Foundation law has enabled the establishment of various foundations in the Federal Republic of Germany for decades. Many foundations address social problems and pursue non-profit purposes.
However, foundations rely on generating income. Particularly due to the ongoing low interest rate environment, they must rethink their investment strategies and find other sources of funding to ensure sustainable income to pursue the foundation's purposes and maintain their ability to act.
Foundation Law
According to foundation law, a foundation is a memberless legal entity with legal personality (see §§80ff. of the German Civil Code, BGB). A characteristic feature of foundations is that they maintain assets dedicated to the „permanent and sustainable fulfillment of a purpose specified by the founder" (§80 (1) sentence 1 BGB).
The principle of asset preservation applies to foundation law (§83c (1) sentence 1 BGB). This stipulates that only the economic income generated from the administration and investment of the foundation's assets is available for pursuing the foundation's purpose, and that the assets must otherwise be preserved (an exception is the consumption foundation according to §80 (1) sentence 2 BGB).
The individual design of the statutes by the founder represents a special feature of foundation law. This criterion makes foundations a tool of choice for social entrepreneurship under foundation law, because the foundation's purpose allows founders to commit themselves to non-profit purposes (§§51ff. of the German Fiscal Code; AO).
Foundations thus make important contributions to the public by promoting non-profit purposes related to the fields of art and culture, education, science, health, sports, and the environment through projects and events.
Regarding the social relevance of foundations, Friederike von Bünau, Secretary General of the Association of German Foundations, says: „Foundations are not only contemporary, they are timeless and extremely important for our society, especially in challenging times like these. They have a special potential to address the problems of our time through their work – for example, the integration of refugees, increased educational opportunities, or greater sustainability. I cannot imagine a society without foundations. It would be poorer in terms of commitment, social support, and new ideas."
Funding of Foundations
In principle, foundation law does not provide any mandatory specifications regarding how foundations specifically invest their assets. However, foundations should establish guidelines as a basis for making comprehensible and sensible decisions regarding the investment of foundation assets. They are subject to state foundation laws and the respective foundation statutes.
The „core assets" of foundations represent the foundation assets initially contributed by the founder. These can be cash, real estate, securities, or other assets. Traditionally, foundations use capital gains such as interest, dividends, or rental income from their assets to further their foundation's purpose.
The principle of asset preservation under foundation law means that foundations are prohibited from investing their assets without generating returns. At the same time, it is relevant for tax purposes that they avoid making highly risky investment decisions. Therefore, foundations traditionally invest their assets in a security-oriented and rather conservative manner.
Challenges of the Low Interest Rate Phase
Given the ongoing low interest rate phase, foundations may face challenges in fulfilling their purpose. This is because the investment income from foundation assets, which may have been invested conservatively, is declining due to low interest rates.
During low interest rates, founders often have to take greater risks to preserve their foundation assets (as was also the case with the Münster Finance Court in its ruling of December 11 in 2014, case no. 3 K 323/12 Erb.). This can result in foundations facing limited options regarding the organization and funding of new projects to fulfill their purpose.
Low earnings can be particularly problematic for foundations that pursue non-profit purposes. If funds are used incorrectly, this can result in the loss of non-profit status. This entails the loss of tax benefits, and the savings thus achieved cannot be invested in non-profit projects.
Possible investment forms and other sources of financing
However, foundations can adapt flexibly and innovatively to this situation under foundation law, develop investment strategies, and generate new sources of financing to stay afloat. The German Foundation Center recommends that founders strive for active asset management and diversify their investments as much as possible.
Prof. Dr. Hans Fleisch, Secretary General of the Association of German Foundations, advises: „The response to low interest rates for many large foundations was a change in their investment strategy, primarily toward equities and real estate, and this has generally worked very well for them. In addition, foundations of all sizes are increasing their efforts in fundraising and partnerships. Foundations are therefore actively seeking new ways to secure their income."
Reallocation Gains in Foundation Law
Since the reform of foundation law in 2023, according to §83c (1) sentence 3 BGB, founders have been able to use gains from the reallocation of their core assets (so-called reallocation gains) for their statutory purposes, provided „this has not been excluded by the statutes and the preservation of the core assets is guaranteed." This now gives foundations the opportunity and flexibility to use profits from the sale of foundation assets.
Environmental Social Government-Criteria
The pursuit of sustainable and impact-oriented investments should generally be given greater importance. Assuming social responsibility is becoming increasingly important in the granting of financial resources, in investment assessments for potential investors, and in public tenders, and provides guidance for investment strategies. Foundations that pursue non-profit purposes are given priority.
