (cf. below).

But, contrary to popular belief, an association (except the specific cases mentioned above) is not at all required to adopt democratic rules if the articles of association (which form the contract between the members) do not so provide.

Certain tax requirements complete these legal rules in order to ensure that the structure benefits from the tax regime of philanthropy. It is assumed that the funding of philanthropic projects carried out will need to benefit from the relevant tax advantages (cf. III, A, infra).

Therefore, an association or endowment fund must meet the fiscal criteria of this regime: the structure must therefore carry on a non-profit activity, be managed in a disinterested manner, pursue work of a “philanthropic, educational, scientific, social, humanitarian, sports, family or cultural nature, or work contributing to promoting artistic heritage, particularly through subscriptions to finance the purchase of objects or works of art intended to be included in the collections of a French museum open to the public, to protecting the natural environment or to the dissemination of French culture, the French language and French scientific knowledge” and not act for the benefit of a small circle of individuals[8].

In principle, disinterested management (which is also necessary to justify the not-for-profit nature of activities) implies that the organisation’s managers fulfil their mandate, and any other separate duties[9], on a voluntary basis.

Consequently, attention must be paid to the line-up of the board of directors, so that no individual paid by the structure sits on it with a right to vote. This mainly concerns any staff employed by the fund or the association to achieve its purpose, particularly if they could be regarded as de facto directors[10].

As an exception, two permitted departures nonetheless enable the directors to receive payment. One piece of legislation[11] allows for the possibility of paying one to three directors (but no more), if the organisation can prove[12] that its own funds (excluding public funds) amount to at least €200,000 (1 director paid), €500,000 (2 directors) or €1 million (3 directors). In this case, the payment may be as much as three times the social security limit, i.e. a gross monthly sum of €9,933 in 2018[13].

Furthermore, pursuant to administrative doctrine, any number of directors may receive a payment within the limit of three quarters of the gross guaranteed minimum wage over the year, i.e. a gross monthly sum of €1,124 in 2018, provided this payment is not concurrent with the aforementioned payment and that the disinterested management is not challenged.

Within these rare limits, the founders therefore have significant freedom to organise the governance of their organisation as they see fit. 

2°      Freedom to draft articles to serve the philanthropic project

The freedom granted to founders in drafting their articles of association enables them to tailor the organisation’s governance to the needs of the philanthropic project.

Expectations may vary and all options are possible, such as organising absolute control over the structure by the founder and the individuals appointed by him, or, on the contrary, integrating external individuals to guarantee democratic functioning, and organising transparent decision-making.

In the case of an endowment fund, the founder may therefore retain full control over the organisation. In this case, the articles should provide for the directors to be appointed (and dismissed) solely by the founder, so that he can choose individuals and profiles suited to the project. Very often, there will be a small group of directors who are relatives or persons closely associated with the founder. In this case, the fund can be a vector of family governance by involving different generations in a collective project. It will therefore serve to pass on family values and unite the family around the general-interest undertaking.

Control may also result from the governance of a third-party organisation when, for instance, the founder’s company contributes to the fund in addition to his own personal investment. Some directors may particularly be individuals discharging certain functions within the company.

Conversely, governance can be a means of involving a diversity of profiles and skills in the fund, particularly to carry out large-scale actions. This will depend on the field of work (namely in the case of research), the amounts involved, and any international scope of action. The founder may seek to broaden the selection of directors and entrust the board of directors with the task of appointing future directors. In doing so, he relinquishes a personal right. However, we believe it necessary to stipulate that the founder’s vote, as Chairman of the Board for example, will prevail in the event of a split vote to avoid any deadlock and enable him to have the final say.

Alongside the board of directors as the managing body, the articles may provide for the creation of various committees, other than the aforementioned mandatory advisory committee, with a more technical role to advise on and assist with operational decisions. The articles may freely grant such committees any other rights, above and beyond a mere advisory role.

The extent of these committees’ tasks, their internal running, their members and the appointment thereof may be defined in by-laws, or in the decision establishing them, to avoid rendering the articles too complex and to retain flexibility in terms of operation.

The governance of an association may also be based on a board of directors whose membership is more or less limited.

As an association is a contract between its members, the latter form a general meeting (which an endowment fund does not have). The general meeting is the association’s deliberative body, empowered to make the most important decisions, unless the articles of association provide otherwise. The board of directors (or any similar body which may be given any title), only has the powers of mandataries set forth in Articles 1984 et seq. of the French Civil Code. Such powers are limited to acts of administration, to the exclusion of disposition. Pursuant to case law, where the articles are silent, the general meeting has powers that exceed acts of everyday management, such as the sale of property, or amending the articles for example.

