The International Journal
of Not-for-Profit Law
Volume 1, Issue 2, December 1998
An article titled Registration of Associations in Central and Eastern Europe and the Newly Independent States: A Survey by Rachel Holmes may be found under the articles header in this issue of the Journal.
The Ministry of Justice is currently revising the draft Law on Associations and Foundations, taking into account the results of a July 1998 public hearing and the comments of ICNL. The Ministry is expected to finish its work in late January/early February, at which time the NGO-government working group will meet with ICNL representatives to finalize the draft. The draft will then be submitted to the Council of Ministers for approval, and we expect that it will be enacted in the coming months.
Director of Humanitarian Aid and Coordination with NGOs, Republic of Albania Ministry of Labour, Social Affairs and Women
As a part of the LEA-LINK project, the revised draft of the Law on Associations and Foundations was prepared in November 1998.
The draft provides for associations and foundations, but foundations must serve the public interest. Three founders (physical or legal persons) are required for associations, while foundations may be established by a single physical or legal person. Courts are responsible for registration. The decision on registration is subject to appeal. If the court does not respond within the prescribed deadline for responding to the application, then approval is assumed. The draft allows associations and foundations to engage in economic activities, provided such activities are not a major portion of their overall activities. Foreign and international associations and foundations may register their branches and offices.
The draft Law on Non-Profit Organizations, prepared by the working group comprised of representatives of the Ministry of Justice, NGOs, and lawyers, was rejected by the Minister of Justice in mid-1998. The Minister appointed a new drafting group to amend the draft. Subsequently, a new draft (the “Velinov” draft) was prepared and introduced into Parliament for consideration in early 1999. This draft is considerably changed from previous versions, notably with respect to its provisions governing foundations, which provide for extensive government control. The draft is undergoing revision before its first reading, now expected in late January. (ICNL has an English translation of the new draft.) It is expected that a new law will be enacted in 1999, but it is much too early to be certain what form it will finally take.
A proposed draft Law on Public Assembly and Peaceful Protest, which had previously been withdrawn, was reintroduced and has gone through a first reading before the Parliament.
On the Treatment of Foreign Foundations according to the Act No. 227/1997
The status of foreign grant giving foundations (endowed) and funds (without endowment) is regulated by Article 27 of the Act on Foundations and Funds No.227/1997.
The activities of a foreign not-for-profit organizations in the Czech Republic are regulated by the above mentioned Act if the organization is registered as a foundation (endowment) or by any other grant giving legal person (fund) according to the law of the state in which the organization has its headquarters. The foreign foundation or fund may develop its activities in the Czech Republic under the same conditions as those valid for the Czech foundations and funds, unless any law applicable to the foreign subject specifies differently. Because of this, the foreign foundations or funds active within the Czech Republic are obliged to provide grants as their main activity. In addition, they may organize several activities, for example in the field of culture, education, sports and social affairs.
A foreign foundation or fund may begin to develop its activities in the territory of the Czech Republic starting the day on which its Branch was incorporated at the registering (commercial) court. The proposal for incorporation should be submitted by the foreign subject. To the proposal for incorporation must include:
- the Statute (By-Laws) of the Branch
- the certificate proving that the foreign foundation or fund is a legal body
- the document which proves that the value of the assets provided to the subject is compatible with the requirements of the Act No. 227/1998
- the written appointment of the person who is entitled to act on behalf of the Branch while in the Czech Republic. The person must have a permanent address in the Czech Republic.
Moreover, with regard to the current practice at the registering courts, it is recommended to include the signature of the person acting on behalf of the Branch, as well as the certificate by which the real estate owner agrees with locating the headquarters of the Branch on his property address.
The court incorporates the following data with the Register of Foundations and Funds on the foreign subject and its local Branch:
- The name and headquarter address of the foreign foundation or fund
- The name and address of the local Branch
- The purpose for which the Branch is established
- The value of the endowment of a foundation Branch or the value of the assets provided to the fund Branch
- The first name, family name(s), Czech personal identification number or date of birth and permanent address of the person entitled to act on behalf of the Branch.
In its Statute the Branch should describe the way by which its organs or persons entitled to act on behalf of it should make decisions and sign documents in the name of the Branch of the Czech Republic, as well as the conditions, under which the Branch will provide its grants – to whom and in which way the grants may be provided – i.e. the Granting Regulations. It is also required to define in the Statute of the Branch what assets are provided to the Branch by the founding subject and their value.
