The International Journal of Not-for-Profit Law - Volume 2, Issue 1
A quarterly publication from The International Center for Not-for-Profit Law

Recognition of Public Benefit in Legal Systems of Several Nations
By Petr Pajas for IJNL, Prague, August 1999

 I.                    Introduction

The theme of whether and how to distinguish between public benefit and mutual benefit of not-for-profit organizations has become a perennial focus of many disputes at conferences dealing with the role of civil society.

One argument used to frame the concrete discussion on the theme is as follows: The right to associate must be respected and the existence of any association, society, union, club or other common activity of human beings is a part of the social structure, which we call civil society.  It does not make much difference whether the association is established for mutual interest of its members only, or it fulfills also some more general public benefit purpose or is engaged in some activity of specific public interest. Moreover, in many cases, it is simply dubious to say how far an activity is just of mutual interest and when it serves a public interest: collecting stamps by philatelists serves to the promotion of culture and arts, playing golf is serving health of otherwise stressed managers, politicians, businessmen, etc.

Another argument of similar reasoning concerns different public needs in different national, regional, or local levels and also in different historical epochs or under different political, social or just temporary circumstances. Therefore, it would be difficult to define any generally acceptable rules of how to define what is and what is not of public benefit or in the public interest.

Finally, what makes up “the public?"  Is it comprised of complete nations, ethnical minorities, a group of a thousand people or any group of more than three people? Where is the boundary that distinguishes the public from the non-public?

The May 1999 conference in Budapest organized by ICNL in close co-operation with Hungarian NGOs under the title "European Civil Society in the 21^st Century - Standards and Mechanisms for Regulating Public Benefit Organizations" examined several problems related to the topic of public benefit. While finding some answers the conference raised more questions and illustrated how different the scope of what is recognized as being of public benefit in various countries may be.

In order to build a base for further discussions, this paper attempts, first to summarize what is recognized as a public benefit in a set of countries, and, second, to propose a way how to establish categories of what should be considered of higher or lesser importance from the point of view of the general public, and how to take into consideration the global, national, regional and local manifestations of how public benefit activities are perceived.

II.                  Modes of Use of Public Benefit Definitions

The notion of public benefit concerns mainly those activities which are either provided to some one or received by a beneficiary subject.

The main providers of such activities are the non-governmental not-for-profit established organizations. The state (national, regional or local governments or self-governments) and its organizations are also providers of certain public benefit activities. But, since that is usually their obligation under each country’s legal system, an examination of government public benefit activities may be omitted from this overview under some circumstances, as described in more detail in Part IV. 

The recipients of public benefit are usually natural persons in need of assistance, or not-for-profit organizations that provide public benefit services or funds for a public benefit purpose. However, in some countries, as is shown in Part III, the notion of public benefit is also connected with assistance to the state organizations or limited to assistance which does not serve individuals.

In most countries, the non-governmental not-for-profit organizations are of several distinct legal forms. In the case of membership based organizations, we shall talk about associations. Associations may be formed by a combination of natural persons or legal entities, known under several other denominations - unions, societies, clubs, brotherhoods, etc. Associations are usually governed by a supreme organ formed by its members, who elect or otherwise nominate an executive body responsible for the association's activities.

In the case of non-membership organizations that grant or otherwise distribute funds, we usually speak about foundations. These may be also known as funds, trusts and several other denominations. In some countries, service providing non-membership organizations might be established as centers, public benefit corporations, as companies with limited liability or stock holding companies. However, in such cases, these should also be defined as not-for-profit legal entities by some additional statement. Foundations and centers are usually governed by a board and have an executive officer charged with statutory powers.

The notion of public benefit activity or public benefit interest is of special importance for the state  when it is not only willing to tolerate the providers of public benefit activities, but when it is also prepared to contribute to their activities by giving some benefits in exchange. These benefits usually include tax benefits (tax exemptions, tax reductions, special tax rates), customs benefits (customs free import of certain goods, special rates for customs fees), registration benefits (free of charge registration of legal entity, easier registration procedures compared to entrepreneurial companies), licensing benefits (provision of special license or status for some activities or service provision). However, there are usually also special obligations and requirements connected with these arrangements, ranging from special tax or annual reporting obligations through special registration procedure to supervising bodies charged with the right to intervene in the activities of the organization.

III.                Comparison of Public Benefit Activities in a Set of Countries

The sources of information for the following discussion are papers, existing laws or drafts of laws, dealing with the issue of public benefit and related requirements or benefits provided by the governments.

