Recently, the State Secretary of Finance updated the 2005 Decree on the corporate income tax liability of foundations and associations. As a general rule, foundations and associations are subject to corporate income tax if and to the extent that they conduct a business. The Decree contains views of the State Secretary on whether and to what extent an enterprise is conducted and provides some approvals. Parts of the 2005 Decree have been amended and tightened. In addition, some new sections have been included in the Decree.
The main changes
The biggest and most relevant changes concern corporate tax liability of subsidized institutions. We elaborate below.
- Policy on "participation in economic life" is codified. (para. 1)
- Policy on "pursuit of profit" has been clarified. In particular, for subsidized institutions and the application of the Grants Decree. (Section 2)
- Policy is included on the possibility for cultural ANBIs to opt for integral tax liability. (Section 3)
- Clarification has been included on when a social interest institution (SBBI) can deduct notional labor costs. (Section 4)
When does a foundation or association drive an enterprise?
A foundation or association drives an enterprise when 3 cumulative conditions are met:
1. there is a sustainable organization of labor and capital,
2. it participates in economic life, and
3. with the intention of making a profit.
To determine whether there is an enterprise, each activity must be assessed separately. It is therefore irrelevant whether or not a foundation or association as a whole strives to make a profit if an individual activity qualifies as running an enterprise. That separate activity that qualifies as an enterprise is then still subject to taxation.
It is not decisive that the articles of association state that the institution does not seek to make a profit, What matters is the actual situation. If the institution systematically generates surpluses, a profit motive must be assumed. The allocation of the surpluses is not important, because in that case it is a question of profit allocation and not profit determination.
Codification of policy on 'participation in commerce'
The Decree includes when, according to the Tax Office, there is 'participation in commerce', particularly in the case of associations. Participation in commerce occurs when goods are delivered and/or services are provided to third parties (possibly including members of associations).
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Indications that participation in commerce does exist are, according to the Secretary of State:
- It is easy to join the group for which the activities are performed.
- Individual activities are carried out for the benefit of members and third parties.
Indications that there is no participation in commerce are, according to the Secretary of State:
- The activities are performed for a closed group with little or no change.
- Services are performed exclusively for the general interests of members. In practice, according to the Secretary of State, foundations are more likely to participate in commerce because they do not have members.
Since a foundation has no members, the decision states that foundations are more likely to participate in economic activity than associations.
The 'profit-seeking' criterion for subsidized institutions
The Decree clarifies that the assessment of the profit-seeking criterion must consider whether the activities are expected to achieve positive results over several years. The starting point for this assessment is an institution's financial statements. However, taxable profits are influenced by inexpensive use and various statutory provisions. As part of the assessment of the fiscal profit motive, according to the Decree, the fiscal depreciation restrictions, the notional payroll deduction and the spending reserve can be abstracted from.
A tightening and broadening of the subsidy decree
Subsidized institutions can realize operating surpluses. Grants can contribute to the surpluses and should be included in taxable profit. For organizations that exclusively carry out activities financed by grants and, according to the bylaws or grant rules, must use the surpluses obtained in accordance with the grant purposes or pay them back to the grantor, there is no profit motive with the application of the Grant Decree.
The 2005 Decree states that, under conditions, there is no profit motive. This is the case
1. to the extent that subsidized institutions, according to statutes or subsidy rules, must use the surpluses obtained in accordance with subsidy purposes or pay them back to the subsidizer.
2. if the institution obtains more than 70% of its income related to subsidized activities from grants and, in addition, receives only own contributions from those for whom the institution performs the services.
The tax literature has always assumed that these conditions are not cumulative and thus there are two situations where there is no profit motive. In recent practice, however, the Tax Administration takes the position that the two conditions are cumulative. Based on the literal text of the old Decree, this is debatable.
Tightening codified
The new Decree tightens the conditions for the absence of a profit motive. The Decree confirms that that the conditions mentioned above are cumulative (stricter reading). It also takes the position that institutions may not obtain any other income, such as rental or hospitality income. At first glance, the new Decree looks like a restriction, but we see this more as a codification of an existing restricted reading that the Tax Administration uses in practice.
Widening
The Secretary of State considers it undesirable that the receipt of own contributions from those for whom the institution performs subsidized activities and the performance of eligible activities by an institution that receives own contributions and/or fees on a contract basis for this purpose should lead to a profit motive. If these activities are not subsidized, but would be subject to grant conditions, then such activities are "eligible activities." The income from eligible activities can then, under conditions, not lead to a profit motive, according to the Inland Revenue. The conditions under which there is no profit drive in such situations are as follows:
(1) The institution shall carry out only subsidized or subsidized and eligible activities.
2. The institution shall finance the total of these activities at least 70% with grants and additionally only with:
a. own contributions of those for whom the institution performs the subsidized activities; and
b. fees received on a contractual basis from municipality(s) (or other governing bodies), supplemented, if necessary, by own contributions from those for whom the institution performs these eligible activities.
(3) The institution shall use any surpluses earned both in accordance with the articles of incorporation or grant rules and actually in accordance with the grant purposes, or return such surpluses to the grantor.
4. The institution has ensured both in its articles of association and in practice that - if there is one - the income from contract funding can only be used for the subsidised or eligible activities.
Integral corporate income tax liability of cultural institutions with ANBI status
Cultural institutions with the ANBI (Algemeen Nut Beogende Instelling) status can apply for integral corporate income tax liability. Integral tax liability ensures that positive results from the corporate part can be offset against losses made in the non-company part. A request for this must be filed within six months after the end of the fiscal year. This possibility was already provided for by law. The annex to the Decree now stipulates the conditions. If the request is granted, the integral tax liability will apply for a period of at least 10 years. We recommend having the (future) tax position assessed to determine whether integral tax liability is advantageous.
Clarification fictitious wage costs deduction
An ANBI or an entity that promotes a social interest (SBBI) may, under certain conditions, deduct fictitious labor costs if work is performed by volunteers. The Decree clarifies that only bodies that promote a social interest are subject to the additional condition that 70% or more of the profit of the body must be achieved through the use of volunteers. This 70% requirement does not apply to ANBIs. In practice (and literature) this reading of the legal text was already used, however, the codification of this is welcome as the legal text leaves room for interpretation differences.
In conclusion
The corporate income tax liability for associations and foundations is becoming increasingly topical and is playing out in practice as institutions expand their operations to generate more income. interpretation used by the Tax Administration in practice. We advise institutions to (re)assess their corporate tax position using the new Decree. If you have any questions about the above or are curious about the concrete tax consequences of the Decree for your institution, please contact us via your relationship manager, by phone at 040 - 2 504 504 or via the contact form below