From Max-EuP 2012

by Thomas von Hippel

1. Object and purpose

A foundation is a legal form which can usually be found in civil law countries. As a rule, a foundation has legal personality, does not have formal members and serves a specific purpose for which the founder has provided an endowment. Usually, foundations are supervised by a state supervisory authority.

Common law countries do not have any special legal form corresponding directly to a ‘foundation’. In some cases, however, trusts and charitable companies (company law) may be a functional equivalent.

The traditional function of a foundation is the permanent promotion of a specific, typically public benefit (charitable) purpose determined by the founder. In some European countries, however, foundations can also have additional functions. One prominent example is Liechtenstein. In 1924, the Liechtenstein legislature created a new type of a ‘self-serving foundation, where the founder establishes himself as the beneficiary (a so-called ‘foundation for the founder’ (Stiftung für den Stifter)). Mindful of the anonymity associated with Liechtenstein foundation law, it becomes apparent that such a foundation primarily serves as an instrument facilitating asset protection or, worse, financial fraud. Austria copied the Liechtenstein model in a less extreme form in the 1990s. In the Netherlands, the requirements for the establishment of a foundation are comparatively low; the only mandatory rule seems to be a non-distribution constraint and thus there exist numerous foundations which also pursue economic activities (eg as cooperatives in disguise). In Denmark, there exist a number of business foundations. The purpose of these business foundations is of hybrid nature, serving both private (commercial) and public benefit purposes

2. Trends of legal development

In the period of absolutism, monarchs regarded the existing public benefit foundations with a degree of suspicion, if not outright hostility. The absolute state claimed a monopoly on social services and disliked ‘intervention’ by independent foundations. Today, the modern welfare state welcomes foundations and other public benefit organizations in the hope that the private assets of the foundations will be used for public purposes and thus relieve the public funds. Additionally, foundations are now regarded as helpful actors in a modern and pluralistic civil society. This evolved view has led to reforms both in foundation law and in tax law (ie tax benefits for public benefit foundations).

Traditionally, a foundation was established through a process of discretionary state approval. Presently, only a few Member States still follow this approach (France (for traditional foundations), Greece and Luxembourg). In most other countries, foundation law was liberalized during the 20th century such that the state supervisory body must—without discretion—approve or register the formation of the foundation if the respective legal requirements are met (particularly, pursuing a permitted aim and possessing sufficient start-up capital). In a few countries it is even possible to establish a foundation as a legal entity without any formal public act (eg Sweden). In the common law countries, charitable trusts can be established without any kind of state action. However, the trust as such is not a separate legal entity.

As stated above, in almost all countries one finds a state supervisory authority for foundations. As a general rule, in most European countries the intensity of supervision by the state authorities has diminished. Thus, it is generally the case that the state supervisory authority is only entitled to supervise the foundation and may not direct the foundation’s organs on the management of the foundation’s affairs. Another example for the now diminished role of the state supervisory authorities is offered by the approval requirements. By tradition, many of the foundation laws had extensive approval requirements with regard to certain decisions of the foundation (as a means of preventive state supervision). However, since the 1980s a strong tendency can be observed in many countries to abolish most of these approval requirements. The main reason for this development seems to be that the approval rules were regarded as ineffective (too bureaucratic and costly for the public authorities). Only some countries still require an approval for important foundation decisions. Consistent with this trend, several countries have introduced private supervisory mechanisms (accounting rules, disclosure, auditing (auditor), etc) which supplement or replace the remaining state supervisory authority.

Regarding the administration of assets, a certain tendency has emerged to avoid overly detailed rules in regards to investments. As opposed to earlier regulations which sometimes dictated gilt-edged investments, current laws will often merely state that there should be a secure and profitable investment of the foundation’s assets. This change affords foundations greater flexibility in light of their particular circumstances (eg asset holdings, liquidity needs, foundation aim).

In the last 15 years many countries have expanded tax benefits for public benefit foundations in order to increase private donations for public benefit purposes.

In light of these tendencies, it is not surprising that the existing (albeit imperfect) empirical data reflects a remarkable increase over the last decades in both the number and economic relevance of foundations in many countries.

3. Legal structures

a) Purpose

Historically, foundations were established with a religious purpose (church foundations). Now, all countries allow public benefit (or charitable) foundations having aims such as research, education, art or culture. In Europe, approximately half of the countries also allow foundations promoting other purposes (eg family foundations in Germany and the ‘foundation for the founder’ allowed in Liechtenstein).

b) Endowment

Greater differences exist regarding the question of whether certain minimum founding assets are necessary.

