The International Journal
of Not-for-Profit Law
Volume 2, Issue 4, June 2000
“Taxation, Partnerships, and the Model Public Benefit Organizations Law”
On May 18 – 21 a group of NGO leaders, government officials, judges, and parliamentarians concerned with the development of the legal regime for the not-for-profit sector in Central and Eastern Europe met in Bistritsa (Sofia) Bulgaria to discuss topics related to taxation, NGO-government partnerships, and the development of a model law on public benefit for the region. The conference was designed to provide maximum participation by the invitees on the topics discussed, and it achieved a number of significant and measurable outcomes.
The opening plenary session involved an overview of the discussion topics for the conference, with presentations by Stephan Kyutchukov, a Bulgarian lawyer and international expert on NGO legislation, a presentation of the “Model Public Benefit Law” by Pitor Gajewski, its principal drafter, and a panel of experts on various approaches to NGO legislation in the region (Gabor Posch from Hungary; Kuba Wygnanski from Poland; Mariana Stoica, MP, from Romania; and Ivo Hristov from Bulgaria). The three topics for the conference were then discussed in plenary and in working groups.
Model PBO Law. Piotr Gajewksi led the discussion of the draft law with the help of a panel of regional experts (Justice Artan Hoxha from Albania; Petr Pajas from Czech Republic; Gabor Posch from Hungary; Ilya Trombitski, MP, from Moldova; and Zivka Vasilevska from Serbia). This group and other attendees at the conference had participated in a workshop in Zakopane Poland in December 1999, where the principles for drafting the model were discussed. (For more information about the Zakopane conference, please see Piotr Gajweski’s article in IJNL Volume 2, Issue 3) This led to the preparation of draft law by the group of regional experts, which was presented for further development at the May conference.
Participants reached consensus on a number of aspects of the approach taken in the draft law, including:
- The law should include an illustrative list of public benefit activities, including a “catch-all” provision; this would acknowledge that other activities might be recognized as being in the public interest as time goes by.
- The law should accept the value of creating a Public Benefit Commission as an independent body composed of representatives from both the government and the PBO community; the Commission should be tasked with certifying PBOs and overseeing PBO activities. The Public Benefit Commission would be entitled to annual budgetary support, as necessary, from the state. The Commission should also have a role in training PBOS about their legal obligations
- Guidelines for internal governance, including duties of officers and directors, prohibitions against personal benefits, and conflict of interest provisions should be included in legislation affecting PBOs and, more broadly, all NGOs.
- The right of PBOs to engage in economic activities, so long as they are not the primary purpose of the organization, should be recognized.
- The law should contain reporting requirements for activities and finances; these should be made available to the public, to ensure transparency of operations.
- Tax benefits and customs duty exemptions, including tax benefits for donors, should be made available in appropriate legislation.
The drafting team of regional experts is currently incorporating comments and suggestions made at the conference, and a new draft should be available for discussion on ICNL’s website by the beginning of October.
Taxation. A draft of the tax survey that ICNL has conducted throughout the region was presented at the conference for the discussion by the participants. In addition, there were presentations about rationales for various tax benefits (by Paul Bater of the International Bureau of Fiscal Documentation) and recent developments concerning the “One plus One Percent Law” in Hungary (by Gabor Posch of the State Audit Office and Gyula Hegyi, the Vice Chairman of the Committee for NGO Affairs of the Hungarian Parliament). The tax survey is presently being edited to reflect comments made at the conference and subsequently, and ICNL expects to publish it in September or October.
Partnerships. Two papers were presented on the partnership panel, one of which described a survey of the relationship between NGOs and government that was conducted in Bulgaria by ICNL staff member Radost Toftisova and Marieta Dimitrova. The second paper, by Petr Pajas, concerns the same subject in the entire region. The working groups discussed aspects of partnerships, and their reports confirmed the extreme importance of this area for the development of a sustainable NGO sector in the region.
Educational Initiative. Because of the fact that many of the people teaching NGO law in the region attended the conference, ICNL staff convened a small meeting of professors and lecturers with an interest in NGO law teaching. This informal get-together was a pre-cursor to the Regional Workshop, which will be held in Budapest on September 8 and 9. Information about that workshop and other aspects of ICNL’s educational activities in the region can be accessed by visiting www.ngolaw.org, a special web site devoted to NGO law education.
This conference highlighted the vigor and expertise of the NGO legal network in the region. Regional experts led the conference and reached consensus on key issues relating to public benefit organizations, NGO taxation, and NGO-government partnerships. Moreover, the Model Public Benefit Organization Law is a significant contribution to NGO law reform in the region, and ICNL has learned of several countries that have already incorporated provisions of this model into pending domestic legislation.
Further information about the draft model law for PBOs will be available through the Journal in future issues.
ICNL’s Educational Initiative for Central and Eastern Europe
By Radost Toftisova
Legal Advisor, ICNL Budapest Office
Education in legal matters related to the non-governmental sector should be of significant concern to any society that claims to be true to democratic values, to the rule of law, and to citizen’s rights.
The rapid and widespread development of civil society activities in Central and Eastern Europe over the past decade accompanied the emergence of national, regional and international problems of an economic, political and social nature. It came as a natural result of the introduction of new freedoms and rights that those societies began to enjoy – or, if we look at it from another perspective, that societies had to confront. The new civil society values did not arise from a vacuum; they were established in certain systems that preserved legal and political traditions, and it was by finding the most efficient way to integrate those values that a society proved its maturity.
ICNL has always envisaged legal education as one of the primary means for achieving its objective – the establishment of an enabling legal environment for non-governmental organizations (NGOs) to be created and function in accordance with their lawful purposes. One of the basic factors to enhance the accomplishment of such a result is a sufficient knowledge of legal issues affecting NGOs both by the public authorities and by the non-governmental sector, so that good laws can be enacted and properly implemented.
In 1998 ICNL began to focus some of its educational activities on university-level education, starting with the teaching of comparative NGO law courses at Central European University (CEU) in Budapest. This gradually has grown into a program that includes two-courses and internship, which allows CEU students to develop practical as well as theoretical skills through simulated clinics and internships. ICNL also began to encourage the development of NGO law courses at other universities in the region.
In 1999, ICNL took a more concrete look at legal education — particularly education at the university level — as a special objective of its program in Central and Eastern Europe. This new approach reflects the growing awareness of the need to develop greater legal expertise throughout the region through the process of educating, in particular, lawyers capable of dealing with the challenges of recent developments. Good laws are often drafted by lawyers, they are implemented by lawyers, and again, lawyers handle any legal problems and disputes that arise in the area of NGO activity. Re-educating already qualified lawyers is necessary but not half as efficient as creating competent young lawyers in the process of their qualification as professionals. That is why ICNL has focused efforts over the past few months to launch its “Educational Initiative for Central and Eastern Europe” (CEE) as a project aiming at encouraging the teaching of “NGO Law” at universities in the region.
The first stage of the project included the creation and launching of a new web site that is expected to contribute substantially to the information flow among various universities and academicians throughout CEE. The web site is accessible through the ICNL main web site, www.icnl.org and also directly accessible at www.ngolaw.org. In the short period following its launch, the web site has already attracted a good number of visitors.
The content of the site includes short articles and presentations, a chart of currently existing NGO law courses throughout the region, teaching materials, contact information, and other relevant data. ICNL has been in contact with university professors with varying experience in teaching the subject. Some of them have been successfully teaching NGO law, while others have demonstrated an interest in doing so. The exchange of experiences and approaches will be, we believe, of immense value to all members of this network. Links are also available to courses on related subjects, such as NGO management (where law is necessarily relevant) and to information about special NGO law curricula, such as the materials ICNL developed for the CEELI Judicial Training Institute.
Teaching NGO law at the university level presents a number of challenges both to the students and to the professors. First, it inevitably reflects the system of teaching that exists in the given country. For example, a clinical course on NGO law has been successfully functioning at Columbia University in New York since 1986. The first and as yet only existing clinic on NGO law in CEE was launched by ICNL as a pilot project in April 2000 at Plovdiv University, Bulgaria. This example only proves that despite certain traditionalistic trends, new approaches are capable of making their way into academic education in CEE.
Second, the subject itself does not require one particular teaching methodology. The research done by ICNL identified a great diversity of methods for teaching NGO law: as regular/overview courses – mandatory or optional –, as legal clinics, as interdisciplinary courses, and as comparative courses. Each method can offer advantages and is capable of being transformed into another, more comprehensive curriculum. For example, ICNL started teaching an NGO law course as a simulation clinic in 1998, and has expanded the offering by adding an introductory course. The University of Veliko Tarnovo in Bulgaria is considering the inclusion of a “regular” NGO law course in its academic curriculum, but has expressed an interest in the specific features of clinical legal education as well. And the Faculty of Law, Political Science in Skopje, Macedonia, is developing an interdisciplinary course in its curriculum to reach the students enrolled, which may add clinical components. It is at this stage – when courses are being developed — that establishing an active network among professors and experts can be a vital influence and can serve as an accelerator for the development of new and more various forms of teaching the subject.
To support this process, and within its Educational Initiative, ICNL is organizing a workshop on the instruction of NGO law for university professors. The workshop will take place in Budapest in September 2000. It will bring together academicians with a demonstrated expertise and/or interest in NGO law as a university subject and will provide them with a forum for discussing issues of concern related to curricula, syllabi, teaching methodology, and other related topics. It is expected that one of the major outcomes of the workshop will be that each participant will leave for his/her home university with more information and a commitment to the development of legal education regarding NGOs.
