Associations – an interesting option with unknown advantages

When someone asks what the rich’s tricks are to pay less taxes, they often come across the terms foundations, tax havens, offshore companies and foreign accounts.

However, few people know that most of these things can be done without large costs through normal and current associations which, contrary to what happens with trusts, do not have a bad reputation to tax offices around the world  (it may also be worth it for those who are not yet millionaires).

No matter what we do, we find associations everywhere in life. For example, think of football. Football clubs are an association which can have hundreds and billions of pounds. Think of big clubs like Real Madrid, FC Barcelona or even FIFA. But of course, there are also other types of associations, such as local singing clubs, bowling clubs, gymnastic clubs, etc.

Now-a-days, especially in the professional football world, associations act as gigantic profit motive companies, which obviously do everything they can in order to keep their tax obligations to a minimum.

An association can be defined as:

An organisation formed by three or more people in order to share knowledge, means and activities to achieve lawful, common, general or private interest purposes, who are provided with certain statutes to manage the operation.

So, the association refers to a long-term voluntary union of natural and/or legal persons to achieve a certain aim. Its existence doesn’t depend on the changes of its partners or members.

The association is an independent subject in relation to the law and is not linked to certain members for continuity. Generally, any citizen has the right to create an association. The association can only be banned or denied authorisation if it goes against criminal legislation or undermines constitutional order.

Virtually any business in the world can come under an association. At first you can create a non-commercial association, just so it exists, and then after a reasonable time you can change the purpose to “commercial activities”.  However, if from the get go you are open and acknowledge that you intend to make profits no one is going to stop you. When you start the business you will need corresponding permission.

Here are some examples of what can be done with an association:

• Buy houses
• Open accounts
• Hire workers
• Enter into contracts
• Donate money
• Ask for and give loans
• Own cars, planes or boats
• Forming companies
• Hold shares
• File lawsuits in the courts

Associations can fully participate in business activities and also be a member of other associations.

For those who know it well, the law of association is an “instrument” where a “great variety of melodies” can be played. It is so flexible that it is perfectly suitable for almost all objectives.

History of associations

The first groups similar to the associations were the brotherhoods of traders and the guilds of merchants in the Middle Ages and the early Modern Age. These organisations not only defended the professions interests, but in some cases, they were also created to improve the communities living and the sociability among the members, as was the guilds of musicians for the singing masters.

The oldest club, which matches what an association is now, was created in 1413 in London for charitable purposes. At that time, the term “association” did not yet exist.

Closer to the current associations were the 17^th century language societies, the unions of the English upper class (men’s clubs), the Masonic lodges, the Enlightenment literary societies and the political clubs during the French Revolution. In addition, in the 18^th century the so- called “reading societies” emerged.

Societies created in the 17^th and 18^th centuries are considered the prototypes for current associations. Their main objective was to promote education and culture. In reading and language societies, the aristocracy discussed current events as well as political and philosophical problems of that time.

At the start of the 19^th century, a large number of associations related to industrialisation emerged, at a time when people began to reflect on the social class system that had marked life so far. The revolutionary thing about associations, which were also called “societies” back then, was that people from different social backgrounds gathered there. The nobility, the intellectuals and senior officials argued in the so-called “reading societies” or “language societies” about current affairs or political and philosophical issues .

In these associations the illustrated bourgeoisie could voice their political ideas. The associations contributed decisively the nobility to adopt bourgeoisie’s values. At the beginning of the 19^th century, the society started to use the term “associations”. These associations covered the ‘life in society’ issue and created a basis for the development of collective and common interests and were therefore very much appreciated.

The associations also gained social and political influence, since they dealt with tasks that the State did not fulfil. This was mainly the aftermath from industrialisation and increasing urbanisation.

This is how charitable associations like Caritas and the Red Cross emerged. In addition, many cultural and leisure associations were founded. These were meeting points for people with political similarities who could not freely devote themselves to politics. The workers association was an example of this.

Conservative and nationalist associations also experienced great popularity. Finally, the continued growth of the associations forced politics to react. 1848 was a milestone for the associations, because the German National Assembly finally recognised that the right of association was a fundamental one. The same thing happened in Austria,  which was included in their Constitution in 1867. This assured, among other things, the right to create associations.

The end of World War II was also a new era for associations. The new associations created in the West were a reflection of the emerging leisure and consumption society. The associations from the 50’s and 60’s no longer focused on politics and culture but on leisure and hobbies. Dance clubs, singing groups, Vespa drivers or even the first fan clubs were increasingly taking over. A wide variety of associations that were created offered the possibility to meet people with similar interests in the community during free time.

