The International Journal
of Not-for-Profit Law
Volume 2, Issue 2, December 1999
Meeting of the Regional Drafting Group in Zakopane, Poland on Regulating Public Benefit Organizations
Legal and Tax Frameworks
On December 8-11, 1999, a group of regional experts got together in Zakopane Poland at a working seminar entitled “Model Law for Central Europe Regulating Public Benefit Organizations.” The aim of the discussions was to create a set of principles that can lead to the development of the proposed model law.
The participants included the following:
- Dr. Zsolt Aradsky, Hungary
- Mr. Paul Bater, UK
- Ms. Nilda Bullain, Hungary
- Dr. Lenka Deverova, Czech Republic
- Mr. Piotr Gajewski, US
- Hon. Artan Hoxha, Albania
- Dr. Leon Irish, US
- Ms. Anna Jendrzejewska, Poland
- Mr. Maciej Jusczynski, Poland
- Ms. Diane Juzaitis, Lithuania
- Prof. Josip Kregar, Croatia
- Mr. Piotr Marciniak, Poland
- Ms. Magda Nowakowska, Poland
- Ms. Zuzana Oborna, Slovakia
- Dr. Petr Pajas, Czech Republic
- Dr. Gabor Posch, Hungary
- Mr. Douglas Rutzen, US
- Prof. Karla Simon, US
- Ms. Radost Toftisova, Bulgaria
- Dr. Ilya Trombitsky, Moldova
- Ms. Zivka Vasilevska, Yugoslavia
A smaller drafting group is presently undertaking to write a draft model law, which is based on the principles developed at the meeting.
Dr. Petr Pajas chaired the meeting, and the working group leaders were Piotr Gajewski and Radost Toftisova. Rapporteurs were Nilda Bullain and Maciej Jusczynski.
The issues that were considered included: definition of “public benefit;” what entities can qualify of the status; should political activities be allowed; should economic activities be allowed; what agency should exercise oversight authority and how should it do so; what sorts of reports should be required and by what organizations; what sanctions should be available and when; what rules about internal governance should apply; what sorts of benefits should be available to public benefit organizations and under what circumstances.
Further discussion of the principles adopted at the seminar and the process for writing the model law will be found in the next issue of IJNL.
A number of important initiatives pertinent to the reforms of the NGO legal framework have been launched recently. Thus in the Republic of Srpska (RS), the Ministry of Justice presented the final draft law on associations and foundations to the government for consideration. It is expected that the government will approve the draft and introduce it to the Parliament sometime soon, as the law was listed on the government’s legislative agenda for December last year. The final draft contains a number of liberal provisions and largely complies with international standards and best regional practice. For example, at least three natural or legal persons can establish an associations. In addition, the law does not provide for a mandatory registration of an association and place on equal footing domestic and foreign NGOs. Equally important, the law provides that an association which is registered in one entity can freely operate in the other entity, with no further administrative requirements attached. The current legal framework in RS does not provide for such a possibility. ICNL provided in-depth legal and technical assistance to the working group in preparing this law.
In the Federation of Croats and Muslims, the Office of High Representative (OHR) finalized the draft law on associations and foundations. This draft will soon to be presented to the Federation Ministry of Justice for consideration. There does not appear to be any substantial differences between the RS and the OHR draft. Some of the differences include the number of required founders for an association (three in the RS draft, two in the OHR draft), and the period within which existing NGOs must amend their internal documents to comply with the new law (one year in the RS draft, six months in the OHR draft). The specific provision for NGOs performing “public competencies” is unique to the OHR draft, and the OHR draft is more explicit on several issues (the functions of a foundation’s management board and tax exemptions for public benefit associations). The OHR draft only provides for separate registries at the court, while the RS draft also provides for a central registry kept at the Ministry of Jusice. ICNL and other outside members of the drafting team worked closely with OHR in preparing this draft.
At the state level, the OHR has decided to present its state level law on associations and foundations to the Council of Ministers. The current framework in Bosnia and Herzegovina does not provide for a possibility for an association or a foundation to register at the state level and hence operate throughout the whole country. This has been perceived as one of the major obstacles for the development of the third sector. The state level draft bears striking resemblances on the OHR entity level draft. ICNL worked closely with OHR in preparing this draft.
Tax and Fiscal Laws Relating to Not-for-Profit Organizations in Croatia
This report was made possible through the support provided by the ENI/DGSR/CS, ENI, U.S. Agency for International Development, under the terms of Grant No. EE-A-00-98-00015-00. The opinions expressed herein are those of the author and do not necessarily reflect the views of the U.S. Agency of International Development.
The term not-for-profit organization encompasses all organizations organized and operated with a purpose other than an economic activity or making profit for private gain. With respect to the manner of their financing they could be classified as follows:
- budget beneficiaries – organizations financed exclusively from the state budget or budgets of local administration or self-government bodies
- not-for-profit organizations in the narrow sense – organizations funded by various forms of grants, donations, subsidies, membership fees, contributions etc.
Not-for-profit organizations supported by sources other than state or local budgets, are:
- private citizen associations,
- political parties,
- trade unions,
- sports associations, clubs and other associations,
- professional associations, communities and federations,
- social welfare-humanitarian associations and organizations,
- religious communities,
- youth associations and organizations,
- health institutions with non-budgetary funding (health centers, hospitals, clinics, and other health organizations),
- other legal entities founded in accordance with specific regulations and with the purpose other than making profit.
This paper refers to not-for-profit organizations in the narrow sense — associations, trusts, foundations and other private institutions not financed exclusively by the state, which is how the term is generally understood in an international context.
1. Taxation of Profit for Not-for-Profit Organizations
According to Article 2, Paragraph 10 of the Profit Tax Act (People’s Bulletin, no. 35/95 and 106/96) not-for-profit organizations founded with a purpose other than making a profit are exempted from profit taxation. The same applies to the institutions performing activities limited to the purpose for which they are set up.
The By-law on Profit Tax (People’s Bulletin no. 7/96, 142/97, and 17/98) further defines not-for-profit organizations and institutions as:
- the Republic of Croatia and state administrative bodies, local administration and self-government entities and their bodies;
- institutions according to the Law on Institutions (People’s Bulletin no. 76/93);
- religious communities, political parties, trade unions, chambers, and private citizen associations;
- trusts and other funds organized for charitable, humanitarian, scientific, cultural or similar purposes; and
- other not-for-profit organizations and institutions not corresponding to any of the aforementioned not-for-profit organizations and institutions, entitled to that status by a special decision issued by the Tax Administration.
Institutions and not-for-profit organizations engaged in profit-making activities become liable for tax on the profit generated by those activities. The By-law on Profit Tax provides additional criteria for tax liability. Until December 31, 1997, not-for-profit organizations and institutions financed or co-financed directly from a budget (state, county, municipal or communal) as well as trusts and funds organized for charitable, humanitarian, scientific, cultural and other similar purposes, were exempted from profit taxation under the condition that the income generated by the economic activities be used exclusively for carrying out jobs and tasks or accomplishing the purposes for which the organization was established.
Until December 31, 1997, not-for-profit organizations and institutions earning profit from a regular economic activity in an amount which exceeds 50,000.00 kuna were obligated to calculate and pay profit tax for the difference between the total profit earned and the tax-free profit amounting to 50,000.00 kuna.