Regarding the general meeting’s organisation, it is possible to secure the membership, and consequently the membership of the board of directors, by making provision, for example, for ex officio members having special voting rights, or exclusive voting rights for certain decisions, or even of a right of veto. The members may also be organised in colleges, with some decisions then being limited to a given college without the others having a voting right for example.

As we have shown, the legal regimes of endowment funds and associations grant philanthropists considerable freedom to choose and define their governance, unlike public-utility foundations in which the founder must accept that he will not have control over the form of governance adopted.

B.      ADOPTION OF THE STANDARD ARTICLES OF A PUBLIC-UTILITY FOUNDATION

Foundations recognised as being of public utility are created by decree of the Minister of the Interior on an opinion of the Conseil d’Etat. Under this decree, the application filed to obtain recognition must strictly comply with standard articles of association, and the content will be examined in detail by the Conseil d’Etat (1°). While this requirement is often a barrier for the founder, it can also be an opportunity (2°).

1°      Strict supervision of governance by the Conseil d’Etat

As it has gradually developed, the doctrine of the Conseil d’Etat on foundations has led to the development of standard articles of association[14]. The control exercised by the Conseil over the articles of association before giving its opinion on the application for recognition as being of public utility leaves little room for manoeuvre for founders. The Conseil d’Etat distinguishes three categories of clauses:

  • mandatory clauses from which no departure is permitted, concerning the very nature of the foundation (particularly voluntary management, irrevocability of endowment allocations);
  • clauses ensuring compliance with the fundamental principles of the foundation’s operation, from which very limited departures are permitted for a legitimate reason;
  • clauses representing mere guidelines.

The standard articles provide for two governance models: a foundation with a board of directors and a foundation with a managing board and a supervisory board, which is less frequent. For more detail, reference should be made to the two models of articles published online which include comments and recommendations by the government based on the doctrine of the Conseil d’Etat.

Currently, the main principle, which is common to both forms, is the foundation’s independence from its founders. This necessarily means that the founder(s) and their representatives, sitting within their college, may not hold more than one third of voting rights on the board of directors or the supervisory board.

Today, this is the main barrier to creating public-utility foundations because it means that an individual making a very generous act, since the foundation must be endowed with at least 1.5 to 2 million Euros to obtain recognition, must also relinquish all direct control over the project they initiate and fund. Founders often have difficulty understanding and accepting this aspect, and they therefore choose an endowment fund or sheltered foundation instead of this legal form.

To guarantee this independence, the board of directors and the supervisory board must consist of different colleges which are usually: the founders’ college, the college of ex officio members (representing the government) and the college of qualified personalities. Alongside these three mandatory colleges, the foundation may be opened to other stakeholders who may have their own college, such as employees or “friends” of the foundation who support it.

The distribution of members within each college must then respect the authorised proportion of seats. The founders’ representatives may not account for more than one third of the directors and the government must have at least one third of seats on the board (unless there is a government commissioner, cf. below). The remaining seats are then freely shared out between the qualified personalities and any other members of optional colleges.

The second requirement, which also explains why this form is not chosen for certain projects, is the State’s mandatory presence in the governance. This participation may take two forms:

  • either within a college of ex officio members who sit permanently on the board and have a right to vote;
  • or by the appointment of a government commissioner who, conversely, participates in the board but only in an advisory capacity.

If the form with a government commissioner is chosen, the college of ex officio members is often replaced with a college of institutional partners, ideally consisting of private or public organisations that are suitably durable and contribute to achieving the purpose (such as other foundations, public institutions and banks). Today, the Conseil d’Etat and the Ministry of the Interior are tending to give preference to the form with a government commissioner.

2°      A restrictive but sometimes appropriate framework

The governance of a foundation is therefore often considered too restrictive by natural person founders who wish to create their philanthropic instrument. However, these restrictions can also be seen as a means of guaranteeing the project’s durability, particularly after the founder’s death.

Allowing qualified personalities independent from the founder to sit on the board of directors often brings in skills that are useful to the project. These individuals, who are chosen for their expertise in the foundation’s area of activity, are co-opted by the other board members. Where there is a college of institutional partners, the founder nominates the members in the draft articles of association submitted to the Ministry and they therefore require its approval.

