The International Journal of Not-for-Profit
Law - Volume 2, Issue 1
A quarterly publication from The
International Center for Not-for-Profit Law
|
|
|
Public Benefit Status and NGOs
See
also, Michael Boyadjiev's summary of the Plenary
By
Ulrich Drobnig, Hamburg
Most East European laws (with the exception of
Estonia) seem to focus on only one issue: An NGO must, by virtue of statutory
definition, have public-benefit status. If it has not, it is not an NGO. This monistic
approach is especially pronounced for foundations but it seems also to be
advocated for associations. This approach, with its focus on public-benefit status, generally is not shared in Western Europe. On the basis of a rough survey of seven West European legal systems I can say that there the legal solutions are much more differentiated. At least three distinctions are being made. 1) The first issue is whether an organization is of
a non-profit character. Access
to the organizational forms of association or foundation is granted only if this
is affirmed. The determination is
usually made by the registration authority, which may be a court or an
administrative authority. 2) The second issue is whether an organization is public
benefit in character. This
issue is decided together with the first issue in the Francophone countries of
West Europe because these countries, like the majority of East European
countries, admit only public benefit foundations. In other countries, where foundations do not exist
as a special type of organization, public benefit status is conferred
independently of the first step. The prominent example is England, followed by
Scotland and Ireland. In these countries, ordinary forms of organization (such
as an association or a commercial company) or even a proprietary arrangement
such as a trust, may serve as vehicles for non-profit activities. In England,
public benefit status is conferred upon these vehicles by registration as a
charity with the Charities Commission, an independent administrative authority. In a third group of countries, public-benefit
status as such is unknown. This is so especially in several Central European
countries, like Germany and the Netherlands. 3) The third issue is the granting of tax
benefits. In those countries which recognize a public benefit status (cf. supra
2), tax benefits are usually
implied by public benefit status. By contrast, in those countries which do not
recognize a special public benefit status, tax benefits are awarded in a
separate step. They are awarded on functional grounds, not as an incidence of
status. The substantive criteria, though, may be very close to those for
public-benefit status. However, since only a matter of taxation is involved, the
tax authorities claim jurisdiction to award the privilege or to refuse it. The aforementioned three issues need not be solved
uniformly for all types of NGOs. Rather, a distinction is often made in dealing
with associations on the one hand and foundations on the other. For good reason,
the control of associations is usually much closer than that of foundations. The
latter, as memberless organizations, are more vulnerable both to misconceptions
of ill- or unadvised founders and to mismanagement during their existence.
Administrative authorities or neutral advisors, such as Civil Law notaries may
therefore be more necessary for the creation and supervision of foundations than
for the creation and supervision of associations; control of the latter is even
prohibited by some constitutions.
Public Benefit Status and NGOs By Michael Boyadjiev, Bulgaria Public
benefit status should be given only to those organisations that want it. This
status means more control from the state but the state control should depend on
the level of benefits an organisation gets. The greater the benefits, the
greater the supervision and vice versa. Private donations are not the result of
privileges granted by the state and therefore there should not be the same level
of state supervision regarding donations, if any at all. Public
benefit status entitles a non-profit organisation to some benefits from the
state. Most important among these are tax benefits, state contracts, use of
public funds, as well as other advantages such as the enjoyment of a higher
public trust in the operation of the organisation, permissions to engage in
certain types of fund-raising (e.g.- lotteries), etc. As the state is the entity
that gives the benefits, it is the one who sets the requirements that an
organisation must fulfill in order to qualify for public benefit status. There
are, however, some hidden dangers in the granting of public benefit status, such
as possible corruption (when deciding which organisation is of public benefit),
too much control of the state over the organisation, and losing the public trust
by virtue of the independence of the organisation from the state. In order to
avoid these problems, it is very important who makes the decision for granting
public benefit status. There
are several different options as to the decision-making body. Each of them has
its own advantages and disadvantages. The most frequently used decision-making
organs are:
The
work of the decision-making organ should also be transparent. This is most true
for the way an independent commission or the courts work. Ministerial decisions
are usually not very clear. Comparing
which organ is more inclined to give public benefit status to an organisation we
can see that the tax authorities are usually at the negative extreme (not
willing to give such a status). They are quite strict when it comes to gathering
the taxes and always prefer the case in which taxes would be more (meaning less
tax-exempt organisations). A positive aspect of tax authorities is that their
decision is final; their grant of public benefit status will carry with it
tax-exempt status as well. Where another agency is the decision-maker, it is
possible for the tax authorities to make a second determination of who is
entitled to tax-exempt status. This is not good practice. The two decisions
should be taken together or at least the requirements should be the same for
both institutions. Another positive feature of tax authorities is that they are
able to supervise the activities of the organisation and evaluate whether they
correspond to the stated purposes of the organisation’s statute. The tax
authorities are specialised in the investigation of forms of fraud such as tax
fraud. The same is true to a lesser degree for a “line” ministry. The courts
and the independent commission are not as well equipped to carry out supervision
of public benefit organisations. Another
important question concerns the speed of the decision-making process. It is
natural that the fastest decisions will be taken by the independent commission
as this is its main activity. On the other hand, the court system is overloaded
with work, and delay has become a normal part of its operation. A common
argument against the courts as a decision-making organ, even before giving them
this new function concerning public benefit organisations, is that they have
problems coping with their workload. As
with any other state agency, the decision-making organ should work
professionally and be staffed with experts in the field of NGOs. This is not
very likely in the case of state administration or the courts. As there are be
no specialised courts for these types of decisions, judges will not be
especially familiar with important details and insights into the needs of and
benefit to the public. Actually, the decision to be taken is not exactly in the
domain of the courts as it is not a question of legal norms but rather a value
determination - what is of benefit to the public and what is not.