The benefits of this initiative are not limited only to increasing interest in NGO law courses throughout CEE and, as a result, establishing an efficient network of law professors. The Educational Initiative also strives to establish the groundwork for extensive university cooperation within the region. The process may start by creating a core group of university teachers teaching NGO law, but it has the potential to grow into greater cooperation, with more comprehensive country-specific and regional implications. As will be discussed at the September workshop as one of its major topics, university cooperation is not limited to the exchange of data and experience. It also involves the joint development of concepts and programs and the creation of a more united community throughout CEE, sharing common views and values with regard to civil society. The countries in the region have a lot in common both with regard to recent legislative developments and concepts, and with regard to problematic issues and their solutions – this provides a good basis for multifaceted cooperation.
The process of cooperation may also be extended beyond the inter-university relationships and relate to the place of law schools in NGO communities. Thus, universities are capable of and should develop close links to NGO communities in their respective countries. They may also establish links to international third sector organizations, in particular those focused on research and training. As generators of future legal experts on NGO issues, universities have much to contribute to and to benefit from such relationships. These connections can also help preserve and fully utilize the practical connection between universities and “real life” clients, even when clinical education is not the chosen method of teaching.
The September workshop would not produce maximum results if it remained an isolated event. This is why ICNL intends to follow up the workshop by promoting an active and efficient network of knowledgeable academicians. Regular updates of the education web site are but one of the planned future steps in this respect. Other steps include establishing online communications opportunities, such as chat groups and bulletin board discussions. The continuing publishing of new teaching materials and/or articles will also be an important resource for new ideas and helpful data. Thus, ICNL plans to play a supporting role in the region as an intermediary facilitating the exchange of information on NGO law courses, and as a database provider.
The effects of ICNL’s Educational Initiative should be perceivable within a very short period of time. After a year, there should be a successfully functioning network throughout CEE of academicians and law experts who represent the main driving force of NGO law academic initiatives in their respective countries. In a couple of years, the first generation of young lawyers specifically trained to help with local legal reform efforts and to engage in government service and private law practice affecting NGOs will graduate. ICNL’s contribution to this process will be a rewarding achievement, whether they will be actively involved in third sector activities or will simply have benefited by widening their professional background.
For more information about the Educational Initiative, please go to the web site www.ngolaw.org.
Central and Eastern Europe Tax Survey
By Catherine M. Shea
Program Director, ICNL
The International Center for Not-for-Profit Law (ICNL) recently commissioned a survey of tax laws and regulations affecting non-governmental organizations in thirteen countries in Central and Eastern Europe. Experienced lawyers from each of the surveyed countries compiled information relating exemptions of NGOs income and profits taxes, special regimes for VAT, and tax benefits for donors to NGOs. ICNL distributed a draft paper summarizing the survey results at its recent regional conference in Bistritsa (Sofia), Bulgaria. Comments are currently being compiled and revisions made. The final survey results are expected to be published in the fall.
Preliminary findings of the survey include:
- All countries surveyed permit at least some types of NGOs to claim exemptions from income or profits taxes for at least some sources of income. Approximately half the countries permit both public benefit organizations (those that are organized and operated to serve public interests) and mutual benefit organizations (those that provide benefits to a more limited group, e.g., members) to claim tax exemptions. Others permit only public benefit organizations to claim exemptions, while a few grant exemptions or reduced tax rates only for very limited categories of income.
- Income from grants, donations, and membership dues is exempt in almost every country.
- NGOs are permitted to engage in business activities to earn money to support their primary purposes in most countries in the region, although a few still prohibit economic activity by NGOs. Several countries, including Bulgaria and Croatia, continue to tax the business income of NGOs in full. Most countries in the region, however, permit NGOs to seek exemption for income from economic activities under at least some circumstances.
- NGOs may make passive investments in virtually all countries surveyed; however, a substantial number tax the income from such investments in full.
- The countries surveyed employ a variety of tax practices with respect to application of VAT to NGOs. The most common approach used is to exempt from VAT transactions in certain types of goods or services, a number of which are customarily provided by NGOs. Other approaches include exempting certain NGOs from VAT, or affording zero or preferential rates to certain goods and services.
- All countries surveyed permit legal entities to claim tax benefits for contributions to certain types of NGOs, and all but three allow such benefits for individual contributions. In many countries, however, the law provides for relatively limited tax credits or deductions. The Hungarian “One Plus One Percent” Law, which allows a rebate of taxes by the designating individual directly to an NGO (or church), is being viewed with interest throughout the region.
ICNL’s work on the survey was funded by the United States Agency for International Development.
Survey of the Current Legislative Framework for NPOs to Perform Social Services in Bulgaria*
By Marieta Dimitrova
partner in AM & Partners Law Firm, Sofia, Bulgaria
In recent years significant changes and reforms have taken place in Bulgaria which have quite naturally affected the social sphere as well. A number of statutory acts were adopted whose underlying feature is the new approach toward the citizens’ needs for social services and the role of Non-Profit Organizations (NPOs) as an dynamic component of civil society.
The purpose of the present document is to analyze the legislative provisions and the existing legal possibilities for the NPOs to provide social services in Bulgaria.
Part One of the present analysis outlines the legal background existing in Bulgaria for providing social services. In this part, we define the concept of “social service” in the context of the current legislation, and the statutory acts governing this matter are explicated. Part Two of the present analysis examines the different types of social services, the possibilities for these services to be rendered by NPOs, and the functions and powers of the coordinating bodies in this area. Parts Three, Four and Five examine and comment on the legal requirements with which the NPOs wishing to render social services should comply, the licensing procedure, and the mechanisms for funding of the activity of rendering social services. And finally, Part Six expresses the views and the opinion of the author of the report about the possible changes in the current legislation with the purpose of expanding the partnership between the state and the local bodies and the NPOs in the area of social services. Part Seven offers some practical guidelines for NGOs willing to engage in social services. The specific documents which the NPOs wishing to provide social services should fill in and submit are indicated. The paper contains also information about the individual institutions authorized to participate in the activity of funding, licensing and rendering social services.
I. Analysis of the Current Legislation/Laws, Rules and Regulations/Regulating the Matter of Social Services. Social Services Providers
The Constitution of the Republic of Bulgaria does not stipulate explicit provisions concerning the social services in Bulgaria and the role of the NPOs in that area. However, considering that social services are an indivisible part of social assistance it should be noted that chapter two of the Constitution stipulates the basic rights and obligations of Bulgarian citizens. Art. 51 provides that the citizens are entitled to public insurance and social assistance. We can conclude in this respect that the Constitution, as the basic law of the country, guarantees the right of the citizens to benefit from social services rendered in the sphere of social assistance. This right is backed up by the obligation of the state to provide an effective system for rendering social services through the generation of up-to-date social legislation.
The issues related to the performance of social services are governed by the Social Assistance Law (promulgated State Gazette, issue 56 dated 1998), the Rules of Implementation of the Social Assistance Law (promulgated State Gazette, issue 133 dated 11.11.1998, amended issue 38 dated 1999, amended and supplemented issue 42 date 1999), Regulation No. 4 dated 16 March 1999 on the conditions and procedures for delivery of Social Services (promulgated State Gazette, issue 29 dated 30 March 1998, amended issue 54 dated 1999). Other statutory acts also refer to the separate types of social services which will be examined in Part Two of the present report.
Pursuant to art. 16 of the Social Assistance Law, social services are defined as activities designated to support persons and families facing difficulties or unable to meet essential living demands. In art. 18 par.1 of the Social Assistance Law it is stipulated that social services are performed by the state and the municipalities, and by legal and natural persons. According to the current legislation, NPOs are registered as legal persons and possess the same rights as the other legal persons working in the social services domain. Individual providers which in the meaning of the law render social services may enter into contracts between themselves for the purpose of organizing and providing social services with joint participation. No preferences or limitations are stipulated with respect to the activity of the separate providers, including NPOs .
NPOs may perform all kind of activities in the social services domain if they comply with the Social Assistance Law and the statutory acts. The legislation in force does not stipulate any explicit limitations or special provisions concerning the activity of foreign NPOs in connection with rendering social services. But taking into account the conditions and procedure for granting a license for performing social services and the requirement that applicants submit a document for tax registration in the country, as well as a document for entry into the register of the relevant court, it can be concluded that for a foreign NPO should be effective, i.e. to be licensed for rendering social services, it should be registered in accordance with the Bulgarian legislation. This should not be interpreted as a limitation which does not allow a foreign NPOs, registered in another country, to provide social services in Bulgaria. Such foreign organization can incorporate a local legal person (NPO) in accordance with the requirements of the Bulgarian law and provide social services on its behalf.
II. Types of Social Services and Institutions for Social Services. Bodies. Interaction Among the NPOs, the State and the Municipalities
Considering the provisions of art. 36, par. 1 of the Rules of Implementation of Social Assistance Law and art. 3, par.1 and par.3 of Regulations No. 4 on the conditions and procedures for delivery of Social Services, the different types of social services may be divided into two major groups depending on the place of their performance. These include: social services provided in the usual home environment and social services provided outside the usual home environment. Depending on the time during which the social services are provided, they may be day-care or year-round services. Social services are rendered through a social service institution. The National Agency for Social Assistance (National ASA) ratifies the minimum statutory requirements for the organization of the activity of the social services institutions. The ratified statutory requirements are mandatory for institutions opened by natural and legal persons, including NPOs.
