The third sector, the space between the state and the economy, consists of non-profits organized by private initiatives that do not pursue economic activity.
Charities, in particular, play a crucial role in our society, often unnoticed due to their diverse activities.
Switzerland stands out with its significant welfare sector, a testament to its commitment to social welfare and philanthropy. One reason is that the Swiss state dominates education and research, which requires fewer private initiatives in these fields.
Switzerland is known as a founder-friendly country. It is home to over 13,000 charitable foundations, with total assets of over CHF 100 billion and an annual distribution volume of CHF 2 to 2.5 billion.
Philanthropists' motivations are varied, although they most likely share a sense of responsibility for fellow human beings, a fight against specific problems, and a desire to make a difference.
As society changes, the demands on charitable foundations also change. Wealthy individuals who act consciously in their businesses and investments seek to achieve philanthropic goals through entrepreneurial methods.
They don't just want to donate; they want to actively engage and make the most significant possible impact.
Impact investing, venture philanthropy, sustainable investing, and responsible investing are crucial considerations when establishing charitable foundations today.
However, comprehensive planning and considering the legal and tax framework are necessary to avoid becoming mere buzzwords.
The Swiss foundation
Establishing a foundation requires dedicating assets to a specific purpose. The principle of freedom of foundation governs Swiss foundation law.
Thus, anyone can establish a foundation and structure its purpose, assets, and organization as they think fit within the specific limits of the law.
In principle, the founder can make any arrangement as long as it does not violate the law or general principles of the Swiss legal framework.
However, such freedom is limited to the establishment phase. Once a foundation has been established, except for the cases provided for by law, it can no longer be freely amended due to the so-called principle of separation.
That solidifies the framework set by the founder. Within such a framework, the foundation's autonomy grants its bodies a degree of freedom, even vis-à-vis the founder.
Still, the freedom of foundation remains an essential and practically significant interpretation aid for assessing questions concerning the interpretation and implementation of the founder's will.
The purpose of the foundation
The purpose defines the foundation's characteristics and is its core and identity-forming feature. It outlines the foundation's task and objective and contains the most essential rules of conduct for its governing bodies.
It further describes the circle of the foundation's beneficiaries, who are the actual addressees of the purpose realization.
To get practical, here's an example of the purpose of a recently established foundation:
“The foundation is committed to eradicating poverty, ending hunger, promoting health, education and equality, and equitable access to and sustainable use of resources.”
The United Nations Sustainable Development Goals inspire this specific foundation. It is in good company as more and more foundations contribute to achieving these goals in various ways.
If you are considering establishing a charitable foundation, you have 17 goals and 169 targets to choose from. With a concrete idea of its purpose, the first hurdle has already been overcome.
But that's not all. Swiss charitable foundations pursue various purposes that cover a broad spectrum of human charity, public welfare, and culture.
Since the tax authorities publish lists of charitable foundations and the entry in the commercial register is public, you can also find a source of inspiration there.
The bodies of the foundation
The highest foundation body is the foundation council, which, in practice, consists of at least three natural persons, and a chairman is appointed. The founder can be a member of the foundation council.
From a governance perspective, it is recommended that the members have collective signature rights. In this case, two foundation council members must be residents of Switzerland.
The founder is responsible for appointing the foundation council and has broad options regarding terms in office, eligibility criteria, and succession to be specified in the foundation deed.
The foundation council is responsible for the overall management of the foundation. This includes ensuring the management of the assets in accordance with the founder's wishes and the pursuit of the purpose.
Its core tasks consist of ensuring the optimal use of funds and thus fulfilling the foundation's purpose, properly managing funds, and bookkeeping and accounting.
The foundation council must appoint an independent and external auditor to audit the foundation's annual financial statements.
For larger foundations, the foundation council may supervise an executive board that is responsible for the foundation's operational management and the implementation and execution of its resolutions.
How to establish a Swiss foundation
The formal requirements for establishing a foundation are that the foundation deed must be either a public deed or a disposition upon death.
They apply exclusively to the declaration of intent to establish a foundation and the description of the purpose and the assets.
According to the law, the founder only has to set out the main features in the foundation deed and can refer everything else to regulations and leave it to the foundation bodies to amend and, if necessary, issue them.
Although the law is quite flexible, drafting the foundation documentation with the utmost care is advisable.
A foundation may exist in perpetuity, and thus, many scenarios should be considered to ensure that the founder’s wishes are upheld over time.
As soon as a foundation is established, it is entered into the public register that notifies the supervisory authority to confirm the supervisory mandate.
The Swiss Federal Supervisory Authority for Foundations ensures that foundations under its supervision use their assets for their purpose. It is responsible for nationally and internationally active foundations.