As a result of amendments and changes to the By-law on Profit Tax of January 1, 1998 the taxation status of not-for-profit organizations suffered significant changes. Namely, not-for-profit organizations and institutions regularly engaged in profit generating economic activities, besides their principal activity, are liable for tax on the total profit generated by those activities, and not only for the difference between the generated profit and a determined lump amount of the exempted profit. The By-law does not define a criteria for the regularity of the engagement in an activity. It also fails to regulate tax exemption for those not-for-profit organizations and institutions financed directly from a budget (state, county, municipal or communal). In addition, the By-law has no provisions in relation to the trusts and funds organized for charitable, humanitarian, scientific, cultural and other similar purposes, which use all the profit earned from economic activities exclusively for carrying out the principal purpose for which they were organized.
The profit tax base is not defined as the difference between the income produced by carrying out an economic activity and tax exempted business expenses resulting from the activity in question, but as the difference between equity capital at the beginning and the end of the tax period. Business books are conducted in accordance with special regulations pertaining to not-for-profit organizations. Regarding the transactions connected to economic activities, not-for-profit organizations are required to file income tax returns with a Tax Administration office at the end of each fiscal year. If there are no economic activities, only those not-for-profit organizations with income or property worth more than 5,000 DEM are required to file returns. The income tax return is filed on a prescribed PD form with balance of accounts as well as a profit and loss statement attached to it. The documents in question should be prepared in accordance with the Law on Accounting. In case an economic activity generates a loss, the organization in question is allowed to transfer that loss into the following accounting period. The loss transferred to the following year is subject to interest. The tax loss may be transferred from one year to another for up to 5 years.
2. Taxation of Grants, Gifts, and Donations to Not-for-Profit Organizations
Not-for-profit organizations are financed by various forms of subsidies, donations, subsidies, grants, etc., provided by their members or other legal or physical persons. The resources generated in this manner are not subject to taxation if devoted to financing a purpose other than producing income. On the other hand, if the funds received are spent to finance an economic activity carried out by a not-for-profit organization rather than on a non-profit activity then the funds obtained without compensation, in the form of donations, gifts or grants will be subject to taxation as a part of the total revenue generated by that economic activity.
In accordance with the Law and the By-law on Income Tax, a taxpayer will not be entitled to an income tax deduction with respect to donations or sponsorships he or she supplied, unless the recipient provides the donor or sponsor with an adequate reciprocal favor in the form of promotional services related to the donor’s company, product or emblem. When no reciprocal favor exists, donations are not tax deductible regardless of the nature of the recipient’s organization (humanitarian association, religious society etc.).
However, pursuant to specific legal regulations, there are two cases when donations up to certain amount, are considered tax deductible expenses. First, in the case of donations to free-lance artists or nonprofit organizations engaged in creative activities. Second, in the case of donations to sports associations, institutions or commercial associations carrying out sports activities.
2.1. Tax Preferences Regarding Donations to Artistic Activities
In compliance with the provisions of Article 21 of the Law on free-lance artists’ rights and promotion of cultural and creative work (People’s Bulletin no. 43/96, and 44/96) all outflows of resources having monetary value (cash, goods, services) for the benefit of legal entities or physical persons engaged in creative or cultural activities and dedicated to accomplishing those activities are considered tax deductible expenses, under the condition that there are no reciprocal favors by the recipients. The income tax base for physical persons, or the profit tax base for legal entities which are not predominantly owned by the state or local administration and self-government entities, as well as public enterprises, will be reduced by the corresponding amount of the gift.
In accordance with Article 21, Paragraph 2 of the Law on the rights of free-lance artists, an individual may deduct up to 5,000.00 kuna annually, while a legal person may deduct up to 15,000.00 kuna. In special cases, individuals or legal persons may deduct larger amounts upon obtaining a certificate by the Minister of Culture stating that the funds in question will be spent on cultural or artistic programs. The certificate is issued upon a request submitted by a taxpayer – supplier of goods.
Donors, whether legal or physical persons, must provide evidence of the amounts paid to the giro account of the free-lance artist or nonprofit organization. This evidence should include a statement of the giro account, a copy of the transfer order, the deed of the donation, the donation agreement, the decision issued by the legal entity’s authorized body, written documentation of the goods and services rendered including their market value and, in the case of a gift worth over 5,000.00 or 15,000.00 kuna, a certificate of the Minister of Culture. Pursuant to Article 2, Paragraph 1 of the Law on the Rights of Free-Lance Artists, donations received from legal or physical persons of up to 20,000.00 kuna annually are not considered to be income produced by free-lance activity and free-lance artists are not obliged to register such donations received on their giro account as business income in their business books, nor are they requested to include such donations in their annual income tax return, which has to be submitted at the end of each taxation period.
Pursuant to Article 22 of the Law on Rights of Free-Lance Artists, the tax-free portion of an artistic author’s fee for a work of art is 25% , provided that the work of art has been certified by an authorized professional artistic association or an authorized agency upon collection of the author’s fee.
2.2. Tax Preferences Regarding Donations to Sports Activities
Pursuant to the provisions of the Law on Sport (People’s Bulletin no. 111/97) legal persons subject to profit tax may deduct expenses for all outflows of goods bearing monetary value (cash, goods, services) and donated without compensation to organizations, institutions and commercial associations engaged in sporting activities. The tax-deductible amount cannot exceed 500,000.00 kuna annually. Taxpayers subject to income tax may deduct up to 50,000.00 kuna regarding donations to sports activities. Such donations are considered to be expenses which can be deducted from their tax base amount. However, the Minister of Finance can approve larger amounts of tax deductible income or profit in the case of sponsoring national teams.
3. Taxation of Economic Activities
Generally, not-for-profit organizations are allowed to perform activities for which they are registered, provided that their primary purpose is not making profit. Regulations related to the registration procedure of not-for-profit organizations lack a clear definition of permitted economic activities. In practice, a restrictive principle with respect to registering associations is generally applied: associations including economic activities in their registration documents are often denied registration or required to delete the proposed activities from their forms, thus eliminating the possibility of doing them. According to this approach, associations should only carry out activities relating to spare time, leisure, amusement, pursuing special interests, humanitarian activities and the like. For example, an association wishing to offer Esperanto courses was not allowed to do so because it was considered to be a commercial activity. In addition, offices authorized to register associations lack uniform standards regarding the definition of an economic activity.
In practice, not-for-profit organizations are generally not permitted to engage in economic activities. Limitation of economic activities to a certain percentage of the entire engagement of an organization is not applied as a principle. However, in exercising this restrictive principle regarding permitted activities, there are some exceptions. For instance, the small number of associations included in the value-added tax system indicates that a considerable portion of these associations’ activities is of a commercial nature.
4. Not-for-Profit Organizations in the Value-Added Tax System
The status of not-for-profit organizations in the value-added tax system is not consistently determined. For example, some not-for-profit organizations are not considered subject to the value-added tax, while others are under certain circumstances.
4.1. Not-for-Profit Organizations Not Subject to Taxation
In accordance with Article 6 of the Law on Value-Added Tax (people’s Bulletin no. 47/95), state authorities, state and local self-government and administration bodies, political parties, chambers and trade unions are not subject to value-added tax because they are not engaged in entrepreneurial activity. In other words, they are not considered entrepreneurs. According to Article 2 Paragraph 3 of the Law, an entrepreneur is a legal or physical person pursuing independently and regularly an income-generating activity. The above-mentioned organizations perform their activities independently and regularly, but the third condition – offering certain deliveries for the purpose of making income – is not satisfied because the principal purpose of the activities carried out by these organizations is fulfillment of particular interests and goals of their members or of the state not making a profit.