Very detailed information has been available from several countries of the Central and Eastern Union and from the New Independent States, especially Hungary, the Czech Republic, Slovakia, Albania, Croatia, the Russian Federation, the Ukraine, Georgia and Uzbekistan, where not only existing laws were available, but also some very advanced drafts of laws already submitted to the legislative bodies of these countries. Detailed information is available on the revenue laws of United States and charities laws of England and Wales. In comparison, the  data from other European countries is general and poorly documented. Some data on countries from other regions (e.g. Ecuador) was included as a reference to a special kind of definition of what also may be considered a public benefit activity. Also included is the case of Bohemia in 1811, referring to the Imperial Edict of Austrian Emperor, which shows, what was already included as characteristics of foundations nearly two centuries ago in Central Europe.

An overview of what is considered to be a public benefit activity or purpose has been summarized in a table of 25 entries for countries and 50 public benefit characteristics[1].  With some exceptions, it is difficult to find identical descriptions of very closely related activities in all countries. Therefore, it must be used with certain respect for generalization, allowing the use of one specific description of the activity in regard to so many countries.

The table uses four codes to express the degree of specificity, which may be found in the laws or draft laws of the countries.

[Webmasters note: the table can be viewed in color by clicking here, but the code is presented in grayscale as well for those who do not have color printers.]

Code 3 (green or dark gray) is used for those cases where the specific activity or purpose may be found directly in a more or less clear statement in the source used. Therefore, such activities might be considered with rather high certainty to be defendable as of public benefit in the relevant country. 

Code 2 (light green or gray) indicates that, with some greater degree of generalization, one may derive from available sources a good probability that the item to be considered is of public benefit in the relevant country. This is typically the case of Netherlands, where from the statement defining as charitable any activity which does not serve for sole benefit of an individual or a closed group of individuals, one may deduce, with some hesitation many purposes that might be covered by such a broad definition.

Code 1 (sky blue or shaded) is used, when there are explicit constraints to the scope of the activity in its more general aspects applied in the country. So, when only orphans or elderly or otherwise incapacitated persons may be the beneficiaries of certain human rights protection  activities while others will be excluded, it is considered a partial attribution of public benefit status to the human rights protection activity in the relevant country.

Finally, code 0 (white) is used where there are either no direct or general statements in the available sources, when the characteristics used are contradictory to other statements, or with the general approach of the legal system of that country.  There are exceptional situations in any country and none of the characteristics might be completely excluded from, nor explicitly included among those which, under specific conditions, would be acceptable as in the public interest.   

The table was organized in such a manner as to order the countries according to the sum of points "obtained" for assigned codes.  The public benefit activities are ordered according to the sum of code points assigned in the whole set of the countries. Therefore, at the top of the table are the most often specified activities, while at the left of the table are the countries with broadest or most specific and detailed definitions of public benefit activities.

Thus, the most "popular" and, with few exceptions, globally inclusive in the given set of countries, are the following public benefit activities:

1.       Promotion of education, training, skills development, knowledge dissemination.

2.       Social care, assistance to families, elderly people, handicapped, others in need.

3.       Promotion of science, research and development.

4.       Support of culture and promotion of arts.

5.       Promotion of religion and support of activities of religious communities.

6.       Care for health, prevention of decease, health rehabilitation.

7.       Protection of children and youth and advocacy of their interests.

8.       Support of sports (mostly amateur), tourism and physical education.

9.       Protection of nature and animals.

10.   Environmental care.

A second group of activities, seemingly more cherished in the Central, Eastern and Southern Europe then elsewhere, is formed by the following items:

11.   Protection of human rights.

12.   Assistance in vocational training to the unemployed.

13.   Support and/or promotion of labor market reintegration training for handicapped and similar services.

14.   Protection of cultural heritage.

15.   Provision of equal access to employment to groups of persons in disadvantageous social position.

16.   Support to brotherhoods, orders or associations which provide all their profit for public benefit purposes.

17.   Assistance to refugees.

18.   Protection of historical monuments.

19.   Protection of public order and traffic security, voluntary fire departments or rescue service, prevention of disasters and incidents.

20.   Services provided exclusively to public benefit organizations. 

The rest of activities included to the list seem to be mentioned in only a few countries or may be considered to be specific for a country or a region. Some more prominent examples are:

21.   Minimization of state expenditures, support of governmental organizations (Hungary, Bulgaria, Macedonia, Albania, Ecuador and in lesser degree some other countries)

22.   Assistance to refugees (Several European countries and Independent States)

23.   Fostering of peace, friendship and harmony between nations and prevention of social, national, ethnical or religious conflicts (Independent States)

24.   Activities of labor, agricultural or horticultural organizations (USA, Ireland Austria)

25.   Support of small and medium enterprises (England and Wales, Austria, Uzbekistan)

26.   Alternative energy production from renewable sources (solar, wind, and chemical energies) (Central Europe)

27.   Activities of brotherhoods, orders or associations providing for the payment of life, sick, accident or other benefits to the members or their dependents and similar cooperative services (USA)

28.   Recycling raw materials from waste (Hungary)

29.   Support of common activities of individual farmers (Austria)

30.   National or local defense (Lithuania)

The author would appreciate any comments, suggestions or additional information concerning the data in the table from those readers who would like to contribute to this comparative exercise or from anybody who might become interested in the topic.

