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The International Journal
of Not-for-Profit Law

Volume 5, Issue 1, September 2002

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

Table of Contents


The Economics of Non Profit Accounting and Auditing: Suggestions for a Research Agenda
Marc Jegers

Australian Charity Law Reform Proposals
Prof. Myles McGregor-Lowndes

Charities and Terrorism: The Charity Commission Response
Debra Morris

Charity Law Review in Ireland and the Challenges for the State/Third Sector Partnership
Kerry J. O'Halloran

The Kamehameha Schools Admissions Policy Controversy
Randall W. Roth

Case Notes

Asia Pacific:
Fiji | New Zealand

Central and Eastern Europe: Croatia

Middle East and North Africa:

North America:
Canada | United States

Sub-Saharan Africa:
South Africa

Western Europe:
European Union | The Netherlands

Country Reports

Financial Action Task Force (FATF) on Money Laundering

Asia Pacific:
Regional | Burma | China | Japan | New Zealand | Singapore

Central and Eastern Europe: Estonia | Kosovo | Latvia | Romania

Latin America and the Caribbean: Regional

Middle East and North Africa: Regional

Newly Independent States: Belarus

North America:
Canada | Mexico | United States

South Asia:
Afghanistan | India | Sri Lanka

Sub-Saharan Africa:
Congo | Malawi | Nigeria | South Africa | Sudan | Tanzania | Togo | Zimbabwe

Western Europe:
Regional | Belgium | France | Germany | Italy | The Netherlands | Portugal | Spain | United Kingdom

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Editorial Board

Case Notes: North America

European Union

Kennemer Golf & Country Club v. Staatssecretaris van Financiën, C-174/00, 21 March 2002.

In a case that followed a request from the Netherlands Supreme Court for a preliminary ruling on the scope of the exemption in Article 13(A)(1)(m) of the 6 th Directive, a Netherlands association with around 800 members established for the pursuit and promotion of sports and games, in particular golf, whose members must pay a joining fee and an annual subscription fee, and must participate in an interest-free debenture loan issued by the club.

The UK government and the European Commission argued that it should be decisive that an organization intends to make a profit and not the fact that it actually makes a profit.  The Netherlands government reasoned that an exemption should not be granted if an organization systematically makes a profit.  The ECJ held that the intention of the organization is decisive and that it is for the competent national authorities to determine whether or not an organization satisfies the requirements to be characterized as a non-profit organization.  This characterization is not affected by the fact that an organization subsequently realizes profits even if the profits are made systematically as long as those profits are not assigned to the services supplied.

The Court, contrary to the position of the Netherlands government, held that: 

Commissioners of Customs & Excise v The Zoological Society of London, Case C-267/00, 21 March 2002.

This case, referred by the UK, concerned the meaning of the criterion that an organization claiming exemption under Article 13A (1)(n) of the 6 th Directive be “managed and administered on an essentially voluntary basis”.  The dispute centered around the issue of whether the Society, which employed several hundred staff but was governed by an unpaid council elected by its 4000 individual members, satisfied this test.  The European Court, considering that no significance attached to the omission of the word “essentially” in the UK legislation implementing this exemption (Group 13, Schedule 9,VATA 1994), concluded that it is necessary to apply a two stage test: 

The Court also found that the words “on an essentially voluntary basis” refer both to the composition of the directing organs and the reward received by the persons actually directing the organization.  Finally, the Court concluded that it is for the competent national authority to determine whether these tests are satisfied in a particular case.  At the time of writing, Customs & Excise has not published any statement of its intended policy.

Commission of the European Communities v. Federal Republic of Germany, Case C-287/00, 12 June 2002.

In July 2000 the European Commission lodged a n infringement procedure based on Art. 226 of the EC Treaty before the European Court of Justice (ECJ) concerning the German VAT exemption for research activities by public sector higher education establishments.  The grounds for the lodging of the procedure suggested that German law in this regard is incompatible with EC Sixth VAT Directive.