The problem of the assets provided to the Branch by the Branch founding subject is still under discussion. According to the Act No. 227/1997 the provision on the endowment or on assets provided by the founding subject at the establishment of the fund is extended also to the foreign foundations/funds in the sense, that in all relevant clauses of the Act it is understood under the notion “foundation” the local Branch. In Article 23, the Act requires a foundation – in this case of a local Branch of a foreign foundation with endowment – to deposit the money provided as part of the Branch endowment in a bank account. The notion “bank” is not specified in any other detail. Therefore, it might be deduced, that the local Branch of a foreign foundation may deposit its endowment also at a foreign bank.
Even for the local Branch of a foreign foundation or fund there exists the obligation set by the Article 22 of the Act, namely, that the Statue of the Branch must specify the extent to which the administrative costs of the Branch are limited. The rule might derive the limitation a) from incomes generated from the endowment of a foundation or from the total assets of the fund, b) from the total value of the sum of all grants provided by the foundation or fund during the current year or c) from the total value of the endowment of the foundation or total value of the assets of the fund available on December 31 of the current year.
With regard to the Article 24 of the Act, the local Branch must keep its accounting books according to the requirements of Czech law. Similar to the Czech foundations and funds, the local Branch must publish an annual report on its activities, as well as incomes and expenditures, in which it specifies all excepted assets and all provided grants above 10,000 CZK and evaluates how the purpose of its existence was fulfilled and whether the use of its grants were proper. The annual report should also contain the evaluation of the rule limiting the administrative expenditures of the Branch. The annual report and all of its official updates must be filed with the registering court.
The internal organizational structure of the local Branch is a matter of the decision of the foreign mother subject. Therefore, the local Branch is not bound by the requirement set by the Act No. 227/1997, which only apply to the Board of Directors and Supervisory Board. The only obligation is to appoint and register a person entitled to act on behalf of the Branch in the Czech Republic. This person must be granted permission for permanent stay in the Czech Republic or be the citizen of the Czech Republic.
In the case of the decision by the foreign foundation/fund to terminate its activities in the Czech Republic, the remaining property of the Branch after settlement of all its local creditors claims shall be returned to the foreign mother subject. Accordingly, the liquidation procedures required by Article 9 do not apply to the local Branch of a foreign foundation/fund upon the termination of the Branch activities in the Czech Republic.
About the Authors: JUDr. Lenka Deverová is an attorney at law and Ing. Petr Pajas is the Executive Manager of First Consulting p.b.c. and a Regional Coordinating Editor of the IJNL.
An article titled Improving Civil Society in Hungary by Daniel Csanády can be found under the articles heading in this issue of the Journal.
With the elections having been completed in the autumn, work is now underway with respect to the NGO law reform initiatives. These include: reform of the existing Law on Public Organizations and Their Associations, a new Law on Foundations, and perhaps (after several delays) a new Law on Charities and Sponsorship. A consortium representing the NGO sector, as well as prominent parliamentarians, supports this comprehensive effort, and the prognosis is favorable for action during 1999.
The Seimas of the Republic of Lithuania, USAID, and World Learning, Inc. sponsored a “Program on Open Legislative Process” in December 1998. Under this program open legislative hearings were held on the draft amendments to the Law on Charity and Sponsorship before the Committees on Budget and Finance and Social Affairs and Labor. A variety of witnesses testified, and observers from other countries had an extraordinary opportunity to view open legislative processes in action. As a result of the hearings, the draft amendments were returned to the drafting group for further work, based on the testimony. In particular, drafters will devote attention to tax benefits issues, including methods of tracking benefits to appropriate beneficiaries. Passage is anticipated later in this session of the Seimas.
The New Macedonian Law on Citizen Associations and Foundations
On June 25, 1998, the Republic of Macedonia enacted the Law on Citizen Associations and Foundations. The primary architects of the law are Prof. Borce Davitkovski and Dr. Natasha Gaber, who spent countless hours working on this landmark initiative. ICNL has also been involved since the beginning of the project, providing comparative information and technical assistance to the drafters. The Macedonian Center for International Cooperation (MCIC) was also instrumental in the process.