These organizations are eligible for value-added tax exemptions for their deliveries, but not for deductions of the value-added tax (preliminary tax) contained in the purchase invoices received. In other words, the value-added tax calculated in vendors’ invoices represents a portion of their purchasing expenses. However, they can be subject to VAT with respect to certain activities. In the case of starting an economic market-competitive activity, the tax exemption for such activity would create certain advantages. Therefore, the Tax Administration issues a decision establishing value-added tax liability exclusively for that particular activity. The decision is issued by the Tax Administration based on their own estimation of acquired conditions or upon the suggestion of another taxpayer or interested party, in which case, the authorized chamber should support the suggestion.
With respect to business activities subject to taxation, not-for-profit organizations are granted the right to deduct the value-added tax amount from the purchases connected to the taxed activity. That means dividing the total amount of the calculated value-added tax on suppliers’ invoices (preliminary tax) into two parts: a deductible portion related to the entrepreneurial activity, and a non-deductible portion related to carrying out statutory activities.
In addition to the not-for-profit organizations listed earlier, which are explicitly granted value-added tax exemptions according to legal regulation, the same applies to not-for-profit organizations engaged in supplying goods or services with a total value under 50,000.00 kuna annually (upon deducting the value of tax-exempted deliveries). These not-for-profit organizations are not obliged to include the value-added tax amount in the invoices for goods or services supplied, but they are also not eligible for preliminary tax deductions on their own purchases. Their invoices should specify that the issuer is not included in the value-added tax system. If they want, they can apply for changing their taxation status. The application should be filed with an authorized Tax Administration office. Upon receiving the application (provided it was received before the end of the current year) the Tax Administration will issue a decision stating that the not-for-profit organization in question is included in the value-added tax system starting January 1 the following year. The decision is considered effective for the period of the next five calendar years.
4.2. Not-for-Profit Organizations Eligible for Tax-Exempt Deliveries
According to the provisions of Article 11 of the Law on Value-added Tax, value-added tax exemption applies to:
- lease services of residential premises;
- medical treatment services provided by health institutions: health centers, ambulance services, clinics, general and specialized hospitals and clinics, and medical treatment services provided by a home care health institution;
- services and deliveries supplied by social welfare institutions;
- services and deliveries supplied by child and youth care institutions;
- services and deliveries provided by religious societies and institutions;
- services provided by educational institutions and student welfare institutions; and
- services provided by public cultural institutions: museums, galleries, archives, libraries, theaters, orchestras and other musical or theatrical, conservation, or restoration institutions as well as institutions for protection of cultural monuments.
The lease of residential premises is tax exempt so long as its purpose is for a permanent dwelling. Occasional leasing of residential premises for tourist or business purposes however, is not tax exempted. This is called a functional tax exemption because it applies to the service category and not to the person or organization providing the service.
The other tax exemptions are considered to be of an institutional character, which means that the institutions or societies mentioned earlier are eligible for tax exemption, but only if they act in accordance with the specific regulations determining their activity. All institutions satisfying these conditions are exempted from value-added tax on all services and goods delivered, including deliveries performed within the scope of their supplementary or secondary activity. Consequently, those institutions will be exempted from value-added tax on the lease of their property, calculation of interest, delivery of goods produced by a production unit that is part of the organization (for example students’ workshops in educational institutions) and the like. Invoices for their deliveries have to specify the section of the law that stipulates the tax exemption.
However, with the development of the nonprofit sector, activities concerning child care, education, culture, health and social welfare are just partially covered by state (public) institutions, while the other part is covered by private institutions formed in compliance with the regulations on commercial companies or the regulations on craftsman activity. The organizations carrying out these activities are required to calculate the value-added tax on all services and goods they deliver. The same applies to institutions, that are not eligible for tax exemption pursuant to legal provisions.
4.3. Not-for-Profit Organizations– Subject to Value-Added Tax
Not-for-profit organizations are, in principle, included in the value-added tax system. Only those organizations which are explicitly declared as not being tax liable have their services and deliveries of goods exempted from VAT. The following organizations are subject to VAT only if they perform taxable deliveries worth over 50,000.00 kuna annually, or have applied to be included in the system:
- private citizen associations,
- sports associations, clubs and federations,
- professional associations, societies and federations,
- youth organizations and associations,
- welfare-humanitarian associations and organizations,
- other legal persons founded according to specific regulations and with a statutory purpose other than making a profit.
Not-for-profit organizations within the value-added tax system are responsible for:
- calculating the amount of value-added tax at a 22% tax rate on the total value of their deliveries;
- keeping records of their accounts receivables, accounts payables and goods imported;
- determining their tax liability or rebate based upon issued and received invoices within a taxation period
- submitting the value-added tax return to the authorized Tax Administration office within 10 days of the conclusion of a taxation period;
- paying the calculated tax amount or submitting an application for a tax rebate within the periods prescribed; and
- submitting the final value-added tax return (on PDV-K form) to an authorized Tax Administration office before the end of April for the previous calendar year, and paying the difference between the stated total tax amount and the amount actually paid or applying for a rebate.
The tax included in the suppliers’ invoices is considered a preliminary tax amount, so long as the invoice was not paid in cash. As such, the value-added tax is not considered to be an acquisition cost. Regarding not-for-profit organizations financed in part by donations, membership fees, and contributions, or partly by income generated through the delivery of goods and services which are subject to VAT, the requirement to divide the preliminary tax into deductible and non-deductible portions is not explicitly prescribed. The deductible portion of the preliminary tax refers to entrepreneurial activity, while the non-deductible portion refers to non-entrepreneurial activity of the not-for-profit organization. There are different views concerning the right of not-for-profit organizations to completely exercise the eligibility for deduction of the preliminary tax. Therefore, an explanation by the Ministry of Finance is anticipated.
4.3.1. Associations in the Value-Added Tax System
Citizens are allowed to form associations in order to fulfill their political, cultural, sporting or other needs. With the exception of political parties and trade unions, which are not considered tax liable, and religious societies, which are tax exempted for their deliveries and services, other associations are generally subject to taxation if the value of rendered services and delivered goods exceeds 50,000.00 kuna.
Membership fees represent one of the financing sources for an association. They are determined based upon a particular criteria that is applied equally for all members. However, it is not necessary that a membership fee be the same for all members. For example, a membership fee in a professional association could be determined differently for working members, retired members and students. However, it is not permissible to grant benefits relating to the fee amount. For instance, a membership fee in a tennis club should not be related to the number of allowable hours on a tennis court. In that case, the membership fee can be regarded as compensation for use of the tennis court and not a true membership fee. Since a membership fee does not represent compensation for the delivery of goods or services, it, therefore, is not subject to taxation.
Besides membership fees, various forms of donations can support an association. A donation is defined as a transfer of property for which the transferor receives no compensation. Donations can be in the form of money, goods or rights. A donation in goods or services by an entrepreneur, subject to value-added taxation, is not tax exempt, however. The donor is liable to calculate and pay taxes with respect to the donation in question. Furthermore, the value-added tax is imposed on all deliveries of goods and services regardless of the nature of the donee.
Donations in goods or services by legal persons not subject to value-added taxation are exempt from VAT. Donations in cash are also tax exempt because the Law on Value-Added Tax does not contain provisions on the taxation of monetary transactions, so long as the money in question is not compensation for a service rendered.