Para. 4(21a) of the German VAT Act, as amended by Para. 4(5) of the VAT Amendment Act of 12 December 1996, provides for an exemption for research activities undertaken by public sector higher education establishments.  The Commission argued that this exemption was incompatible with Arts. 2 and 13(A)(1)(i) of the Sixth VAT Directive.  A formal notice was sent to Germany on 6 November 1998.  In the notice, it was indicated that a state university is a taxable person for VAT purposes in so far as it is not acting as a public authority, but is effecting transactions for consideration.  The German government did not reply to the letter, and the Commission issued a reasoned opinion in a letter of 26 August 1999 and requested Germany to take measures to comply with this within 2 months of its notification.  Germany replied to the reasoned opinion in a letter of 4 April 2000, but that reply did not satisfy the Commission, which lodged the case in question with the ECJ.

Based on Art. 2(1) of the Sixth VAT Directive, every supply of goods or services effected for consideration within the territory of an EU Member State by a taxable person acting as such is subject to VAT.  Art. 4(1) of the Directive defines a taxable person to be "any person who independently carries out any economic activity".  The term "economic activity" is, in Art. 4(2) of the Directive, described as all of the activities of producers, traders and persons supplying services, and also the exploitation of tangible or intangible property for the purpose of obtaining income from the property on a continuing basis.

 Art. 4(5) of the Directive indicates that states, regional and local government authorities and other bodies governed by public law are not to be considered to be taxable persons in respect of the activities or transactions in which they engage as public authorities, even if they collect dues, fees, contributions or payments in connection with these activities or transactions.   Finally, Art. 13(A)(1)(i) of the Directive provides for an exemption in respect of children's or young people's education, school or university education, and vocational training or retraining, including the supply of closely related services and goods, provided by bodies governed by public law with this as their objective or by other organizations defined by the EU Member State concerned as having similar objectives.

According to the Commission, the activity concerned was based on a private contract relating to a research project between the relevant state university and a contracting body, which determined, inter alia, the type and the scope of the services as well as the consideration.  Therefore, when carrying out that activity, the state university acted in the same way as a private company and was subject to VAT.  The German government indicated that the measure concerned was introduced for simplification purposes.  The German government also reasoned that Art. 2 of the Directive is neither an obligation nor a prohibition and only defines the basis of assessment and not the liability to tax.  Finally, the German government argued that the research service was closely related to and essential to education in state universities because it gave teachers the possibility to attain the required link between higher education and professional life.

The ECJ rejected the arguments of the German government and held that Art. 2 of the Sixth VAT Directive defines the activities subject to VAT (Commission v. Italy, C-203/87) and that only the activities referred to in Art. 13 of the Directive may be exempt.  In respect of the interpretation of an exemption, the ECJ referred to earlier case law in which it was decided that the terms used to specify the exemptions referred to in Art. 13(A) of the Directive must be interpreted strictly (Stichting Uitvoering Financiële Acties, C-348/87; Institute of the Motor Industry, C-149/97 and D., C-384/98).  The ECJ indicated that Art. 13(A)(1)(i) of the Directive does not make any reference to the research activities of state universities and that this exemption only covers the supply of goods and services necessary for education, such as teaching materials.  The fact that research activities for the benefit of private persons may be of assistance to education is not sufficient to establish the existence of a sufficiently close legal relationship between education and the activities concerned.  In this respect, the ECJ considered that the exemption is intended to ensure that access to university education is not hindered by increased costs resulting from the fact that the closely related supply of goods and services is subject to VAT.  The fact that research is subject to VAT, however, does not increase the costs of education.  Finally, with regard to the simplification argument, the ECJ confirmed earlier decisions in which it had ruled that the conditions for exemptions set out by an EU Member State cannot define the content of an exemption (Gemeente Emmen, C-468/93; Commission v. Spain, C-124/96; and Commission v. France, C-76/99).

Accordingly, the ECJ held that the German exemption from VAT in respect of research activities carried out for consideration by public sector higher education establishments is incompatible with Art. 2 of the Sixth VAT Directive.