1 .Types of Social Services Delivered in the Usual Home Environment
These are stated in detail in art. 5-art.10 of Regulations No. 4 on the conditions and procedures for delivery of Social Services and include:
- day-care homes – which create conditions for the day care of persons with mental impairments, persons over 18 years of age with physical impairments with certified first or second group disability and of persons over 60 years of age;
- home social patronage – it provides services to persons over 60 years of age, persons with certified first or second group disability, and disabled children. Home social patronage includes the delivery of food, maintenance of the personal hygiene and the hygiene of the premises, inhabited by the person attended, providing necessary assistance in case of disability or serious illness, assistance in the communication and the maintenance of social contacts, and rendering various everyday services;
- social services bureaus – which provide social and legal consultations on problems related to social assistance, engage in activities for the distribution of humanitarian aid, perform social work with disadvantaged children, persons and families, offer consultations and assistance in finding jobs, caring for babies, elderly and sick people, consult and assist persons and families who want to adopt a child;
- centers for social rehabilitation and integration – which render social services to children with slow development, to children and adults with sensory impairments, to children with difficult behavior, children and adults with physical impairments, persons with mental impairments, disadvantaged children and adults, abused children and women, alcohol addicts, drug addicts, former prisoners, persons prostituting, and beggars. The centers provide rehabilitation, social and legal consultations, orientation to social services institutions, programs for social integration and re-socialization, education and vocational orientation, and training in professional skills of persons with mental impairments;
- dining centers – providing food for the needy;
- clubs for disabled persons – organizing social contacts and possibilities for active life for persons with a certified group of disability;
Before examining the social services provided outside the usual home environment we will explore the specific day-care social services delivered to the disabled, stipulated in art. 44 of the Law on the Protection, Rehabilitation and Social Integration of the Disabled (promulgated State Gazette, issue 115 dated 1995). Part of these services constitute a special case of the day-care homes: the centers for social rehabilitation and integration, the dining centers and the clubs of the disabled due to which they will not be commented explicitly upon in the present account. Together with them, however, other possible day-care social services for the disabled are provided for in this law and namely: residential care for the disabled at their homes, opening of specialized shops, rendering of everyday and communal services, as well as administrative, legal and intermediary services tailored to the individual needs of the disabled. All social services in the meaning of the Law on the Protection, Rehabilitation and Social Integration of the Disabled can be performed by natural and legal persons, NPOs and religious communities, after receiving permission from the Ministry of Labor and Social Policy.
2. Types of Social Services Provided Outside the Usual Home Environment
They are stipulated in art. 11-art.18 of Regulations No. 4 on the conditions and procedures for delivery of Social Services, and are rendered in the following institutions and include:
- homes for children or adults with physical impairments. Those render social services to children and young persons of 7-25 years of age with heavy physical impairments that prevent them from attending ordinary and special schools within the system of the Ministry of Education and Science, persons under 18 years of age with heavy physical impairments of the limbs with first or second group certified disability, and blind persons over 18 years of age;
- homes for children or adults with mental impairments which provide social services to children and young persons from 3 to 18 years of age with a different degree of mental impairments, children or adults with sensory impairments (blind, deaf), persons over 18 years of age with different degree of mental impairments, persons over 18 years of age with mental illnesses, and persons over 18 suffering from dementia;
- social vocational centers which provide professional qualifications and new qualifications to persons from 14 to 35 years of age which have a certified group of disability, with slight intellectual retardation and with sensory impairments, as well as to children over 14 years of age coming from disadvantaged families;
- children’s villages which provide conditions for short-term recreation for children and young persons from 7 to 18 years of age who are orphans or with one living parent, children of divorced parents or of single mothers, children from families eligible for social assistance or from disadvantaged families, children from social services institutions, and children from refugees’ families;
- homes for elderly persons which provide social services to persons over 60 years of age, as well as to persons with impaired mobility or bedridden patients of the same age;
- homes for temporary accommodation in which social services for homeless persons over 18 years of age are rendered. The period of accommodation in these homes can extend up to three months within one calendar yea. Article 16, par. 3 of Regulations No. 4 provides an exception with regards to orphans who have completed social vocational institutions or other institutions and who can be accommodated in the homes for temporary accommodation for a term of one year;
- orphanages in which social services are rendered to children and young persons who are under 18 years of age and left without parental or foster care. The activity of the orphanages is stipulated in the Rules on the organization and the activity of the homes for abandoned children, issued by the Ministry of Labor and Social Policy (promulgated State Gazette, issue 29 dated 1999);
- seasonal homes, which provide conditions for recreation for a period of up to three months to persons over 60 years of age, persons over 16 years of age with a certified group of disability able to attend to themselves and persons and families with children under 18 years of age who are eligible to receive social assistance.
Pursuant to art. 21 of the Social Assistance Law, NPOs may perform all the activities in the social services, provided they comply with the current legislation. Considering the other statutory acts in the domain of social assistance, it can positively be concluded that there are no social services in Bulgaria that under the law or other statutory act are confined solely to the area of operation of the state or the municipalities. The provision that gives green light to the NPOs for working in the social sphere is permanently provided in the legislation. The question is not whether there is a legal possibility for the NPOs to render social services but rather whether favorable conditions for the practical realization of this possibility are being created. The problem will be analyzed when expounding on the interaction between the different social services providers and more specifically on the possibilities for interaction between the NPOs, the state and the municipalities, as well as in the part considering the possible changes in the statutory acts which guarantee and expand the role of the NPOs in the social services domain.
The state and the municipalities render social services by virtue of the law, and state and municipal bodies have the managing, coordinating and controlling functions in the area of social assistance and services. For NPOs working in the domain of social services, it is important to be familiar with the structure, functions, and powers of these bodies.
State policy in the area of social assistance is determined by the Council of Ministers. The Ministry of Labor and Social Policy is the specialized body of the Council Of Ministers that is responsible for the management, coordination, and control in the domain of social policy and hence in the domain of the social services. Pursuant to Epistle No. 485 of the Council of Ministers dated 22 Dec. 1997 (promulgated State Gazette, issue 125 dated 1997) defining the main functions and objectives of the Ministry of Labor and Social Policy in the domain of social assistance, the Ministry:
- develops programs for resolving social problems and for diminishing the consequences of privation;
- regulates the activities of the institutions in the domain of social assistance;
- encourages and assists the charitable and humanitarian activity;
- encourages and controls the rendering of social services and the development of a network of social institutions by the profit and non-profit organizations; and
- organizes and participates in the work of the specialized body in the area of social services.
The activities in the domain of social services are performed by the Ministry of Labor and Social Policy in cooperation with the municipalities and NPOs pursuing charitable and other philanthropic goals. To achieve this cooperation the Social Assistance Law provides for the formation of a Council of Social Assistance as a public consultative body at the Ministry of Labor and Social Policy. Representatives of the different Ministries, the National Association of the Municipalities of the Republic of Bulgaria, representatives of the organizations of the employers and the employees, represented on national level, as well as representatives of the NPOs participate in the Council of Social Assistance. The organization and activity of the Council of Social Assistance shall be regulated by a decree of the Minister of Labor and Social Policy. At the time of the compiling of the present report no such decree has been issued.
The specialized body of the Ministry of Labor and Social Policy in the area of social assistance is the National Agency for Social Assistance (National ASA), whose structure is approved by the Minister of Labor and Social Policy. National ASA is a legal person with an independent budget. This specialized body prepares and proposes legislative drafts in the domain of social assistance, develops and ratifies legal requirements for the activity in social assistance, gives permissions for the opening and closing of social services institutions, grants licenses for the rendering of social services, and performs other activities connected with the further qualification of the personnel working in the domain of social assistance. Regional Agencies for Social Assistance are created at the National Agency for Social Assistance. They have basically managing and controlling functions regarding the activity of the municipal offices for social assistance.
The maintenance costs of National ASA and the regional agencies are covered by the republican budget.
The municipal office for social assistance is the specialized body for social assistance in the municipality. It is a legal person maintained by the municipality’s budget. The institutions rendering social services on the territory of the municipality are also included in the structure of the municipal office. The municipal office for social assistance works in cooperation with the NPOs and other natural and legal persons and encourages their activity in the area of social assistance.
III. Legal Relationship Between the Municipalities and the State, and the NPOs Rendering Social Services
As it was mentioned earlier in this report, social services are provided by the state, the municipalities, by natural and legal persons including NPOs. They can organize and render social services with joint participation on the basis of a contract. In the present section we shall expound on the existing possibilities for the NPOs providing social services to use state or municipally owned real estate property in their activity, and the joint participation, respectively, in rendering social services.
Firstly, we shall examine the possibilities for the NPOs providing social services to enter into contracts for lease of municipal real estate property, to acquire ownership rights on estates constituting municipal property or limited estate rights on them, and the possibility for gratuitous use of municipal real estate property
Pursuant to the Law on Municipal Property (promulgated State Gazette, issue 44 dated 1996), municipal property can be private and public. Under the provisions of art. 12, par.3 of the same law the real estates and the chattels which are public municipal property cannot be leased, remised or used jointly with third parties. Public property is the real estate intended for the accomplishment of the functions of the local authorities and administration, as well as the real estate designated to satisfy the public needs of municipal importance and the cultural sites. All other municipal estates and chattels, not included in the scope of public property, are private municipal property. Therefore NPOs, on the grounds of their activity, can negotiate the use and the acquisition of rights only on sites constituting private municipal property. The municipal council of the respective town or village organizes the care for, the management and the disposition with the municipal property by a special decree on the procedures for the acquisition, care for, the management of and the disposition with municipal property. It should be noted that every municipal council adopts such a decree and although it is based on the law it is possible that certain differences might exist for the different municipalities.
NPOs rendering social services have the possibility, under the provisions or art. 14, par. 2 of the Law on Municipal Property, to lease premises in private property of the municipality for the performance of social activities. The lease is based on a writ of the municipality mayor under the terms and procedures of the above decree of the respective municipal council. The term of the lease cannot extend to more than 3 years. Thus the ensuing lease-hold legal relations may be terminated on the part of the municipality before the end of the term if a pressing municipal need arises. In that case the lessee is obliged to vacate the premises within a period of three months from the service of the notice. In addition, NPOs may acquire the right of ownership on a real estate – private municipal property, or limited property right of construction on municipal land under the general procedure upon the holding of auction. A contract is signed on the grounds of the results of the auction.