4.3.2. Humanitarian Associations in the Value-Added Tax System
There are some specific characteristics concerning the taxation of humanitarian associations. Humanitarian associations carry out the collection and distribution of humanitarian aid in accordance with the Law on humanitarian aid. Their activities are not intrinsically entrepreneurial i.e. their purpose is not making a profit. However, the Law on Value-added Tax does not include humanitarian organizations among the explicitly enumerated organizations entitled to tax exemption. A subsequent commentary by the Tax Administration Central office (letter class: 410-19/97-01/557, file no.: 513-07/97-2 of January 23, 1998) clarifies that the Croatian Red Cross is not considered to be subject to value-added tax, since it is not engaged in entrepreneurial activities. In compliance with this commentary, the Red Cross is tax exempted even with respect to the first aid courses it offers for a fee, as well as blood deliveries to the Croatian Health Care Institute rendered for compensation, although voluntary donators supplied the blood. This tax exemption is applied regardless of the compensation value demanded by the Croatian Red Cross.
In most cases humanitarian associations are not included in the value-added tax system, i.e. with respect to taxation they have the status of a final consumer. When they buy goods or services on the domestic market, the value-added tax is included in the price. This value-added tax amount cannot be declared as a preliminary tax because humanitarian organizations are not subject to value-added tax.
In the case of donations from abroad and pursuant to the tax exemption prescribed by Law, the customs office will not calculate value-added tax on final import of humanitarian aid. The tax exemption of humanitarian aid will not be administered for import of oil and oil derivatives, tobacco and tobacco products as well as alcohol and alcoholic beverages.
International humanitarian organizations are entitled to special status with respect to taxation. As reflected in the following instances:
- Provided that the status of a humanitarian organization is made equal to the status of diplomatic and consular representative offices (for example UNHCR) the organization is eligible for the same tax exemption prescribed for diplomatic and consular offices. This tax exemption right is stipulated by the reciprocity principle and refers to the purchase of goods and services for official needs. If state protocol implies reciprocity, then the foreign humanitarian association is eligible for tax exemption on the territory of the Republic of Croatia for the goods and services purchased for official needs as well as private needs of the office staff members with the same status as diplomatic and consular personnel. The tax exemption right is not applicable to the purchase of goods used for humanitarian purposes.However, under certain conditions, international humanitarian organizations can realize tax exemptions on the purchase of goods, under the condition that the goods will be distributed in Croatia within humanitarian programs and purchased on the Croatian market. The prerequisite for the tax exemption is conduction of an import-export customs procedure prescribed by the provisions of the Trade Act. The procedure permits customs to approve import-export customs clearance of goods although the goods have not passed the customs line, but approval of all participants in the import-export procedure is necessary. Export delivery is considered to be any direct or indirect delivery of goods to a recipient abroad i.e. outside the Republic of Croatia customs territory, or in other words to an entrepreneur with headquarters or residence outside Croatia. A taxpayer proves an export delivery of goods by an export customs declaration certified by an authorized customs office. The document declares that the goods have passed customs clearance and left the Republic of Croatia territory, and also that collection was carried out in compliance with the regulations prescribed for foreign trade and foreign exchange operations. Provided that the above conditions are satisfied, the entrepreneur delivering the goods to a foreign humanitarian organization is eligible for the value-added tax exemption because the delivery in question is subject to the exemption. Inasmuch as the goods are intended for distribution within a humanitarian aid program inside the Republic of Croatia territory, an import customs declaration designated to the foreign humanitarian organization is issued. The import of goods for the purpose of humanitarian aid is customs exempted with respect to the Customs Law, while pursuant to the Law on Value-added Tax a final import of humanitarian aid is also tax exempted.
- The Law on Value-added Tax does not grant a general tax exemption for the purchase of goods and services offered by international organizations. However, if the organization in question has signed international agreements with the Republic of Croatia and the agreements are approved and proclaimed in accordance with the Constitution, they can exercise the tax exemptions prescribed by those agreements. According to the provisions of Article 134 of the Republic of Croatia Constitution, the legal power of such agreements takes precedence over the law. Since the regulations on value-added tax fail to prescribe the procedure and technical implementation of the tax exemption ensured by the international agreements ratified by the Republic of Croatia, the Ministry of Finance has suggested the issuing of certificates, which will permit international organizations to prove their tax exemption eligibility consequent to the ratified international agreements (letter to the Ministry of Foreign Affairs class: 410-19/98-01/238, file number: 513-07/98-2 of February 6, 1998). Thus, as a result of ratification of an agreement with the Republic of Croatia, the International Red Cross Committee is permitted to exercise a tax exemption right on its purchases of goods and services.
5. Customs Duties
The Customs Law (People’s Bulletin no. 53A/91. to 92/94.) prescribes certain exemptions for the import of goods by not-for-profit organizations. As a result, international organizations are entitled to customs exemption of the items intended for their official needs. The same applies to diplomatic and consular offices of foreign countries in Croatia, and to articles designated for their official needs as well as to diplomatic and consular personnel with respect to articles for their personal use. If the articles exempted from customs duties are to be alienated or given to other person, they must be reported to a customs office in order for custom clearance to be executed.
Humanitarian organizations, associations of the blind and persons with impaired hearing, and associations of persons suffering from muscular and neuro-logical disorders are exempted from duties on the import of specific equipment, devices and instruments, spare parts and operating supplies for the purpose of their needs, and under condition that the goods are produced outside of the country. Duties are not imposed on the import of specific equipment used in various workshops for rehabilitation, employment and retraining of handicapped persons if the equipment is produced outside of the country.
Imports of art collections and art objects by museums and art galleries are not subject to customs if they serve the purpose of carrying out their activities. The same applies to archives importing reproduced archive material. Government bodies, companies, institutions, associations and other legal persons are also exempted from duties on goods received from abroad free of charge for scientific, cultural, religious, humanitarian or welfare purposes. The Customs Administration keeps records on the type, quantity, and value of the goods imported with customs preferences for all these situations.
Pursuant to the decision issued by a customs office, the customs preferences will be declared void if the exempted goods are used for purposes other than the one for which they were exempted. In such case, the beneficiaries of the customs exemption will have to pay duties according to the customs base and rate determined at the moment of import as well as the total amount of default interest accrued.
The Republic of Croatia has ratified the Convention on the import of goods of an educational, scientific, and cultural nature. In conformance with the Republic of Croatia Constitution, the above mentioned Convention is a constituent part of the Croatian internal juridical system, and accordingly takes precedence over the law. In compliance with the provisions of the aforementioned Protocol the signatory states have agreed to grant exemptions from tax and other internal imposts of any kind, on the import of books and publications designated to libraries. In compliance with the stated provision of the Protocol, the customs office will not impose duties on the books designated to libraries in cases where the import is carried out by means of certain foundations or trusts.
6. Other Taxes
6.1. Capital Transfer Tax
In accordance with the Law on Capital Transfer Tax (People’s Bulletin no. 69/97) the capital transfer tax rate is set at 5% and is imposed on acquisitions of real estate property. According to the law, “real estate” refers to land and buildings. The following are subject to value-added taxation rather than capital transfer tax:
- Buildings constructed and delivered and paid for after enactment of the Law on Value-added Tax, are not subject to capital transfer taxation, but to value-added taxation.
For the same reason, the following are subject to value-added taxation:
- buildings and their component parts (individual houses, apartments, business premises, garages, roads, bridges and alike) completed (i.e. constructed and delivered) after enactment of the Law on Value-added Tax,
- those portions of real estate do which are to be completed after enactment of the Law on Value-added Tax.