In practice, the founder remains quite free to choose the members of the board of directors or the supervisory board, but subject to these proposals being approved by the supervisory administrative authority.

These requirements have been identified as a real disincentive to the development of foundations in France and they may be amended in the near future. A recent report on foundations, exploring the particular model of shareholder foundations, suggests abolishing the State’s mandatory representation as a board member and recommends opting for the appointment of a government commissioner[15], thereby confirming and building on the current practice of the Conseil d’Etat.

Following on from the various reports, studies and conferences devoted to shareholder foundations[16], the governance of public utility foundations may be relaxed as part of the forthcoming PACTE bill (Plan d’action pour la croissance et la transmission des enterprises – action plan for business growth and transformation).

As the activity is of public utility, the government’s involvement in the foundation nonetheless remains justified, as guarantor of the general interest. This aspect contributes to giving this legal form its high profile.

Founders must therefore agree to give up their control of the structure, but they gain the assurance of securing their undertaking’s durability.

II        securing long-term action

By initiating a general-interest project, philanthropists generally have a long-term vision which raises the question of durability. Given the uncertainties surrounding the duration of an endowment fund and an association (B), a public-utility foundation has undeniable advantages (A).

A.      advantages of a public-utility foundation

The strict framework of a public-utility foundation gives it a certain advantage over other structures in terms of the durability of the organisation and its work (1°), but also, where applicable, in terms of safeguarding a particular patrimony (2°).

1°      Durability of the organisation and its work

As explained above, the lack of control by the founder or his college and the government’s involvement in the governance ensures the stability of the foundation’s governance and guarantees the durability of its public-interest purpose.

Government representatives above all ensure that the foundation’s managing bodies effectively pursue the purpose defined by the founder. In this respect, they play a veritable role in overseeing and monitoring compliance with the founder’s wishes after his death, as expressed at the time the foundation was created and defined in the articles of association where applicable.

With the form that is destined to develop, the special role of the government commissioner is essential. In addition to offering greater flexibility than the systematic presence of State representatives as ex officio directors, in practice the government commissioner would seem to be more of a constructive partner for the foundation, than an interventionist and invasive supervisory authority.

But above all, the government commissioner has the necessary prerogative rights to ensure that the founder’s wishes are followed. To do so and despite their advisory capacity, a government commissioner may: ask for a board meeting to be convened or a question to the entered on the board’s agenda; request a new deliberation by the board when they consider a previously carried resolution to be contrary to the articles, by-laws or applicable rules; be appointed by the competent ministry according to the foundation’s activity; and exercise administrative oversight over the running of the foundation (visits, right of disclosure, etc).

Most often, government commissioners truly endeavour to safeguard the undertaking based on the founder’s initial intentions. Regarding this psychological or philosophical aspect, it is particularly advisable to draft recitals in order to embody this intention and if necessary, to clarify any future interpretation of the articles in case of a dispute, to facilitate the government commissioner’s task.

By clearly stating their wishes, the founder will be able to bind the government’s future control over the foundation, and guide any interpretation. The ex officio directors or, more likely the government commissioner, will then be required to enforce them. Opting for a foundation therefore offers a better guarantee of durability than merely stipulating a charge on the foundation’s constitutive donation.

As a foundation consists of an allocation of assets, rights or resources to a general-interest undertaking, this allocation represents a charge on the constitutive donation. The charge is the special purpose defined by the foundation’s corporate object[17]. The possibility of revoking the donation if the charge is not executed[18] is effectively a measure aiming to protect the wishes of founders, including after their death, as it may be invoked by their heirs. The possibility of taking legal action nonetheless has the drawback of being subject to the supreme power of assessment of the judges hearing the dispute, and therefore to the uncertainty of justice.

However, the government’s direct involvement in the foundation’s governance provides, in principle, additional upstream protection for founders, and without the need for legal action. Thanks to their prerogatives, a government commissioner may intervene as of right in the event of any decisions derogating from the founder’s wishes, in order to draw attention to the risk incurred. By their oversight, the government commissioner acts as an active safeguard before the disputed decisions can take effect, which would seem better than a lengthy and uncertain lawsuit.

Finally, a foundation is a patrimony and not a union of persons like an association. It does not have any members, which means it can be truly detached from individuals and protected against hostile takeovers or majority conflicts that can arise in general meetings.

These various measures that ensure the activity’s durability therefore also protect the patrimony allocated to the foundation.

2°      Safeguarding a patrimony

As a result of its durability, a foundation structure may also be envisaged to protect a specific patrimony.

