Prof.Vesna Pendovska

Q & A

On

TAX & CUSTOMS ISSUES RELATED TO
MACEDONIAN NONPROF IT ORGANIZATIONS

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1.What are the major taxes and customs duties applicable to NPOs?

Once duly registered with a competent court register, NPOs gain the legal
personality attribute. Thus, they auto matically are subject to all fiscal
instruments applicable to legal persons in general, with the exceptions
regulated by law. NPOs are liable for profit tax at entity level, personal
income tax and social contributions fo r their staff (except for volunteers),
property tax, gift and inheritance tax, VAT on purchases of goods and
services, customs and other import duties, as prescribed by tax and
customs laws and secondary regulations . (See: Annex 1 List of relevant
fiscal laws)

2. Where can I get more informatio n on filing requirements and tax
liabilities for my NPO?

The Ministry of Finance and the Public Revenue Office have informative
services, booklets, free info lines, and web sites where you may get the
information that you need.

3. Are we obliged to prepare fi nancial plans and submit annual
reports?

Yes, according to the Law on Acc ounting and the secondary regulation
all legal persons must file an annual report with the ZPP (Payment
Operations Service). Financial pla nning is at free disposition to the
entities, but is strongly advisable for many reasons: better utilization of
resources, more efficien t management, more successful completion of
goals and objectives of the NPO, etc. A professional, certified accountant
best does the preparation of the annual accounts. This is especially
important when NPO engages in economic activities and generates
income, and is involved in importa tion or exportation of goods and/or
services. Note that failure to comply with fiscal laws may be treated as
tax evasion and even criminal penaltie s may be imposed to the executives
or the board members of the NPO.
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Moreover, bear in mind that financial planning and the main Law on
Associations of Citizens and Foundations prescribes annual reporting,
and the adoption of these important doc uments is in the statutory powers
of the NGO Assembly.

4. Is it better to do the annual fina ncial statements by ourselves or
should we engage a certified accountant? Why?

Yes, the latter keeps you “on the safe side” although it will add to your
running expenses. You are always better off when you have an
accountant to do your bookkeeping and accounting. Of course, you need
not employ one, but hire him for a specific task under contract for
professional services.

5. My NPO is compelled to charge membership fees in order to cover
operating expenses. Is income from fees taxable with profit tax?

NGOs are liable under the provisions of the Law on Profit Tax as any
other legal person. Apart from the explicit statutory tax-exemption for
entities employing disabled individua ls, the law provides one possible
legal relief from taxa tion of NGO income deriving from membership
fees. Namely, tax-exempt is any ty pe of income that is strictly
designated for carrying on the activities of the legal person – the tax
payer (from budgets, funds etc.). That type of income is not included in
the NGO tax base for the purposes of profit tax. In our view, although
LPT fails to explicitly mention memb ership fees, they, by their innate
nature, obviously fall within the category of designated income, and
subsequently ought to be treated as tax-exempt.

6. My NPO just received a sizable donation from a foreign
organization. Is such a donation subject to tax? Do we have to report
the donation to the competent a uthorities at the State Revenue
Office?

The answer is no. The purpose of donated monies is fulfilling the
statutory objectives of the NGO and donation is a type of income that is
explicitly regulated by the LACF as legitimate source of income for

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NGOs. No special reporting requirements are needed, but beware that
according to the existing foreign payment operations law, you will
receive the MKD value of the donation at the official rate published by
the Central Bank of RM. That’s becau se domestic entities are not allowed
to hold foreign currency accounts in their name.

7. Our NPO needs resources for fulfilling the statutory goals and
objectives. We are afraid the funds we raise from membership fees
will not meet this goal. Can we engage in commercial activities to
improve our financial sustainability?

Macedonian NGO’S are not allowed to engage in economic activities
directly, but only through a separately established commercial subsidiary
company. It is important to stress that this legal possibility must be
reflected in the by-laws/statutes of the NGO. The company (which has to
be set up in a legal form of either Ltd. or Inc. company) has got all
attributes of a regular business entity regulated by commercial law, and is
consequently being taxed like all business organizations.
This is a rather rigorous legal appro ach, given that the majority of CEECs
allow some tax benefits at least for part of that income, under terms and
conditions prescribed by law. Most of ten exempt from tax is the portion
of the income used strictly for performing the activities of the NGO in
question, or income related to it’s main activity and purpose.

