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- Year: 2006
- Country: Transnational
- Language: English
- Document Type: Publication
- Topic: Aid Effectiveness,CSO Framework Legislation,Regional/Global Overviews,Taxation and Fiscal Issues
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The Fiscal Framework for Corporate Philanthropy
in CEE and NIS
David Moore *
Corporate philanthropy is only one aspect of the broader concept of
“corporate citizenship.” Corporate citize nship is the deliberate engagement of
businesses in their respecti ve communities through various actions, including pro
bono contributions of goods and services, training for employees and students,
renovation of buildings, an d reduced-fee or free health, education, and social
services. Philanthropy is an important–but by no means exclusive–way that
businesses can become engaged to improve surrounding communities.
Corporations engage in philanthropic activity for a variety of reasons.
Typically, the tax incentives provided to donors are not a primary motivation.
Nonetheless, a favorable fi scal framework is fundamental to promoting deeper
corporate involvement–and corporate philanthropy–with communities and with civil
society. A recent study by The Independent Sector in the United States illustrates a
strong link between tax policy and charitable giving. This study shows that the ability
to claim a tax deduction for charitable co ntributions plays a major role in donor
decisions–at every income level–regarding how much to give.
The fiscal framework can provide tax ince ntives for corporate donors, either
through allowable tax deductions or tax cred its, or though innovative means such as
Slovakia’s “corporate 1% law.” The fiscal framework can remove potential obstacles
to corporate giving by ensuring that recipients are not taxed for the donations they
receive. The legal framework can encourag e corporations to establish independent
grantmaking entities–usually foundations–which can act to fulfill the corporation’s
philanthropic goals. This overview will ex amine these legislative and fiscal trends in
Central and Eastern Europe (CEE) and the Newly Independent States (NIS).
Tax Incentives for Corporate Donors
Tax laws in nearly every country in CEE offer some degree of incentive for
corporate giving (though very little in Ma cedonia). Most NIS countries also offer
some tax advantages for corporate philant hropy, with the notable exceptions of
Azerbaijan, Belarus, Georgia and Russia. Available donor incentives include:
• Tax deductions
• Tax credits
• Tax designation schemes (1% laws).
In both regions, tax deductions are overwhelmingly the most common form of
donor incentive. Only in Latvia are companies provided tax credits. To qualify for a
tax deduction or credit, the corporate donati on must generally go to a legal entity
pursuing some enumerated purpose, such as a health, humanitarian, cultural,
educational, scientific, or amateur sports purpose. In some jurisdictions, potential
recipients include municipali ties (Bulgaria, Slovakia) or individuals and businesses
(Kosovo). But in nearly all countries, potential recipients include NGOs–or more
precisely, the category of NGOs pursuing designated purposes. The key determining
factor for tax incentives is usually the purpose of the donation, not the organizational
form of the recipient.
Some countries do, however, link tax incentives to specific organizational
forms, such as NGOs or public benefi t organizations (PBOs). In Hungary, for
example, corporate donors giving to PBOs may deduct up to 20% of pre-tax profits;
corporate donors giving to prominent PBOs may deduct 150% of the donation up to
20% of pre-tax profits. In Latvia, recipien t organizations must be NGOs appearing on
a Ministry of Finance-approved list, entr y onto which is burdensome and must be
Macedonia also limits the availability of tax deductions according to the
recipient of the donation, but excludes NGOs from the potential recipients. Instead,
tax deductions are granted only where the recipient of the donation is a public
organization funded by the state budget–in other words, public institutions–or the
Red Cross. A donor may not claim a deductio n for a donation to an NGO, regardless
of the purposes the donation is supporting.
All countries allowing for deductions lim it the benefit to a certain percentage
of either gross income (Bosnia, Croatia, Czech Republic, Serbia, and Montenegro) or
pre-tax profits (most of the remaining CEE and NIS countries). That percentage
generally is set between 0.5% and 10%. Hu ngary and Lithuania allow for deductions
to be made up to 20% and 40% of taxa ble income, respectively. In Uzbekistan,
100% of the income generated by a commercial subsidiary established by an NGO
may be tax-exempt, if that income is transferred to the founding NGO and used to
support the NGO’s statutory purposes.
One of the more innovative tax incentives in the region in recent years has
become known as the “1% Law.” Pioneered in Hungary in 1996, the 1% Law allows
private individuals to design ate 1% of their tax liability to an NGO and 1% to a
church. To be entitled to receive 1% cont ributions, a foundation or association must
carry out public benefit activities. State mu seums and other state cultural institutions
are also eligible recipients. Hungary’s 1% Law, through which $15.76 million was
designated for NGOs in 2001 alone, has serv ed as a model for similar tax designation
legislation now enacted in Slovakia, Lithuania, and most recently, Poland. It is only in
Slovakia, however, where bo th individuals and businesses may participate in the
designation system. A company may split its designation amount among several
Two recent advances should be noted. On March 8, 2003, the President of
Kyrgyzstan signed the Law on Amendments to the Tax Code, exempting
humanitarian aid, grants, charity donati ons, endowments, and membership and
entry fees from income tax. The new ta x code provisions increase allowable
deductions for local donors from 2% to 5%. As parliamentary deputy K. Karabekov
stressed, “Grants to … people in need ar e not given now because of gaps in the
legislation…. [Amendments to the tax code ] would be very important to encourage
In December 2002, the Bulgarian Parliament enacted tax law amendments
benefiting NGOs and donors in Bulgaria . As of January 1, 2003, the amendments
reduced the corporate income tax on “don ations accounted as expenses” (formerly
as much as 25% of the donation) to 15% when made to PBOs registered in the
Central Registry, and to 20% when made to other legal entities.