The law is the result of significant public participation. NGO representatives, government officials, academics, and international experts worked together on the draft. To promote legislative transparency, the drafters circulated the law to all known NGOs, organized roundtable discussions, and used the media to publicize the legislative initiative. After participating in one of the roundtable discussions, a government official commented that the level of public participation made the process a model of democratic law making that would hopefully be replicated in subsequent initiatives.
Prior to the enactment of this law, the NGO sector was governed by the 1990 Law for Social Organizations and Associations of Citizens. This law predated that first multi-party elections in the country and contained a number of gaps, ambiguities and restrictive provisions. For example, there was no legal basis for foundations, and ten citizens were required to found an association. In addition, the Ministry of Interior was responsible for registration, and the law failed to regulate a number of issues relating to NGO internal governance.
The new law is a significant step forward. More significant provisions (both positive and negative) are summarized below:
For the first time, the law creates a legal basis for foundations in the country. Following traditional civil law principles, foundations are defined as non-membership property-based organizations. Foundations may be formed by any physical or natural person (including by will), and must have a minimum endowment equivalent to at least DM 10,000.
Citizen associations are membership organizations, and must be founded by at least five citizens “of legal age.” If provided by statute, foreigners may join – but may not found – a citizen association. (As discussed below, they may however found “associations of foreigners.”) Legal entities may neither found nor join associations. Earlier drafts permitted legal entities to found associations, but we understand that the Ministry of Justice objected to this on the grounds that the Constitution only permits citizens to found associations.
Associations and foundations may be formed to “exercise and protect economic, social, cultural, scientific, professional, technical, humanitarian, educational, sports, and other interests and beliefs, in conformity with the Constitution and law.” Associations and foundations may broadly engage in advocacy activities, but they may not directly participate in an election campaign, fund raise for an electoral campaign, or finance a political party.
The law explicitly states that “citizen associations and foundations may not perform economic activities.” (Article 7.) They may, however, “found limited liability companies and shareholding companies to perform their goals, interests and activities, and to finance their functions determined by statute.” (Article 7.) Interestingly, many NGO representatives support this provision, despite its restrictive nature.
The law attempts a positive definition of the nondistribution constraint. It states that any profit must be used to support statutory goals or activities of the organization. In addition, members of governing bodies may not vote on issues affecting the member, his/her spouse, a relative of the second degree, or a legal entity over which the member has control or an economic interest.
Associations and foundations must present basic documents, as defined in the law, to the court with jurisdiction over the seat of the organization. The court is obligated to rule on the registration request within 30 days, although the law does not provide for default registration if the court fails to act within this time period. Registration may be denied if the organization’s goals, activities, program or basic documents would violate the restrictions on political activities, or if they are directed at the violent overthrow of the constitutional system, the instigation and fostering of military aggression, or the instigation of national, racial or religious hatred and intolerance. (Existing organizations can also be dissolved for these reasons.) In addition, the court may reject the registration request if the founders, after notice, fail to correct deficiencies in their basic documents or application. Founders may appeal adverse decisions. NGOs acquire legal entity status upon their entry the registry.
The law also states that associations “may be entrusted with the performance of public authorizations.” In other words, associations may carry out certain activities on behalf of the state – this is not a determination of public benefit status that entitles an organization to tax benefits. This authorization is conferred by the ministry with competence over the association’s activities. In granting public authorizations, the ministry is to consider the nature and field of activity, the professional goals of the association, the need for the activity, the organization’s capacity, and the organization’s experience. An association may lose a public authorization in cases of abuse or non-performance.
The law also establishes basic rules for the internal governance of the organization. Associations must have an assembly and an executive organ. A foundation must have a managing board. The majority of members of the executive organ/managing board must be Macedonian citizens.
Associations and foundations may acquire objects, funds and property rights. They may collect fees, contributions, donations, and grants. They may also earn dividends from businesses they establish and may receive funds from governmental sources. The law contains special provisions for the assets provided by “social-political” organizations to social organizations and citizen associations during former times. The law also establishes the principle that associations and foundations should receive tax and fiscal incentives, leaving the details to be worked out in separate legislation.
An association may be involuntarily terminated if there are fewer than 5 members, if the Constitutional Court issues a decision that the program and statute of the organization violate the Constitution, if it is determined that the association ceased to operate, or “in other cases determined by law.” A foundation may be involuntarily terminated if it is determined that it ceased to operate, if the assets are insufficient for the implementation of its goals, if it “loses” its property, if the goal for which it has been established has been fulfilled or cannot be fulfilled, if its time period established by statute has expired, if has gone bankrupt, and by “other cases determined by law.” The law also states that associations and foundations may be dissolved if the organization violates the constitution or the limitations described in the law on political activities. Interestingly, the law also allows the founder to dissolve the organization if this right was guaranteed by statute.