In order to measure, present and document the concrete implementation of activities, foundations can use the Environment Social Government criteria (environmental, social and governance criteria; ESG) as a guide.
Equity Investments
In periods of low interest rates, investors can often benefit from long-term return opportunities at low share prices. When investing in equities, it is advisable to pursue a diversification strategy in the equity portfolio so that risks can be spread across multiple asset classes, minimized, and fluctuations in returns can be offset.
Investing in exchange-traded funds (ETFs), for example, is a good option in this regard. The advantage is that this allows for broad diversification of investments, even with small amounts. ETFs, as passive funds, often outperform active investment funds by generating returns comparable to the benchmark index.
When investing in equities, foundations should adhere to ESG-criteria and align their equity portfolio with these sustainability criteria.
Founders should be aware that investments provide them with the potential to control the impact and, through sustainable decisions, can have a positive impact on charitable causes. Foundations can also use ESG criteria to ensure that their investments are consistent with the ethical principles they have set for themselves.
Other sustainable investment approaches include establishing exclusion criteria for investments that, for example, violate international standards or human rights, or that affect industries that can no longer be supported as a whole. Investments can also be specifically selected based on their ecological or social impact, which is associated with a positive return (impact investing).
It is important that new investment strategies be reviewed by a lawyer for their compliance with the existing statutes. If the statutes are updated to allow for new investment strategies, this should also be subject to legal review.
Real Estate
Furthermore, during periods of low interest rates, it can make sense to invest in different properties in different market segments and regions. This is because a later sale can achieve a higher purchase price on the real estate market during periods of low interest rates.
Real estate itself can also be usable and profitable, for example, as it generates income through rentals. Other properties can also be used to fulfill a charitable purpose under foundation law, for example, by leasing them to non-profit organizations at favorable rents.
Foundations should align their investment strategy with their charitable purposes and make ecological, social, and sustainable investments (ESG-criteria). These criteria should be particularly observed when investing in rental properties, especially new construction, renovations of existing properties, and the purchase of new properties.
In concrete terms, this may mean that foundations must be aware of their environmental responsibility when investing in real estate and consider aspects such as environmental pollution, energy efficiency, and resource conservation when compiling their product portfolios.
Foundations pursuing charitable purposes, in particular, should also be aware of the social impact of real estate investments, for example, with regard to municipal infrastructure or accessibility, and act accordingly and transparently.
ESG compliance of real estate investments not only plays a significant role in the need to align investments with the foundation's identity and assume social responsibility.
There are also legal regulations that make this unavoidable. These include the EU Sustainability Reporting Directive, the EU Disclosure Regulation, and the ESG Taxonomy. These are reflected at the national level in the Building Energy Act and the Carbon Dioxide Allocation Act.
Due to the interest rate sensitivity of real estate, the risks should always be considered, and the use of the respective properties should be reviewed by a lawyer for compliance with the foundation's statutes and legal regulations.
Fundraising
Fundraising represents one option under foundation law for generating funding sources during the low-interest rate phase. It encompasses various activities that can contribute to generating income, such as collecting donations, organizing events, acquiring grants from public or private institutions, and building relationships with potential donors, sponsors, and collaborators.
In this way, foundations cannot only ensure the pursuit of their respective charitable purpose through projects or events, but can also gain greater reach and visibility in the public eye.
For this purpose, it is advisable to examine whether new communication channels can be developed or whether existing ones should be expanded. Public relations can be used to draw attention to specific funding projects or events in order to generate funding sources for them.
If supporting a foundation creates added value for the donor, it must be examined whether it is a donation without consideration or already constitutes sponsorship. The latter has consequences under income and tax law.
Consumption foundation
Foundation law also offers the possibility of converting a conventional foundation into a consumption foundation if a foundation does not have sufficient resources to sustainably fulfill its purpose and this would change if it were converted into a consumption foundation (§85 (1) sentence 3 BGB).
In addition, a partial consumption foundation can be established under foundation law. In this case, liquid assets can be used to pursue the foundation's purpose as a expendable foundation, while the long-term purpose is pursued with the income from the remaining foundation assets.
Résumé
dtb-partner and expert in foundation law and non-profit organizations Bertold Schmidt-Thomé comments: „Foundations need financial flexibility to effectively address social problems. Therefore, during periods of low income, they must pursue new financing and asset investment options."
There are various options available that founders can consider in their future investment planning, from optimized investment strategies to fundraising. Foundation law also opens up flexible structuring options, such as the establishment of a (partial) consumption foundation.
Status 26.06.2025