Tax exemption for associations and foundations: an opportunity governed by a strict regime

In Switzerland, setting up a non-profit association or foundation may allow for complete exemption from income and capital taxes. However, this tax privilege is neither automatic nor unconditional. It is based on a demanding legal framework, refined by case law, clarified by administrative circulars (circular no. 12 of the Swiss Federal Tax Administration) and interpreted differently depending on the canton. In practice, it is not uncommon for organisations to fail to obtain this status due to a lack of precise answers to the increasing demands of the tax authorities.

This article addresses the main aspects of the tax regime applicable to entities pursuing purposes of public interest, with a particular focus on associations. While this analysis is approached through the associative prism, the principles discussed are generally transposable to foundations, with the necessary adjustments being essentially of a statutory or organizational nature.

A public utility approach, legally regulated

The exemption is based on Article 56, letter g of the Federal Direct Tax Act (FDTA), which provides that legal entities pursuing public utility or public service purposes may be exempted from direct taxation, provided that their funds are dedicated exclusively and irrevocably to that purpose. This principle is applied in a similar manner at cantonal level.

The central criterion is that of public interest. As confirmed by the established case law of the Federal Supreme Court and doctrinal analyses, this concept covers disinterested activities carried out in the public interest and intended for an open circle of beneficiaries. The association must serve the community at large and not a closed group of members, a profession, a family, or a specific interest group.

The purpose of the association must therefore be clearly oriented towards the common good: charitable, social, educational, ecological, cultural activities, etc. Tax case law generally excludes political activities from the scope of public benefit. The Federal Supreme Court recently confirmed (ATF 9C_430/2024) that collecting signatures for a popular initiative does not justify tax exemption, as such activity was deemed to promote partisan interests, assimilated to the private interests of members.

Finally, merely declaring such purposes in the articles of association is not sufficient: it must also be demonstrated that the association pursues such activities in an effective and continuous manner.

An appropriate legal form and aligned articles of association

The association must be established in accordance with Articles 60 et seq. of the Swiss Civil Code. The content of the articles of association is of fundamental importance.

They must include clauses considered mandatory, such as the prohibition to distribute profits, the irrevocable allocation of funds to the stated purpose, and the transfer of remaining assets, upon liquidation, to another tax-exempt entity pursuing a similar goal.

Governance is also scrutinised. If board members receive high remuneration, excessive reimbursement of expenses, or hold multiple remunerated management functions within the association, this may be interpreted as a deviation from the non-profit purpose and lead to a denial of exemption.

Administrative vigilance: grey areas to anticipate

In practice, certain situations make analysis more difficult. This is particularly the case when the association employs several staff members, pays significant salaries, or bears substantial expenses (travel, allowances, prestigious premises, etc.).

Whenever doubts arise as to whether resources are definitively dedicated to a public-interest purpose, the tax authorities may refuse or withdraw the exemption.

In such circumstances, it is strongly advisable to submit a formal tax ruling request. Such a ruling allows the taxpayer to present, in advance, all factual, statutory, and organizational elements of the association, and to obtain a formal position from the tax authorities on the possibility of exemption. This process is particularly relevant in borderline situations (presence of paid staff, services rendered to related parties, significant ancillary economic activity, etc.). Moreover, the ruling constitutes a proactive dialogue with the tax administration, securing the legal position of the entity in the long term.

A documented procedure and continuous monitoring

The application for exemption requires the submission of a complete file, including the signed articles of association, the minutes of incorporation, a business plan, a provisional budget, and any evidence of actual activity (partnership agreements, actions taken, reports, etc.). In the most rigorous cantons, annual financial statements and an organizational chart may be required at the initial application stage.

Even once granted, exemption is not immutable. The association must continue to file tax returns, and any change in its purpose, statutes, or governance may result in a reassessment of its favorable tax status.

Finally, it should also be reminded that tax exemption opens the right to the deductibility of donations made to the association, provided that it is included on the official list published by the administration. Such public recognition is a significant source of financing, both from individuals and corporate sponsors.

Reduced taxation even without exemptions

Denial of tax exemption by the cantonal authorities does not automatically result in an unduly heavy tax burden, compared with companies. In fact, in the absence of formal recognition of public utility, associations remain subject to a specific favorable regime, distinct from that applicable to commercial companies. At the federal level, income tax applies only above CHF 5’000, at the moderate rate of 4.25%. At the cantonal level, most cantons also apply a reduced tax rate, generally around 50%, to non-profit legal entities, even when they are not formally exempt. This reduced taxation reflects recognition of their specific mission and selfless operation. It provides a favourable framework, although less advantageous than complete exemption.

A nuanced exemption

It must be emphasized that tax exemption, even when granted, does not extend to all taxes. It applies to direct taxes, namely federal direct tax (IFD), cantonal and communal taxes on income and capital, and under certain conditions, supplementary real estate tax where the property is directly allocated to the exempt activity.

By contrast, other taxes remain applicable regardless of public utility status. These include value added tax (VAT), tax at source levied on salaries paid to employees not fiscally resident in Switzerland or holding a permit B, as well as real estate capital gains tax and transfer duties, which are subject to specific regimes. Their application depends on the nature of the transaction, the canton, and the allocation of the property. These aspects must be examined separately in the global tax analysis of the association.

Conclusion

The Swiss tax exemption regime for associations constitutes an attractive, yet strictly regulated framework. For founders of non-profit projects, it is essential to address this issue at the outset, anticipating both formal and substantive requirements. In complex cases, obtaining a tax ruling is an essential tool for security. Tax authorities expect a rigorous and coherent demonstration of the pursuit of genuine public interest. Only under these conditions can an association secure recognition of its public utility, including on the tax front, and ensure the long-term sustainability of its mission.