Upon dissolution, remaining assets are distributed according to the provisions of the statute. Presumably different rules will apply to organizations receiving tax benefits, but this is not clear.
Part VI of the law permits foreigners who reside in Macedonia for more than one year to found an “association of founders.” Before registering this association, the court must first receive the opinion of the Ministry of Foreign Affairs. In addition, an association of foreigners may only be formed for scientific, sports, cultural, humanitarian, and social goals, as opposed to the broader range of permissible purposes for a citizens association. The law also provides for the establishment and operation of foreign and international NGOs in Macedonia.
Part VII entitles associations and foundations to form unions or umbrella organizations, which mitigates slightly the rule that legal entities may not form associations. Macedonian organizations that become members of international organizations must notify the court in which it registered within thirty days.
Part VIII contains penal provisions. Organizations may be fined 100,000 to 200,000 denars (approximately US $2,000 to $4,000) if it violates the provisions relating to political activities and economic activities. In addition, a “security measure” is imposed against organizations violating these provisions, prohibiting them from undertaking certain activities for a period of one to five years. Fines of 20,000 to 80,000 denars (approximately US $400 to $1600) are imposed on an organization that operates before it is inscribed in the register, if it fails to submit in a timely manner amendments to its founding act or statutes, or if it does not inform the court within thirty days that it has joined an international organization.
Organizations must reregister by January 6, 1999. The drafters of the law are developing projects to help judges and NGO representatives understand the new law. They are also preparing a commentary on the new law that will help resolve ambiguities in the new law (one key issue they will address is the extent to which NGOs may directly engage in economic activities).
In the first issue of the Journal there was a story on the draft Public Utility Act that was then under consideration. Although the Polish Sejm (parliament) will almost surely consider major legislation affecting NGOs during 1999, the Public Utility Act is not longer under active consideration.
The new bill that is being drafted deals with cooperation between NGOs and government. The government and the sector are working very collaboratively to develop this legislation It will deal with a wide variety of issues, including the definition of public benefit, the appropriate registration and regulation mechanisms, the right of foundations to use economic activities to pursue their statutory purposes, procurement rules for NGOs, and other important issues.
As soon as an English translation of the new bill is available, it will be posted on the ICNL webpage. The intention is to publish a detailed story on the draft legislation in the next issue of the Journal.
Strike While the Iron is Hot–Recommendations for Amendments to Slovakia’s NGO Legislation
The new Slovak coalition government owes much to the Slovak NGO community. The third sector’s “OK ’98” non-partisan “get-out-the-vote” campaign deserves much of the credit for the high 84% voter turnout in September’s elections. Even more impressively, eight of ten first-time voters cast ballots (this same group had a 20% turnout in previous elections). The opportunity for change in the Slovak legal framework affecting NGOs is ripe, and must be seized.
Slovak NGOs currently register in one of four legal forms: civic associations, public benefit organizations, foundations, and non-investment funds. With the exception of the 1990 Czechoslovak Law on Association of Citizens which continues to govern civic associations, the other three forms are regulated by legislation passed by the previous government in 1996 and 1997, over the objections of most of Slovakia’s NGOs. This paper will address the most pressing areas for reform and offer suggestions to bring Slovakia’s NGO legislation more in line with best practices in the region.
Registration procedures. Associations and foundations must register with the Ministry of Interior. Non-investment funds and public benefit organizations register with the district regional office (Slovakia is divided into eight administrative regions). The Ministry of Interior maintains the central registry and overall jurisdiction. In the case of foundations, there is a two-tiered approval process—first with whatever central body regulates the field in which the foundation will work, and then with the Ministry of Interior. We recommend that Slovakia revise its legislation to vest registration with the courts in all instances. This would be in keeping with trends in the region. Court registration is generally less susceptible to political pressures and influences. In addition, registration should be a purely administrative procedure, with little discretion on the part of the registering officials.
