Balancing a personal philanthropic strategy with a love of the arts
Philanthropists who want to support the arts have several options to choose from. To start with, they can donate to a museum, art centre or artists’ association; buy artwork; or create a foundation, a museum or even an artist residency. Stéphane Couchoux, lawyer, senior partner and national head of the "Charities, Philanthropy & Business Impact" sector at law firm Fidal, looks at the tax framework for these initiatives. Interview conducted by Laurent Issaurat, Head of Art Banking Services at Societe Generale Private Banking
Croisine Martin-Roland: Stéphane, you've been in charge of the “Charities and Philanthropy” sector at Fidal since 2012, and you’ve worked in this field for more than 20 years. What kinds of clients do you support and for what kinds of goals?
Stéphane Couchoux: My multidisciplinary team of experts in areas such as law and taxation for philanthropy and foundations, social law, property law and intellectual property law primarily supports patrons and philanthropists: companies of any size, executives and high-net worth individuals. We carry out a wide range of assignments. These run from planning a “foundation” (in practice, we do this for an enormous number of endowment funds) during themed workshops, to creating them and monitoring their operational rollout.
Laurent Issaurat : The tax deduction regime is very generous for donations by individuals to museums, art centres, and non-profit organisations. Could you give us an outline?
Stéphane Couchoux: Individual philanthropists actually have access to various mechanisms that offer strong incentives to give by allowing them to claim a tax credit of up to 66% of the amount donated, whether in cash or in kind (such as works of art). They can dedicate up to a fifth of their taxable income to their charitable initiatives each year. The “ordinary law” mechanism is that of cultural, artistic or heritage philanthropy, which involves supporting a cause that is of general interest in this area through a public or private non-profit (association, endowment fund or other foundation)(1).
Another, more targeted mechanism focuses on contemporary art: the donors get the same tax benefit (income tax credit) if they support a private non-profit organisation that holds contemporary art exhibits for the public. In practice, the mechanism makes it possible to act as a patron for this kind of cultural stakeholder even if their operations are subject to business taxes because they are competitive in nature(2). Note that for individuals who must pay French real estate wealth tax (IFI - impôt sur la fortune immobilière) the income tax credit may be replaced by an even bigger real estate wealth tax credit, even though it’s capped at €50,000 per year. In fact, the real estate wealth tax deduction is 75% of the amount donated, which can only be given in cash to foundations of public interest or sheltered foundations(3).
In all cases, the donor must work through a dedicated public or private non-profit organisation. Donors cannot directly support an artist they have chosen, nor seek to expand their personal collection. Finally, depending on its legal structure and the form of the gift or donation, the organisation may be totally exempt from transfer duties(4).
Croisine Martin-Roland: In some cases, an in-kind donation of an artwork to a museum could also generate a tax credit. What conditions must be met for this to happen?
Stéphane Couchoux: Making a donation in kind is a charitable act that allows the donor to claim an income tax credit of 66% of the amount donated. In such cases, the calculation basis for an in-kind donation is the asset's market value, namely the amount that could be paid to the donor if the asset in question were sold. The donor may be sorely tempted to inflate the value of the donated asset to maximise their tax benefit. Watch out for tax audits for this very issue! For high-value works of art, we advise our clients to get a preliminary expert assessment to establish the asset's value and be prepared any request from the tax authorities. Remember that the gift is only definitively given once it is formally accepted by the recipient. The recipient must issue a tax receipt to the donor that lists the asset's value. Consequently, we recommend using a conservative estimate of the value of an asset given as an in-kind donation. In practice, gifting one or more works of art is often a sensitive transaction in terms of not just tax law but also the French Civil Code (especially with respect to inheritance law) and intellectual property law. In this regard, we prepare draft agreements (“deeds of acknowledgement of gifts from hand to hand”) to provide a framework for the transaction. We also plan for the beneficiary organisation's governing body to meet specifically to accept the gift or donation.
Laurent Issaurat : Purchases of French national treasures or artwork from living artists may also be encouraged by tax incentives. Could you give us a quick rundown on that?
Stéphane Couchoux: It is unfortunate but only businesses, and not individuals, can take advantage of a special mechanism after purchasing work from living artists. Since we're talking about a purchase and not a donation, a company cannot claim a tax credit for it, but it can amortise or depreciate its purchase price over a period of five years under the conditions set out by the French General Tax Code(5). The same goes for specific provisions for French national treasures that can only be applied by businesses, although the 2020 Finance Act clearly reduced the scope of this mechanism due to its weak impact.
Croisine Martin-Roland: Endowment funds, which are a legal structure introduced in France in 2008, have been extremely successful. Can you tell us about their benefits?