Tax Treatment of Donations and Recipient Organizations
Corporate giving is, of course, also in fluenced by the tax treatment of the
recipient organization. Fortunately, income from grants and donations is typically
exempt from tax in countries of CEE and NIS. In some countries (including Bulgaria,
Latvia, Lithuania, Poland), a full tax exemption for donations is prescribed only for
public benefit organizations, or NGOs engaged in specified public benefit purposes.
Thus, a core issue affecting the develo pment of an appropriate framework for
philanthropy is the definition of which NGOs should be considered “public benefit”
organizations. The situation in Estonia is illustrative. Currently, the Estonian tax laws
provide for a “list” of public benefit type organizations–o rganizations apply for entry
on the list, and once they are listed, they are entitled to certain tax benefits. Entry
on the list is determined by the tax author ities, according to the income tax law,
which provides that an organization is qualified for the list if it provides charitable
support of certain activities (science, culture, education, health care, etc.) in the
public interest. The criterion is sufficiently broad that the tax authorities have had
difficulty applying it consistently. As a result, some membership-type clubs have
obtained status on the list, while research-b ased organizations, or think tanks, have
initially been denied entry. The granting of public benefit status and tax benefits to
organizations that do not in fact serve the public benefit undermines the public
image of the sector and may frustr ate efforts to expand philanthropy.
Public benefit status can be conferred ei ther explicitly, through public benefit
legislation, or implicitly, through provisions in various laws that are functional
equivalents of the operational provisions of public benefit legislation. Public benefit
provisions are contained in the basic NGO laws in Bosnia, Bulgaria, and Romania.
Separate legislation on public benefit or ganizations has been enacted in Hungary
(1997) and Poland (2003), and is currently in draft form before the Latvian
Parliament. In the NIS, charity laws have been adopted in Armenia, Moldova,
Kyrgyzstan, Russia, and the Uk raine, and have been submitted in draft form to the
parliaments in Georgia, Ta jikistan, and Uzbekistan.
The challenges relating to regulating public benefit organizations are several:
what constitutes public benefit activity, wh o should determine if an NGO qualifies as
a PBO, what benefits and obligations atta ch to public benefit status. In several
countries, including Russia, Estonia, and Ta jikistan, legal recognition of PBOs (or
charities) needs further clarification or elaboration. At the federal level in Russia, the
concept of charitable status is not linked to tax benefits; current Tajik legislation
does not clearly distinguish between charities and other NGOs. In countries offering
limited donor incentives, the clear connect ion between PBO status and tax benefits
can be critical to encourage the growth of philanthropy.
Two recent advances deserve ment ion. On April 24, 2003, the Polish
Parliament adopted the Law on Public Benefit Activity and Volunteerism. Among
other features, this new law defines the criteria for public benefit status of Polish
NGOs. Any NGO that meets conditions specified in the law may apply for the status
of a public benefit organization. Public benefit status is connected with significant
privileges, primarily tax benefits.
Also, the draft of the Law “On Charitable Activity” was approved on the
second reading at the Lower Chamber of th e Parliament of Tajikistan in February
2003. If enacted, the law would help to improve implementation of the tax code
provisions related to tax treatment of charities. The new law would also provide a
basis for expanding existing ta x benefits to charities in compliance with international
good practices. Expanded tax benefits to charities should, in turn, help promote
Establishment of Corporate Foundations
Many businesses seeking to make a long-term impact in a country or a region
do so through the creation of corporat e foundations. As independent grantmaking
entities, often supported by endowments , corporate foundations are a critical
example of the long-term dedication of asse ts to sustain philanthropy. The threshold
questions for companies seeking to establish grantmaking foundations relate to
establishment, registration, and operation within a given legal system. How easy is it
to set up a foundation? Is a minimum start-up capital required? Does the legal
framework encourage the maintenance of endowments? Are there management rules
or minimum payout requirements? Does th e fiscal framework encourage investment
In some countries, such as Croatia, the foundation is not a favored NGO form.
The Croatian Law on Funds and Founda tions (1995) prescribes burdensome
conditions for the establishment of foundations and gives the registration authority
(Ministry of Justice) unwarranted discret ionary power over the establishment and
internal governance of foundations. As a result of the regressive framework, only
some 75 foundations have been registered in Croatia to date (compared to more
than 20,000 registered associations under the enabling Law on Associations), despite
significant potential for the development of an endowment culture.
Countries with a more enabling framework for foundations are wrestling with
other problems. There is fear in Slovakia that companies will rush to set up their own
foundations to which they can then designat e the 1% of their profit tax (under the
new 1% Law) in the following year. These newly created foundations, however, may
well serve as effective channels to distribute companies’ 1% designation and possibly
other company funds to Slovak NGOs (a s opposed to companies designating the
amounts directly). Leading Slovak NGOs and experts ar e now helping to educate
companies on the importance of responsible giving, whether through the creation of
these foundations or through other means.
* David Moore ( firstname.lastname@example.org ) is Program Director for Central and
Eastern Europe at the Budapest office of the International Center for Not-for-Profit
Law (ICNL). He is also Managing Director of the European Center for Not-for-Profit
Law (ECNL), an affi liate of ICNL. This article originally appeared in the Autumn 2003
issue of the Social Economy and Law (SEAL) Journal , published by the European
Foundation Centre. We are grateful to SEAL for permission to reprint it.