Liability of Not-for-Profit Organizations

Country Reports: Asia Pacfic

The International Journal
of Not-for-Profit Law

Volume 4, Issue 2-3, March 2002


In China, the Public Welfare Donations Law has been on the books since 1999.  But it has apparently not stimulated enough giving to satisfy the government.  In an article published in the People’s Daily in October 2001, it was reported that the central government has called for “regular donations” from employees of Party and government organizations and enterprises to the disaster-stricken and impoverished regions of China.  The Ministry of Civil Affairs, which has jurisdiction over Chinese NPOs is promoting this movement toward greater awareness on the part of the Chinese people.  The article concludes that where necessary new rules and regulations should be written to encourage more donations in a transparent and well-regulated manner.


Taxation of Not-for-Profit Organizations and Their Donors in Japan
Is this Tax Reform or Not?

By Robert Pekkanen and Karla Simon *


Tax benefits are designed to promote the growth of civil society organizations and the purposes they promote.  To the extent they are available to public interest organizations, they give recognition to these organizations and their promotion of the public interest.  Tax benefits allow the organizations to retain more of their resources, which in turns spurs their development. [1]   Japanese civil society organizations traditionally have not received very favorable tax treatment.  While some organizations have been exempt from tax, as discussed below, the number has been limited.  In addition,  the regime for tax deductible contributions has been fairly stingy.  For fiscal year 2001 the Diet enacted a new tax law (to correspond in part to the new „NPO“ legislation enacted in1998), [2] which allowed certain specifically designated NPOs [3] to be entitled to receive deductible contributions, but not, curiously, to be exempt from the corporate tax.  In this article, we concentrate on two dimensions of taxation: income tax exemption for the organizations themselves, and income tax deductions for contributions (by corporations or individuals) to them.  And we discuss the 2001 „tax reforms“ with a critical eye to what they were designed to accomplish.

Income Tax Exemptions

Under Japan’s Corporation Tax Law, Articles 4 and 7, Public Interest Legal Persons (PILPs) (shadan houjin and zaidan houjin), authorized by Article 34 of the Civil Code, are exempt from corporate income tax, except to the extent they receive income  from profit-making activities.  There are 33 specific types of profit-making activities listed in the law, and for those the tax rate is only 27% (as opposed to  the 37.5% rate imposed on for-profit corporations).  In addition,  PILPs are allowed to exempt from taxation up to 20% of their income from profit-making activities if that income  is used to expand their core activities that are in the public interest.  PILPs are subject to consumption tax (e.g., VAT), other indirect taxes, and local taxes.  They may be exempted from local taxes only if their main purpose is the establishment of a museum or the pursuit of studies.  PILPs are exempted from several other types of taxation including taxation of the interest earned on endowment funds. These benefits are significant, but they are available only for PILPs organized directly under the Civil Code Article 34 and not for other organizations, such as NPOs organized under the 1998 Act.

Social Welfare Corporations, Private School Corporations, and Religious Corporations, which are all organized under special laws that were adopted during the Occupation of Japan, [4] are also subject to the favorable tax regime that applies to PILPs, but they face a few different rules.  For example, they are permitted to deduct the greater of 50% or 2 million yen of the income earned from their profit-making activities.  Medical Corporations, on the other hand, do not enjoy the same kind of tax treatment as do PILPs.  They are taxed like for-profit corporations, at the full corporate tax rate, except to the extent they receive medical fees as reimbursements by the social insurance system. This exception applies only to  “Special Medical Corporations” (tokutei iryo houjin) that the Ministry of Finance has certified as being especially in the public interest.  Such “Special Medical Corporations” are taxed at 27% and receive some other tax exemptions as well (e.g. tax on real estate acquisitions for nurses’ training facilities).

No other Japanese not-for-profit organizations, including NPO Legal Persons are exempt from income taxes.  This feature of the fiscal year 2001 tax reform, discussed below, is quite puzzling and tends to continue to favor PILPs and other non-NPO legal persons.

