Dissolving an Austrian private foundation: from ground to deletion

Dissolution does not immediately terminate the private foundation as a legal entity. It changes the task of the foundation. Instead of applying its assets to the previous foundation purpose on an ongoing basis, the board must conduct an orderly winding up. Existing legal relationships must be identified, liabilities must be discharged or secured and the remaining assets must be transferred under the statutory rules and the foundation documents.

The foundation is deleted from the commercial register only after winding up has been completed, a final account has been prepared and completion has been registered. This distinction has practical consequences. Termination of contracts, sales, transfers, tax filings and coordination with creditors may all be required between the dissolution resolution and deletion.

Our overview of dissolution and liquidation explains the governing concepts. This article focuses on the procedure and the decisions that the board, founders and ultimate beneficiaries should prepare before deletion.

Section 35(1) PSG identifies five basic situations: expiry of the term stated in the declaration, opening of bankruptcy proceedings, a final refusal to open insolvency proceedings for lack of sufficient assets, a unanimous dissolution resolution of the foundation board and dissolution by court order. A unanimous board resolution is not an unrestricted option. It must be supported by a ground for dissolution.

Under section 35(2) PSG, the board must unanimously resolve to dissolve when it receives a permissible revocation by the founder, the foundation purpose has been achieved or has become unattainable, an applicable statutory 100 year case arises or another ground stated in the declaration exists. Founder consent is not a general additional requirement. The decisive question is which statutory or documentary ground has been satisfied.

A revocation assessment begins with section 34 PSG. Only an individual founder may reserve the right to revoke. No right exists without a valid reservation. With several founders, the exact documents, any rules on joint exercise and the scope of the reservation must be read in full. Our guide to founder rights, amendment and revocation explains these preliminary issues.

The Austrian Supreme Court requires an overall assessment and, where necessary, a forecast when deciding whether the foundation purpose has become unattainable. Temporary difficulty, economic unattractiveness or internal conflict is not enough. The relevant question is whether, on a reasonable view and over the longer term, circumstances capable of making the purpose achievable again are no longer expected.

Before resolving, the foundation board should assemble the current foundation deed, supplementary deed, all amendments, the commercial register record and the facts supporting the asserted ground in one coherent file. In a revocation case, the file should include the valid reservation, the formally effective declaration and evidence of receipt. Where the purpose is achieved or unattainable, it should contain the relevant resolutions, financial information and a reasoned forecast.

Because a dissolution resolution leads to a commercial register entry, the notarial recording requirement for body resolutions under section 39(2) PSG must be addressed. Where the stated term has expired or the board has unanimously resolved to dissolve, the board files the dissolution with the commercial register. Under section 35(5) PSG, dissolution in those cases becomes effective upon registration.

If the board fails to adopt a resolution required by section 35(2) PSG, the persons named in section 35(3) PSG may apply to the court. They include every member of a foundation body, beneficiaries and ultimate beneficiaries, every founder and any person authorised by the declaration. The competent court determines the matter in non-contentious proceedings.

A premature dissolution resolution is also open to review. If the stated ground does not exist, a person with standing may apply under section 35(4) PSG to have the resolution set aside. The Supreme Court has held that such an application is not excluded merely because the dissolution has already been registered. This review protects the continuing purpose restriction against a resolution lacking a statutory basis.

Our guide to the foundation board and liability examines the general duties concerning evidence, conflicts and documentation. Where major assets are involved, the board must distinguish the foundation’s interest from the expectations of individual founders or beneficiaries.

Under section 36(1) PSG, the foundation board must publicly invite creditors, with reference to the dissolution, to submit their claims no later than one month after publication. Waiting only for responses is not sufficient. The board should actively review the accounts, contracts, court proceedings, guarantees, security interests, taxes and any other potential obligations.

Existing contracts do not end automatically upon dissolution. Leases, service agreements, financing arrangements, participation agreements and insurance policies must be performed, terminated, transferred or amended by agreement under their respective terms. For long term obligations, the board must decide whether early termination is available and commercially sensible or whether a secured residual administration is needed.

Section 36(2) PSG applies the creditor protection rules of section 213 AktG. The remaining assets therefore cannot be transferred to ultimate beneficiaries immediately. The statutory one year waiting period is particularly important. A known creditor who does not respond may require an amount to be deposited. Liabilities that cannot yet be discharged or remain disputed must be secured before distribution.

The asset inventory should extend beyond bank accounts and securities. Shareholdings, real estate, loan receivables, works of art and other tangible assets require an assessment of title, encumbrances, valuation and transferability. Dissolution does not invariably require every asset to be sold. Whether realisation or another form of transfer is appropriate and permissible depends on the declaration, creditor protection, valuation and tax treatment.

After creditors have been paid or secured, the remaining assets must be transferred to the ultimate beneficiary. The declaration is the primary source for identifying that person. It should be reviewed early because it may contain conditions, substitute recipients, allocation ratios or specific instructions for the form of transfer.

Section 36(4) PSG provides a default rule for dissolution following revocation. Unless the declaration states otherwise, the founder is the ultimate beneficiary. Where there are several ultimate beneficiaries, section 36(5) PSG provides for equal shares unless the declaration contains a different allocation. If no ultimate beneficiary exists, the beneficiary refuses the assets and the declaration contains no alternative, the remaining assets pass to the Republic of Austria under section 36(3) PSG.

Before transfer, each asset should be recorded with its liabilities, acquisition values and potential tax consequences. Real estate also requires attention to land register implementation, existing leases, financing security and transaction costs. For business shareholdings, the articles, consent requirements and the financial condition of the company must be reviewed.

Once winding up has been completed, the foundation board prepares the final account and files completion with the commercial register. Under section 37 PSG, completion is registered and the foundation is deleted. Its books and records must be kept at a safe place determined by the court for seven years. If further measures later become necessary, the court may appoint the former board or a liquidator to complete them.

A reliable dissolution file begins with every version of the foundation deed and supplementary deed, a current commercial register extract, appointments of governing bodies, the beneficiary and ultimate beneficiary provisions and proof of the specific ground for dissolution. Annual accounts, current bookkeeping, asset schedules, contracts, security interests, pending proceedings and a list of known or potential creditors should also be included.

One common error is to assume that a unanimous board may end a foundation that the participants no longer want. Another is to transfer individual assets to beneficiaries too early. Until winding up and creditor protection have been completed, the foundation’s assets must remain available for its obligations.

Disputes often concern valuation, the selection of assets to be sold, transfers in kind, allocation ratios or the identity of the ultimate beneficiary rather than the abstract ground for dissolution. These issues should be identified before the resolution. The resolution file and winding up plan nevertheless serve different functions. The ground authorises the start of dissolution, while the plan controls its proper implementation.

Accounting and tax work should form part of the timetable from the outset. Distributions, transfers in kind and sales can have different consequences depending on the asset. Coordinated legal, tax and accounting work avoids having to rebuild a legally possible transfer later for economic reasons.

Our article on founder rights in the declaration explains how rights can be reserved at formation. For an existing foundation, however, the notarised wording that was actually adopted is decisive, not the former expectations of individual participants.