Foundation Law and Foundation Law Reform in Europe
The comparative study of foundation law in Europe is a point of emphasis on the Institute. Seminal work in the area of foundation law was accomplished with the publication in 1971 of Mestmäcker and Reuter’s “Stiftungen in Europa”, which for many years served as a benchmark comparative law treatise. The starting point of the current study was the symposium “Stiftungsrecht in Europa” that, in cooperation with the Christian-Albrechts-Universität Kiel’s Institut für Wirtschafts- und Steuerrecht, was held in Salzau/Schleswig-Holstein from 18 May through 20 May 2000 under the leadership of Hopt and Reuter. The Zeit-Stiftung Ebelin und Gerd Bucerius generously supported the conference.It is the goal of the project to ascertain the current state of foundation law in the member-states of the European Union, Switzerland, Liechtenstein, the USA and East European nations and to undertake a comparative study whose conclusions can be utilized in the discussion on the reform of German foundation law.
In many parts of Western and Eastern Europe, the character of foundation law finds itself in a state of flux. The reform of foundation law is, for instance, being discussed in Great Britain, Italy, Latvia, Switzerland and the Ukraine. In Germany, foundation tax regulations were recently amended to provide broader support of foundations through a law that was signed on 14 July 2000 and took effect the following day (BGBl I 1034). Thereby, the tax allowance for donors was enhanced retroactive to 1 January 2000 and the ability of foundations to create reserve funds was improved
In addition to these tax measures, a federal and state working group appointed by the Federal Ministry of Justice is presently studying whether and to what extent private foundation law also needs to be reformed at the federal and/or state level. All of the parliamentary factions are fundamentally in agreement that a reform of private foundation law is required in order to raise the number of foundations and, in times of empty budget coffers, to increasingly integrate foundations in the performance of functions serving the public good, as they have long since proven themselves a “third sector” in the provision of means of subsistence alongside the economy and the state.
At present, draft proposals are on hand from the Bündnis 90/Green Party faction (November 1997 proposal for a law in support of foundations) and the Free Democratic Party (January 1999 proposal of a law for the reform of foundation law). Changes or additions to §§ 80 et seq. of the BGB (German Civil Code) have however to this point been deferred.
While the societal importance of collective unions continually loses its significance, the willingness and economic ability of individuals to place - according to their particular aims - substantial financial means at the disposal of the general public is on the rise. Not insignificantly, foundation law awoke the interest of political parties on account of the sizable value of assets expected to be bequeathed in the coming years (estimates run at approximately 400 billion DM yearly) and due to the estimated 14 trillion DM of assets privately held in foundations.
However, the comparative law analysis revealed that, as postulated by Schulze, in the majority of the legal systems there continues to exist a deep-seated anxiety over the “dead hand” (“mortmain”), whereby the creator of a foundation continues to dictate the use of his assets from the grave.
It is for this reason that foundations are as a matter of public policy per se restricted in Roman legal systems (Belgium, France, Italy, Portugal, Spain) and similarly so in Great Britain. In contrast, in the USA the perception of institutions as contributing to the public welfare is respected to the very border of illegality and manifest abuse.
In Germany (and similarly in Greece) reservations with regards to the “dead hand” have not led to the general prohibition of foundations aimed at a private purpose. They have however significantly contributed to the extent that the licensing process tied to the formation of a legally competent foundation which is to be domiciled in Germany has, to date, remained unchanged.
Now, the rejection of a licensing model in favour of a normative or, alternatively, a registry model is in Germany nearly uniformly demanded. Pursuant to currently applicable law, licensing approval lies in the discretion of the responsible state agency, but such authority stands counter to the fundamental right of authorization afforded founders. Under the normative model, the required elements for the formation of a foundation would be specifically set forth in legal guidelines. The foundations will then be maintained in their own individual register. Whether the registration will itself amount to a constitutive effect is not yet completely clear.
The replacement of the licensing model with a registration model corresponds to the development in Western and Eastern Europe that seeks to create greater freedom for foundations. Already for more than 100 years, foundation law in Switzerland has done away with a licensing model and the preclusion of privately aimed endeavours. Liechtenstein has taken advantage of the “dead hand” debate being led in other locations, and goes as far as courting the introduction of foreign assets by to a great extent permitting privately aimed foundations. Austria’s authorisation of private foundations through its foundation law of 1993 has led to a boom in the establishment of foundations. Also, a normative system applies for Austrian foundations. The licensing system applicable in Belgium does not permit the denial of authorisation based on consideration of the foundation’s aims. Authorisation by sovereign decree, as in a normative system, can only be denied based upon a legal ground. In 1997 Italy replaced a licensing system in both form and substance with a normative system. To date unique in the world, Article 34 of the 1978 Spanish constitution goes as far as explicitly recognizing a “Right of Foundation” (derecho de fundación) as a logical corollary to the right of association.
According to the comparative law study of Drobnig, the most unequivocal alteration of the foundation’s essential nature has occurred in Eastern European nations. In the majority of these countries, with the exception of Bulgaria, new foundation regulations from the last decade have filled the void that the collapse of communist dictatorships left behind in the “third sector”. In none of these lands is the authorisation of a state agency required. Courts and administrative agencies are only lawfully entitled to review the formation of the foundation. All of the newer laws provide for a registration model whereby the foundation normally acquires legal status through registry.