Safeguarding a patrimony may be a general-interest mission in itself, in the case of an art collection for example, or historic property, the protection of which justifies recognition as being of public utility. In this case, a foundation is an excellent means of transfer for the future, as we can see with the many foundations established for the purpose of disseminating works of famous artists (Vasarely, Picasso, Giacometti, etc.).

Indirectly, allocating a patrimony to a foundation is also a way of preserving this asset, if it represents a source of income to fund a general-interest mission. In this case, safeguarding the asset is not a purpose, but a means of achieving the foundation’s goal.

This, for example, is the mechanism underpinning a shareholder foundation which, by holding the majority of a company’s capital[19], will secure a durable source of funding for its general-interest object while developing the actual business over time to maintain its resources, thus creating a virtuous circle[20].

B.      THE MORE UNCERTAIN DURABILITY OF ENDOWMENT FUNDS AND ASSOCIATIONS

Paradoxically, the durability of an endowment fund and an association is more uncertain than that of a foundation owing to the greater freedom permitted in respect of their articles of association. Their duration effectively depends on the individuals who succeed the founders, and is therefore based on a relationship of trust (1°). These organisations may, however, be quite appropriate as a forerunner to a future foundation (2°).

1°      Durability based on a relationship of trust

Having considerable freedom in drafting the articles of association is an undeniable advantage when a founder governs their work themselves. However, after their death, it means that the individuals who take over, where this is the case, will have just as much freedom, including to change the object, even though it must obviously remain a general-interest purpose.

Naturally, it is quite possible to stipulate that the structure, particularly an endowment fund which has no members, will not continue after and will therefore be dissolved upon the founder’s death.

However, if the initiator wants their work to continue after their death, they will mainly rely on the trust they have in the individuals appointed to succeed them (either in person or by a vote provided for in the articles).

In this case, the articles of an endowment fund must allow the founder to appoint a successor who will have the same rights, i.e. the right to subsequently appoint their own successor and so on and so forth. Provision should also be made for a fallback procedure if no successor is appointed or if the potential successor dies prematurely. Generally, the successor will be appointed by the board of directors.

However, the durability remains uncertain and there are no legal means of fully guaranteeing it. Apart from the possibility of appointing a testamentary executor, the main way of protecting the founder’s wishes is by bringing an action in revocation of the donations made for non-execution of a condition, which therefore remains in the hands of the heirs and may be ineffective. Since the successor has just as much freedom as the founder, the fund’s action can be modified without limitation, simply by altering the articles of association. No ex-ante administrative control applies and it is quite possible for the purpose to be changed. However, under no circumstances may the fund’s assets be diverted away from a general-interest purpose, or be captured by the successors. The fund’s legal existence would then be challenged by the authorities, which has a power of ex-post control.

A previous case[21] indirectly illustrates the difficulty inherent in protecting the founder’s work after his death, from a procedural perspective. In this case, the claimant, who was no longer a director of the endowment fund in question, failed after four years of proceedings to contest sales of allocated assets which he considered – whether rightly or wrongly – to be contrary to the articles, as intended by the founder at the time he established the fund.

The uncertainty is just as high in respect of associations, particularly as this organisation inevitably involves several individuals (at least two to make the contract). The risk here is the occurrence of a hostile takeover by a majority in the general meeting opposed to the founder, unless the articles of association are secured.

While their durability is uncertain, an endowment fund and an association may serve as a temporary organisation in order to get a project started.

2°      Forerunners to a foundation

While the long-term durability of an endowment fund or association is uncertain, these organisations are nonetheless appropriate to initiate a project as a forerunner to what could subsequently become a public-utility foundation.

Firstly, a foundation will be chosen for a project of a considerable scale in order to be approved by the Conseil d’Etat. It may therefore be difficult to start up a project under this form. A forerunner organisation can therefore be used to launch and develop the project, to validate its advisability and viability, and to assess its impact.

Secondly, an endowment fund and an association are perfectly suited to management during the founder’s lifetime. The conversion to a foundation may therefore be merely a step taken to secure its continuity after the founder’s death.

Until 2014, this approach consisted in dissolving the existing legal entity and then transferring its net assets to the newly created foundation. This reorganisation process was simplified by the 2014 law on social and solidarity economy[22] which created a specific legal regime for converting an association[23] or an endowment fund[24] into a public-utility foundation[25].

