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The International Journal
of Not-for-Profit Law

Volume 12, Issue 1, November 2009

A publication of the International Center for Not-for-Profit Law

Table of Contents

Letter from the Editor

NGOs in the Political Realm

Special Section

Political Activities of NGOs: International Law and Best Practices
International Center for Not-for-Profit Law

NGOs: An Antibiotic Against Bureaucracy, Democracy's Degenerative Illness
Eduardo Szazi


Citizen Participation in Mexico Through Advisory Councils
Consuelo Castro

State Supervision of NGOs in Peru
Maria Beatriz Parodi Luna

Endowment Funds: New Develpments in the World of Philanthropy in France
Philippe-Henri Dutheil

Legal Framework for External Supervision of NGOs in Current Czech Law
Katerina Ronovska

British Charities and Insolvency
Pesh Framjee

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Editorial Board

Endowment Funds: New Developments in the World of Philanthropy in France

Philippe-Henri Dutheil1

The endowment fund is the latest addition to the family of foundations. It is a tool designed as a vehicle for patronage activities initiated by both individuals and legal entities (businesses, professional organizations, etc.), and has a number of innovative characteristics.

Groundbreaking – revolutionary – shock to the system: Article 140 of the French Act for the Modernization of the Economy of 4 August 2008 has been described in the strongest possible terms.

Indeed, this text gave rise to the endowment fund, a new non-profit-making organization (NPMO) defined as “a non-profit-making legal entity under private law that receives and manages, through capitalization, assets and rights of any kind that are contributed to it free of charge and irrevocably, and uses the income from the capitalization in order to carry out work or a mission of general interest, or redistributes this income to assist a non-profit-making legal entity in the performance of its work and missions of general interest.”

According to the Ministry of the Economy, Finance and Industry, which initiated this innovation, the endowment fund was designed to have:

The endowment fund, the next generation of foundation

An endowment fund is legally akin to the foundation “family,” since they are defined as being an irrevocable assignment of rights or assets to a cause of general interest. However, endowment funds also take on characteristics of other types of NFPOs (non-for-profit organizations).

The flexibility of the “association” status...

The use of the terms “non-profit-making legal entity under private law” to define an endowment fund naturally refers to the definition of an “association,” an agreement under which persons form a group with a goal other than sharing profits.

Moreover, when we compare the very strong constraints that exist for the setting-up and operation of foundations with the simplicity offered to NFPOs, it must be observed that the endowment fund presents some points in common with the legal form of the NFPO.

Indeed, the rules for setting up and operating an endowment fund are as unrestrictive as those applicable to NFPOs. In this respect, we should mention:

  • legal formalities for formation reduced to a bare minimum: it is sufficient to merely file the articles of NFPO at the Prefecture, followed by publication in the Official Journal;
  • flexible management conditions: any endowment fund must be managed by a Board of Directors. The only rule laid down is that this Board must have at least three members. Therefore, there is considerable freedom in the governance that may be implemented.
  • No prior administrative authorization is necessary, nor is compliance with the complex governance rules such as they exist for most types of foundation.

    We should also note the virtual absence of fundamental, mandatory rules for this new type of NFPO.

    Apart from the characteristics arising from the definition used in Article 140, a number of options are open:

  • Setting-up by one or more individuals or legal entities, be they public or private, French or foreign, regardless of their kind or activities;
  • Setting-up for a definite or indefinite period;
  • The possibility of opting for an endowment (the “capital” of the fund, which generates income), either intangible or consumable, with no minimum amount being stipulated for this endowment.
  • … combined with the tax and legal advantages of foundations.

    The lawmaker has provided the endowment fund with attractive legal characteristics, comparable to those enjoyed by the most complete forms of foundation:

  • Broad capacity to receive donations: An endowment fund may receive all types of gifts: hand-to-hand donations, donations and bequests, own resources, financial income, etc. Moreover, the right to object conferred upon the Prefect by Article 910 of the French Civil Code is not applicable to endowment funds: they may freely receive the gifts made to them (donations, bequests). However, there is one important exception: collecting public subsidies is prohibited (except in cases of a joint order by the ministries responsible for the economy and the budget - Art. 140, §III);
  • Unlimited capacity to hold assets of all kinds;
  • Varied resources: an endowment fund may not just receive gifts, including those arising from an appeal to the public, but may also collect the income generated by its endowment (rents, dividends, etc.) as well as own income from its commercial or economic activities (sale of assets, payments for services rendered).
  • Like foundations (and associations), endowment funds may be exempted from trade taxes (VAT, CIT at the regular rate, business tax) if they comply with the conditions set forth for any NFPO (management with no financial interest, absence of privileged ties with businesses in the market sector, activities that are non-competitive or that are carried out under different conditions than those developed by profit-making structures).

    A specific tax guideline has been announced. It should notably specify the principles that will apply in the event of the coexistence of profit-making and non-profit-making activities.

