Charities and associations are liable for corporation tax if and to the extent that they carry on a business. In this article, we shall not bore you with the rules for determining whether a business is being carried on, nor with the conditions for exemptions. If you would like to know more about this (or, more generally, about the tax liability of foundations and associations), we would be happy to send you our memorandum on this subject.
Once it has been established that a business exists, the profit on which corporation tax is due must be determined. It goes without saying that the liability for corporation tax can be reduced by making the best possible use of the options available to minimise the taxable profit.
One such option is the deduction of the notional wage costs of volunteers. In order to be eligible for this deduction, the foundation or association must qualify as ANBI (Public Benefit Organisation) or SBBI (Organisation Promoting Social Interests) and the profit must have been generated primarily (70% or more) through the work of volunteers. For the purposes of this scheme, volunteers are: natural persons who carry out work for a lower remuneration than is customary in the market.
The amount of the notional costs is then calculated by multiplying the number of hours worked by the volunteers by the minimum wage (and, of course, any amounts actually paid to the volunteers for their work must be deducted from the notional costs).
A recent case before the Gelderland District Court concerns a charity shop organised as a foundation. The foundation does not qualify as an ANBI, but it does qualify as an SBBI. It is no longer in dispute that the foundation is subject to corporation tax. The issue at hand is whether the foundation has met the 70% criterion. The foundation believes it has. It calculates the notional labour costs of its volunteers at €79,300. Compared with the profit of €93,169, this is more than 70%. However, the Tax and Customs Administration argues that, of the total number of hours worked (22,306), fewer than 70% were worked by the volunteers (the volunteers worked 8,410 hours during the financial year), meaning that the notional cost deduction cannot be applied. The Court agrees with the Tax Authorities and refuses to allow the notional cost deduction.
The other point of dispute in this case concerned the question of whether the returns on the foundation’s investments form part of the profit subject to corporation tax. After all, the tax liability applies only insofar as the foundation operates a business. The Court ruled that the foundation’s objectives do not indicate that they extend beyond the operation of the charity shop. Therefore, according to the Court, the foundation’s investment assets can only be attributed to the business, and the income from those investment assets is also subject to corporation tax.