Philanthropy and Sustainable Investment A Pocket Guide to the Foundation Market
Switzerland provides a world-class arena for foundations. It has over 13,000 foundations, with total assets exceeding 70 billion Swiss francs. Between 1.5 and 2 billion of that amount is distributed each year.
Reason enough, surely, for Credit Suisse to partner with the Center for Philanthropy Studies at the University of Basel and the Center for Foundation Law at the University of Zurich to publish a practical guide for charitable foundations. Professor Dominique Jakob, the guide's co-author, on the market for foundations in Switzerland.
Yvonne Suter: What are the distinctive characteristics of the Swiss market for foundations?
Prof. Dominique Jakob: The Swiss marketplace for foundations has traditionally been characterized by a low degree of regulation and an emphasis on private autonomy and donor freedom, coupled with secure political and economic structures. This has led to the impressive number of more than 13,000 charitable foundations, with assets totaling more than 70 billion francs. Compared to the number of residents, this is a very high density of foundations that have sought each other's company, justifiably earning Switzerland the reputation as a "paradise for foundations." Foundations serving private interests (especially corporate foundations with an estate planning function) are likewise well-situated in Switzerland. It is only pure family foundations that continue to be handled less favorably by the courts, laws, and tax authorities, so in these cases foreign foundation models tend to predominate today.
What should be taken into consideration when establishing a foundation?
Particularly with charitable foundations, it is important that the foundation have sufficient assets to fulfill its mission effectively over the long term. Otherwise, other foundation models or forms of giving should be considered. Anyone who establishes a foundation should take this responsibility seriously, setting guidelines on governance, investments, and mission fulfillment, while also allowing room for the foundation's board to direct future development.
What effect did the financial crisis have on Switzerland's market for foundations?
Many foundations lost assets and consequently could not bring in enough income to fulfill their mission – a requirement for dedicated foundation assets that generally are not to be touched. At first, many foundations were forced to sit idle, which is why there has been a growing conversation more recently about reactivating and consolidating foundations. New forms of investment and asset management have allowed a foundation's core assets to be used in service of its mission (without being given away) – as through the granting of loans or mission-oriented investments. Some foundations could be converted to spend down their core assets; other foundations were established as limited term trusts from the start.
How are foundations regulated in Switzerland? Are there differences/distinctive features among the cantons?
Private foundation law is uniformly regulated by the Swiss Civil Code. But there are cantonal supervisory authorities for foundations that are active only in one canton, and naturally cantons have jurisdiction over questions of tax exemption for charitable purposes. Certainly there are differences between cantons, some of which are known for more or less liberal authorities, so it is possible to "shop around" – that is, to choose the foundation site that seems most receptive to a given project. There are also differences in density (Basel is the leader, with 46 foundations per 10,000 residents) and number (Zurich leads with 2300). Especially strong growth can be seen in the cantons of Geneva and Ticino.
With a total of 13,046 charitable foundations, a high-water mark has been reached in the Swiss market. Are foundations about to enter a period of consolidation?
I think so! Many foundations will of course still be established, but the market has recognized that "more" isn't always better. We need quality, not quantity. An increasing number of foundations will merge or even dissolve, and many foundations that are too small will not be formally established at all, but will instead operate as sub-foundations that depend on other entities.
What is the outlook for persons who are not residents of Switzerland but want to establish a foundation here?
Anyone is welcome to establish a foundation in Switzerland – even with a foreign passport or foreign assets. It is no coincidence that so many of these foundations are in Switzerland. Conditions here, in contrast to those in many neighboring states, are both attractive and stable. Caution should be exercised, however, if Switzerland is merely being chosen as a domicile for charitable activities that take place in other countries. There are pitfalls lurking in the tax law with respect to recognizing charitable activities that (only) occur abroad, and also to deducting donations and grants that cross state borders.
What are the trends/challenges in the market for foundations? Where will the market be in five to ten years? What role can umbrella foundations play?
The work of foundations is suffering from a crisis of legitimacy and regulation. Foundations have been caught up in the international trend for regulation and screening, and basic trust in their legal form – rightly or not – has been shaken. Lawmakers in Switzerland are aware of the pressure placed upon Swiss foundations by FATF recommendations. The great challenge of the years ahead will be bringing these conflicting values into harmony, and arriving at an appropriate relationship between governance and donor freedom, transparency and confidentiality. As locations compete, the legal system that best achieves "practical concordance" will prevail.
All this should not be confused with the drive for transparency from within the charitable sector, which has sought to improve data collection and collaboration between foundations.
Umbrella foundations, in particular, will help to consolidate this sector. When there are institutions that can reliably house and effectively implement smaller foundation projects, a greater number of those who are interested in foundations will be spared the expense of having to establish their own.
Is digitization also a hot topic for Swiss foundations? What is the advantage of digital platforms for foundations?
Digitization is a consequence of the aforementioned effort to create transparency. The collection and processing of data necessarily occurs digitally. Key questions include: Who collects the data – the state or private interests? Which data is collected, and is this mandatory or voluntary? If the credibility and impact of the charitable sector is to be enhanced, a state registry for foundations makes little sense. A registry for all charitable organizations (not only foundations) would be more useful; the data it collected could be required for tax-exempt status. A private, voluntary platform that is distinguished for being useful and effective will have a better reception among foundations.
You've put together a guide for foundations with Professor Georg von Schnurbein and Dr. Goran Studen. Why is a guide for foundations necessary right now? For whom is the guide intended?
The guide is intended for everyone who works, or wants to work, with foundations: individuals planning to establish a foundation; their advisors accompanying them through the process; boards who oversee the daily administration of foundations, working to fulfill their missions; and also public tax and supervisory authorities in search of an orienting benchmark amidst volatile conditions. The work of foundations is a complex field, many parts of which are in flux. Our guide concentrates on the essentials, and we hope that it can provide a clear and helpful orientation. We especially tried to convey those considerations that depend upon the legal situation, so that every user can make appropriate individual decisions. After all, the beauty of the foundation sector is its diversity, and every foundation is unique.