Keeping New Castle Warm Limited v. Commissioners of Customs & Excise, Case C-353/00, 13 June 2002.

Another case referred by the UK concerned whether a UK grant for the supply of advice is part of the taxable amount within Art. 11(A)(1)(a) of the EC Sixth VAT Directive.  Keeping Newcastle Warm (KNW) carried out work, including the provision of energy advice qualifying for grants under the Home Energy Efficiency Grant Regulations 1992. KNW declared and paid VAT on the amounts of GBP 10 received per item of energy advice provided by the Energy Action Grants Agency (EAGA).  KNW requested a refund of the VAT paid between 1 April 1991 and 31 August 1996, arguing that the grant for energy advice was not directly linked to the price of the supply which would have been charged had it not been provided to the consumer free and was not part of the taxable amount within the meaning of Art. 11(A)(1)(a) of the Sixth VAT Directive.  Art. 11(A)(1)(a) of the Sixth VAT Directive indicates that the taxable amount for supplies of services is everything that constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies, including subsidies directly linked to the price of the supplies.  The Commissioners of Customs and Excise, however, held that the energy advice grant was linked to the amount properly charged for the energy advice and constituted the consideration for the supply. 

Reg. 5 of the Home Energy Efficiency Grant Regulations 1992 provides for a grant to be awarded for certain work, including the provision of energy advice, which is defined as advice relating to thermal insulation, the economic and efficient use of domestic appliances, facilities for lighting, or space or water heating.  Applications for a grant must be made to a network installer, who has to verify if an applicant is eligible for the grant and send the application to the administering agency (Reg. 7(1) and 7(3)(a)).  Reg. 7(3)(b) indicates that, if the administering agency does not approve a grant, the costs of the work are borne by the network installer, but, if approval is given, the applicant must pay the agreed amount (Reg. 7(3)(i)).  The maximum grant for energy advice which must be paid to the network installer is GBP 10 (Regs. 9 and 10).

The following preliminary questions were asked:

(1) Is a payment made by the EAGA to the KNW, which receives it in respect of energy advice given to an eligible householder, a subsidy within the meaning of that word in Art. 11(A)(1)(a) of the Sixth VAT Directive?

(2) If the answer to question (1) is yes, is that payment also directly linked to the price of the supply of energy advice, so as to form part of the taxable amount of that supply by reason of the concluding words of Art. 11(A)(1)(a)?

(3) If the answer to question (2) is no, is that payment none the less part of the taxable amount by reason of constituting the consideration (or part of the consideration) for a supply?

KNW argued that the grant received from EAGA for energy advice constituted a subsidy which was not directly linked to the price of the supply because the amount received was always equal to the maximum set.  In addition, as the energy advice was supplied to consumers without consideration, it was a flat-rate subsidy for the operating costs of KNW and not directly linked to any costs.  The United Kingdom, referring to the ECJ decisions in the cases of Coöperatieve Aardappelenbewaarplaats (C-154/80) and Tolsma (C-16/93), argued that the financial assistance at issue constituted consideration within the meaning of Art. 11(A)(1)(a) of the Sixth VAT Directive, as a direct link existed between the subsidy and the services supplied.  The European Commission argued that the purpose of Art. 11(A)(1)(a) of the Sixth VAT Directive was to ensure that the taxable base included the whole consideration paid for the supply of goods and services, regardless of whether the consideration was paid by the recipient or a third party, including a public authority.  Consequently, if it was a flat-rate subsidy and the only payment made in relation to the energy advice, it should constitute a consideration for services supplied.