Economic Activities. Foundations and non-investment funds are currently barred from undertaking economic activities, with some small exceptions. In the case of associations and public benefit organizations, the threshold above which economic activities are taxed is quite low—100,000 Slovak crowns (about $3,000 USD). If an organization’s income from economic activities exceeds that amount, all such income is taxed at 40%. To encourage more financial sustainability and independence for NGOs, we recommend Slovakia adopt new legislation permitting foundations and funds to carry on economic activities, and that it reconsider the taxation issue. Possibilities include raising the threshold amount for tax-free earnings from economic activities, permitting tax-free earnings to the extent the economic activity directly relates to the organization’s purposes, or not taxing profits that go to support publicly beneficial goals of the organization.
Taxation. Foundation and non-investment fund income is currently subject to a 15% withholding tax by banks, which discourages support from international endowment funds. This should be eliminated.
Operational Issues. Foundations and non-investment funds have a mandatory 15% cap on administrative expenses. In the case of public benefit organizations, the cap is a completely unworkable 4% (which may explain why only 31 of the more than 13,000 NGOs have registered under this law). We recommend elimination of any mandatory limit on administrative expenses, and a requirement instead that such expenses be “reasonable”. This reflects the reality that administrative expenses can vary significantly depending on the nature of the organization’s work and the level of its oversight of grants or other activities. Foundations and non-investment funds have minimum capitalization requirements (10,000 Slovak crowns to start, raised to 100,000 Slovak crowns within six months in the case of foundations and 2,000 Slovak crowns for non-investment funds). A better approach would be to require a foundation or non-investment fund to have sufficient capital to achieve its purposes, not a set minimum.
Activities. Public benefit organizations are limited to six specified areas of activity. This closed list should be changed to either a demonstrative rather than exclusive list, or a “catch-all” phrase added to encompass other activities serving the public generally. Foundations are currently restricted to grant-making activities only, not operational activities. This should be changed, giving foundations the option of carrying out their own programs or giving grants to other organizations to undertake their activities.
We anticipate much lively debate in the next several months as NGO and government representatives explore various paths to NGO law reform. Different possibilities include amending the current laws to eliminate the most egregious provisions; preparing new, comprehensive legislation regulating associations and foundations; combining legislation regulating both foundations and non-investment funds into one general foundations law; revising tax rules to grant NGOs and donors greater benefits; preparing regulations to provide for transparency in the selection of NGOs receiving public funds; and myriad other avenues. The organizational and lobbying skills demonstrated by Slovakia’s third sector thus far will serve it well in this next crucial undertaking to improve their legal framework. We wish them every success.
ICNL is pleased to announce the electronic publication of its first report for Central and East European Law (formerly Select Legislative Texts and Commentaries). The Slovenian Report, written by Dr. Verica Trstenjak of the Ministry of Science and Technology, is a thorough analysis of the Not-for-Profit sector and the legislation governing it in the Republic of Slovenia. We feel that this report will be of great assistance to other countries in the region, as well as around the world.
New Draft Law on Associations and Foundations for Montenegro
The Ministry of Justice of Montenegro prepared the first draft of the Law on Associations and Foundations which is to replace the current Law on Citizens Associations of 1990 and the Law on Foundations of 1985.
The concept of an association proposed in the draft is somewhat restrictive. An association can be established only for the promotion of mutual benefit interests. In addition, a founder of an association can only be a natural person residing permanently in Montenegro. A foreign citizen can be the founder of an association provided he has permission to reside in the country. Legal persons cannot be founders or members of an association.
A foundation can be established by a legal or a natural person that has a place of business or a permanent residence in Montenegro. No minimal number of founders is prescribed.
Courts are responsible for registration. If the court disregards the prescribed deadline of 15 days for registration, favorable assumption applies, provided that all requested documents have been timely submitted. However, the draft does not provide for the right of an NGO to appeal against the court’s decision denying registration. Nor does the draft impose a duty on the court to state the underlining reasons for denial.
An association or a foundation is permitted to engage in both related and non-related economic activities. Profits obtained by these activities must be reinvested in the NGO’s main statutory activities and cannot be used by any individual. The draft however does not provide or refer to any tax exemptions with respect to NGOs economic activities.
As a principle, foreign associations and foundations are allowed to operate under the same conditions prescribed for domestic NGOs. Foreign NGOs can also establish an office or a branch. No special requirements are prescribed for a cooperation between domestic and foreign NGOs.
A number of important issues are not addressed in the draft. Among others, the list includes the internal structure of an association and a foundation, the duties of the management, the rules on the conflicts of interests and the distribution of assets after the liquidation.