If a foundation is only active within one Swiss canton, then cantonal authorities supervise such a foundation.
The Federal Supervisory Authority also publishes model foundation statutes that serve as a reference when drafting the foundation documentation.
The external auditor provides the supervisory authority with copies of the foundation's audit reports and all critical notifications.
A preliminary decision is usually obtained from the tax authorities before establishment to ensure implementation and planning security. The decision states that the foundation concept is generally eligible for tax exemption based on non-profit status.
In addition, the supervisory authority can be approached to obtain assurance of future supervision.
During the founder’s lifetime, a foundation is established before a notary with the undertaking to contribute at least CHF 50,000 as foundation capital.
The foundation is then entered into the commercial register, and the supervisory authority confirms supervision.
Finally, the notarized documents are submitted to the tax authorities so that they can certify the definitive tax exemption.
The tax framework
Foundations that pursue charitable purposes are tax-exempt for the income and capital exclusively and irrevocably dedicated to these purposes.
Tax exemption is essential for charitable foundations for two reasons: to ensure the foundation's effectiveness and for donors, as the tax deductibility of donations is regularly linked to the tax-exempt status.
For a tax exemption, the foundation’s activities must focus exclusively on the welfare of third parties.
In addition, the founder’s contribution of the funds must be irrevocable.
Finally, the actual fulfillment of the purpose must be ensured to prevent mere capital accumulation.
Activities in charitable, humanitarian, health-promoting, ecological, educational, scientific, or cultural areas can achieve the objective pursuit of the general interest and promote public welfare.
The prevailing popular opinion determines whether a particular activity is in the public interest.
The principles of legal ethics, as expressed in the Federal Constitution, Swiss laws, and legal precedents, are essential sources of knowledge in this regard.
In addition, there needs to be an element of altruism and the absence of profit or self-help purposes.
Profit-making purposes are deemed to exist if a legal entity in economic competition or in an economic monopoly uses capital and labor to make a profit and demands payment for its services, as is usually the case in economic life.
However, not every gainful activity leads to a refusal of tax exemption. Where there is a gainful activity, it must not be the actual purpose of the institution.
At most, it may be a means to an end and should not be the sole economic basis of the legal entity.
Entrepreneurial purposes are excluded from charitable status.
Pure capital investments via company shareholdings are possible if this does not allow any influence on management, and dividend distributions support the foundation.
Although a foundation's activities are not, in principle, limited to Switzerland, tax authorities may restrict global activities to developing and emerging countries.
Modern philanthropy in Zurich
Philanthropy has evolved from simply awarding grants to a wide range of support activities.
In particular, entrepreneurial funding models seek to maximize impact and multiply funds through various means such as loans, equity investments, and convertible loans.
Venture philanthropy and impact investing are becoming increasingly crucial alongside sustainable and purpose-driven investments in the non-profit sector.
However, this often presents challenges for tax authorities in terms of tax exemption.
In February 2024, the canton of Zurich amended its tax exemption practice to permit entrepreneurial funding models expressly.
The funding is to be used in areas in which no market (yet) exists, and thus, investments are made that profit-oriented third parties would not make, provided that the funds returned are used again for charitable purposes.
Therefore, charitable foundations can use impact investing models as part of their funding, provided this does not lead to market distortions.
However, this does not mean they can now provide total entrepreneurial funding, as the tax authorities will continue to restrict this to a portion of the funding volume.
Another pain point regarding international activities has also been resolved.
Whereas this was previously essentially limited to developing and emerging countries, activities abroad are now possible regardless of the type and location of the activity, provided they appear worthy of support from a Swiss perspective.
Foundation board members can now also be appropriately remunerated, which previously regularly failed due to tax exemption.
Zurich is thus setting a new standard that other cantons should follow, benefiting founders, beneficiaries, and projects.
Foundation governance
The Swiss Foundation Code provides excellent guidance for implementing a foundation governance framework.
It is based on the four principles of effectiveness, checks and balances, transparency, and social responsibility.
The first principle ensures that charitable foundations implement their foundation purpose as efficiently and effectively as possible.
A foundation's actions are guided by the founder's intentions, which its governing bodies must consistently interpret and implement.
The foundation council aligns all activities, including grant-making and asset management, with the founder's purpose to optimize the foundation's impact.
The second principle implements suitable organizational measures to balance leadership and control for all critical decisions and procedures.
A foundation lack owners, members, or shareholders and thus has no inherent control mechanisms like associations or corporations.
It is self-governed, requiring it to establish internal checks and balances.
The foundation council is responsible for leadership and must ensure appropriate controls are in place to maintain accountability.
According to the third principle, foundations should maintain the highest level of transparency regarding their basic principles, objectives, and activities.