The following are subject to capital transfer taxation:
- all types of land,
- real estate constructed and delivered before enactment of the Law on Value-added Tax (before December 31, 1997),
- real estate constructed before December 31, 1997 but delivered after that date,
- newly built real estate which is not entirely completed on December 31, 1997, but only for the sections fully completed before that date,
- newly built real estate when delivery is not carried out by entrepreneur but by a person not having entrepreneurial status in the sense of the Law and the By-law on Value-added Tax. Consequently, when the newly built real estate is alienated by a not-for-profit organization, which is not subject to value-added taxation, the acquirer will be liable for the capital transfer tax.
The acquirer pays the capital transfer tax. The tax liability arises at the moment of conclusion of a contract or some other legal business for the purpose of acquiring a real estate. A taxpayer is obligated to report the inception of tax liability to a Tax Administration office in the area where the real estate is situated, within 30 days of the date of inception. Based on the reported tax liability, the Tax Administration will issue a decision on evaluation of the capital transfer tax amount, which is due to be paid by the taxpayer within 15 days.
The Republic of Croatia and local self-government and administration bodies, state government bodies, public institutions, trusts and foundations, the Red Cross and similar humanitarian associations founded according to special regulations are exempted from capital transfer tax. In compliance with this tax exemption, capital transfer tax is not imposed on acquisitions of real estate by the above mentioned institutions regardless of whether the acquisition is realized as a transfer between the institutions or between the institution (as acquirer) and some other person. Nevertheless, if the stated institutions transfer their real estate property to other persons, the persons in question are not tax exempted for the transfer of real estate. The acquirer will be tax exempted only in the case that such transfer of property is free from taxation pursuant to some other modes of tax exemptions regulated by the Law on capital transfer tax, some other laws or international conventions. The capital transfer tax exemption applies also to foreign country diplomatic and consular representative offices under condition of reciprocity, as well as international organizations for which the capital transfer tax exemption is stipulated by an international convention.
6.2. The Inheritance and Gift Tax
In compliance with the Law on Financing Local Self-Government and Administrative Bodies (People’s Bulletin no. 117/93) inheritance and gift tax is imposed on gift recipients and inheritors (legal and physical persons) for currency and monetary claims as well as for movables with individual exchange value exceeding the equivalent value of 2,000 German Marks (DEM) in kunas accounted according to the mean exchange rate at the National Bank of Croatia on the day of establishing the liability. The inheritance and gift tax is not imposed in cases where donated or inherited movables have already been subject to capital transfer taxation (value-added tax).
The basis for the gift and inheritance tax amount is the market value of inherited or donated property at the moment of inception of tax liability, depreciated for debts and expenses. The Tax Administration Office or some other authorized body determines the market value. The inheritance and gift tax is paid at a 5% rate within 15 days of receiving a decision on tax assessment issued by an authorized Tax Administration body.
In accordance with the aforementioned law, the inheritance and gift tax is not imposed on the state, local self-government and administration bodies, the Red Cross organization, institutions, trusts, and other humanitarian organizations and associations.
6.3. Tax on Organizing Entertainment and Sports Shows
Not-for-profit organizations which are, within the boundaries of their activities, engaged in organizing entertainment and sporting events, such as movies, entertainment, sports and other shows, are subject to tax on the income made on the tickets charged for the shows. The tax rate amounts to 5% of the total value of the sold tickets, and the payment is due within seven days of the date of the show. Payment is made to the account of the county which hosted the show. The income made on tickets for theatre shows, museums, and other cultural shows as well as economic shows and exhibitions, are tax exempted with respect to the tax on organizing entertainment and sports shows.
6.4. Tax on Company Name
The tax on company name or title is imposed on the legal and physical persons liable for the profit tax or income tax. The city or municipality where the main office or residence of the taxpayer is situated administers this tax. The tax is paid at the annual amount determined by a decision on tax assessment issued by the body authorized for tax administration according to the seat or residence of the taxpayer. Not-for-profit organizations exempted from profit taxation are not subject to tax on the company name.
6.5. Administrative and Court Fees
Public benefit companies in the fields of preschool education, education, science, culture, heritage preservation, health, social welfare and humanitarian organizations do not pay administrative fees in connection with their operation.
Humanitarian organizations, organizations dealing with the protection of disabled people and families of victims of the Homeland war do not pay court fees.
7. Taxation of Employees’ Salaries
The salaries of not-for-profit organizations’ employees are established in compliance with employment contracts, labor relations by-laws or collective agreements between authorized trade unions and authorized bodies without additional limitations prescribed by special regulations. Employers in not-for-profit organizations assess the amount of income tax for their employees in the same manner as the employers in for-profit organizations or employers – physical persons.
In contrast, salaries of government employees and personnel, as well as public service employees, are determined in accordance with special legal regulations: — the Law on Government Employees and Personnel and on Salaries of Judiciary Officials (People’s Gazette no. 74/94, 7/95), the Law on Salaries of Judges and Other Judiciary Officials (People’s Gazette no. 75/95), and the Law on Salaries of Public Service Employees, as well as collective agreements between the Republic of Croatia government and authorized trade unions. The Republic of Croatia government and the authorized trade unions establish dynamics of salary increase by means of mutual agreements.
The following taxation rules apply to not-for-profit organizations as well as for-profit ones.
The employer (or a person supplying salaries) is due to file statistical report on payment of salaries (SPL form) with an authorized money transfer organization (ZAP) not later than the eighth day in a month for the previous month. The principal purpose of the report is to provide statistical data on the fluctuation of salaries. The form is sold at stationary stores or People’s Bulletin stores.
The total amount of an employee’s salary is decreased for the following compulsory contributions assessed on wages and salaries:
- contribution to Pension and Disability Fund
- contribution to Health Insurance Fund
- contribution to Employment Fund.
An employer providing salaries is entitled to certain preferences with respect to the calculation and payment of salaries.
A legal person is released from payment of contributions to the Pension and Disability Fund as well as contributions to the Health Insurance Fund on the salaries of employees who are disabled Croatian war veterans. With respect to the contributions from the salaries and wages of Croatian disabled war veterans, companies, institutions and other legal or physical persons are liable for a pay health contribution amounting to 50% of the prescribed rate.
Companies, institutions and other legal or physical persons must pay 50% of the prescribed rate for health insurance contributions assessed on and from the wages and salaries of employees who are disabled workers, or disabled persons included in professional rehabilitation programs. Other contributions on and from the salaries and wages of disabled workers are assessed and paid in accordance with the prescribed rates.
Commercial associations and institutions for the employment of the disabled are exempted from payment of pension and disability insurance contributions on the salaries of disabled persons employed or disabled persons included in professional rehabilitation programs, while the health insurance contribution on and from the salaries and wages is paid at 50% of the rate prescribed by law.
The income from non-independent work is decreased by the contributions prescribed by law. The basis for the income tax consists of the total amount of income realized from non-independent work reduced by the amount of the prescribed contributions assessed on wages and salaries and the non-taxable portion of income defined as a personal deduction.
Until January 1, 1997 the primary personal deduction for domestic taxpayers amounted to 800.00 kuna per month annually. The personal deduction for retired persons is equal to the total pension amount but cannot exceed 2,000.00 kuna per month.
Personal deductions for domestic taxpayers are increased with respect to supporting family members. Increase rates are as follows:
- 30% of the personal deduction amount for supporting a husband or wife or other family members including the first child,
- 10% of the personal deduction amount for the second child. The same rate is added for each following child.
- 20% of the personal deduction amount for supporting a disabled close family member.
The personal deductions are cumulative. The income tax rate amounts to 20% of the income tax base up to the triple amount of the primary personal deduction, i.e. up to the amount of 2,400.00 kuna, or 35% on the income realized above that amount.