Associations in the present

In Germany there are more than 630,000 associations. One in two citizens are a member of an association. In Austria there are more than 120,000 associations, which, per person,  is twice as many as in Germany. Switzerland is about average with more than 80,000 associations.

Therefore, it is not true that Germany is the country with more associations per person. Actually, in relation to Europe, Germany, along with England, is only average. Scandinavian countries and the Netherlands have a larger number of associations per inhabitant. Southern Europe countries have fewer associations.

For a long time, associations have had a provincial and tainted image. However, in recent years, associations have often been rediscovered and valued as places for citizens’ initiatives. More than 90% of social initiatives are carried out in the associations environment. They offer services at affordable prices, such as football lessons, tennis, or other types of sports. On average, one in three Germans is a member of a sports association.

It is frequently said that associations are outdated and that young people hardly participate. This preconception is only partly justified. There are associations that, due to the topic they are dealing with, simply have little generational change, for example, traditional male singing or shooting associations.

On the other hand, more and more young people participate in associations that want to protect the planet or human rights, or those that deal with the critical analysis of  society’s information. There are more and more associations, meaning the competition to attract members is high. So, associations form one of the pillars of our civil society. Without the voluntary commitment of the members of the associations, the State would be totally overwhelmed when facing all social problems.

Therefore, substantial changes to association’s legislation that could complicate their organisation and administration is not likely. On the contrary, the Federal Ministry of Finance commissioned the Institute of Economic Research (IFO) of the University of Munich to study and assess the consequences of the advantages and disadvantages in EU countries in their respective legislation for associations (more exactly: the forms, types and principles of recognition of non-profit associations). Ultimately, tax regulations must be structured in such a way that the population’s commitment increases, or at least, there are no obstacles in the way.

The trend to create associations is definitely increasing. Compared to the 70’s, today there are five times more associations. It is very unlikely that this trend will revert. As well as non-profit associations, there are also profit-making ones, which we will not discuss in this article.

In today’s article we will only focus on non-profit associations.

In a nutshell, here we have one of the most simple and manageable legal strategies. The mere use of an association implies a noble and public utility compromise, not an economic interest and an increase of our wealth.

Associations are popular and are not usually at the tax offices’ centre of attention. If you use associations correctly, as we explain in this article, you can get many advantages from them.

Summary of concepts around associations

Statutes

The statues govern the internal constitution of the legal entity from the private law point of view.

Sponsorship

Sponsorship is defined as a cash or in kind contribution to (charitable) organisations. Despite the fact that it is actually done for unselfish reasons, business objectives are indirectly achieved through advertising, so the brands perception is improved. Instead of being a direct purchase, it is rather an exchange of provisions.

Donation

Donating means giving assets voluntarily and permanently(!) for a “good cause”.

Founding capital

“Founding capital”, unlike “donation”, means that the assets are not handed out for the non-profit organisation’s current activity, but they serve as a permanently obtained  base capital for a newly created foundation or – for sub-foundations – as a base capital for an existing foundation.

Commercial activities

There are three types of commercial activities:

• Essential auxiliary services
• Expendable auxiliary services
• Other commercial activities

Essential auxiliary services

You have an essential auxiliary service when

• the organisation is generally aimed towards fulfilling its intended purposes
• the intended purposes cannot be achieved without it
• and as long as the auxiliary service doesn’t compete with similar organisations, beyond what is necessary to achieve its objectives.

Typical examples of essential auxiliary services are:

• Sport events in sport associations,
• Concerts in musical or singing associations,
• Theatre performances in cultural associations,
• Conferences in scientific associations,
• Disabled residences of disabled associations.

Expendable auxiliary services

Profits derived from expendable auxiliary services are free from corporate tax if €10,000 per year is not exceeded. Here you have to consider all the profits from all taxable activities.

As for VAT, in case of expendable auxiliary services, it is normally based on the fact that the initiatives are carried out as a hobby, so it is not actually a business activity. Corporation tax only extends to the expendable auxiliary service, but the association itself remains tax-free. If you obtain a surplus with the auxiliary service, up to €10,000 of it will be tax-free.

Other business activities

With sale volumes above €40,000 earned in this area (for example: other economic, agricultural and forestry activities), it is essential to request an authorised exception to the tax authority, otherwise, the non-profit entity status of the entire association will be lost, like how it is in Austria. The regulations of other countries in relation to this matter are very varied.

