It is widespread assumption amongst founders of new blockchain technologies that the creation of a non-profit foundation, a non-profit private limited company (gGmbH) or a business company (gUG) is the correct legal form for the implementation of the project. There are indeed numerous examples of projects that chose this route. The Ethereum Foundation, established in 2014, is most likely one of the most successful examples. However, it has to be taken into account that it has its registered seat in Zug and is subject to Swiss law. The most famous example within the German jurisdiction is most likely the IOTA Foundation which has its registered seat in Berlin and which had its non-profit status recognized. There may be sound reasons to use a non-profit corporation in order to facilitate the mass adaptation of a new technology but depending on the actual intentions and interests of the founders, a non-profit corporation may also not be suited at all.
How Can a Corporation Be Recognized as Non-Profit?
The German Tax Code defines the circumstances under which a corporation may be recognized as a non-profit corporation. This option is given where a corporation pursuits charitable causes. The pursuit of charitable causes by a corporation is defined by the German Tax Code as activities of the corporation which are aimed to altruistically facilitate the general public in material, intellectual or moral aspects. The facilitation of the general public cannot be assumed if the recipients are predetermined as is e.g. the case with family foundations. The law also includes an exclusive catalogue of eligible areas. Next to religion, art, culture, sports and numerous other areas, science and research as well as consumer protection are eligible non-profit areas which also make the most sense with regards to new blockchain technologies. Finally, the non-profit status can only be recognized, if the corporation acts in an altruistic way. This specifically requires the corporation to solely allocate its resources to its statutory purposes and that members and shareholders do not receive a profit share or other contributions.
When is the Recognition as a Non-Profit Sensible for Blockchain Initiators?
The successful recognition as a non-profit saves taxes. Non-profit corporations are e.g. exempt from inheritance, gift and property tax. Donations and membership fees are also tax exempt for non-profit corporations. Nonetheless, the foundation of a non-profit corporation for blockchain projects is only sensible if the initiators do not intend for a commercial use of the corporation. A recognized non-profit corporation for the facilitation of a new blockchain technology will therefore have to make use of its resources to e.g. facilitate the development of the core software, to facilitate educational programs with regards to the actual utilization of the technology and the mass adaptation of it. Purely commercial activities which aim at generating profits such as the operation of a crypto exchange or the operation of a crypto custody service may not be carried out.
Non-Profit as Savior from BaFin Authorization Requirements?
It is a common and widespread misconception that non-profit corporations are not subject to BaFin authorization requirements. Even though the authorizations as regulated in the German Banking Act (KWG) and the German Investment Firm Act (WpIG) will only be required, if a provider operates a regulated activity in Germany and commercially which will generally not be the case with non-profit corporation. As an alternative to the requirement of a commercial conduction of the business, both regulatory regimes will also be applicable in case that the service provider objectively requires a professional business setup for the activity. This may be the case if carrying out the activity requires professional structures such as an orderly accounting or the employment of staff. The authorization requirement of the financial regulatory law does therefore not exclude the recognition of a corporation as non-profit.
Attorney Lutz Auffenberg, LL.M. (London)