The Law on Municipal Property does not provide for preferences for NPOs rendering social services in leasing or acquiring estates constituting private municipal property. A tangible opportunity for efficient cooperation between the NPOs and municipalities in the sphere of social services exists under art. 39 of the Law on Municipal Property. Pursuant to the above-mentioned provisions, there is a legal possibility to constitute a gratuitous right of use to a NPO on a estate which is private municipal property. The gratuitous right of use is constituted with the writ of the municipality mayor for a period not longer than 10 years and only upon the decision of the municipal council. A contract between the municipality and the NPOs is concluded on the grounds of the writ. It should be noted here that the law does not explicitly list or favor the NPOs but since this is a possibility opened to all legal persons, the NPOs rendering social services are implicitly included. The requirement for the writ of the mayor to be based on the decision of the municipal council presupposes the preparation of a motivated project for rendering social services on part of the organization. The project is considered by the municipal council before the decision is taken.
The Law on State -Owned Property (promulgated State Gazette, issue 44 dated 1996) provides also the possibility for use of real estate – private state-owned property for the performance of social activities. Similarly to the Law on Municipal Property, the Law on State-Owned Property distinguishes between state-owned public and state-owned private property. Public state-owned property includes the sites constituting exclusive state-owned property under the provisions of the Constitution of the Republic of Bulgaria, real estate remised to the government institutions, real estate to meet public needs of national importance, as well as cultural sites. The public state-owned real estates can not be expropriated, encumbered with estate rights and acquired because of prescriptive rights. Therefore with respect to sites owned by the state, NPOs rendering social services might use only estates constituting private state-owned property. Basically, private state-owned property sites are leased by auction or with a tender. But art. 19, par. 2 of the Law on State-Owned Property provides through National ASA the legal means for interaction with the state for NPOs rendering social services. According to this decree, real estate may be leased without auction or tender for the health, educational and humanitarian activities for satisfaction of the respective social needs of the population. The leasing is done by the respective local executive or the head of the government institution at prices fixed by the Council of Ministers. The term of lease of such premises cannot be extended for more than 3 years, except with the approval of the Minister of Regional Development and Urbanization. The Law on State-Owned Property does not permit the leased premises to be sub-leased, to be remised or used jointly with third parties under a contract.
In view of the aforesaid, it can be concluded that no preferences for NPOs rendering social services are established in the law that regulates the management of the municipal and state-owned property. They are treated equally with the other legal persons. There is no obligation for municipalities or the state to assist NPOs providing social services by renting them premises or other material assets. Rendering social services with the joint participation of the state and the municipalities on the one hand and the NPOs on the other presupposes a contract under which the state, respectively the municipality, undertakes certain obligations in relation to the rendering of social services. The very limited legal possibilities for gratuitous use of premises which are municipal or state-owned property, restrict and do not encourage providing state-owned or municipal property for use of management by NPOs.
IV. Licensing . Licensing Procedure Under Special Laws
Unlike the state and municipalities, the natural and legal persons, including NPOs, need to be granted a license to receive funding from the Social Assistance Act for rendering social services. The rules for licensing of natural and legal persons and NPOs that provide social services is provided at a legislative level – in the Social Assistance Law. Provisions to this effect are also contained in the Law on the Protection, Rehabilitation and Social Integration of the Disabled. The terms and procedures for granting licenses are stipulated in a statutory act – The Rules of Implementation of the Social Assistance Law.
Licenses for rendering social services are granted by the National ASA. Pursuant to art. 42 of the Rules of Implementation of the Social Assistance Law, the applicants wishing to be licensed and receive funding from “Social Assistance” fund for rendering social services, including NPOs, submit at the National ASA the following documents for issuing of a license:
- description of the planned activities;
- copies of the certificates of registration at the relevant court and copy of the statutory or administrative act of their incorporation;
- evidence of tax registration for the tax-liable persons;
- a receipt for paid application fee. On issuing or renewal of a license the applicant pays a fee of 10 levs. The fee is deposited in the “Social Assistance” fund.
Legislation does not provide for specific requirements for the foreign NPOs. The provisions of art. 42 of the Rules of Implementation of the Social Assistance Law, however, implicitly stipulate the requirement that foreign NPOs can apply and be granted license for rendering social services only if they are registered as NPOs under Bulgarian law.
The applications for license granting are considered by a commission consisting of five members chosen under rules established by the Director of the National ASA. The commission considers applications in the order of their filing and if necessary, may ask for the opinion of other experts about the social effect of the activities for which license is intended. The commission has the right to require the applicants to submit additional documentation. If inaccuracy or incompleteness is established in the application documents, the commission notifies the applicant within 3 days and gives instructions for their correction. Within 14 days from the submission of the documents, the commission makes its recommendation to the director of the National ASA for the granting or refusal of a license. In case of recommended refusal, the commission presents its reasoning in writing. Within 14 days of the submission of the commission’s proposal the head of the National ASA issues the license. The refusal of the director of the National ASA to issue a license is subject to appeal under the procedure of the Law on Administrative Legal Proceedings, before the Supreme Administrative Court. The term of the granted license for rendering social services is 5 years. Upon the expiration of this period, the owner of the license may submit a new application for its renewal together with the required documents.
The documents submitted by the applicants are kept at the National ASA in accordance with the Law on the State Archives Fund and are available to all persons holding a legal interest. If malpractice are established the head of National ASA issues a motivated ordinance for revoking of the license. The persons concerned are notified to this effect within 7 days from the issuance of the ordinance. The ordinance with which the license is revoked may be appealed under the procedure of the Law on Administrative Legal Proceedings before the Supreme Administrative Court. A new license may be granted one year after the revocation of the first license, upon the showing that the requirements of the law have been complied with.
NPOs operating in rehabilitation and social integration area, including social services for the disabled, should be granted a license under the Law on the Rehabilitation and Social Integration of the Disabled. This requirement is stipulated in art. 4 of the Law on the Rehabilitation and Social Integration of the Disabled and is elaborated in details in the Rules governing its application. Persons who wish to be granted a license, including NPOs, must submit an application tot the “Rehabilitation and Social Integration” Fund (RSIF), with a description of the planned activities and copies of the certificates of registration at the relevant court that provide evidence of tax registration. The application with the attached documents is considered by a commission of five members. Within 14 days from the submission of the documents the commission makes its recommendation to the president of the fund for the granting or refusal of a license. Within 14 days of the submission of the commission’s proposal, the president of the fund issues the license and in the case of refusal states his/her motives in writing. The refusal for granting a license by the president of RSIF is subject to appeal under the procedure of the Law on Administrative Legal Proceedings. The term of the granted license for rendering social services is 5 years. Upon the expiration of this period, the owner of the license submits a new application for its renewal together with the required documents. The granted licenses are entered in a special register which is kept in the RSIF.
V. Funding and Control
Social services are provided against payment of fees by the persons who use them pursuant to the Law on the Local Taxes and Fees or under agreement between the parties. Pursuant to art. 17 of the Social Assistance Law there are several possibilities for the payment of the fees and more specifically:
- fees paid in full by the persons using the service;
- fees paid partially by the persons and the municipal office for social assistance;
- fees paid in full by the municipal office for social assistance.
Natural and legal persons, including NPOs, may open institutions for the performance of social services by defining the conditions and procedures under which the social services will be rendered in compliance with the minimum normative requirements affirmed by the National ASA. The persons using the services pay fees for the social services rendered by those institutions. These fees, however, are a very inadequate resource for funding of such institutions, since art. 18, par. 1 of the Social Assistance Law stipulates that when NPOs render social services and the proceeds accrued from fees for rendered social services exceed the expenses, according to their annual financial reports, the surplus is deposited in the Social Assistance Fund. Conspicuous is the fact that the Law does not stipulate such an obligation for the other social services providers which puts the NPOs rendering social services at a disadvantage. The cited provision does not take into account the operational and administrative expenses of the NPOs in connection with the rendering of social services. In fact, the provision contravenes the established legal opportunities for a NPO which quite naturally does not make profits, to make profits with non-commercial purpose but rather for the funding of its activity.
For the purposes of funding social assistance activities, the law provides for the institution of a Social Assistance Fund at the Ministry of Labor and Social Policy.
The Social Assistance Law opens up the possibility for licensed NPOs operating in the social services domain to apply to the Social Assistance Fund for funding after providing adequate justification for a project. The current legislation, however, does not provide for a procedure for application and allocation of funds from the “Social Assistance” Fund, neither there are distinct criteria for applying or a term for the pronouncement of the competent authority. In that case, without appropriate guarantees and obligations of the state this possibility could turn into empty rhetoric without actual utilization. The NPOs apply for resources from the fund on equal footing with the other licensed legal and natural persons.
The Social Assistance Law binds the NPOs which have received funding from the “Social Assistance” fund to submit annual general and financial reports to the National ASA on their activity in the area of social services. Such obligation is not stipulated for the other licensed legal and natural persons which have used financial resources from the fund. This distinction in treatment clearly discriminates NPOs in contrast with the other social services providers.
Another, specific possibility for the NPOs to apply for funding by the state exists under the Law on the Protection, Rehabilitation and Social Integration of the Disabled. Under the provisions of art. 48 of the same law the Rehabilitation and Social Integration Fund is instituted at the Council of Ministers. The fund is a legal person with a non-budget income debit and credit account and registered office in Sofia. The resources of the “Rehabilitation and Social Integration” Fund are used for the support of projects and programs for disability prevention, and for rehabilitation and social integration of, and social assistance to the disabled. The fund is administered by a Management Council which organizes tenders and decides on projects and programs for prevention, rehabilitation, and social integration. NPOs rendering social services for the disabled may apply for funding of projects and programs by the fund. The Managing Council is the decision-making body. In case of refusal for funding the Managing Council must motivate the refusal by specifying the actual and legal reasons for such decision and within 14 days of its pronouncement notify the persons concerned. The refusal of the Managing Council may be appealed under the procedure of the Law on Administrative Legal Proceedings before the Supreme Administrative Court.