In the context of the expected reform of German foundation law, it is being discussed whether the state supervision of foundations can be further reduced. In Germany, Switzerland and generally also in Liechtenstein and Austria (with the exception of the Austrian “private foundation”, a newer legal form created in 1993) an administrative agency carries out the authorisation and oversight function. In contrast, the modern East European laws for foundations afford greater independence from the state. With the Charity Commission, English charity law has also announced the appropriateness of a politically independent authority as foundation overseer. In the area of private foundations, Austria provides for judicial supervision that is complemented with an obligatory review by a judicially appointed foundation auditor. Privately aimed foundations in Liechtenstein are only subject to judicial oversight upon the application of the intended foundation beneficiary. Reuter has stated that the reform goal of German foundation law is the endorsement of registration (in a still to be created foundation register) and the supervisory function being given to the courts in the framework of voluntary jurisdiction.
Family foundations are not yet covered in §§ 80 et seq. of the German Civil Code; rather, they are governed by provisions of state foundation laws that wholly or in part forgo any federal supervision of foundations. Under the overwhelmingly predominant view, no further demands are to be made upon family foundations with regards to designation of the purpose or intended beneficiary. It is only in Brandenburg where a grant of authorisation to establish a foundation is precluded if the foundation is designed to exclusively provide for the maintenance of one or more family members. The object of the current debate surrounding the reform of German foundation law is the question whether German family foundations de lega ferenda should be allowed to remain in this form. With the exception of Liechtenstein (and also the USA), other West European legal systems do not allow family foundations absent temporal limitations or additional requirements, i.e., indigence, worthiness. Even the Austrian private foundation law restricts their length to a (extendable) period of 100 years. Under the draft proposal of Bündnis 90/Green Party, a family foundation would be limited to a duration of 30 years following its entry in a foundation registry. According to this proposal the foundation expires when its aim is not changed during this time period. Rawert also favours a time limitation with regards to family foundations.
As noted by Kronke, one sees the advancement of the business-aligned foundation, a manifestation that is rarely found in German practice. In Europe it predominantly emanates from the ability of a foundation to act (at least indirectly) as a business sponsor - however not without the simultaneous imposition of restrictions or the coupling of authorisation to special conditions. In recent years Spain and Italy have created new provisions for indirect enterprise foundations. In the Netherlands foundations are the second most common form of business sponsorship. At present, foundations having an interest in firms, i.e., only indirectly operating a business, already constitute a licensable entity in Germany.
Kronke is of the opinion that supervision of business oriented foundations as well as family foundations will not be per se dispensable in the future. He argues that business supporting foundations additionally require a functionally adequate institutional structure (board of directors and supervisory body) and should as to other matters (e.g., guarantee capital, rendering of accounts, disclosure requirements, bankruptcy procedures) be incorporated into a functionally appropriate regulatory framework.
The reform proposal of the current ruling majority follows the preliminary draft of a Swiss foundation law reform as well as the more recent legislation of the German states and requires that enterprise foundations possess an aim beyond general, economic business concerns.
A completely new organisational concept of the “dependent foundation” (an institution without legal personality which has some similarities with a trust) as a “virtual legal entity” has been developed by K. Schmidt. According to prevailing opinion, the dependent foundation is a goal-circumscribed asset without its own legal identity and for which §§ 80 et seq. of the German Civil Code accordingly has no applicability. K. Schmidt as well does not want to pronounce dependent foundations as having a legal character in a technical sense. The classification aim of rights and obligations remains exclusively with the “foundation sponsor” (who is in this respect comparable with the trustee in Anglo-American law). Under his model the foundation sponsor administers the foundation asset in his own name for accounting by the donor (who is in this respect comparable with the settler in Anglo-American law) and his successor in interest. A “virtual foundation” is simulated through the mutual rights and obligations which exist in a fiduciary relationship. Thereby, a foundation-like organisation results from the dependent foundation. He posits that a “foundation sponsor” becomes a “pseudo-organ” of a “pseudo-foundation”. Thus, the dependent foundation is not subject to the state’s legal supervision and its usual deterrent effect upon the donor.
The construction of the “virtual foundation” raises grave questions that deserve an in-depth discussion. First, it is debated whether in addition to the allocation of an asset there even results a fiduciary relationship (by virtue of a conditioned gift) out of which a fictitious foundation can be constructed. It also remains unclear whether the “virtual foundation” asset is only financially responsible for the sponsor’s foundation related debts and is truly protected from the reach of the foundation sponsor’s private creditors. Finally, in the upcoming reform considerations it must be decided whether the dependent foundation should remain free from oversight or (as suggested by Reuter) be subject to agency supervision. K. Schmidt has spoken out against such supervision.
A possible standardisation of foundation law and the law of tax-exempt organizations in the European Union (EU) is a central question for the future of foundational entities. Should certain principles of foundation law in the EU be harmonised? Or do the principle of subsidiarity and cultural divergences inside the EU member-states oblige abstention from a European regulation? Hommelhoff considers the harmonisation of public interest law to be ruled out in the interim. In any event, in the context of enterprise foundations, one should keep in mind the observation of Walz that utilizing the rights of non-profit organisations to undertake a cost-advantageous, self-financed capitalisation via a tax-supported foundation asset would contravene European subsidy law (Art. 87 EC Treaty) at the present stage.
The articles and country reports prepared in the context of the current project together with a comprehensive collection of foundation laws will be published shortly by the Heymanns publishing house under the title “Stiftungsrecht and Stiftungsrechtreform in der Europäischen Union, Switzerland, Liechtenstein and the USA” (Foundation Law and Foundation Law Reform in the European Union, Switzerland, Liechtenstein and the USA).