IV.  Possible Categories of Public Benefit Providers and Tax Benefits or other Compensations Available to them

The comparative table of public benefit activities and its discussion above shows that there are certain categories of activities which are more or less generally acceptable or which are specific to the regions or local political and law systems.

Hungary has become a pioneer country with the introduction of a special scheme, under which there are two main categories of publicly beneficial organizations - "ordinary" and "prominent" ones. For each of these categories of organizations, there are different benefits and requirements, as well as different benefits to those who support these organizations. Moreover, there is also the well known Hungarian 1% plus 1% direct income tax assignment law, which required a special campaign organized by the Non-Profit Information and Training Center (NIOK) to encourage tax payers to make use of their right. As a result, a substantial number of donations reached the organizations listed in one of the two categories.

Hungarian PBOs in general must comply with the following rules:

1.     If the PBO is of a membership type, the public benefit services provided by the PBO must be accessible to non-members.

2.      The PBO may engage only in such business activities which support its main public benefit activity.

3.      There must be a declaration of non-distribution of any profit made by the PBO to its founders, eventual members or members of its governing bodies.

4.      The PBO may not be engaged in any political activity, including financing political parties.

5.      The governing body of the PBO must meet at least once a year and there must be clearly defined rules for the order of convening the meetings of the governing body and its decision-making procedures, including publicity and quorum.

6.      There must be assured rules protecting the PBO against conflicts of interest.

7.      The PBO must have a supervisory or auditing body or procedure.

8.      The PBO must publish a detailed annual report approved by its governing body.

Prominent PBOs in Hungary include those which have been authorized to fulfill certain public duties for which the state or local governments would otherwise be responsible. Moreover, prominent PBOs must disclose data on its activities and management to local or national press.

Similarly, in the Czech Republic, foundations and public benefit corporations (centres) may be established only for public benefit purposes (see the Table).  The law provides certain tax and other fiscal benefits to them, while requiring regulations similar to those which govern Hungarian PBOs.[2] In July 1999, the Czech Government and Parliament decided to provide contributions to endowments of 44 Czech granting foundations from privatization funds. At the present, there is an acute need to revise the laws governing registration, operation and state support of associations and public benefit corporations. For these reasons, the Czech Government has requested the Council of Non-Governmental Organizations, its advisory body composed of representatives of Czech NGOs and governmental officials, to draft a proposal defining PBOs. Additionally, the proposal may introduce categories of PBOs, a method for registering such PBOs and enforcement mechanisms.

The proposal to the Czech Government is based on two main points of view: first, what is the main target group of the activity, and, second, what is its possible impact on the public welfare?

The target factor distinguishes the activity on the scale of its impact: national or international, general public, open groups of persons, closed groups of persons or individuals. The "closed" groups are those formed by the members of a family, by the employees of a company or corporation, members of a governing body or the membership of an organization, if not open to everybody. The Czech legal system provides definitions of these classes of closed groups.

The public welfare factor ranges from very positive and publicly recognized to negative or even causing a harmful impact. This qualification, of course, depends rather strongly on the concrete social, political and cultural environment and may change with time and vary regionally even in one country.

Under some circumstances, it also may be important whether and to what extent the activity is based on voluntary work and how one guarantees that the activity is essentially a not-for-profit activity. This should not exclude just and adequate reward for the work done in the public interest or for public benefit.

Based on the above philosophy, the proposal constructs the following main categories of public benefit activities and the PBOs which are engaged in such activities:

Category A.          The activities done in the name of the state and in the interest of its integrity and the security of its citizens.

This category includes mainly the activities of state agencies and budgetary and subsidiary governmental organizations which are still rather abundant in the Czech Republic. The scope of activities includes the extended services connected with the public administration, enhancement of the legal system and democratic institutions, national defense and security of citizens and realization of international obligations on the level of independent organizations. However, even in this field of activities there are several independent and non-governmental organizations which operate under contracts and provide training of state officials, organize symposia, forums and conferences, and work on the development of the legal system. There are still some Quasi NGOs, established by the state in the past to mimic real independent organizations fulfilling representative roles in international organizations.

 Category B.         Preferred and public beneficial activities of national importance.  

This category includes mainly the activities of either state or local governmental organizations plus several public benefit corporations (NGOs) which carry out the distribution of drinking water, provide flood prevention operations, maintain roads, guard buildings of public or strategic importance, care for national and local parks and natural monuments or architectural monuments of national importance, etc. Also included may be institutions caring for the development of science (Academy of Sciences), education (four main universities) and spiritual values (prominent churches), which depend on the resources from the national budget.

Category C.         Publicly beneficial activities of regional or local importance.

There are many NGOs and public institutions active in this broad field of activities which are independent in their economic activities from the government but still have certain privileged relations to the state budget. Naturally, these are: