Shareholder Foundations Can Help Taxes But May Not Help Earth

Shareholder foundations are attracting increasing interest. Companies such as Sweden’s IKEA, Germany’s Robert Bosch GmbH, Switzerland’s Rolex, Denmark’s Lego Group, India’s Tata Group, and Canada’s Mastercard Inc. are all wholly or partially owned by foundations. More recently, Patagonia Inc. founder Yvon Chouinard donated his corporation to a foundation dedicated to the environment, thus declaring “the Earth is now our only shareholder.” Many have praised the transaction, while others have criticized it.

Now it’s time to ask ourselves: Has the Earth agreed to be our only shareholder, as Chouinard seems to think?

For the founder: As the shareholding is transferred to the foundation irrevocably and inalienably, without owners or members, the shareholder foundation ensures the long-term stability of its philanthropic activities and its business.

For the corporation: This stability allows it to continue developing on a long-term basis. Putting the planet at the head of its corporate structure has the merit of generating pride among its employees, who now become actors in a social project with a humanitarian scope.

For public finances: The shareholder foundation will be advantageous if, within a reasonable time, it redistributes sums for charitable purposes that exceed the value of the tax benefits received by itself and its founder.

Among the G-7 countries, the Canadian tax system is one of the most generous for founders and their foundations—so generous that it often proves to be disadvantageous for public finances. There are three tax incentives. The foundation benefits from a tax holiday in perpetuity. The founder also is exempt from tax on the donation of their listed shares, while their other shares are taxed at the 25% rate. The founder additionally receives a tax credit of 50% of the value of the donation. In return, the foundation is required to donate 5% of its assets annually for charitable purposes.

According to this regime, the real value of what the foundation pays out annually for charitable purposes rarely compensates within a reasonable time for the loss in revenue for the public treasury resulting from these three tax gifts, even after a period of 40 years.

There are similar tax incentives in the US, with a 5% charitable obligation for foundations. However, foundations registered under Internal Revenue Code Section 501(c)(4), such as Patagonia, don’t allow the founder to take advantage of the tax deduction for donations. Some founders still opt for this regime because it allows the foundation to use its funds for political purposes, including environmental causes.

With Patagonia, the foundation benefits from a tax holiday in perpetuity, and Chouinard won’t be taxed on the donation of shares to his foundation. This tax exemption on the gift of shares alone represents an estimated tax saving of $700 million. In return, Patagonia plans to pay the foundation annual dividends of $100 million, which it undertakes to use for environmental purposes. In present value, it will take about 15 years before these charitable initiatives begin to exceed the tax gifts offered to the foundation and to Chouinard.

Many founders and shareholder foundations around the world benefit from a tax regime more or less advantageous for public finances, sometimes similar to the one Patagonia set up.

And finally, for the planet: This year marks the seventh anniversary of the Paris Agreement on climate change. The world must halve its carbon emissions by 2030, which means that investments will be increasingly difficult to calculate, and the International Energy Agency already estimates they will need to be at least $4 trillion per year. To achieve this, it will be impossible to rely solely on the contribution of already heavily indebted governments. It will now be necessary to turn to the wealth accumulated in the private sector and by philanthropists.

Some 3,000 billionaires hold wealth totaling nearly $13 trillion, and each of them deploys their philanthropy on their own terms and conditions. One may certainly question whether a shareholder foundation pursuing environmental objectives is really the preferred tool to fight the climate crisis.

Tax regimes that allow the three tax gifts of a tax holiday for the foundation, tax exemption on the gift of shares, and a generous tax deduction to the founder—in return for minor charitable contributions from the part of the foundation—suggest that shareholder foundations don’t in fact contribute to the fight against climate change, because their investment in the environment is largely insufficient due to its cost to public finances.

In Patagonia’s case, the analysis shows that it will take 15 years before this initiative allows the investment, after tax, of a first dollar in the climate crisis, which already creates more than 20 million refugees per year. In the context of a severe climate emergency that requires immediate investment, the solution presented by Patagonia turns out to be unsuited to the schedule imposed by the crisis.

If the planet could convene its assembly of billions of shareholders, it would recommend the rejection of this solution in favor of the fair and immediate tax contribution of the billionaires and their foundations.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Brigitte Alepin is a tax professor at the Université du Québec en Outaouais. She is also an author and moviemaker.

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