The control in connection with the rendering of social services is exercised by the Ministry of Labor and Social Policy. The specialized controlling body is the Inspectorate at the National ASA. In performing their controlling functions the inspectors have the right to visit without limitation the places where social services are rendered, to demand explanations and the presentation of documents, verifications, and information. The inspectors must maintain confidentiality of private and classified information which has become known to them in the course of their inspection as well as to respect the honor and dignity of the aided persons. If infringements of the law are established, including data for committed crime, the inspector immediately notifies the prosecutor’s office. If the infringements do not constitute a crime under the Penal Code of the Republic of Bulgaria the inspector has the right to impose the following administrative sanctions:
- to give mandatory instructions for the elimination of the recognized infringements;
- to suspend the enactment of the illegal decisions of the social services institutions;
- to enter into the register of the licensed NPOs the information about the recognized infringements.
Other bodies granted controlling functions are the Public Councils instituted by a decision of the Municipal council. The Public Councils render assistance and cooperate in accomplishing the activities of social assistance, and exercise public control on their performance.
VI. Suggestions for Legislative Changes with View to the Expansion of the Possibilities of NPOs for Rendering Social Services
The Social Assistance Law provides that the Ministry of Labor and Social Policy performs the activities of social policy in cooperation with the municipalities and the NPOs. The municipal offices for social assistance work in cooperation with the NPOs with charitable and other humanitarian purposes and with natural and legal persons and encourage their activity in the area of social assistance. Similar provisions are stipulated in other laws and regulations which pertain to the social sphere and the rendering of social services. Some of these provisions acknowledge the role of the NPOs. They express the recognition on behalf of the state and the municipalities of the potential of NPOs for solving problems in the social sphere by active participation and cooperation of these organizations and express the new attitude and approach of the lawmaker toward the NPOs. Undoubtedly this is one positive tendency which however needs further development. The possibilities for NPOs to participate in providing social assistance, to render social services and to stimulate their activity with the provision of certain counter-part engagements on behalf of the state should be guaranteed and expanded.
In this respect, specific provisions which guarantee the actual cooperation in the social services area between the state and the municipal bodies, on the one hand, and the NPOs, on the other hand, should be stipulated in the Social Assistance Law and the pertaining rules and regulations.
Under the current legislative provisions the social services are institutionalized, and under the existing system of social services’ institutions they are rendered predominantly by the state and the municipalities. The institutionalization of the social services, the fact that the institutions in Bulgaria operate in the conditions of Currency Board, and the interference of still existing but outdated models for delivery of social services affect negatively the quality of social services. The law does not preclude NPOs from providing all kinds of social services while wholly undertaking the responsibility for the financial support of this activity. But the possibilities to look for funding by the state for rendering activities in the sphere of social services are extremely limited and NPOs have to rely on funding predominantly by other sources (e.g. funding by foreign donors still occupies an essential place among those sources).
Therefore, to encourage the activity of rendering social services by NPOs, it is necessary for the law to emphasize the alternative forms of joint delivery of social services which combine the efforts of the state, the local authorities and the NPOs, secured with the respective mechanisms for funding. One such alternative form, for example, is the commissioning of the management of social services institutions, opened by the state or the municipality, to NPOs as well as the joint establishment of such institutions with the division of the obligations and the funding accordingly. Unfortunately, experience has shown that examples of joint rendering of social services on the basis of a contract between the state and/or the municipalities and the NPOs are extremely limited. In most cases the relations are not regulated by a written agreement since there are no legislative provisions to that effect. In that case the general provision acknowledging the role of the NPOs in the sphere of social assistance is not adequate, and remains a “green-light provision” only.
Without the stipulation of a procedure, clear-cut requirements for to the NPOs and the obligations of the state or/and the municipalities regarding the conclusion of contracts for joint delivery of social services with the NPOs, the provision of art. 39 of the Rules on the application of the Social Assistance Law which state that social services may be organized and rendered with the joint participation of the separate providers, remains just wishful thinking and has a rhetorical character. The NPOs should also be given an equal standing as social services providers alongside with the state and should enjoy more expressly stated rights and even preferences in the area.
With respect to the possible changes in the current legislation, the present analysis suggests the following :
First, to introduce regulation by law of the forms of rendering social services jointly by the state/municipality and the NPO as a kind of social mandate, and to adopt the approach of decentralization of the management and funding of the activity provision of social services. The obligations of the state and the municipalities in the area of social assistance should be clearly differentiated. The local authority in the body of the municipalities should receive more freedom and flexibility to manage the activity in delivering social services and to fund jointly with NPOs the rendering of such services. The mechanism of such social mandate includes: the defining of clear-cut criteria for NPOs which are eligible to apply for commissioning, the procedure for commissioning and short terms for the pronouncement of the competent authorities, parameters for the financial involvement of the state/municipality for joint rendering of social services. The relations between the state, municipalities and the NPOs should be settled with a contract regulating the specific possibilities for funding. Another issue to be considered is the establishment of minimum mandatory content of these contracts.
Secondly, if the above stated concept for commissioning the activities of rendering social services on the basis of social mandate and the development of alternative forms for rendering social services, is accepted, it would become necessary to amend the procedures for funding NPOs, consistent with the procedure for commissioning. The existing legislation and the Law on Municipal Budgets in particular should explicitly provide for possibilities and procurement mechanisms for municipalities to fund NPOs in the area of social services. Changes should be also made with regard to the procedure for licensing. The procedures for granting licenses should be accompanied by certain specific rights or privileges for the NPOs rendering social services rather than being simply a formal requirement. This would put an end to the existing practice of NPOs performing activities in the area of social services to work piecemeal, and will encourage the formation of an overall concept about the role of NPOs in this area.
Thirdly, the current tax legislation should also be changed with the purpose of stimulating benefaction and charitable activities, for the facilitation of funding of NPOs from various sources.
Fourthly, certain amendments are recommended in the laws which establish the conditions and procedures for the use of state-owned and municipal property with the view of creating favorable possibilities for the state-owned and municipal estates to be used free of charge by NPOs rendering social services.
And fifthly, alternative forms for rendering and performing social services for the different categories of citizens in need should be developed at the legislative level. Thus, for example, the Child Protection Draft Law, which is to be ratified by the Bulgarian Parliament in the second reading, provides for the possibility for NPOs to open family homes, day-care homes and other alternative forms for the upbringing and education of children in a family-like environment. Such modern approaches toward social services to children could be adopted also toward the rendering of social services to the disabled and other categories of persons and families eligible to such services.
VII. Practical Manual
1. Documents for Applying for Licensing and Allocation of Resources from the State Funds
NPOs wishing to provide social services and be funded by the Social Assistance Fund should first be granted a license by the National ASA. On applying for such license NPOs have to submit an application in free format with a description of the planned activities. They also have to prove their legitimacy by submitting the relevant documents (Court Decision for registration, certificate of tax registration) attached to the application. At the time of writing of the present report about 30 NPOs have applied for licensing and have been granted a license respectively. A sample form of a license is given in Appendix No.1. Practice, however, shows that this licensing procedure is too formal and few of the licensed organizations have in effect opened institutions for rendering social services. Most licensed organizations work on joint projects with foreign NPOs.
The NPOs which apply for funding by the Social Assistance Fund and the Rehabilitation and Social Integration Fund should be aware that the specific application requirements for applying are developed and determined by the Managing Boards of the funds. These requirements are not stipulated in a statutory act and are subject to change depending on the decisions of the managing bodies of these funds.
It is mandatory for NPOs rendering social services that want to apply for funding by the Social Assistance Fund to have been granted a license by the National ASA. The allocation of funds is possible only after the NPO has provided justification for a project. The documents which the applicants submit before the Fund include documents concerning their registration and legal status as well as information about the project (description of its scope, objectives, activity, strategy, duration, financial information).
NPOs which apply for funding by the Rehabilitation and Social Integration Fund must receive in advance a permission by the President of the fund. On applying they submit:
- documents of court and tax registration, articles of incorporation and operation of the organization,
- minutes from the meeting of the managing body of the organization for ratification of the decision for the accomplishment of the specific project,
- the permission from the president of the fund,
- documents confirming the secured or expected funding for the project from other sources,
- information about the organization’s partners to the project (if applicable),
- professional references about the team which will accomplish the project,
- information on the project with which the NPO applies for funding by submitting a short summary describing the objectives of the project, activities, strategies, persons for whose benefit it is intended, justification of the necessity of the project, expected results, forms of control, scope of the project (national, regional; municipal, local), detailed schedule of the completion of the project and financial information about the project. It should be noted that “Rehabilitation and Social Integration” fund can undertake the funding of maximum 90% of the total cost of the project. The basic aims and activities of the applicants should be within the priorities of the fund. The allocation of funds is conducted by tenders. The criterion for the evaluation of the project is its quality – it must comply with the topic of the tenders and with the aims and the nature of the fund’s activity. The expenses preliminarily incurred on the development and realization of a project are not refunded.
2. Fees Paid by the Persons Using the Social Services Pursuant to the Law on the Local Taxes and Administrative Fees.
Article 90 of the Law on the Local Taxes and Administrative Fees (promulgated State Gazette, issue 117 dated 10.Dec.1997) stipulates that persons who are accommodated in private boarding houses or private social patronage pay fees as agreed. The institutions covered by the provision in this particular case include social services institutions opened by private natural or legal persons, including NPOs. When negotiating the amount of the fees NPOs should take into consideration the provisions of art. 18, par.2 of the Social Assistance Law. Under this provision if the financial reports show that the proceeds from the fees exceed the expenses the surplus is deposited in the Social Assistance Fund.
