The German Federal Fiscal Court (BFH) has issued important clarifications regarding legal protection against deadlines imposed by the tax authorities under Section 63(4) of the German Fiscal Code (AO).
German foundation allocates profits into different categories
In the case at issue, a charitable foundation held interests in two GmbHs (investment fund and corporate holding companies). It received annual profit distributions from these shareholdings. The foundation distinguished between ongoing income, which it used promptly for its charitable purposes, and portions of the distributions that it classified economically as restructuring or disposal gains and allocated to the foundation’s assets.
In support of its position, the foundation referred in particular to the classification of the funds at the level of the GmbHs, as well as the capital maintenance requirement under German foundation law and the need to safeguard the foundation’s long-term financial capacity.
Tax authorities demand prompt use of funds and set deadlines
The tax authorities did not follow this reasoning. Following a tax audit, they classified the distributions in their entirety as funds within the meaning of Section 55(1) No. 5 AO, which generally must be used promptly for charitable purposes. By way of a compliance order (Auflagenbescheid) under Section 63(4) sentence 1 AO, they therefore imposed deadlines for the use of funds and required the foundation to use the amounts regarded as impermissibly accumulated within specified periods for charitable purposes. The foundation challenged these compliance orders through administrative objection proceedings and a lawsuit.
BFH limits legal protection against deadlines imposed by the tax authorities
The BFH first clarified that a compliance order under Section 63(4) AO has a very limited regulatory effect. According to the BFH, the imposition of a deadline operates exclusively in the taxpayer’s favor: if the organization uses the designated funds for tax-privileged purposes within the prescribed period, its actual management is deemed retroactively compliant. By contrast, the order does not contain any binding determination that an impermissible accumulation of funds actually exists, nor does it have binding effect for future tax assessments. As a result, the court held that the organization lacks the required legal grievance.
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The question whether funds were validly allocated to asset management or should instead have been used promptly remains reserved for the tax assessment proceedings themselves. In the BFH’s view, under the structure of the German Fiscal Code, such issues cannot be clarified separately in proceedings against a compliance order, but only in connection with a tax assessment notice. For this reason, the action against the imposed deadlines lacked the necessary legitimate legal interest. The BFH therefore did not rule on the substantive question whether the funds were in fact subject to the prompt-use requirement.
How associations and foundations in Germany can protect their charitable status despite strict deadlines
Unfortunately, the judgment primarily strengthens the procedural position of the tax authorities. For nonprofit organizations, this means that compliance orders under Section 63(4) AO must initially be accepted, even where the organization considers the tax authorities’ allocation of funds to the relevant tax sphere to be incorrect. Whether funds should actually have been used promptly can only be reviewed by the courts in the context of the tax assessment proceedings.
If a nonprofit organization takes the view that, contrary to the tax authorities’ position, the funds subject to the imposed deadline are not funds that must be used promptly, it is advisable to seek expert advice and review the classification of the funds before the deadline expires. Otherwise, depending on the extent of the violation, there may be consequences for the organization’s tax-privileged status during the tax assessment proceedings.
Our NPO team would be pleased to advise you on questions regarding the classification of your income, the prompt use of funds, and legal protection against measures imposed by the tax authorities. Please contact us anytime!
BFH, judgment dated December 4, 2025, V R 25/23