Deductibility of Charitable Contributions — Traditional Rules

In general it is clear that making contributions to a not-for-profit organization deductible from the contributor’s income increases resources available to the organization and also encourages the donation by giving the added tax benefit to the contributor.  Qualifying contributions from corporations or individuals to PILPs can be deducted in Japan, but the circumstances under which these contributions qualify for deduction is limited.  Moreover, the application of tax deductibility is left to a considerable extent to the discretion of the Ministry of Finance. [5]

Charitable contributions are deductible if they are made to organizations  designated by Income Tax Law 78 (2) –[2] as “Special Public Interest Promoting Corporations” (tokutei koueki zoushin houjin) (or to designated purposes, shitei kifukin) of regular PILPs.  These “Special Public Interest Promoting Corporations,” or tokuzou as they are commonly known, include 26 corporations based on Special Laws and closely linked to the government.  These include the National Institute for Research Advancement and the Japan Foundation, as well as all Social Welfare Corporations and Private School Corporations.  PILPs organized under the Civil Code can be added to this list by being certified by the Minister of Finance, and almost 900 have obtained the proper certification. Individuals’ contributions of up to one quarter of their annual income over a floor of 10,000 yen (about $100) are deductible.  Corporations contributing to tokuzou can do so up to limits determined by a formula (1.25% of income plus 0.125% of paid-in capital).  The limited number of organizations  that can receive a deductible charitable contribution under the Income Tax Law prior to the 2001 reforms  is shown in Table 5-3.

Bequests to Special Public Interest Promoting Corporations are also deductible from inheritance taxes.

Table: Special Public Interest Promoting Corporations (1996) [6]
PILPs incorporated associations (shadan houjn) and foundations (zaidan houjin) 822
Private School Corporations 1125
Social Welfare Legal Persons 14,832
Other 189


Tax Reform

In the Fiscal Year 2001 Tax Reform, provisions were made to allow certain Specified Nonprofit Activities Legal Persons (NPO Legal Persons) to gain the status of “Tax-Deductible (“nintei”) Specified Nonprofit Activities Legal Persons” (hereafter, Tax-Deductible NPOs).  These provisions were enacted on March 31, 2001 and came into effect on October 1, 2001.  Applicants for this status must be NPO Legal Persons and be certified by the Commissioner of the National Tax Administration as having satisfied a list of requirements, as detailed below.  It is important to note that although this new law permitted deductible contributions to be made to the Tax Deductible NPOs, the contribution limits set out in the Income Tax and the Corporation Tax, discussed above, were not increased.  However, bequests to Tax Deductible NPOs are also deductible from inheritance taxes.  On the other hand, Tax-Deductible NPOs are not exempt from local taxation.

Qualifying for Tax-Deductibility under the New System

The Commissioner of the National Tax Agency makes the determination of tax-deductible status.  This official can also investigate the organization to make this determination (or to consider its removal).  There are a number of qualifications  that an NPO must  meet to qualify for and maintain tax-deductible status. [7]

First, there are restrictions on its activities if an NPO is going to qualify for tax deductibility.  Religious or political activities are not permitted.  Provisions designed to avoid Tax-Deductible NPOs from being used as front groups prohibit special relationships with specific persons, contributions to corporations, religious groups, or political groups. There are also rules that prohibit the distribution of profits to directors, employees, contributors, or their relatives, thus preventing self-dealing and other forms of abuse by insiders.  Similarly, no more than 1/3 of employees or directors may be members of the same family, nor may 1/3 of directors or employees be employees or directors (including relatives of such) of another legal person or group (this regulation is intended to prevent the nonprofit from being a front organization) be directors of a Tax-Deductible NPO.

Second, there are restrictions on expenditures.  At least 80% of expenditures and at least 70% of contributions must be spent on Specified Nonprofit Activities (meaning those activities for which groups formed to perform can receive legal status as NPO Legal Persons. To be able to fit within the tax-deductible class, NPOs must make available to the public and also provide to the National Tax Administration the criteria, methods, and names of individuals by which or by whom grantees will be solicited and evaluated.  Actual funding decisions must be treated in the same way.  Except in times of emergency when notification may follow, transfers of funds overseas must be noticed in advance, including date, amount, and recipient.  Strict accounting standards are spelled out for Tax Deductible NPOs.