Article 86 of the Law on Local Taxes and Administrative Fees stipulates that persons using homes for social care or other forms of social services pay a monthly fee into the account of the municipal budget to the amount corresponding to the actual sustenance of one person. The law defines the scope of the actual sustenance of one person. It includes monthly expenses for food, bedding and clothing, laundry and hygienic products, transport expenses for the delivery of food, as well as the corresponding part of the common expenses for electricity and heat, water, pluming and garbage, with the exception of the target aids for the use for every-day needs of electricity, fuel, water, laundry and clothing provided by the government and non-government organizations to the institutions for social care and other forms of social care.
The fee due is deducted from the individual income of the person receiving social services. The amount available to those persons for individual expenses should not be less than:
- 20% from the individual income of persons accommodated in homes for mentally impaired persons and in homes for mentally ill;
- 30% of the individual income of persons accommodated in homes for the elderly, in homes for physically impaired persons and in homes for deaf and the blind persons;
- 40% of the individual incomes of the persons who are supported by the system of the home social patronage and the day-care homes;
- 50% of the individual income of the persons over 18 years of age accepted for training in the social vocational centers and for children over 16 years of age, accommodated in institutions for children.
The provision of art. 87, par. 3 of the same law states that if the remaining part of the individual income is insufficient for covering the fee due for the social service, the difference is covered by the budget of the municipality in which the home or the other social care institution is established.
The Law on the Local Taxes and Administrative Fees stipulates in art. 87, par. 4 that for persons who pay alimony to minors, the amounts of the individual expenses and the fee for receiving social service are determined after the deduction of the adjudicated alimony.
The Law on the Local Taxes and Administrative Fees exempts from the payment of fee for the received social services persons who do not have any individual income and savings. Art. 88 of the Law on the Local Taxes and Fees specifies the categories of persons exempt from fees for the social service they receive. These include: children under 16 years of age, accommodated in institutions for social care and in day-care homes and children under 18 years of age trained at social vocational centers; persons temporarily accommodated in distribution centers and orphanages; children with health and social problems accommodated for a short-term recuperative rest in children’s villages.
The Law on the Local Taxes and Administrative Fees provides that orphans and children with one living parent under 18 years of age and without individual income who have been accepted for training at the social vocational centers are provided with resources for individual expenses to the amount of 50% of the basic minimal income
In conclusion, a very small number of NPOs work effectively in the sphere of social services in Bulgaria and they rely in their activity primarily on funding form foreign sources (foreign organizations and foreign governments).
Nevertheless, their experience even under current legislation shows that NPOs have extremely high capacity in the social sphere. The existing bond between the nature of the social services and the non-profit objectives in the activities of the NPOs represents a solid basis for delivering efficient, high quality, and low cost social services to citizens in need. The primary task of the new Bulgaria legislation in the social sphere is to develop this idea by providing for and guaranteeing wider rights and possibilities for NPOs to deliver social services.
Ministry of Labor and Social Policy
National Agency for Social Assistance
for rendering social services
Issued on ……………………………………………………………………
Registered office, address ……………………………………………………………………………
Date of issuance …………………………………………………………………………………………………… Director of the National Agency for Social Assistance:
The license expires on: ……………………………………..
The license hereby is issued on the grounds of art. 43, par. 5 of the Rules of Implementation of the Social Assistance Act (Epistle No. 243 of the Council of Ministers dated 1998) and application Ref. No. ………………..dated ………………..19……
List of laws, rules and regulations used:
- Constitution of Republic of Bulgaria of 1991
- Social Assistance Law of 1998
- Law on the Protection, Rehabilitation and Social Integration of the
Disabled of 1999
- Law on Municipal Property of 1996
- Law on State Owned Property of 1996
- Law on Administrative Legal Proceedings of 1979 (last am.1999)
- Law on the Local Taxes and Administrative Fees of 1997
- Law on Municipal Budgets of 1998
- Child Protection Draft Law
- Rules of implementation of Social Assistance Law of 1999
- Rules of Implementation of the Law on the Protection, Rehabilitation
and Social Integration of the Disabled of 1999
- Regulations No 4 on the conditions and procedures for delivery of
Social services of 1999
- Rules on the organization and the activity of the homes for abandoned
children of 1995
- Epistle No 485 of the Council of Ministers of 1997
* This report was made possible through 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(s) and do not necessarily reflect the views of the U.S. Agency for International Development. The law for enacted in May 2000.  The question remains as to whether the licensing procedure is necessary and justified, given the small number of NPOs that have applied so far, and the insufficient funds available for distribution by the Social Assistance Fund.
New Tax Amendments
By Dragan Golubovic
The Croatian government recently introduced amendments to the VAT Regulation, extending custom and tax benefits for NGOs which have received foreign donations. According to the new Regulation (Official Gazette, no. 44/00), the import of goods which are deemed necessary to advance the organization’s not only humanitarian, but also cultural, sport, scientific, educational, religious and other seemingly public benefit statutory activities is custom and VAT exempt, if the organization has used a foreign donation for such an import. In kind foreign donations to those organizations are also custom and VAT exempt. Finally, for the same type of NGOs, the purchase of domestic goods and services that are deemed necessary for carrying out the organization’s statutory activities is VAT exempt, if the organization has used a foreign donation for such a purchase. The same custom and tax benefit package applies to local administrative bodies receiving foreign donations. The regulation came into effect on May 4.
The Government also introduced amendments to the VAT Law (Official Gazette, no. 54/00), which provide that deliveries rendered by individual artists and cultural organizations will no longer be subject to VAT. Until now, deliveries that exceeded 85, 000 kuna (app. 10,000$) were subject to VAT.
Recent Development of the Laws Regulating Not-for-Profit Organizations in the Czech Republic
By Petr Pajas
First Consulting p.b.c., Prague, ICNL Consultant
In a transition period of ten years, the Czech Republic has moved from a system of suppressed democracy, unlimited power of one party, and totally state owned economy towards a pluralistic democracy based on free elections and market economy. This transition has allowed the Czech Republic to enter the family of countries forming the Atlantic Alliance and apply for membership to the European Union. With regard to the activities of civil society, the Czech Republic also underwent a dramatic change during these ten years. There are now about forty thousand associations and several hundred foundations and other legal entities, which form the third sector, referred to as non-governmental organizations (NGOs). The relatively advanced legal system and specific and in several aspects, unique system of state aid can enable and support the existence of NGOs.
The recent development in the Czech Republic, in both the political ambit, as well as the NGO sector itself, manifests the trends toward a qualitative change. As it appears, the period characterized by the transition towards a democratic and open society is being replaced by a period of consolidation and improvements in which more forms of citizen participation will find expression not only in NGOs increased professional activities, but also in the amendments, broadening of the related laws, and their implementation.
From this point of view, the next several years, specifically the period preceding the desired accession to the European Union, may make the Czech Republic again a country where the special interest of the international NGO community is centered.
This paper aims to summarize the status quo and to discuss recent developments of proposals and other trends in the legal framework of the Czech Republic, which may make the activities of non-governmental, not-for-profit organizations more important and citizen participation in many areas of social life more direct and commonly appreciated.
II. Structure of the Related Legal Framework
The legal system for the NGO sector developed in a specific way. Unlike many other countries in the region, the Czech Republic recognizes two main categories of NGOs: those based on membership and those not based on membership.
In the category of membership-based NGOs, the main legal form is associations of citizens regulated by the Act No. 83/1990. The same law regulates the trade unions and unions of employers, both of which have a more liberal way of establishment compared even to the liberal requirements governing the establishment, registration, activities, governance and internal regulations of associations. Besides these, there are several chambers of professionals, the Czech Red Cross, political parties and political movements and churches and religious congregations, as well as interest associations of legal entities, which may be established and operate under the provisions of specific laws. The very liberal nature of the laws governing all these types of NGOs enabled associations, despite certain basic limits set by the laws on their economic activities, to be an attractive tool for pragmatic entrepreneurship, without the restrictions on assets, registration obligations and any other features required from a commercial legal form. Currently, foreign and international associations also may operate in the Czech Republic with special permission issued by the Czech Ministry of Interior after consulting the Ministry of Foreign Affairs. <![endif]>
The category of non-membership-based NGOs since 1998, include not only foundations, as in other countries, but several other specific legal forms described in the Czech legal system. Specific laws now regulate the establishment, registering, self-governing principles, public reporting and accounting procedures, as well as certain other features of a) foundations with endowment, b) funds without endowment, c) public benefit corporations and d) public or private universities and higher education institutions.
The law requires foundations to possess from their beginning and to maintain through their existence a minimal registered endowment whose yields are fully exempt from corporate income tax. This income must be used for a public benefit purpose. The same law allows for the existence of funds without endowments, but provides less favorable tax benefits and limits more strictly their space for economic profit-generating activities. Foreign foundations and funds may operate their branches in the Czech Republic, and foreigners may become founders of Czech foundations or funds without restrictions.
Specific law regulates the establishment, registration, governing structure and operations of not-for-profit public benefit corporations with the specific purpose of providing under well-defined and non-discriminatory conditions, public benefit services accessible to anyone. These NGOs may engage in more economic activities to generate additional income and they may also apply for a state or local government subsidy.