The income tax is increased by a surtax, which may be introduced by any city with more than 40,000 inhabitants. The surtax base is the amount of income tax assessed for a taxpayer residing in a city, which introduced the surtax.
The amount of non-taxable income depends on a taxpayer’s social status or on certain tax preferences (for example, Croatian disabled war veterans are tax exempted for the income from non-independent work).
The following types of income are tax exempted:
- Based on non-market status:
- relief provisions for disabled war veterans and close family members of fallen war veterans,
- relief for destroyed property caused by war, natural disasters and other uncommon occurrences,
- welfare relief pursuant to special regulations,
- child care allowance and money received for newborn babies,
- support for disabled persons based upon regulations on health and pension insurance (for example, compensation for physical injuries, allowance for help and care, compensations for disability),
- state awards,
- pensions of domestic taxpayers realized abroad,
- amounts received for insurance of goods, life, and property,
- amounts received from optional pension plans.
- Based on avoiding double taxation:
- interest realized on domestic and foreign currency savings, current accounts, credits and loans, and securities,
- dividends and shares in companies subject to profit taxation,
- profit made on the sale of financial property.
- Based on particular laws:
- compensation for military service – the military wages paid directly by the Ministry of defense,
- compensation to civil security members and other persons regarding activity related to protection from natural disasters,
- compensation for temporary incapacity for work paid by the employment bureau (for example, cash compensation for period of unemployment – dole), health insurance bureau ( the compensation regarding health insurance) or social-welfare fund,
- awards to pupils and students with respect to the work within their practical school programs, up to the amount of 1,000.00 kuna per month,
- income realized by regular students and pupils for the jobs provided by students and pupils associations,
- compensation for injuries occurring at work,
- compensation and awards to convicts for work in correctional institutions
- compensation, allowances, awards, daily expense allowances for business trips, dismissal wages, non-recurring money relief in the case of employee’s death, and other financial supports up to the amount stipulated by the provisions of the Article 23. Paragraph 2. of the By-law on income tax.
8. Government Funding
The funding of not-for-profit organizations in Croatia from the state budget or budgets of local administration or self-government bodies is regulated in various ways. The health care and welfare activities carried out by private institutions are funded either in accordance with agreements concluded for corresponding activity or according to specific regulations. There are particular conditions set up with respect to founding such organizations. Upon satisfying those conditions, an organization acquires the special status of a private institution becoming a contractual party to an authorized ministry.
At the beginning of July 1998, in compliance with Article 23 of the Law on associations, the Parliament has adopted the “decision on criteria required to establish eligibility for state funding for associations carrying out activities for the benefit of the Republic of Croatia” (Peoples’ Gazette no. 86/98.).
The Republic of Croatia is interested in associations pursuing their activities throughout the entire state territory by means of a membership network. The associations are expected to promote the highest constitutional values: freedom, equality, national equality, peacekeeping, social justice, respecting human rights etc. In addition, they must be members of an international organization. An association’s programs and activities are assessed in order to determine the fulfillment of these conditions. The Republic of Croatia Government sets up a government commission responsible for assessment of activities performed by associations and the benefits they can carry.
The above mentioned associations can be granted financial support from the state budget, provided that they are engaged in activities outside the scope of state governing bodies. These funds are not granted to associations financed according to special regulations. Those associations are obliged to submit a report on the state of their program realization as well as a financial report on sources of funds.
Support funds obtained from the budget cannot be used to cover the benefits pertaining to the association’s members pursuant to special regulations.
The Government of the Republic of Croatia upon the suggestion from the Government Commission sets up the amount of budget funds which will be used to support the aforesaid associations.
Twice a year the Government reports to the Parliament on the amount and distribution of state budget funds to associations beneficial to the Republic of Croatia.
There is currently no experience regarding the budgetary financing of associations.
The local administration and self-government bodies (municipalities, cities, and counties) also provide support to associations from their budgetary funds. Some cities introduce competitions for distribution of these funds. However, the major part is distributed without any contest or activity program presentation. In compliance with the Law on associations (Art. 23 ), the decision mentioned earlier should be consistently applied to grants supplied from municipal, city or county budgets.
Endowments of Foundations Receive Contributions from the State Privatization Fund of the Czech Republic
By Petr Pajas
Prague, Czech Republic
At last! Following more than eight years of waiting, thirty-nine Czech foundations have been selected to obtain a significant contribution to their registered endowment from the State Privatization Fund of the Czech Republic.
The story begins with the suppression of foundations and the confiscation of their properties shortly after the Communist Party take-over in postwar Czechoslovakia, which was the final blow after the persecution by Nazis during the war. Prior to the war, foundations made significant impacts on the development of Czech society. The foundations established by noble or rich families existed in the Lands of the Czech Crown for centuries. In fact, the foundations’ legal existence until 1991 was based on an Imperial Edict from 1811, which may be taken as evidence of their sustainability and long-term recognized tradition. During the nineteenth century, and later at the very beginning of the Czechoslovak Republic, there were several important foundations, which gave origin to many institutions. After 1952, what remained were only a few palaces in Prague and other buildings in other cities that being used for purposes other than those for which the foundation was founded. Indeed, this was nothing very special in a country where all private property had become so-called “common property of the people.”
November 1989 brought about not only the rebirth of democracy and pluralism in politics, but it also opened the doors to private enterprise and made it possible to return the stolen property to at least some percentage of original owners of the estates and industrial companies or their heirs. Even foundations were allowed to return to the legal framework. However, with only very few exceptions, there was no one who could claim for the legal return of the original property of foundations. Instead, several foreign foundations started to operate in Czechoslovakia, and many local civic initiatives stood behind the rapidly growing number of newly established foundations. While the former were using the assets of foreign independent foundations or state agencies and individuals who wanted to support the changes taking place in the Central Europe, the latter depended exclusively on the determination and work of a very concrete group of people and collected the assets needed for achievement of their goals from small contributions and gifts of citizens and corporations. Only a few of the local foundations were able to generate income from their own property and use it for the publicly beneficial purpose for which they were established.
Simultaneously, the need for strong domestic foundations grew, mostly due to the fact that the state was not found to be the best and the most reliable partner in co-financing new educational or other important initiatives. The need to find at least matching funds for the Central European University in Prague initiated the idea to use a small part of the funds made available by the privatization of state owned industry for an endowment of a foundation. Shortly afterwards, in the beginning of 1992, the Czech National Council (the parliament of the Czech Republic, at that time a constituent part of the Czech and Slovak Federative Republic) enacted the amendment to the Privatization Act, according to which, a part of the portfolio of state industry privatized by the voucher privatization method should be made available to the needs of foundations. At that time, the requirement to provide a certain portion of the privatized assets to foundations was accepted as reasonable and legally acceptable. Besides, the voucher privatization, as such, was considered a way of compensation not only for those from whom the property was stolen, but also to those who worked on bringing about most of the post-war assets to be privatized.
As a result, in 1992, the State Privatization Fund established the Foundation Investment Fund (FIF, or NIF in Czech) as a share holding company, and the Government of the Czech Republic created a Council for Foundations as its advisory body. While the former institution was presumed to take care of the 1% voucher privatization portfolio and then distribute the shares or dividends from it to foundations, the latter institution, the Council for Foundations, was assigned the role of looking for foundations to which a contribution should be made.
However, the work of these institutions was not very successful. After a very emotional proclamation of the Council of Foundations in the summer of 1992, according to which foundations with good public benefit projects should apply for funds from privatization, an avalanche of newly created foundations with well-designed future projects was initiated. As a result, more then 600 foundations applied for the funds. Experts of the Council of Foundations were soon overwhelmed by the huge number of projects to choose from. All that at a time when no money nor the portfolio were available.