Possible reasons for creating an association

If you are still not sure what associations are for and in which cases they might be useful, here is a small list of possible reasons for creating one.

Asset protection with an association

Neither the State nor the creditors have access to the assets. The protected assets are not owned by a natural person, but are maintained by a legal entity that belongs to itself or its members. Unlike what happens in a company, where you can proceed against the partners participations, in associations this is not possible.

Avoid the obligation to report

In order to avoid the obligation of reporting information about shares and foreign assets, an association can be used by a partner or owner. When structuring the statutes properly, it can be effectively achieved so the founder remains in charge of the company. Since the assets of the association belong to itself, and not to the founders or members of the Board of Directors, neither the foundation nor the association’s membership have economic rights.

Anonymity through an association

The Registry of Associations only provides information about the names and surnames of the organ representatives. In Swiss associations there is no registration that is publicly visible. The founders can be both natural and legal persons. The required information is very limited, in particular, there is no identity or address verification.

Any change to the managing bodies or those authorised to represent the association can be easily made by sending signed PDF documents. It should also be noted that associations do not need to indicate an exact address for their registered office. The law only requires to indicate a municipality as the address of the association’s headquarters, for example “the headquarters of the association is located in Vienna”.

An easy administration and legal form

The association is a legal entity that, in comparison with trading companies, can be founded and managed easily. Unlike other legal forms, you do not need to have equity capital.

Current expenses and administrative costs can be reduced to the minimum level. In Austria, for example, holding a general assembly every 5 years and preparing an annual activity report is enough. Although you have to do bookkeeping, in most cases, having a simple record of income and expenses is acceptable.

Avoid exit tax in countries like Spain and Germany

By transferring the shares to an association with tax benefits (which you control yourself), you can avoid the exit tax or you can considerably reduce the tax burden. In the best case, the association itself founds the capital company. Otherwise, depending on the country of residence, the transfer may only work through a taxable sale. It is also possible to benefit from tax relief in non-profit associations.

Liability limitation

If there are no other legal regulations or other statutory agreements, the responsibility lies solely with the association. The registered association is a fully legal entity that responds to the obligations with their assets. Therefore, the private assets of the founders, members or organ representatives are not affected.

Tax advantages

With an adequate structure, in particular with a correct formulation of a “common good” pursued by the association, the association can benefit from a series of tax advantages. However, the association can also carry out commercial activities, but the common good activity indicated in the statutes must prevail. As a general rule, a total exemption of corporate taxes, economic activity taxes and VAT can be attained. In addition to this, in some cases donations to the association can be deducted in taxes.

Receive subsidies

Associations in the social field; Self-help associations – the ties of our country’s social networks have expanded. Different associations have set out the task of helping.

So, there are already associations for the support and reintegration of people who are physically ill, for the elderly, for foreign children, for the reintegration of young people with criminal records, etc. Quite often those who help out and volunteer together with the members of the association are social workers or social educators who were previously unemployed.

Another kind of associations are self-help associations. These are managed by the “affected” ones themselves, who are tired of “professional help” and want to start helping themselves. So, you could create an “ Initiative association for the unemployed” or a “Wheelchair club” or a “Bankrupt businessmen” association.

The best thing about these type of associations is that, as they are useful for the public, you can request subsidies and receive funds and donations from the Employment Office as initiatives for job creation or training courses.

As a manager of an association you should make sure that all donators are able to deduct their donations for tax purposes, since, after all, this will increase their generosity. But for that, the purpose of ”common good” is not enough. It is mandatory that this donation is dedicated to a recognised and ‘worthy of promotion’ public utility objective. Although this is not always enough either.

Avoiding certain laws

Associations can also be used to avoid certain laws applicable to companies.

Opening of commercial establishments law. This law only applies to “sales establishments”. But we only talk about a sales establishment when the items are on sale to “anyone”. An association may decide to sell items or make its facilities available only to their members.

There are other law examples that limit business hours or the sale of alcohol, it is the regional government who sets the dreaded closing time. Of course, these times are avoidable. The police cannot do anything against your association if, for example, the members serve themselves alcohol.

Insolvency at a particular level

An association can be used to continue the commercial activity within the framework of personal insolvency. After all, you don’t own “the business”, it belongs to itself or its members. If “the business” is then managed through the association or through the participation of a capital company, it is completely irrelevant to your personal situation.

Further information about associations

If you want more information about the use of associations, you can make a consultation or, if you want to register an association directly, you can also write to us and do the registration through our partners.