Third, there are three „public benefit“ tests, which must be met for an NPO to qualify.  There is a geographic test: the Tax-Deductible NPO must either (1) receive contributions from individuals or legal persons from multiple geographic areas (cities, wards, towns or villages) (no more than 80% from one area); (2) engage in Specified Nonprofit Activities in multiple geographic areas (no more than 80% in one area); (3) or spread its funding or service across multiple areas (again 80%).  A second test includes four provisions designed to prohibit mutual benefit organizations from qualifying for tax-deductible status.  For example, more than half of the activities must not be services or funds for the benefit of members.  Nor may more than half of the Tax-Deductible NPOs activities be for exchange, contact, exchange of opinions, etc., among members.

The third public benefit test is the public support test.  An accounting formula is provided to determine that at least 1/3 of the group’s total revenue comes from public support though contributions.  Both revenue and public support are defined in detail.  Revenue does not include such items as government funding (hojokin).  Contributions from any individual (or his or her relatives) or legal person will only count towards the public support up to a total of 2% of total contributions.  This prohibits the organization from having a single large donor count towards meeting the public support test.  Contributions from directors, employees, and their relatives only count towards public support under certain conditions.  Only contributions of 3000 yen (about $30) or more count towards the public support total. [8]

Finally, there are reporting duties for Tax Deductible NPOs, which are fairly extensive.  Organizations must file reports every year (within three months of the year’s end) with the National Tax Administration.  The National Tax Administration will keep on file and permit public access to these documents for three years after they are filed by the NPO.  The following documents are required to be filed: documentation of funding (sources and amounts of income, amount of borrowing); lists of activities and services, charges, and objects of provision; list of parties engaged in transactions of 500,000 yen or more a year with the Tax-Deductible NPO, their names and the amounts; conditions for membership, membership fees, recruiting scope, and numbers of members residing in different geographic areas (administrative units); specific accounting of activities engaged in with the contributions (including planned activities), scope and methods of collection of contributions; contributors’ name, address, and amount given; names and compensation of employees; copies of all documents submitted to the permitting agency that granted the Tax-Deductible NPO its status as an NPO Legal Person. This agency must also attest that the NPO Legal Person has not violated its own charter or the law.


Although the changes in the tax laws in 2001 do qualify as reform in that they allow NPOs to gain access to tax deductible contributions, the requirements of qualification are exceedingly rigorous. [9]   In addition, it is curious that income tax exemption was not granted to NPOs at the same time as tax deductibility was permitted.  This new tax regime tends to continue to prefer PILPs, in that they are allowed to be exempt from income tax and do not need to meet some of the requirements that NPOs face for tax deductibility.  If the intent of the tax legislation was to encourage the development of civil society in Japan, a more favorable approach to tex reform might well have been adopted.


* This article is adapted from a book chapter by the two authors entitled “The Legal Framework for Voluntary and Not-for-Profit Activity,”  in The voluntary and non-profit sector in Japan.  An emerging response to a changing society, Editor: Stephen P. Osborne, Aston University, UK; (Routledge, forthcoming 2002.)

[1] For a general discussion of the tax privileges accorded to not-for-profit organizations, see ICNL, Tax Preferences for Nongovernmental Organizations

[2] In 1998, in response to a very significant political shift in attitude, the Diet passed the “Special Nonprofit Activities Promotion Law,” which created a new category of incorporated organization known as the “Special Activities Nonprofit Legal Person” or “NPO.”  This law is a Special Law attached to Article 34 of the Civil Code.  The Economic Planning Agency is the agency designated by the law as the agency responsible for granting recognition to and overseeing NPOs.

[3] The term NPO used here specifically refers only to the type of organization designated  by the „Special Nonprofit Activities Promotion Law“ enacted by the Diet in 1998, which created the NPO Legal Person in Japan.

[4] For a fuller discussion of these organizations and how they fit within the Japanese legal context, see „The Legal Framework for Voluntary and Not-for-Profit Activity,“ supra note 1.

[5] See Amemiya, Takako. “Japan.” In The International Guide to Nonprofit Law. Lester Salamon, ed. New York: John Wiley and Sons, 1997, p.208.

[6] Data from Naoto Yamauchi NPO deetabukku p. 89.

[7] Note that some of these requirements might be simplified by an implementing ordinance. However, even if thatis done, the great likelihood is that they will be altered only very slightly. The provisions can be found on the Ministry of Finance website.