The initial activities were subdued by the simple fact that the first chairman of the Council of Foundations was elected Lord Mayor of Prague and his successor was not at all interested in the project. As a result, the FIF did not obtain the portfolio, nor did the Council of Foundations continue with its work.
From 1992 to 1995, the situation of foundations at several conferences of foundations was sharply criticized, but no solution was found regarding how to validate the governmental promise of funds to foundations. In March 1995, after consulting specialists, mainly the Charles Stuart Mott Foundation from USA and others, the idea of establishing a National Endowment Foundation, which would take over and further maintain the portfolio assigned originally for the FIF took the form of a draft law. While the project was rejected by the government, it had the effect of reviving the original promise of the Czech Government. Even the Council of Foundations voted against its chairman in support of the new project. The draft law was finally adopted by a group of deputies of Parliament and resubmitted again in 1996 as a proposal to establish a Czech National Foundation with a very democratic decision-making structure and annual endowment-contributions distributing organs. The Bill on the Czech National Foundation passed successfully through two readings in the Parliament, only to be taken off the agenda at the last session before the 1996 elections together with several other Bills, which were not acceptable to the Government of Civic Democratic Party of Vaclav Klaus.
The 1996 elections brought about several significant changes to the political scene of the Czech Republic. The chairmanship of the Council of Foundation was assumed by Mr. Pavel Bratinka, Minister without Portfolio of the Government. Under his chairmanship, the Council of Foundations was enlarged by several representatives of non-governmental organizations and officials from those ministries of the Government that have on their agenda the cooperation and partial support of associations. The enlarged Council soon came to the conclusion that there were already several foundations in the Czech Republic which might be given the responsibility to take care of the endowment, and, therefore, that there was no more need to establish a new Czech National Foundation. Thus, at the end of 1997 a new concept was born on how to distribute the privatization money, which had been estimated at that time to amount to CZK 500,000,000 under the State Privatization Fund and CZK 2,000,000,000 in market value from the remaining portfolio set aside by FIF.
However, one important prerequisite was still missing. It was clear that the activities of foundations should be regulated by a stricter law than what was provisionally provided by the Civil Code amendment of 1992. After seven years of drafting and negotiating, the new Law on Foundations and Funds was enacted by the Czech Parliament on September 1997 to come into force from January 1, 1998. The original foundations were given one year to register as foundations with endowment or as funds without endowments, or to transform into public benefit corporations providing public services.
The new Law on Foundations and Funds made it easier to define the legal entities to which the contributions from the privatization fund may be given. The law defined the notion of a “registered endowment” as that part of the total assets of the foundation which may not be sold, used as a lien, nor willfully diminished by the actions of the foundation. The law allows only the income generated from the endowment to be used, but this income is fully exempt from corporate income tax, which represents a savings on tax in the region from 20% to 35% of the annual income, depending on the type of income.
Thus, the Council of Foundations, working with the approved Law on Foundations and Funds, could require the recipient of the privatization contribution to be only re-registered foundations with endowment and the contribution itself to enhance the registered endowment of the recipient foundation. In this way, it was ensured that the distributed money will not be consumed by foundations themselves, but only the income from it will serve for many years to those in need of grants from the chosen foundations.
The Government of Mr. Tošovský, which replaced the Government of Mr. Klaus in November 1997, took over the results achieved by the Council of Foundations. In May 1998 a tender for foundations interested in securing the contribution from privatization has been announced. In between, the political development in the Czech Republic continued by extraordinary elections after which a minority government of the victorious Social Democratic Party came into power. The new government also assumed responsibility for the tender for privatization contributions to foundations.
Under the chairmanship of Minister Jaroslav Bašta, the Council of Non-Governmental Organizations, into which the former Council of Foundations was transformed under the previous Government, continued to work. In March 1999, seven committees of the Council decided the fate of ninety-three applications accumulated during the tender. Only thirty-nine of these fulfilled the formal requirements of the tender and were evaluated further.
Finally, the Council recommended, and the Government approved, a proposal to the Parliament to provide contributions to twenty-six foundations, out of which 16 scored best in six nominal groups (health care promotion, social care promotion and humanitarian assistance, education promotion, culture promotion, environment protection and human rights protection), where a nationwide substantial grant-giving activity of the foundation has been required. Ten other foundations were selected from the seventh group, which was open to foundations with regional activities or their own projects instead of granting activities.
After a heated discussion and many days of lobbying by some foundations that were not recommended, the Czech Parliament finally adopted the resolution on July 8, 1999. Thirty-nine foundations that passed the test of formal requirements are to be given the contributions at the amount proportional to the points they received in each of the seven groups in the evaluation process.
Despite its compromising characteristics, the Parliament resolution is of great historical importance. It is, first of all, the long awaited realization of a promise to replace the gap in the natural process of establishment of foundations, not to speak of the complete loss of their property that resulted from the combination of the war-time Nazi occupation and the post-war Communist regime. In fact, the resolution means that there is to be a potential of CZK 500,000,000 in the endowments of the Czech foundations, which may generate annually from CZK 30,000,000 to CZK 75,000,000 in assets, which directly serves the non-governmental organizations (recipients of grants from the foundations). Moreover, the Parliament in its resolution requires the Czech Government to prepare the criteria for the second round of the tender for distributing contribution receiving foundations to the end of September 1999. This means that another portion of about CZK 2 billion may become available to foundations’ endowments. It is expected that in the second round there will be about 150 to 200 successful foundations, each of which would get more than CZK 10,000,000 in contributions to their endowment. According to the proposals discussed, it is also possible that a small part of the distributed sum, about 10% of it, may be made available to be used for direct grant making in the first one or two years. That would make the much needed money available immediately, without waiting a year or more for the interest rate or investment income from the endowment.
Several important self-regulatory and co-operative processes have been generated by the development of the case of privatization funds distribution to foundations.
First, as already mentioned above, the formal Council of Foundation has developed step-by-step into a full-fledged active and respected advisory body of the Czech Government, as well as a forum where the new plans for co-operation between civil society organizations and the state administration may be discussed and formed into concrete activities, projects or even legislative initiatives.
Second, foundations and other donor representatives, meeting under the auspices of the Donors Forum, have come up with proposals of three important documents: an ethical code for foundations, a strategy of the not-for-profit sector for the next decade, and the commitment of foundations receiving the privatization money to common investment activities.
The last mentioned initiative resulted in a special tender for a bank prepared to establish a special investment fund, which would make it possible to generate greater income from the endowments under conditions compatible with governmental requirements.
By having approved the resolution on distributing contributions to foundations, the Czech Government and Parliament have set an example to the countries where privatization is still under way. Despite the long waiting, the result is of the win-win category: the state helps private foundations regain at least partially their strength and, henceforth, civil society becomes much more self-sustainable and less dependent on foreign and/or governmental financial resources in its future development.
Registration And Activities For Kosovar NGOs In A New Legal Environment
Despite the number of NGOs that has increased rapidly in the last ten years, Kosovar NGOs have never had an opportunity to develop under the restrictive legal framework that existed until now. Civil society had always been considered the “public enemy”; thus, all possible means were used to fight against it, including hostile legislation.
With the recent departure of Serbian troops from Kosovo and the establishment of the European Convention for the Protection of Human Rights and Fundamental Freedoms (“the Convention”) as the new basis for the Kosovar legal system, the floodgates for the development and growth of civil society in Kosovo finally opened. On November 16, 1999, the United Nations Mission in Kosovo (“UNMIK”) enacted the Regulation on the Registration and Operation of NGOs (“regulation”) in Kosovo.
