GERMANY – Germany's Bundestag has passed a law aiming to make it easier for the country's charitable foundations to carry out their activities.

The Act to Strengthen Volunteering extends the time limit within which investment income, donations and other funds received must be spent on tax-exempt public benefit purposes, in order for the foundation to receive tax breaks on income.

Previously, money – except for legally constituted reserves such as free reserves or project reserves – had to be spent within two years of receipt.

This period has now been extended to three years.

Verena Staats, legal adviser to the Association of German Foundations, said: "That's a fundamental change and will benefit foundations because it gives them more time to decide what to do with their funds."

Furthermore, foundations will for the first time be able to build up free reserves retroactively.

Previously, the free reserve – formed from up to one-third of investment income, and 10% of donations and other funds received – was built up on an annual basis.

Public benefit foundations may also now donate money to endow other public benefit foundations, such as smaller foundations in their start-up phase.

These gifts had only been allowed for recipients that were active charities, and had to be spent on their operations within the two-year time limit.

Now these donations can be used to build up funds to be held indefinitely.

The new law also establishes a minimum lifespan of 10 years for time-limited, or spend-out, foundations (Verbrauchsstiftungen).

These foundations' funds are to be wholly spent over a specified time period, after which the foundation will be wound up.

This change provides increased legal certainty for these organisations and their associates.

It was also previously unclear as to what constituted a donation to these foundations.

The new law clearly specifies that donations to the capital of time-limited foundations do not attract the same tax relief as similar donations to other foundations.

However, tax relief is still available on general donations, up to 20% per annum of the donor's income.

The new law also provides a more precise basis for determining the public liability of voluntary representatives of foundations and associations, and of voluntary members of associations.

Staats said: "Previously, we had a limitation of liability only for the voluntary council of a foundation or association. They were only liable for intent and gross negligence.

"Now, the limitation of liability is extended to all voluntary representatives and voluntary members. The new law says whoever brings an action against the representative or member must prove the volunteer acted intentionally or with gross negligence."

The law also cuts some of the red tape that inhibits volunteering, and increases the level of allowances volunteers may receive.

There are nearly 20,000 foundations in Germany, with combined assets of €100bn and an annual spend of €17bn.

The law was passed on 22 March, but some provisions have been backdated to 1 January.

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