Professionalism is acquired when you deal in depth with an area, which cannot
happen in the court or a ministry unless especially created for the purpose.
Closely linked to the question of competence and professionalism is also the
question of consistency. It is possible that two organisations with similar
purposes receive different treatment - one is granted the public benefit status
and the other is not. To avoid this, all decisions must be consistent. In
relation to the court, there is a difference in this regard between common law
and civil law countries. In the common law, the precedents have binding force -
stare decisis. Once a case is decided in a certain way, this decision is
followed in subsequent cases. In civil law countries there is no system of
precedent so there is quite often no uniformity in decision-making. This is what
has happened in Hungary where the court has taken different decisions on the
same issue. The same result can occur if the decision is taken by a “line”
ministry. Perhaps the Ministry of Culture is more inclined to give public
benefit status than the Ministry of Education. Such a situation will also lead
to a lack of uniformity. A good solution for both of these problems -
professionalism and consistency, is the creation of an independent commission,
whose only work is to deal with the question of decision-making connected with
public benefit status. Such a commission will have professionalism as a result
of its specialised nature. Because the commission will be the only organ making
this determination, one may expect uniformity in its decisions. Last
but not least in importance comes the appealability of the decision. Any refusal
for granting public benefit status should be subject to appeal. As
already mentioned, any of these models can work or fail completely, depending on
the social circumstances. The Charity Commission works in England but maybe
would not be a good solution in another country. Similar is the situation with
the courts – a court may be the best place in theory for the determination to
be made, but in practice the slowness of the judicial system can render the
decision completely unworkable. However, by comparing the above-noted criteria
we can see that in the majority of the cases the best place for making the
public benefit determination is the independent specialised organ. In
order for the decisions to be most impartial and professional, a decision-making
organ should consider the opinion of NGO representatives, tax authorities, the
different political powers (or organs), as well as several independent experts. A
frequently discussed problem is whether registration should be a one- or
two-stage procedure. In a one-stage procedure, public benefit status is given at
the same time registration is made (when legal personality is obtained). A
two-stage procedure requires an additional step to acquire public benefit
status. There are some advantages of the one-stage procedure which need to be
mentioned. A single application procedure may save time and money. Also the
burden of proof as to whether an organisation qualifies for public benefit
status is left to the determination-making organ. A disadvantage is that there
is a large possibility for abuse. There is also a limitation for organisations
that decide to change their purposes and become of public benefit. They must
create a new legal entity, which may obtain this status at the moment of
registration (and at the same time terminate the pre-existing legal entity which
is already an unnecessary complication). A
two-stage procedure allows for a very quick registration at the first step, as
there is no public benefit determination to be made. It also does not create the
limitation discussed above. There is more confidence and less possibility for
misuse in this case. However, as there are two application procedures, it may
take more money and time. The first advantage here is that the state and society
in general have more warranties against any abuse with the public money
collected by an organisation which enjoys public benefit status. The second is
the impossibility of transferring that money for mutual benefit. The tax
authority’s control shall be more directly implemented and any reorganisation
of a public benefit organisation will be very closely monitored.
Whatever
the procedure for acquiring public benefit status, there must be some criteria
to be followed when making the decision. One basic idea must be taken into
consideration - there should be no requirement for the organisation to have
carried public benefit activities before being granted the public benefit
status. Every decision-making organ must realise the fact that when
organisations are registered as public benefit, only their purposes are tested.
Their activities are tested only with the follow-up supervision of the
registration agency. What is usually required in the public benefit
determination procedure is that the organisation fulfils as its principal
purpose one of the public benefit purposes stated in the law governing public
benefit organisations. A catch-all provision for purposes that are not included
in the law but may be seen as public benefit ones should also be included in the
law. The
second basic principle is that all the legal requirements in accordance with the
granting of public benefit status should be strictly and explicitly described in
the law. Public
benefit status is a way by which the state can give impetus to organisations to
provide important social services. Instead of providing those services by
itself, the state shares the expenses and responsibility with the third sector.
|
Send mail to datiken@icnl.org with
questions or comments about this web site.
|