The regulation was formed as a result of a democratic participatory process. Domestic and international NGOs operating in Kosovo worked with UNMIK to draft this regulation. The result was an advantageous regulation that promotes open society in Kosovo. It is understood, however, that law in itself does not create open society; only the meaningful protection of human rights and freedoms forms the bases for its existence. Rooted in the principles of the Convention, the Regulation on the Registration and Operation of NGOs is an essential element toward the development of democracy and protection of civil society in Kosovo.
The regulation fully recognizes the right of individuals to associate and work together for a common interest and public good. If an association wishes to form a legal entity separate from the legal personality of its members, the regulation provides simple procedures to do so. For example, only three persons are required to register an association, whereas one person is needed for a foundation. In addition, UNMIK has very limited powers to deny registration. Reasons for a denial of registration are clearly listed in the regulation. Moreover, the regulation does not require NGOs to register. NGOs need only register if they wish to operate as legal entities. The freedom to register or not register, and the freedom of expression and association reach full meaning in Kosovo.
Another positive feature of the regulation is that both physical and legal persons have the right to form non-governmental organizations (“NGOs”). The regulation also acknowledges the registration of the following groups of organizations: (1) NGOs whose purpose is for public benefit; and (2) NGOs such as professional associations that are formed for the mutual benefit.
With regards to domestic NGOs, the regulation requires that they present two formal documents in order to register: a founding instrument and the statute. The regulation requires that a minimum of provisions necessary for the operation and governance of NGOs be included in the statutes. The requirements for the provisions themselves vary between associations and foundations. For instance, foundations are required to have an additional governing organ since they do not have membership status.
The types of provisions required by the regulation include a statement as to the organization’s purpose, which must follow the regulation, and the basic governance structure. Basically, the statute should determine the highest governing body of the NGO, and state how many times a year it should meet, which cannot be less than once a year. In general, founders have significant freedom to decide on the structure of governance for their organizations.
A notable characteristic of the regulation is that it recognizes and regulates the registration and operation of foreign and international NGOs. For the first time, foreign and international organizations have the right to work in Kosovo as legal persons.
Another advantage under the regulation is that the registration authority, the UNMIK Office for Civil Documentation, is required issue a registration certificate, or a denial of registration together with an explanation, within 60 working days of receiving an application to register.
The regulation gives the right for NGOs to engage in economic activities that support the organization’s goals. NGOs are permitted to generate income from any lawful activity, and to manage their own property in furtherance of their statutory purposes.
In addition, NGOs that were created for the benefit of the public have the right to obtain public benefit status, which releases them from paying tax on custom duties as well as other tax and fiscal obligations.
In sum, the Regulation on the Registration and Operation of NGOs offers extensive opportunities for the development of civil society and the strengthening of the non-governmental sector in Kosovo. This is very important because a healthy non-governmental sector protected by the law in turn supports the development of pluralism and social stability as well as respect for the rule of law—conditions that are essential for the development of democracy.
The International Center for-Not-for-Profit Law (ICNL) served as the primary technical advisor to UNMIK on the draft regulation. ICNL is an international organization that facilitates and supports the development of civil society and the freedom of association. Its purpose is to assist the creation and improvement of laws and regulatory systems that permit, encourage, and regulate voluntary, independent, not-for-profit organizations in countries around the world. ICNL currently provides technical assistance to the UNMIK registration office on implementation issues
ICNL’s work in Kosovo is supported by the Charles Stewart Mott Foundation, with initial funding from the United States Agency for International Development.
By Gjylieta Mushkolaj
Consultant for the International Center for Not-for-Profit Law
— This article was previously published in “Koha Ditore,” Kosovo Independent Daily, on November 27, 1999.
The New Montenegrin Law on Associations and Foundations
As soon as the Montenegrin Parliament reconvened following cessation of hostilities after the NATO bombing campaign, it passed the draft Law on Associations and Foundations (Official Gazette of the Republic of Montenegro, No. 27, of July 29, 1999). ICNL provided extensive assistance to the Ministry of Justice in preparing this law.
As compared with the first draft, the final draft has been improved and contains a number of liberal provisions. Thus at least five natural and/or legal persons which have a domicile, place of business, or residence in Montenegro can establish an association. By contrast, one or more natural or legal persons can establish a foundation, regardless of their domicile or place of business.
The law distinguishes between membership and public benefit associations, but falls short of providing specific criteria that would draw a line between those two kinds of associations and does not provide a separate set of rules specifically applicable to public benefit associations. A foundation can be established only for advancing public benefit purposes, including humanitarian purposes.
Importantly, foreign NGOs are placed on equal footing with domestic NGOs with respect to registration. Registration is mandatory and for domestic NGOs results in acquiring a status of legal entity. A foreign NGO that seeks to operate in Montenegro needs to submit to the Ministry of Justice (the registration authority) proof of registration in the country in which it is domiciled, the name of the person authorized to represent the organization, the seat of the organization in Montenegro, and the organizational form in which it will operate (branch, office, affiliation, agency).
The Ministry of Justice must decide on registration within ten days after submission of a request for registration. If it fails to meet the prescribed deadline, the organization is presumed registered on the first day following the expiration of the deadline. However, it is not quite clear what the practical implications of this favorable presumption will be. For example, without an actual decision on registration, an NGO will hardly be able to open a bank account, obtain a seal or enter into a lease agreement. Interestingly, the law cites only one reason for denial of registration – an incomplete request for registration. An organization may institute an administrative (non-litigation) procedure against a decision of the Ministry denying registration.
As regards internal governance, the law provides that an association must have a general meeting of members and a management board, while a foundation must have a management board and a supervisory board. However, the law is silent on a number of issues pertinent to internal governance, including conflict of interest rules. This could give rise to abuse in practice, especially given that the law does not specifically provide that the organization’s statute must contain provisions on conflicts of interests.
Both associations and foundations are allowed to engage in economic activities provided that the profit generated from such activities is only used for advancing the organization’s major statutory goals. The language of the law seems to indicate that an organization can engage in both related and unrelated economic activities. However, it is not clear whether an organization can engage in related economic activities without having to establish a separate legal entity. An organization may acquire assets through membership fees, donations, grants, passive income, gifts, and through income generated from any lawful activities.
In addition to the requirement for mandatory registration, which is inadequate when compared with international standards, other provisions require further legislative attention. These include the penalty and sanctions provisions. Overall, however, this law can be regarded as a significant step forward toward providing a sound legal framework for NGOs in Montenegro.
The new Law on Income Tax was enacted by the Slovak Parliament on November 24, 1999. The law came into force on January 1, 2000. However, article 48 will not be effective until January 1, 2002.
Article 48 reads:
“Statement of possibility to use paid-in income tax for public benefit purpose
Any person who has received income subject to this law can give a statement to the tax office, in which he states that 1 % of his paid-in income tax will be used in consideration of expenses of education, health care, social care, fitness, sport, protection of environment, culture and reconstruction of cultural monuments; for account of a natural person or legal person stated by him. This statement is obligatory for the tax office.”
However, it is very likely that the above provision will be amended before it actually comes into force. Both the NGO sector and the government seem unsatisfied with the version of article 48. They consider its scope of application as too broad, not reflecting the concept of “public benefit”, and opening possibilities for abuses. Legal initiatives for further amendment of the Income Tax Law are expected shortly.