    An endowment fund may also benefit from:

  • exemption from the tax on their capital income (on the condition that the endowment of the endowment fund not be consumable);
  • exemption from all free transfer taxes concerning gifts and bequests made to them.
  • With respect to the tax incentives for patronage, it should be emphasized that the endowment fund has been placed within the scope of application of Articles 200 and 238 bis of the French Tax Code (FTC): subject to compliance with the usual conditions in this respect, donors may benefit from an income tax credit of up to 66% of the amount of the gift (individual patrons) or a corporate income tax credit of 60% of the amount of the gift (legal entity patrons).

    On the other hand, as the laws currently stand, an endowment fund may not benefit from the reduction in the Impôt de Solidarité sur la Fortune (wealth tax) that falls within the scope of Article 885-0 V Bis A of the FTC. This is the main remaining comparative advantage in favor of structures such as the common public interest, university or partnership foundations.

    How should we assess the endowment fund?

    A minimal required framework...

    Certain aspects of the operation of an endowment fund were specified in Decree no. 2009-158 of 11 February 2009.

    This text, which supplements the legislative provisions, sets out different obligations and requirements that must henceforth be respected by any endowment fund.

    The law already stipulated that a Statutory Auditor must be appointed for any endowment fund whose annual resources exceed EUR10,000, a relatively low threshold which will likely be reached by many funds. Further, the Decree then specified the conditions for the Statutory Auditors’ work for the endowment fund.

    The powers granted to the departmental Prefects are also specified, at the heart of the endowment fund control mechanism. The formalities for setting up an endowment fund must be fulfilled with this administrative authority.

    A highly detailed activity report must be sent to the departmental Prefect every year, including:

    The Decree also lists the various serious problems that affect the carrying-out of the purpose of the endowment fund (breach of the financial management rules, consumption of the capital endowment, failure by the statutory auditor to comply with the audit rules). If the public administration observes any of these problems, he/she may suspend the fund’s activities, or even instigate a dissolution procedure.

    The Decree also specified the conditions of financial management for endowment funds. Each Board of Directors is competent to define the fund’s investment policy. The articles of association must specify the rules applicable to this investment policy and notably include the rules of dispersion by investment category as well as a limitation by issuer. The only authorized investments are those mentioned in Art. R 931-10-21 of the French Social Security Code, i.e., those authorized for Provident Institutions. If the endowment exceeds EUR1 million, a financial consulting committee must be set up.

    Lastly, we note that endowment funds may only appeal to the public with prior authorization from the authorities, whereas a simple information notice is sufficient for an appeal to the public made by an association or a foundation. The public administration, to which the endowment fund must refer an appeal for donations, may refuse such fundraising campaigns for various reasons relating to the cause the fund intends to support, the prior criminal convictions of its directors, etc. After two months, no response from the authorities is deemed as tacit acceptance.

    In practice, these operating rules are not very restrictive for most endowment funds, which are concerned by compliance with the laws.

    ... which reinforces the attractiveness of an endowment fund

    The characteristics of an endowment fund make it a particularly attractive tool for bearers of general interest projects, be they individuals or companies.

    The absence of legal restrictions before set-up and in terms of governance, as well as the substantial existing tax incentives, will surely allow endowment funds to fulfill the role assigned to them. Let us recollect that Article 140 of the Act for the Modernization of the Economy falls within a section entitled “Attracting private funding for general-interest operations.” Without wanting to anticipate the change in mentalities that this objective implies, given France’s traditions with respect to philanthropy, the proposed legal vehicle seems perfectly adapted.

    Project bearers will notably be able to maintain control over the endowment fund set up, which is a significant change in philosophy with respect to existing foundations so far, in which the governance required by the laws and the authorities have the effect of mitigating the power of the founders.

    This trend is in sync with the changes observed in the attitude of most patrons and philanthropists. While in the past the act of giving was considered to be sufficient in itself, current donors are taking an increasing interest in how their donation is being used, even wishing to structure its use themselves. The fact that a donor wishes to sit on the Board of Directors of an association or foundation that he/she supports is no longer unusual.

    Similarly, the decrease in administrative authority over the bodies that bear actions of general interest corresponds to a strong trend in recent years. Patrons, who are often business managers, are finding it more and more difficult to have to submit to a sometimes-punctilious administrative control (cf. procedures to set up common public interest foundations or corporate foundations). Further, the administrative procedure to be respected gifts or bequests granted between private individuals remains an issue, even if it has recently been made less burdensome. In this respect as well, the endowment fund is in step with modern times.

    Therefore, no one doubts that the endowment fund will enjoy a well-deserved success in coming years.

    However, a string of abuses would suffice to discredit the endowment fund. Let us recollect the damage done in the past by scandals such as that at the Association pour la Recherche sur le Cancer (Cancer Research Association) in the 1990s. This could lead the authorities to further regulate this legal form, or convince donors to move away from this type of structure.

    Genuine vigilance will be necessary, both on the part of the founders and managers of endowment funds and of their Boards, precisely due to the significant latitude granted to them.

    In particular, serious consideration must be given to the governance implemented when setting up future endowment funds, in order to avoid situations in which bad management, grave errors of judgment or even embezzlement may not be detected early enough.


    1Philippe-Henri Dutheil is chairman of the International Not-for-Profit Organizations Network for Ernst & Young and a member of ICNL’s Advisory Council.


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