8. Is the rate of profit tax in our country very high?

Luckily, much lower than in other co untries in the region, or in EU
member countries. Macedonian profit tax rate is the lowest in the region
and is set at 15% for a ll legal persons irrespec tive of size and activity,
fact that may partially offset the negative effects of taxing income
derived from ec onomic activities.

9. How are we supposed to pursue that economic activity? Should we
organize a business department within the NPO? Separate
accounting, appoint general manager?

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No, as is explained previously, the only legal way of performing
economic activities by NGOs is through a separately established
subsidiary company.

10. What is a wholly owned subsidiary?
It’s a company solely owned by one by one founder, which can be a
natural or juridical person, both domestic and foreign. More detailed
rules concerning terms and conditio n for the establishment of a
subsidiary ought be sought in the Commercial code. For the purpose of
establishing licensed organizations (s avings houses, banks, broker/dealer
etc), the specific legislative requirement s contained in other statutes must
be taken into account.

11. How much will it cost to set up a commercial company?

The cost shall depend on the type of the company you wish to set up. The
Commercial code regulates that issue, thus at the moment (beware for
changes that are pending at year-end) statutory capital for an Ltd
company is 5,000 DM in denar counter value, and for a corporation is
20,000 DM respectively. Other costs may arise from notary fees, stamp
duties, registration fees, and consultant fee in case you are hiring a
professional consultant or a lawyer to do the registration for you.
Altogether the establishing costs ma y end up to be considerable, the
income from the profits derived from this economic activity may very
well secure the stable and sustaina ble existence and growth of your NGO,
and justify the initial costs.

12. We cannot afford to pay-in the statutory capital for that company
in-cash. Can we make contributions in-kind?

Contributions in-kind are allowed, generally in res and in
rights/royalties. Contribution in labor and in personal services cannot
qualify as equivalent for start-up capital of the company.

13. What if we set up a joint st ock corporation and are the only
shareholder? The Commercial Code requires at least 2 shareholders
for AD. Does it mean we have to find a partner for this enterprise?

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It is unclear which statute will prevail in this particular case, but we would
strongly recommend that you choose to establish a Limited liability
company as your subsidiary, for reas ons of legal and factual simplicity
and modest compliance requirements. The joint stock corporation is
incomparably more formal, comp lex and with rigorous compliance
requirements.

14. How shall our company be taxe d? Are there any legal benefits
and incentives if we use profits for developing our activities?

For now, no legal tax incentives are av ailable concerning the profits of
your subsidiary company. Notwithsta nding the fact that the profits will
be used for improving the activities of your NGO, they will be taxed as
ordinary business income at 15% rate.
Comparatively, the so-called “relat ed income” is tax-exempt; unlike
“non-related income” that is subject to the normal tax rules. The concept
of related income has one flaw: to determine the fine line between the
related and unrelated income, which often times is a Tantalus task.

15. One of our members is gettin g married. He is not rich, and
wonders if the NPO can lend him some money?

Lending monies to members is a sensitive issue. Since its obviously
beyond the objectives and aims of the NPO it such and similar practices
ought be avoided. If however there is a valid decision by the Managing
Board for a loan to a member, there must be a written contract between
the parties. Special attention must be paid to the interest on the loan,
bearing in mind “arm’s length princi ple”, transaction between related
parties. Generally accepted rule is that the interest should correspond to
the market rate for si milar financial loans.

16. My NPO had an excellent fina ncial year. We are thinking of
investing some money in securities. Is that legal for NPOs?

NGO’s may generate income from i nvestments directly. Dividends from
their subsidiary company are taxed at that company level with profit tax
and is then received by the recipien t entity. Of course, NGO may invest
in stocks of various companies and generate income, which will not be

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included in the tax base, if it has been taxed once at company level and if
that company is resident of RM.
Dividends from non-resident companie s may not enjoy this incentive,
and will be taxed twice (second time at recipient level) unless a Double-
Taxation Treaty between the countries is in place.