[8] Note that some of these requirements might be amended  by an implementing ordinance. However, even if so, the great likelihood is that they will be altered only very slightly. The provisions can be found on the Ministry of Finance website.

[9] The public support test, while seemingly drawn from US law, is more burdensome than the equivalent requirements of IRC section 501(c) (3) and will create difficulties for NPOs.  It is unclear what the Diet was aiming at when it imposed these very strict tests.


Developing New Legislation to Govern Vietnamese NGOs

By Karla W. Simon*

At present, there are few NGOs in Viet Nam, in part because the legal and policy framework for their existence is dated and extremely limited.  With few exceptions, at all levels of government from the central down to the district, village and commune, only government entities are available to respond to social and economic needs.  These include both most ministries and mass organizations such as the Fatherland Front, Youth Union, Woman’s Union, and Veterans Union.  These have millions of members and meets a broad range of social and economic needs.  The mass organizations are state-managed, staffed and controlled.

The basic legal regime for Vietnamese NGOs (VNGOs) can be found in several laws and regulations.  Initially, associations were authorized under the 1957 Law on the Right to Establish Associations.  The 1992 Constitution provides for VNGOs by guaranteeing citizens rights to become involved in organizations that benefit society and recognizes international organizations.  The Civil Code of Vietnam, adopted in 1996, provides a more detailed system for dealing with domestic VNGOs.  Under the Civil Code, a domestic NGO can be legally formed in Vietnam if:

“It is authorized by a competent State authority; has an organizational structure; independently owns and is liable for property; and, independently enters into legal relations in its own name”.

The Civil Code recognizes the following types of not-for-profit legal persons: social and socio-professional organizations, social and charitable funds and other organizations, as provided by law.  Requirements for the contents of a VNGO charter are also found in the Civil Code.  Given its explicit language, the Civil Code of Vietnam seems to be the leading authority for the right to establish VNGOs and may have superseded the previous law on associations.

Operating under this legal and policy framework there are about 30 officially recognized NGOs that are affiliated with either a government ministry or mass organization.  They seem to operate with some degree of autonomy from the government and have been formally sanctioned by the Government.  Most are centered around Hanoi.  Examples include the Highland Education Development Organization (HEDO), Toward Ethnic Women (TEW), Education For Nature (ENV) and Vietnam Save Association for Disabled Children.

There are three types of such organizations:

  • Those that have their origin in mass organizations or other state bodies;
  • Groups of researchers that are university or hospital based; and
  • Small organizations that work through private operations to meet local needs.  TEW, noted above, is one such organization.  It has a handful of employees and operates a not for profit handicraft store in Hanoi.  It helps to promote village-level, ecologically sound farming projects.  The TEW director is a government employee.

It should be noted that for the past few years an inter-ministerial committee in Viet Nam has been drafting a new NGO law.  They have produced a number drafts.  It appears that the work of this committee has been frustrated by political opposition to the enactment of an NGO law.  However, it now appears that Viet Nam is fully committed to enact such legislation and in fact has committed itself to do so in the context of joining the World Trade Organization.

In October 2001, the Government of Viet Nam formally requested the assistance of Vietnam Assistance for the Handicapped (VNAH) and the International Center for Not-for-Profit Law (ICNL) in organizing a two and a half day workshop to examine the current status of NGO law in Viet Nam, in other nations and other related issues.  The workshop took place in December in Hanoi and served to help identify next steps needed to enact legislation favorable to the development of strong and effective NGOs in Viet Nam.  Participants included two international experts from ICNL – Dr. Leon Irish and Prof. Karla Simon, ICNL’s co-founders, local representatives from INGOs and those in the Government of Viet Nam with responsibility for and interest in the development of a local NGO movement.  Funding for the Workshop was provided by USAID.

The Workshop attendees demonstrated a keen interest in the subject and seem to be genuinely committed to helping to put into place a new Vietnamese NGO law.  Topics discussed included identifying a series of next steps and the timetable needed to enact a national NGO law.  The discussion also mentioned likely roadblocks to enactment and means to address these hurdles.

*Karla W. Simon is Co-Founder (with Leon Irish) of ICNL and General Editor of the International Journal of Not-for-Profit Law (IJNL).  She is Professor of Law and Co-Director of the Center for International Social Development at the Catholic University of America and can be reached at