Stéphane Couchoux: First, when endowment funds were introduced in 2008, they had to be recognised in the literature and by practitioners as true “foundations,” which we immediately explained to our own clients and stakeholders. Although they cannot use the word “foundation” as their corporate name” (it is exclusively reserved for foundations of public interest), endowment funds are truly foundations in the sense that they can be created by a single founder (such as an individual), they lawfully carry out a mission of general interest, they are funded by gifts and donations and their governance is centred on a board of directors. Given the above, endowment funds are highly popular with sponsors of charitable projects such as individuals due to the advantages they offer, as legislators wanted, in contrast to the restrictions placed on foundations of public interest. In brief, their main advantages are:
They can be created quickly: it takes less than a month to create an endowment fund (in practice it takes at least one year to create a foundation of public interest).
They’re accessible: the initial contribution is minimal, as the initial endowment can be as low as €15,000 in cash (for a foundation of public interest, the initial endowment is €1.5 million and it’s “blocked,” meaning it can only be used to fund the foundation’s programs).
They're discreet and offer extensive capacity for charitable giving: gifts and donations from the endowment fund's patrons do not have to be included in its by-laws if they are given after the endowment fund is created. Furthermore, starting from the day after an endowment fund is created, it can receive any kind of gift or donation: gifts from hand to hand (such as artworks), donations and bequests, whether in full ownership or with divided ownership rights.
Their governance is controlled by the founder, who can sit on the board of directors and appoint (and remove) other board members (in a foundation of public interest, the founder can only control one third of the votes).
They are efficient: gifts and donations to the endowment fund can be “consumed” to pay for programmes and operating fees. This means that the capital of the endowment fund can either be maintained overtime or be made spendable; they can use the capital and not just the income it generates (in a foundation of public interest, gifts and donations allocated to the endowment are intangible, which means they cannot be "consumed" in this way).
They offer tax benefits: endowment funds offer the same benefits to donors as foundations of public interest, except for the IFI tax credit.
Laurent Issaurat: When a philanthropist wants to be involved in a project's operations (creation of a museum or an artist residency, etc.), can the endowment fund be combined with other structures of general interest such as an association? What advantages does this offer?
Stéphane Couchoux: It's relatively rare for an endowment fund be involved in operations, in the sense of directly managing a programme of general interest. That’s another advantage that the law reserves exclusively for endowment funds: to play an exclusively redistributive role to help other stakeholders of general interest. An endowment fund can even be created to support a single association or museum, and it will retain its tax advantages as long as the endowment fund's beneficiary organisation is deemed of general interest for tax purposes.
Croisine Martin-Roland: Could you tell us about the criteria that define what is of “general interest”?
Stéphane Couchoux: For philanthropy under “ordinary law” in the cultural and artistic area mentioned above, there are no fewer than six conditions that must all be met by the beneficiary non-profit organisation before tax benefits can be applied (tax credits for donors and exemption from transfer duties for the beneficiary organisation):
The organisation must operate in at least one of the areas stipulated by the legislation, namely art, culture and heritage.
The organisation must not have special relationships with one or more businesses: in other words, the organisation's main purpose cannot be to help a company directly develop its business.
The organisation’s management must be altruistic.
The organisation's activities must not lucrative (as defined for tax purposes), meaning it must conduct non-competitive activities that are not subject to tax, unlike those of a business.
The organisation cannot operate to benefit a limited number of people. This means that it cannot be created to support a single artist.
Finally, the organisation must operate in France or the EU, although exceptions may be made if the organisation works to promote French or French-speaking culture outside Europe.
In practice, we vet each of our clients’ charitable endeavours to ensure they meet these conditions. This preliminary analysis is required to verify and guarantee that the charitable endeavour is eligible for tax benefits, or to make changes to the initiative or advise against it if need be.
Laurent Issaurat : When a living artist, or their heirs, want to honour their life's work (by opening a museum, for example), the line between general interest (sharing their work) and specific interest (making money off an inherited collection) can be blurred. Under what conditions can a project of this nature be deemed charitable?
Stéphane Couchoux: In practice, this is a complex subject, especially if the artist is still alive. We’re often asked this question by artists who want to become better known, promote their work and/or (more prosaically) attract financial support.
The most important questions for starting an honest reflection over a charitable project is whether the artist is ready to make a free and irrevocable transfer to a (or its?) “foundation”, and how much he’s willing to contribute in this way.
We want to know with certainty that the artist’s goal is primarily charitable and only incidentally to their benefit, and not vice versa.
(1) Article 200-1 of the French General Tax Code
(2) Article 200-1-f of the French General Tax Code
(3) Article 978 of the French General Tax Code
(4) Articles 757, 794 and 795 of the French General Tax Code
(5) Article 238 bis AB of the French General Tax Code
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