NGO’s may receive interest from bank deposits and from debt
instruments (government bonds, treasur y notes etc.) that is taxable as
ordinary business income, except in terest from government bonds, which
is tax exempt. Capital gains from sale of securities and immovable
property are included in tax base at the amount of 70% and taxed as
ordinary income. Capital losses may be off set by capital gains and the
remaining losses may be carried-forward up to three years.

17. The stock markets are in a dow nturn. Maybe it’s wiser to buy an
office building downtown, and rent it. That way our NPO will have
steady and sufficient income for pursuing our humanitarian
purposes. What tax issues are relevant in that situation?

Income from rented real estate may be more stable and predictable than
the security prices on the Macedonian Stock Exchange, especially since
there are only a few companies listed w ith the official markets which is
not much of a choice anyway.

18. We are buying government bonds, they are tax-free. What other
assets or investments have preferential tax treatment for NGO’s?

The latest amendments of the Personal Income Tax Law ( 8/01) provide
for exemption from taxation of se veral types of interest: from
government loans, a vista bank deposits, savings deposits, bonds issued
by central government and municipalitie s. This benefit is in favor of
individual resident taxpayers, and it is unclear weather the same
treatment is extended to legal juridical persons (NGO’s inclusive), sinc
e
Profit Tax Law is not explicit on the same issue.

19. My NPO is founded for the purpose of raising funds to help
Roma children. Our By-laws state that fundraising is a major
objective of our organization, and that all funds must be used for

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clothing, books and education. Our Board contemplates three
possible ways of collecting money for that purpose:

• one time fund raising campaign by selling T-shirts with
motives from Roma children drawings;
• setting up an exhibition at a private mall with posters on
the statute and living conditions of Roma population,
and collecting contributions from customers;
• opening a small gallery shop for hand made works by
Roma people as well as other goods. The shop would be
open regular hours.
What are the tax consequenc es of the three examples?

The first two situations where you raise money through donations and
sporadic activities – occasionally putting up exhibitions where you collect
contributions – are tax-exempt. Th e third case, however calls for
commercial activity carried on regular ba sis, and the profits there of will
be taxed at 15% tax rate.

20. An international organization decided to donate humanitarian
aid to my NPO. Are we liable for customs and for VAT on that
import?

Your NPO is not liable for VAT in this particular case, provided that you
are a registered domestic humanitarian, NPO and NGO (Art. 27,10 of
Law on VAT)

21. My NPO is engaged in helping abandoned pet animals. For that
purpose we purchased animal food on which we paid VAT. Since the
transaction was done in line with the main nonprofit goal of our
organization, are we entitled to a VAT rebate?

VAT rebate is possible only for entities, which are registered VAT
taxpayers. It is tricky weather this purchase of animal food should be
done by a separate company or directly. In case of direct purchase by
NPO that is not registered for VAT, there shall be no VAT rebate. This
could be possible in case separate commercial company has been set up
and is registered for VAT (has annual turnover in excess of 1.000.000
denars).
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22. My NPO is planning to organize a seminar with registration fee,
in order to cover the incurred costs. Are we compelled to charge
VAT on the individual registration fee receipts?

Educational, training, upgrading of knowledge, and similar services are
generally VAT exempt, but not if organized by NPOs and charged with
entrance fee. Therefore, VAT should be cal culated and charged.

23. In my NPO only volunteers have been engaged so far. However,
as our activities grow we are cons idering hiring full time workers.
Are we liable to pay income taxes and social security contributions
for our workers?

The employees in NPOs have equal tr eatment as workers in other sectors
of economy and/or government, with respect to their rights and duties
under labor law and Collec tive contracts. Accordingly, employers are
responsible for calculation and withol ding of personal income tax and
social security contributions prior to each distribution of wages and/or
other remuneration, in accord to law. This solution corresponds to good
international practices.

24. I wish to donate one Macedo nian NPO. Will my donation be
exempt from my personal income tax? What about gift tax of the
NPO receiving the donation?

Unfortunately, individual philanthropists are not entitled to deduct from
their taxable income the amount of donation they made to a NPO. The
existing Law on personal income tax does not provide any tax incentives
for encouraging gifts to associations of citizens and foundations.
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