The registered association (e.V.) is a corporation and is therefore subject to corporate income tax on its profits. If a registered association generates revenue through a paid exchange of services, this revenue is subject to VAT at the current rate of 19%, as is the case for any other taxable entity.
Most associations in Germany are non-profit. The non-profit status is confirmed by the tax office upon request and under certain conditions. The conditions are regulated by §§ 51 to 68 AO.
If a non-profit organization carries out a commercial business, this part of its activities is not exempt from tax. One of the characteristics of a commercial business is that it is carried out in direct competition with other entrepreneurs and therefore participates in "normal economic life". The association acts here as any entrepreneur on the market. An activity of the association is not considered an economic business if it serves to realize and promote the tax-privileged purposes of the association in accordance with its statutes and the activityactivity is suitable for achieving these purposes; furthermore, the commercial business operation must not be in competition with other companies that are not tax-privileged. This tax-privileged economic activity is called a special-purpose business. Profits from the special-purpose business are not subject to corporate income tax. The revenues are only subject to the reduced VAT rate of 7%.
In its judgment of November 30, 2016 (case reference: V R 53/15), the Federal Fiscal Court (Bundesfinanzhof, BFH) ruled that the ball event "Nacht der Nächte" ("Night of Nights") held by a Cologne carnival association with 1,200 guests did not fall under the scope of the special-purpose businessand the income from the event was therefore subject to the full VAT rate of 19%, and the profits were subject to corporate income tax. The Cologne Fiscal Court had ruled differently in the case.
The question at issue was whether or not the carnival association operated a special-purpose business.
The BFH points out that all of the above conditions must be met in order to assume a special-purpose business. It is therefore a requirement that the special-purpose business serves to realize the tax-privileged statutory purposes of the association, that these purposes can (only) be achieved by such a businessand the business is not unavoidably and to a large extent in competition with non-tax-privileged businesses in the market.
The ball organized by the association does not fulfill these conditions because the ball itself is not dedicated to the preservation of traditions and the promotion of culture, but rather pursues commercial goals. Not every social event held by a carnival association during the carnival weeks, with participants in costume and carnival performances, can therefore be classified as a special-purpose business. The event itself must be characterized by elements of the carnival in its traditional form. This is the case at a carnival session. For any other event, carnival performances and mood music without reference to tradition are not sufficient.
The fact that the commercial activity makes a financial contribution to the non-profit activities of the association and therefore, in the abstract, serves a purpose, is not sufficient for tax exemption. Finally, the BFH found that there are competing events organized by commercial enterprises that are held in the same or a similar way.
The question of whether a tax-privileged non-profit organization exists is a recurring issue with the tax authorities. In the past, the tax authorities have often not taken up such cases in order not to impair the life of the association. However, this can change at any time – including with retroactive review. Therefore, every association must expect that it will suddenly be subject to a corresponding audit by the tax office, which will always look at the past and thus often also at the existence of the association. Also dangerous here are fire brigade festivals, sports balls or street festivals.
The law does not take into account that the people involved are working on a voluntary basis, without pay and without their own interests at heart. In the event of misconduct, the responsible persons involved face the full force of the law, which also includes criminal penalties, but also personal liability for tax claims of the tax authorities that have been realized but not paid by the association. Therefore, caution is advised here and every association's board should review the activities of their association from this perspective.
The statements represent initial information that was current for the law applicable in Germany at the time of initial publication. The legal situation may have changed since then. Furthermore, the information provided cannot replace individual advice on a specific matter. Please contact us for this purpose.