Three main solutions are encountered. In a few countries, the law imposes a specific amount (eg €70,000 for an Austrian private foundation). In other countries, the law does not require a specific initial amount, but requires the capital to be adequate for the fulfilment of its purpose. In some Member States, the competent state authority will only accept that the assets of the foundation are adequate if they amount to a specified value. Sometimes administrative practice can be comparably strict (eg France as regards traditional foundations). In a third group of Member States, founding assets are not required at all (eg the Netherlands) or only in a symbolic form (eg in the common law Member States a trust can be established with £1). However, even in the Member States falling in this third group, a foundation may be dissolved by court order if it lacks the means to achieve its purpose and there are no prospects of their future existence.

c) Internal governance

The foundation has no membership and consequently no general meeting. Only a board of directors is required; some countries require the board to comprise at least three members. Only relatively few countries require any governing organs beyond a board. In most countries, there are only a few mandatory rules on the internal governance of a foundation. Thus, the founder often has a wide scope of freedom as he can usually specify certain rules in the statutes, though this may be difficult to accomplish in those Member States which require the founder to embrace a model set of rules (France).

Some differences exist with regard to mandatory private supervisory mechanisms, eg internal supervision (independent directors, internal supervisory boards), public accountability and disclosure, and monitoring by auditors or other third parties. Some Member States have almost no obligation of any private supervisory mechanisms. Other Member States (especially those states where the position of the state supervisory authority is comparatively weak) include more or less mandatory private supervisory mechanisms.

Foundations are particularly distinguished by the absence of an active membership. In not having a controlling body comprised of members or shareholders, the initial aim of the foundation ideally (and characteristically) endures unaltered and indefinitely unless the founder has in some way provided otherwise. The foundation practice in some countries, however, encompasses organizational forms that have a quasi-membership structure with the result that the foundation resembles an association benefitting third parties (eg in the Netherlands). The extent to which such elements of ‘quasi-membership’ are permissible is in many countries uncertain as the national foundation regulations typically do not contemplate such a situation.

d) State supervision

As observed above, in almost all countries a state supervisory authority for foundations exists, although with generally limited powers.

e) Economic activities and holding foundations

In respect of economic activity, two contrasting approaches are encountered: one allows a foundation to engage in economic activity without special restriction, whereas the other restricts economic activity in one way or another. The reasons for restrictions are sometimes motivated by creditor protection, but they are sometimes concerned with protecting the assets of the foundation because such economic activity is inherently more risky than investment.

Thus, in some countries, there is no restriction at all. One example is the Netherlands where there exist many foundations carrying on direct trading activities. The traditional view is that the creditors are protected sufficiently by the non-distribution constraint. However, there is a tendency in modern legislation to enact general provisions for all organizations undertaking economic activities. In other countries, any economic activity must be subordinated to the foundation’s public benefit purpose in the sense that economic activity is allowed only where it furthers or facilitates that purpose and profit is not the foundation’s main aim in undertaking the activity (Nebenzweckprivileg). One example of this sort is provided by Spanish foundations, which may only pursue economic activities of their own if these activities directly further the foundation’s purpose or are complementary or ancillary to it, provided in both cases that the rules on fair business practice are respected. The rule therefore permits a foundation to engage in economic activity not only as a subordinated or ancillary activity, but also as its main activity provided that its object in doing so can be considered to be the promotion of a purpose providing a public benefit (eg economic activities in the cultural or health sectors).

Most Member States allow a foundation to establish a subsidiary trading company (a so-called holding foundation). A prohibition in this regard exists in only a handful of countries (eg Slovenia).

4. Uniform law

Currently there are no harmonization projects in foundation law. In fact, there seems to be a consensus that it would not be desirable to force the Member States to unify their different foundation types since they serve different functions.

Nevertheless, it is true that the public benefit foundation is the only type of foundation which is accepted in every Member State, and, in practice, public benefit foundations are the most important foundation type.

Consequently, it is under discussion whether a European Foundation Statute should be introduced. Such a legal form could, in turn, become a kind of ‘model draft’ for national foundation law.


Elie Alfandari and Amaury Nardone (eds), Associations et fondations en Europe (1994); Council of Europe (ed), Associations and Foundations (1998); Frits Hondius and Tymen van der Ploeg, Foundations (2000); Klaus J Hopt and Dieter Reuter (eds), Stiftungsrecht in Europa (2001); Klaus J Hopt, W Rainer Walz, Thomas von Hippel and Volker Then (eds), The European Foundation (2006); Andreas Richter and Thomas Wachter (eds), Handbuch des internationalen Stiftungsrechts (2007); European Foundation Centre, Country Profiles (2007).

Retrieved from Foundation – Max-EuP 2012 on 14 April 2024.

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