In the Czech Republic, the national or local government budgets still fully or partially fund many state or municipal not-for-profit organizations. When creating the law on public benefit corporations, the Government apparently intended to use this new legal form as one of the possible ways to privatize budgetary and subsidiary organizations, mainly the universities, high schools, hospitals, theaters, museums, galleries, cinemas, swimming pools and utility services. However, limitations in the way ownership of state or municipal property was transferred to essentially private corporations made these expectations unrealistic. Only several hundred public benefit corporations exist today, and most of these have replaced foundations after the new Act on Foundations and Funds No. 227/1997 has become effective and required the foundations to register either as foundations with endowment, funds without endowment or public benefit corporations.
As a result of this development, the new law on higher education modified specifically the public benefit corporation from any public or private university or higher education institution, adding to their governing apparatus academic governing features and a more sophisticated access to the state subsidy per student, as well as the need for state permission to operate as a university based on accredited curricula.
This example from the field of education created the situation, when also the Ministry of Labor and Social Affairs, the Ministry of Culture and the Ministry of Health consider or even already work on drafting similar laws providing for specific public service providing but private institutions into which the institutions run by the state may be transformed.
In this short overview of the legal system of the Czech Republic, it may be noted briefly that there are specific tax and fiscal laws regulating the corporate profit tax, value added tax, customs regulations, real estate transfer tax, real estate property tax, donation tax, heritage tax, administrative fees etc. In all of these tax laws, specific articles provide certain tax or payment exemptions to not-for-profit legal entities and in several cases to a particular legal form, such as foundations, funds, public benefit corporations or associations.
Specific laws also regulate bookkeeping. In the Czech Republic there are still two procedures for income and expenditure accounting: double-entry accounting and bookkeeping based on the use of a single-entry accounting book.
III. The Three Main Stages of Development and the Three Special Laws
The introduction of Act No. 248/1995 on Public Benefit Corporations started the three stages of development of the Czech legal system with regard to not-for-profit organizations. This law introduced for the first time, the notion of a not-for-profit standard, barring distribution of any profit to the founders, to the members of governing bodies or to the employees. This law also provided for the first time, obligatory annual reporting, including comments on the annual balance of incomes and expenditures. Another important feature of the law was the introduction of the governing structure based on a board of directors, which may not remain unchanged forever and must rotate membership with limited possibility for reappointment of the same person to the board after the second term in office. Besides the board of directors, none of which might be employed by the corporation, there may exist also a separate body – the supervisory board. The supervisory board oversees both the board of directors and the corporation management to determine whether they have fulfilled the requirements set by the law, the founding document and the statute of the corporation. Both these bodies are in the hands of the founders, who appoint their members for a term of three years. Strict regulations address possible conflicts of interest among the members of the two governing bodies. And finally, the law provides for registration of the new legal entity at the commercial court, which maintains the Register of Public Benefit Corporations as a public document, currently available on Internet with the register of commercial legal entities.
The introduction of Act No. 227/197 on Foundations and Funds, replacing the liberal and incomplete provisions on foundations incorporated into the Civil Code since 1992, instigated the second stage of not-for-profit sector development in the Czech legal system. The new law not only defined the two distinct legal forms – foundations and funds – but it introduced the notion of an endowment and its maintenance, distinguishing between donation to the foundation and a grant by a third person. Finally, the law requires that any foundation or fund include in its statute certain limitations on the use of its assets and incomes for administrative expenditures. The law assumes several features from the law on public benefit corporations concerning the composition of the board of directors and supervisory board, but it is more liberal with respect to their self-reelection procedures and it is significantly less restrictive concerning possible conflicts of interest. This law also defines in a more positive way the public benefit categories in which foundations or funds may be established. The registering body is now the court and not the district state administrative office, as it used to be. The Register of Foundations and Funds is a public document available on Internet.
The third stage in the Czech development of the nonprofit sector started with presenting the governmental(?) Bill on Associations, approved already by the Government and currently in discussion at the Chamber of Deputies of the Czech Parliament. This new law is intended to replace the current law on associations of citizens. Its main features are similar to those of the above two laws: it introduces the notion of an association as a legal entity created voluntarily for the purpose of realizing the right to associate, but does not limit that right to citizens, making foreigners and citizens of the Czech Republic equally entitled to establish an association and to apply for its registration as a legal entity. The most important new features introduced by the Bill are: a) the more precise definition of the organizational structure with a definition of the statutory body and its responsibility for legal acts toward third parties; b) more detailed and transparent method of establishing and dissolving subunits with their own legal identity under the umbrella of the association statute; c) the regulation of the dissolution, merging and splitting of associations with liquidation or without liquidation of assets, which was entirely missing in the previous regulations and many times misused in commercial activities; d) registry with the Ministry of the Interior into a public Register of Associations; e) the obligation of reporting similar to that of public benefit corporations or foundations/funds, when the association obtains a substantial subsidy from a public budget or whenever it is engaged in some economic activity; f) the period of time in which existing associations must submit basic data on their statutory organ and other data to be put into the Register, as well as longer period of time for bringing the by-laws of the association into compliance with the Bill’s new requirements.
In each of these three stages of legal development, government drafters exhibit both a better understanding of the needs of NGOs and a more professional approach to drafting. In all three stages, experts of the present First Consulting were involved in advisory or co-drafting positions, making use of their experience gained during long-term co-operation with the International Center for Not-for-Profit Law.
IV. The Role of Courts in Implementing the New Laws
The new foundation law provided the whole 1998 year, in which the 5400(?) at that time existing foundations had to register with the commercial court as a foundation with endowment, a fund or transform itself into a public benefit corporation. Thus, the courts were chosen as the registering agencies in an effort to make the procedure more transparent and less dependent on any possible political influence.
However, the courts were already registering agencies for commercial legal identities and some judges were suspected to have used their power to postpone registering decisions when not given extra payments from companies’ founders. In order to minimize the risk of corruption, some courts have adopted a special system of allocating registering cases to individual judges, which should eliminate the possibility of the judge dealing directly with the subjects applying for registration.
This situation has been only one of many difficulties encountered by foundations during the re-registering period. Evidently ill-acquainted with either the law on foundations or the law on public benefit corporations, some judges applied procedures of the registration process known to them from commercial companies cases, without acknowledging the basic differences between the commercial and non-commercial subjects. In some cases, the judges used arguments or required additional documentation going far beyond the requirements of the law. Despite these heightened expectations, many applications from foundations were submitted without required documents, incomplete or erroneously completed.
As a result, there remain several hundred former foundations’ re-registration of transformation cases open and awaiting the judgment of the court of appeal, because the commercial courts have denied the registration in the first instance. Thus, in many cases, there are still subjects operating as a foundation according to the previous law and at the same time trying to operate as close as possible to the requirements of the new law on foundation and funds or to the law on public benefit corporations. Unfortunately, important and well-known foundations have chosen to close down rather than wait endlessly for proper registration.
In light of the better practice requirements promoted by the international NGO community, the World Bank and ICNL, this development may be considered a serious failure of the Czech judiciary system. Appropriate instructions to judges and/or making registration an administrative matter more than a case for courts’ decision-making may provide a remedy.
V. Particular Legal Issues Concerning NGOs
There are several specific legal issues, which have or may have particular impact on the NGO sector.
Since 1996, the group of experts from the Conference of NGOs operating in the field of social care and health are involved in drafting laws, which will initiate a radical change of the social care and assistance to handicapped people. The new approach requires subsidies to handicapped people, so that they may order the service needed from any social service provider, be it the state institution or an NGO. The issue is closely related to the need to classify social services that should be made available to people in need and with a scheme of state licensing for providers of such services. The present government supports the idea in its basic premises, but postponed the final legal solution of it by dividing the complex original draft of the Bill on Social Care into several legal norms. Currently, the licensing issue is closest to being implemented; other parts of the series of legal norms (rules?) are still in the drafting process.
The Government and Parliament recently decided to distribute 500 million Czech crowns among nearly 4O Czech foundations as a contribution to their endowment. As a result, problems with courts supposed to register the endowment were further complicated by the issue of efficiently managing the foundations’ endowments. The current law is restrictive as to the way in which the endowment assets might be invested to generate income. It leaves several aspects open and unsolved, which lets judges decide identical cases in completely opposite ways. The situation invites analysis and amendment of current endowment regulations.
The Czech Government distributes annually about 1,6 billion Czech Crowns to associations via the line ministries. Until recently, the distribution process more or less followed the old style of subsidizing some chosen associations, without much opportunity being given to NGOs through some form of competition. In addition, the money comes from the state budget and as such, it must be distributed and used in the same fiscal year. The government(?) is looking for methods by which the procurement for this money may be made more transparent, the chance for equal access provided, as well as accountability through a several year period.
Ever-growing attention is being paid to the legal conditions related to the execution and use of volunteer work. Volunteer work brings certain values to NGOs and some financial experts have already warned NGOs about the risk of being asked to pay the tax on profit, whenever the value of assets produced by the work of volunteers exceeds the related expenditures. In some cases, this may burden NGOs’ budgets. Moreover, nothing in the law protect volunteers against health risks while volunteering, and the question remains open of how, if ever, volunteer work should be evaluated.
Finally, the tax and accounting rules for entrepreneurial and not-for-profit legal entities differ. Demonstrated several times and evident from practical implementation, NGOs may pay a higher tax than a commercial entity involved in the same business even with the 30% deduction of the corporate income tax but separate accounting of every kind of income generating activity. Recently, a motion to the Constitutional Court has been considered as a way to overcome this unequal treatment. Aware of the situation, some government officials are working on the amendment of the tax law and the accounting regulations. Unequal treatment of NPOs and commercial legal entities has been noted recently in accounting and tax procedures – cases where it is better not to make use of any tax exemption.
