The foundation: definition, establishment, and advantages

In our legal system, non-profit entities play a key role in various spheres such as culture, social welfare, and politics. These entities have legal personality and are classified into non-profit associations and foundations. Our partner in the Corporate Law Department, Juan Antonio Botella, previously published an article on foundations in the field of art. Accordingly, this article will focus on a broader analysis of foundations, covering their definition, the necessary steps for their establishment, and some of the advantages for companies in setting up a foundation.

What is a foundation?

A foundation is a legal entity with its own legal personality that is non-profit in nature. This means it does not seek to generate profit for distribution among its members, but rather allocates its assets to purposes of general interest such as the defence of human rights, social welfare and inclusion, civic engagement, education, culture, science, sport, health, and so on.

Foundations are primarily governed by the founder’s intent, their governing statutes, and the following legal framework:

• Law 50/2002 of 26 December on Foundations

• Royal Decree 1337/2005 of 11 November, approving the Regulations of Foundations under state competence

• Law 49/2002 of 23 December, concerning the tax regime for non-profit entities and tax incentives for patronage

• Royal Decree 1270/2003 of 10 October, approving the regulations for applying the tax regime for non-profit entities and patronage incentives

• Regional legislation, where a foundation primarily operates within a particular Autonomous Community
  
  

Who can establish a foundation?

According to Articles 8 and 9 of Law 50/2002 on Foundations, the following parties may establish a foundation:

• Natural persons with legal capacity to act and the ability to freely dispose of their assets.

• Private legal entities, provided that the competent body—according to their own governing documents—resolves to establish the foundation and is authorised to dispose of assets gratuitously.

Foundations may also be established mortis causa—that is, by individuals who express the will to create a foundation in their will, specifying its purpose and the assets and rights necessary to endow it with sufficient capital.

Steps to establish a foundation

There are six essential steps involved in setting up a foundation:

1. Obtain a certificate of name. The first step is to apply for a certificate of name reservation from the State Foundation Registry. Once issued (typically within 5 to 10 days), the founder has 3 months to execute the deed of incorporation. Failure to do so within this period will require a new application, attaching the expired certificate.
   
   

2. Draft the governing statutes. After securing the certificate, the foundation’s governing statutes must be drafted. At a minimum, the statutes must include:
   

   – The foundation’s name
   – Registered office and territorial scope
   – The foundation’s purpose
   – Basic rules for allocating resources and identifying beneficiaries
   – Composition and rules governing the Board of Trustees, including appointments, removals, and procedures for adopting resolutions
   
   

   While not mandatory by law, it is advisable to regulate additional matters such as:a. Funding
   b. Annual accounts and operational plans
   c. Amendment, merger, or dissolution of the foundation

3. Provide the endowment. Foundations must be endowed with assets worth at least €30,000, contributed in the form of property or rights. Depending on the nature of the contribution, certain rules apply:

   
   

   – Cash contributions: At least 25% must be paid upfront, with the remaining amount to be paid within five years from the date the deed is executed

   
   – Non-cash contributions: Must be fully provided at the time of incorporation and must be accompanied by an independent expert’s valuation report included in the deed.
   
   

4. Execute the deed of incorporation. The deed must include, at a minimum:

   – Founder’s details
   – Declaration of intent to create the foundation
   – Endowment details
   – Governing statutes
   – Appointment of the Board of Trustees
   
   
5. Settle taxes and apply for a tax identification number (NIF). Once the deed is executed, the foundation must obtain its Tax Identification Number and, although exempt, submit the relevant Stamp Duty and Transfer Tax return.
   
   
6. Register with the foundation registry. After obtaining the NIF and settling taxes, all documents must be submitted to the competent State Foundation Registry. Prior to registration, the Registry will request a report from the Protectorate to assess the endowment and the suitability of the foundation’s purposes.

Advantages of setting up a foundation as a corporate entity

Today, many companies choose to promote the public interest by establishing foundations. Examples include Telefónica, S.A., Repsol, S.A., and DKV Servicios, S.L. Beyond serving a public purpose, incorporating a foundation offers several corporate benefits:

• Enhancing brand image. Although a foundation has its own legal personality and operates independently of the company, it serves as an effective vehicle for conveying social responsibility and commitment, thereby enhancing corporate reputation.
• Access to funding and grants. Foundations are eligible for public funds and grants that for-profit companies cannot access.
• Boosting R&D. When a company sets up a foundation focused on research and education, the resulting knowledge and innovations can benefit the company itself, creating synergies that improve its market position.
• Favourable tax treatment: Foundations benefit from significant tax advantages, such as exemptions from Stamp Duty and Transfer Tax, and depending on their characteristics, possible exemptions from Business Rates (IAE) and Property Tax (IBI). Foundations are also not subject to Wealth Tax or Inheritance Tax.
  
  

As we have seen, although the establishment of a foundation offers numerous benefits, the process can be somewhat complex. For this reason, Devesa has a highly specialised team to support clients throughout the entire process, ensuring legal certainty and efficiency at every stage of formation.

Do you need advice? Access our area related to foundations:

Commercial and corporate law