The regime simplifies the process by maintaining the legal personality during the conversion to avoid having to transfer assets, contracts and other necessary things (INSEE number, bank account, etc.), thereby avoiding the costs. For example, where real property is owned, the conversion only entails payment of a fixed-rate real-estate transaction fee (CSI) of 15 Euros[26], instead of the notarial and land registration fees which apply in the event of a change in the owner’s legal situation.

A forerunner endowment fund may also be designed as a vehicle for safeguarding a patrimony, in the same way as a foundation. The fund may therefore pursue the purpose of keeping a collection or a historic monument for example, allocated to its endowment. The endowment fund may not, however, have as its main purpose the continuity of a business in which it is a shareholder.

Nonetheless, no provision restricts the possibility for an endowment fund of being a majority shareholder in a business. The shareholder foundation mechanism is also transposable to it, since a company’s stock may represent a simple investment of the endowment, in order to generate the necessary income to achieve the general-interest purpose. The above-mentioned IGF report goes even further and suggests creating a special endowment fund for the purpose of holding and protecting a company’s capital[27].

III      TAX INCENTIVES FOR PHILANTHROPY AFTER THE 2018 FINANCE LAW

Initiating a philanthropic project is, by nature, based on a disinterested donation constituting a liberality. The project’s funding therefore results from an allocation of income that is irrevocable and is granted without valuable consideration.

Taxation nonetheless remains a key question in philanthropy. Although the tax benefits of philanthropy are an important incentive to the donation, they are not generally a motive per se for the philanthropist. However, it will be important to analyse taxation for the project’s funding and, to a lesser extent, for the choice of structure, so that the founder can do more and do better thanks to the tax benefits.

The project funding may effectively be favoured thanks to the special tax regime of philanthropy, because a part of the founder’s income tax or property wealth tax may ultimately be allocated to the general-interest project (A). Depending on the legal form of the beneficiary organisation, it may in principle benefit from tax neutrality on payments received, thanks to the regime of exemption from transfer duties on donations (B).

A.      INCOME TAX RELIEF AND TRANSPOSITION OF WEALTH TAX RELIEF INTO PROPERTY WEALTH TAX RELIEF

The 2018 finance law did not significantly change the regime of income tax relief for donations made by private individuals[28]. As mentioned above, the tax reduction was solely extended to donations, within the limit of €1,500, made to corporate foundations by shareholders, corporate officers, or members of the founding company or companies belonging to the same tax-consolidated group.

The tax reduction is still equal to 66% of the amount donated in cash or in kind, within the limit of 20% of taxable income. Any surplus which cannot be deducted in a given year may be carried over for the next five years. This tax reduction is applicable to donations made to the three types of organisation studied above.

However, the benefit of this tax reduction could be indirectly impacted by the creation of the flat tax levied on investment income[29]. Dividends, interest and capital gains on disposals of securities will now be subject to an all-inclusive flat tax of 30%, including social security levies. As a result, this income is no longer included in the overall taxable income subject to income tax[30], unless an option for the progressive tax scale[31] is expressly made.

Now, as we have said, donations granting a right to an income tax reduction are determined within the limit of 20% of taxable income, i.e. all income subject to the scale. Prior to the introduction of the flat tax, administrative doctrine specified that “however, the income to be taken into account […] does not include income to which a flat withholding tax applies or capital gains taxed at a proportional rate”[32]. The 20% limit may therefore be quickly reached, depending on the income structure[33], particularly for the wealthiest taxpayers whose income is financialised.

On the other hand, the finance law revolutionises taxation of wealth by abolishing the former wealth tax (ISF) and introducing a tax solely on real property wealth (IFI). While the ensuing reduction in the number of taxpayers liable for this IFI might impact the collection levels of foundations, to which most ISF donations are made, it does not affect the previous system of wealth tax reduction.

The former wealth tax reduction for donations is therefore transposed identically to the new tax[34]. Within the limit of a €50,000 reduction, donators may deduct from property wealth tax 75% of the amount of donations in cash and donations made in full ownership of company shares admitted to trading on a French or foreign regulated market[35]. However, no provision is made for carrying over any surplus that could not be deducted. Furthermore, as the tax reduction for subscribing to the capital of an SME (TEPA system) is abolished, the €45,000 limit on tax relief when the two payments are cumulated will no longer apply.

The beneficiary organisations are also unchanged and are essentially public-utility foundations[36], whereas endowment funds remain excluded from the system as before. These beneficiaries must always give donators a receipt complying with the model defined by order[37], to prove their payment.