They must prioritize internal and external transparency as visibility enhances their effectiveness in securing grants, attracting employees, and engaging with beneficiaries.
The foundation ensures comprehensive public communication about the foundation’s activities and finances.
This transparency fosters dialogue with stakeholders, particularly beneficiaries, and strengthens the foundation's role as a proactive force in civil society.
Finally, the principle of social responsibility requires foundations to develop their organization and activities according to the requirements of the times.
Foundations must comply with legal obligations in all operating geographies.
Their social responsibility goes beyond legal compliance, requiring them to address societal challenges and integrate evolving issues into their activities.
While they engage with social issues, they must avoid pursuing specific political interests to maintain public benefit principles.
In light of these four principles, the Swiss Foundation Code provides 28 recommendations in a practical context.
We recommend reading these guidelines if you are considering establishing a charitable foundation.
Financial management of charitable foundations
Asset management plays a vital role in implementing the foundation's purpose.
Ideally, in addition to preserving the foundation’s assets, income can be generated to leverage the foundation’s impact.
However, this is not just about returns but investments that align with the foundation's purpose.
Generally, the foundation's assets must be managed according to recognized commercial principles. This means considering parameters such as liquidity, risk distribution, and security.
We recommend a specific clause in the foundation deed that enables the foundation council to invest the foundation's assets in a purpose-related and sustainable manner and use both income and capital to realize its purpose.
This is particularly relevant if the foundation wants to invest in businesses in an established market environment without jeopardizing its tax-exempt status.
From a tax perspective, this is seen as a pure investment activity subject to the condition that the investment does not allow any influence on management, and dividend distributions support the foundation.
The foundation council is subject to prudent investor rules. Still, since it can be entitled to use capital and income to realize the foundation's purpose with purpose-related investments, it may accept lower return expectations that are outweighed by the contribution to the foundation’s purpose.
The foundation’s investment management framework should adhere to professional standards and separate execution from control.
This means that investment management is typically performed by external managers supervised by the foundation council.
Specific investment regulations, to be approved by the supervisory authority, regulate the details of the strategy and its execution.
The impact of new technologies
We see a growing interest among founders in enhancing engagement and traceability with technology.
Blockchain applications, in particular, could revolutionize how foundations act and interact with donors and supported individuals and communities.
Let’s take a token, a digital and non-replicable unit of information stored and transferable on a blockchain issued by the foundation.
This token allows owners to become part of the governance and decision-making process.
With smart contracts, programs that run on a blockchain, a distributed system enables an organization to interact and manage resources governed by code rather than people.
A charity can be a great example of a decentralized autonomous organization (DAO) by accepting donations from donors and letting them vote on the cause to fund.
This is how the Ethereum network, a mainstream decentralized blockchain with smart contract functionality, describes a collectively-owned organization working towards a shared mission.
Donors can actively shape the foundation’s impact and trace specific activities. An enhanced level of decentralization and engagement builds trust and could attract further funds for charitable purposes.
A token can also grant access to specific communities curated by the foundation to foster project and program support, skills development, empowerment, community building, and mobilization.
As mentioned above, foundations must adhere to the highest transparency standards.
However, not every donor is keen to read lengthy annual reports. Still, they want to ensure their donations are used according to the foundation’s purpose.
Blockchain technology offers the benefits of transparency and traceability. The level of decentralization can be tailored according to the founder’s wishes and in line with the foundation's purpose.
Furthermore, crypto payment applications can support fundraising and granting.
For example, UNHCR, the UN Refugee Agency, dedicated to saving lives and protecting refugees, forcibly displaced communities, and stateless people, has launched a blockchain-powered payment solution to reach people in need with speed, agility, and accountability.
Non-fungible tokens (NFTs) are unique, not interchangeable, and offer further applications. Their use cases for digital art collectibles, supply chain documentation, and gamification provide new avenues for charities to raise and deploy funds.
We are in a still-evolving environment, but the impact of new technologies on the non-profit sector can already be seen in various projects and applications.
To conclude on Swiss charitable foundations
If you have been fortunate and desire to give back and support those in need, a Swiss charitable foundation offers an exciting opportunity to implement your social impact thesis.
Next to a flexible and predictable legal and regulatory framework, the Swiss non-profit ecosystem, which consists of dedicated networks and associations, academia, specialized professionals, and accessible authorities, is another decisive factor enabling successful charity work.
Setting up a foundation requires a structured approach focusing on governance to ensure a coherent and professional management framework aligned with the founder’s values, vision, and mission.
The charitable sector is constantly evolving, and recent developments, particularly in Zurich, show the Swiss commitment to supporting modern philanthropy toward enhanced efficiency and effectiveness.
16-09-2024