The ECJ confirmed its decision in the case of Office des produits wallons (C-184/00), in which it held that Art. 11(A)(1)(a) of the Sixth VAT Directive applies, inter alia, to situations where three parties are involved, i.e. the authority which grants the subsidy, the body which benefits from it and the purchaser of the goods and services delivered or supplied by the subsidized body.  Consequently, the ECJ ruled that the grant paid by EAGA as a public authority to KNW in connection with the supply of energy advice to public households is part of the taxable amount within the meaning of Art. 11(A)(1)(a) of the Sixth VAT Directive.  PB

The Netherlands

Mid-Life Crisis of "Plan"
A Dutch Case Study

by Frits Hondius* 

I recently learned of the governance problems encountered by a public benefit foundation, the Foundation Foster Parents Plan Nederland, through articles in the Dutch press and legal journals.  On June 13, 2002 in Milan I made a presentation of this case to an international seminar on governance of public benefit NGOs organized by the Ambrosianeum Foundation.  About 20 participants, which included NGO specialists, lawyers, accountants and notaries, participated in this meeting, which was chaired by Professors Adriano Propersi and Marco Grumo of the Catholic University of Milan.

Since 1998 I have conducted a number of studies about scandals, internal quarrels or even outright crimes in connection with associations or foundations.  I have noted that such problems are likely to occur within large NGOs supported by a multitude of small donors.  “Plan” seems to fit into this category.

“Plan” is shorthand for “Foundation Foster Parents Plan Nederland.”  This long name was compressed into an ultra-short one: “Plan.”  A nonsensical name at that – who would dream of shortening “Doctors without Borders” into “Borders?” 

“Plan” is a mass movement incorporated under Dutch law as a foundation, supported by thousands of people who ”adopt” as foster parents children in third world countries.  Under Dutch law a foundation is totally independent, elects its board by cooptation, is not under any form of general public control such as the British Charity Commission, the French Cour des Comptes, or the Spanish patrocinado and has no legal obligation whatsoever to provide any information, not even to the people who support its work.  It is true that “Plan” submitted itself for certification by the Central Office on Fund Raising.  But again, the Central Office on Fund Raising is a private voluntary body, created originally to help Dutch local authorities better coordinate the dates of local street collections.

The unease among foster parents was aroused by the fact that the Board of “Plan” adopted in the mid-nineties a strategic change.  Its activity would no longer solely support foster parent/foster child relationships, but would from now on focus on improving the structure of society in the countries concerned as a better means of enhancing the protection and welfare of the child.  However, many foster parents did not wish to be part of that “plan.”  They simply wished to continue foster parenting.  Apparently there was no structure or procedure within the foundation for giving these people a voice.  With a variation on Kipling the general wisdom has always been that “foundation (capital) is foundation, association (people) is association, and never the twain shall meet.” 

To outside observers, the violence of the conflict was puzzling.  Is it because people who practice philanthropy are over-emotional?  Since Dutch law offered no remedy, those disagreeing with the foundation or its director, had to resort to two alternative remedies:  a “dissatisfied consumers” association, and/or a legal action in the law courts.  Legal actions have been filed, but have so far been unsuccessful.  One such action, for example, aimed at contesting the payment of the lawyer’s fees to a foundation set up by the lawyer for this purpose.   In no other country of Europe would this have been imaginable.

The pressure exercised by the media against the reluctance of “Plan” to publicize certain information, such as the excessive salary of the director (many times that of directors of other NGOs) had some effect, but the basic problem remains.  A foundation is not a suitable structure for a people’s organization.  How can a foundation give voice to the masses?

A possible reply has been advocated in Italy by the very body that hosted the Seminar, the Ambrosianeum Foundation, on how to associate people in a meaningful manner with a foundation.  The new concept, called “participatory foundation,” (“fondazione participante”) was elaborated by the Notaries Firm Bellezza and is today widely recognised, inter alia, in Italian tax laws.  Its attraction lies in the fact that participant status can be given not only to people but also to authorities for example to local councils.  The model described in a folder offers in my view an attractive blueprint for improving relations between foundations and the public at large.

Dr. Frits Hondius was the founder and former Chairman of the Europhil Trust.  He can be reached at hondius@wanadoo.fr.  He drew up this note at his own initiative and without any brief from “Plan” for the sole purpose of arousing interest and seeking comments.


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