New Ways of Charity Foundations – Venture Philanthropy in Liechtenstein
Whereas foundations are generally used for the protection of family assets, a new generation of founders promotes a different focus: Charitable or mixed foundations to protect assets and give back to society at the same time. In this context, charitable activities are not pursued by making à fonds perdu contributions, but with investments in purpose-oriented assets.
One opportunity for foundations of family entrepreneurs is to invest in mission and impact investing. These types of investments are well known and currently gaining momentum, not least due to regulatory initiatives on sustainable finance. However, there is an even greater form of engagement for foundations: Venture Philanthropy. Venture Philanthropy is the most far-reaching form of mission-based investing. It combines traditional philanthropy with the strategy of venture capital investors. Foundations use the approach of venture capital investors and invest in start-ups or projects that are in line with the foundation's mission. Venture Philanthropy is an investment strategy that financially and strategically supports the development of businesses, considering the potential for success and exit as well as the measurement of social and/or environmental impact. In this process, young companies, especially within the technology and life science sector, are not only granted financial resources, but also commitment from the foundation or the founder themselves with personal and professional support.
In Switzerland and Germany, Venture Philanthropy regularly encounters problems with foundation and tax law. In particular, the requirements for the investment of the foundation's assets and the tax law requirements for the exclusivity of the use of funds can become difficult to navigate, as foundations jeopardize their tax exemption. Liechtenstein, on the other hand, offers great opportunities to establish Venture Philanthropy as an investment strategy as well as a liberal tax and foundation law regime. In particular, Liechtenstein does not have an asset preservation principle for charitable foundations. Therefore, foundations may in principle make high-risk investments such as investments in venture capital. The Liechtenstein Foundation Supervisory Authority (Stiftungsaufsichtsbehörde) recognizes those new forms of modern philanthropy.1
Generally, the application for tax exemption due to non-profit status is granted upon application to the tax administration. A prerequisite for the status of a charitable foundation is that the foundation fulfils a charitable purpose according to Art. 107 (4a) Persons and Companies Act (Personen- und Gesellschaftsrecht). For this purpose, the foundation must promote the common good in a charitable, religious, humanitarian, scientific, cultural, moral, social, sporting, or ecological scope, even if only a certain group of persons is promoted by the activity. Liechtenstein foundation law also expressly permits mixed family foundations in Art. 552 § 2 (4)(2) Persons and Companies Act. These are foundations that predominantly pursue the purpose of a pure family foundation, but also serve charitable or other private-benefit purposes. However, in its foundation documents, a charitable foundation must submit predominantly to a charitable purpose.
In addition, foundations in Liechtenstein may pursue commercial activities alongside their charitable activities. According to Art. 4 (2) of the Tax Act, income of up to CHF 300´000.00 is exempt from taxation. If this limit is exceeded, the entire profit is taxed.
Another frequently occurring problem is cross border philanthropy of tax-exempt foundations. Whereas Switzerland or Germany tie the tax exemption for foundations on certain conditions if it comes to international philanthropic activities, Liechtenstein offers considerably more flexibility. In particular, Liechtenstein does not tie tax exemptions on the condition of domestic philanthropy but is open to pursue international philanthropy without risking the tax exemption.
As one of the leading Liechtenstein law firms, we provide comprehensive experience in foundation, tax law and investment law. We advise founders and foundations on all legal aspects of asset allocation and investment and help (charitable) foundations to pursue the founder’s will. As experts in corporate structuring we advise both foundations and start-ups in venture philanthropy and in general entrepreneurial funding.
For further information, please contact Claudius Müller-Rensmann.