B.      ORGANISATION’S EXEMPTION FROM TRANSFER DUTIES ON DONATIONS

The exemption from transfer tax on donations[38] applying to donations to certain general-interest organisations still applies, unchanged. It enables eligible organisations to devote all the amounts received to the achievement of their aim, with complete tax neutrality.

This exemption particularly applies to endowment funds meeting the general interest conditions of Article 200, 1-g) of the French Tax Code, and to public-utility foundations whose resources are exclusively allocated to disinterested scientific, cultural or artistic work, and to assistance, defence of the natural environment or animal protection.

However, this exemption has still not been adapted following the extension of the legal capacity of associations that are merely declared. Since 2014, these structures may now receive liberalities, under certain conditions[39] and as a result, donations made to them, other than gifts by hand[40], remain subject to transfer tax between non-related individuals, at the confiscatory rate of 60%.

By Alexis Becquart, Xavier Delsol & Arnaud Laroche

[1] See Jean-Baptiste Autric and Laurent Butstraën, Guide pratique du mécénat d’entreprise, éd. Larcier, 2015.
[2] See Law no. 87-571 of 23 July 1987, Art. 19-8, last paragraph, amended by law no. 2014-856 of 31 July 2014.
[3] See French Tax Code, Art. 200, 1°-a), up to this date, these donations did not grant any tax relief.
[4] Law no. 2008-776 of 4 August 2008, Art. 140, V.
[5] Catherine Bergeal, Bercy conference on the development of endowment funds, 19 November 2008, workshop 1.
[6] Decree no. 2009-158 of 11 February 2009, Art. 2.
[7] Law of 1 July 1901, Art. 5.
[8] See BOFiP, BOI-IR-RICI-250-10-10-10, of 10 May 2017, § 90.
[9] See BOFiP, BOI-IS-CHAMP-10-50-10-20 of 7 June 2017, § 160 and 440.
[10] See BOFiP, BOI-IS-CHAMP-10-50-10-20 of 7 June 2017, § 380.
[11] French Tax Code, Art. 261, 7-1°-d.
[12] Other conditions must be met, notably the democratic operation of the organisation.
[13] For details, see BOFiP, BOI-IS-CHAMP-10-50-10-20, of 7 June 2017, § 150 to 360.
[14] The standard articles of association with a board of directors were updated at the end of 2017, whereas the model with a managing board and a supervisory board dates back to 2012.
[15] Inspection générale des Finances, Le rôle économique des fondations, April 2017, pt 5.2, p.43.
[16] Xavier Delsol, Virginie Seghers, Les fondations actionnaires en Europe, PROPHIL Study 2015.
[17] New Civil Code, Art. 1145.
[18] Civil Code, Art. 953 and 1046.
[19] Above-mentioned law no. 87-571, Art. 18-3.
[20] Xavier Delsol and Sophie Schiller, Les fondations actionnaires : outil de mécénat à développer, Actes pratiques et stratégie patrimoniale, no. 2/2014.
[21] See Appeal Court of Toulouse, 13 May 2015, no. 15/00129, D-Z X v. Fonds de dotation N DE G H.
[22] Law no. 2014-851 of 31 July 2014.
[23] See above-mentioned law no. 87-571, Art. 20-2.
[24] See above-mentioned law no. 2008-776, Art. 140, XI.
[25] See study 16 of the guide “Restructuration des organismes à but non lucratif”, Dalloz, June 2018
[26] French Tax Code, Art. 881 C, 11°.
[27] IGF, Le rôle économique des fondations, pt. 4.3, p. 35 et seq.
[28] French Tax Code, Art. 200.
[29] French Tax Code, Art. 200 A.
[30] French Tax Code, Art. 13-2.
[31] French Tax Code, Art. 200 A, 2 and 158-3, 1°.
[32] BOFiP, BOI-IR-RICI-250-30 of 12 Sept. 2012, § 10
[33] See Arnaud Laroche, Flat tax, don et réduction d’impôt, Juris-association no. 579, 15 May 2018.
[34] BOFiP, BOI-PAT-IFI-40-20 of 8 June 2018.
[35] French Tax Code, Art. 978.
[36] BOFiP, BOI-PAT-IFI-40-20-10-30 of 8 June 2018.
[37] CERFA receipt updated by the order no. 2018-404 of 29 May 2018.
[38] French Tax Code, Art. 795.
[39] Law of 1 July 1901, Art. 6.
[40] French Tax Code, Art. 757, par. 3.

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