VI. Do We Need Further Improvements or Change to the Whole System?
Further improvements may be needed for specific laws, but to continue in the series of new laws for any situation does not present a long-term solution. Therefore, there is an acute need for profound analysis of the present legal system in cooperation with the government task force for harmonization of the Czech laws with European Community law, so that a synergy in the government efforts and needs of the NGO sector may be reached to create optimal timing and content for further systematic reform. Several basic reforms are already underway. Recently, the Chamber of Deputies of the Czech Parliament approved the new Commercial Code. Similarly, the Civil Code is being redrafted currently. Also, new laws regulating the use of state property, the new tax system and laws addressing several other legal issues stand high on the present Czech government’s list of priorities.
Both the NGO and public sector may benefit from a law more specifically regulating public benefit activities in general and providing for the existence of an independent agency capable of monitoring the behavior of public benefit organizations. The agency may use the organizations’ reports and conduct non-intrusive, ad hoc checks at NGO premises in order to monitor public benefit behavior. Such an agency could detect misuse of the benefits or other violations of the law and might even provide additional certification to the registered NGO, recognizing its status as a public benefit service or funds provider. This status would then provide a certain degree of priority whenever the certified NGO would apply for a subsidy from public budgets or even from some private sources, like foundations, private sector mercenaries’ donations or sponsors.
VII. Expected Development in the Near Future
In the two years remaining of the present government’s term in office, a new Act on Associations, as described briefly above, and the amended Act on Public Benefit Corporations may be expected. Both laws are already in the legislative process.
The Donors’ Forum, an association of donors and foundations operating in the Czech Republic, has begun preparations for significantly amending the Act on Foundations and Funds and has centered on improving endowment maintenance and use provisions, as well as the registration documentation and process. Soon, the final versions will be enacted of a series of laws regulating the social care and assistance provision and licensing for such services, which would involve NGOs as equal partners with public sector institutions. The government also prepares new state property law and changes to the public procurement laws.
NGO experts from Bohemia Corps have started the work already on a draft of a law regulating volunteer work. There is also a need to work on a sponsorship law. These initiatives may bring results during 2001.
VIII. Need for International Cooperation
Keeping in mind the scope and content of the new legal initiatives already in force and being prepared or considered in the Czech Republic, there is an apparent need for efficient cooperation with the international NGO community. The community might be interested in similar developments and may produce the synergy effects in improving the drafts being prepared, as well as realize necessary corrections or new impulses and ideas about consolidation and improving the quality of the Czech legal system’s development stage concerning NGOs. This is true in the cooperation between the experts of Poland, Hungary, Slovakia, Slovenia and the Czech Republic.
Nevertheless, the assistance and support from the experts of the International Center for Not-for-Profit Law (ICNL) and presumably, from other international organizations as well, such as CIVICUS or the European Center of Foundations, would be not only appreciated, but potentially critical for the process’s success.
ICNL expertise and organizational background provided by its Budapest Office may be especially useful due to its ability to prepare seminars on issues common in the region and to help instruct key persons in the NGO sector and government. ICNL’s staff of internationally experienced lawyers and its contacts with United States government agencies are the organization’s strengths. Likewise, the United States Embassy in Prague hosted informal meetings where experts from the NGO sector met those from the government. The friendly atmosphere of these meetings in addition to the respected position of the Embassy in the political establishment of the country have exercised a positive and facilitating effect in the past and potential for such a role continued into the future.
One of the most urgent issues currently might be to hold an international seminar of experts from Poland, Czech Republic, Slovakia, Slovenia and Hungary organized in Prague in the fall of 2000 that would open a forum for the discovery of new ideas supporting the improvement of the legal system and functioning of the judiciary in all these CEE countries who share similar political and economic environments as well as historical and cultural heritage.
IX. Challenges to the EU Accession
The EU accession process in the Czech Republic accelerates the reconstruction of the legal system. However, it is also delaying some changes in the legal system that are not directly necessary for harmonizing the Czech laws with the “acquis communautaire” of the EC. Therefore, the success of the consolidation period depends also on the development in the EU – as soon as the EC legislation dealing with EU institutions cooperating with NGOs will be formulated, supporting the future of the NGO sector in accessing countries, including the Czech Republic.
Again, to reach a common understanding of this need, the scope of contacts may be strengthened between NGO experts from EU countries and those in CEE countries. Here also, the European Foundation Center, ICNL and CIVICUS may play an important and even solitary role as proponents and organizers of the exchange of ideas, meetings of experts and presenter of seminars or conferences.
On 15 December 1999 the parliament passed the new income tax law which took effect from 1 January 2000. The new law radically reforms the corporate income tax system by exempting all undistributed profits of corporate entities. As a consequence of this reform, income tax at the rate of 35% is now imposed on most forms of profit distribution, including:
- gifts and donations to all nonprofit institutions, except those included in a government-approved list;
- gifts and donations to the nonprofit institutions included in the government-approved list to the extent that they exceed 2% of the social tax base for the month in which the payments are made;
- dividends and other profit distributions paid to all nonprofit institutions, except those included in the government-approved list;
- admission and membership fees paid to nonprofit associations if participation in the association is not directly related to the taxpayer’s business.
(For the text of the law itself , please click here)
New Legal Development for NGO Sector in Kosova/o: UNMIK Issues Administrative Direction Implementing NGO Regulation
By Gjylieta Mushkolaj
Consultant to ICNL
Strengthening the NGO sector has been a priority of the international community since the establishment of the United Nations Mission in Kosovo (UNMIK). Aware that the quality, capacity, and endurance of the NGO sector depends upon the environment in which NGOs must operate, during the first six months of operation in Kosovo UNMIK issued the Regulation No. 1999/22 on the Registration and Operation of NGOs in Kosovo.
On May 9, 2000, Bernard Kouchner, Special Representative of the UN Secretary General in Kosovo, signed Administrative Direction No. 2000/10 implementing UNMIK Regulation No. 1999/22 on the Registration and Operation of Non-Governmental Organizations in Kosovo. This action is a step forward in developing a legal system that protects the independence and long-term sustainability of the NGO sector in Kosovo.
The Administrative Direction provides detailed guidance to NGOs operating in Kosovo and to the UNMIK NGO Liaison Unit on the legal requirements related to registration, reporting requirements for NGOs with public benefit status, and NGO tax/fiscal benefits.
The Administrative Direction clarifies registration rules, including the right not to register informal groups. It also establishes a review process for denials of registration. This marks significant progress for Kosovo, because of the bitter experience with the discretionary powers of the governmental bodies in the previous system.
In accordance with Regulation No. 1999/22, the Administrative Direction contains special rules for NGOs that have been granted public benefit status and therefore receive tax and fiscal benefits. These NGOs must prepare and file an annual financial and activity report. In addition, an interim report is due on September 30, 2000 for activities in Kosovo through June 30, 2000.
In conformity with the international best practice that the public should have a legitimate interest in NGOs that receive tax and fiscal benefits, the Administrative Direction provides that reports filed in accordance with it shall be available to the public. However, the administrative direction does recognize the right of NGOs to protect truly confidential and proprietary information from public disclosure, and determines the procedure for disclosure of such information.
UNMIK has prepared instructions for filing annual reports and a model annual report form that NGOs may use. ICNL has posted the draft form on its web site, and has strongly encouraged Kosovar NGOs to provide comments on these forms before they are finalized.
The Administrative Direction provides special requirements for larger NGOs. Domestic NGOs with annual income or expenditures over 100.000 DEM and foreign and international NGOs with annual income or expenditures over 250.000 DEM must have their annual reports audited by an independent auditor.
The last section of the Administrative Direction sets forth the framework for tax and fiscal benefits for NGOs with public benefit status. It details the exemptions from customs duties, excise tax, and sales tax to which public benefit NGOs are entitled. It also contains specific procedures for receiving customs duties exemptions.
Following the example of cooperation in the drafting of UNMIK Regulation No. 1999/22, a draft of the Administrative Direction was shared with local NGOs in a number of towns and cities, and their comments were incorporated into the final version of the document. UNMIK also worked closely with the International Center for Not-for-Profit Law (ICNL), which provided technical assistance on the Administrative Direction and model forms. With the support of the Charles Stewart Mott Foundation, ICNL is working with the Kosovar NGO community and UNMIK to help build a legal framework that fosters the growth of civil society in Kosovo.
The VAT Law was approved by the parliament on 14 July 1999 and applies from 1 January 2000. The law, which was published in the Official Gazette of Macedonia (SVRM 41/1999), repeals the Law on Sales Taxes on Products and Services. In general, the VAT law follows the framework of the EC VAT regime.
The standard rate of 19% applies to all supplies of goods and services not subject to the reduced rate. The reduced rate of 5% applies, inter alia, to medicines, books, newspapers and other publications.
Exemptions include goods imported by international organizations, donations from non-residents, the work of scientists, writers and artists, donations for scientific research at public scientific institutions, including scientific, cultural and educational publications and juridical and archive documents.
By Dragan Golubovic
Recent events in Montenegro prove the notion that securing an enabling legal environment for NGOs will ultimately depend on proper implementation of the law. Last year, the Montenegrin Parliament enacted a fairly liberal Law on Associations and Foundations (Official Gazette, no. 27/1999), which meets international standards and best regional practices on a number of important scores (the review of the Law was published in IJNL, Volume 2, Issue 2). Art. 33 of the Law, inter alia, provides:
Social organizations and citizens’ associations which are entered into the register of social organizations and the register of citizens’ associations shall, within six months from the enactment of this Law, adjust the internal acts to the provisions of this Law and re-register with the Ministry of Justice.
Within the same period, foundations, funds and legacies which are entered into the registry of foundations, funds and legacies shall re-register as non-governmental foundations, in accordance with the provisions of this Law.
On November 9 in Podgorica, ICNL organized a round table in collaboration with the Ministry of Justice and the Center for Democracy and Human Rights on the compliance of the new law with international standards. The participants sought clarification of the re-registration requirement and received assurance from the Ministry of Justice official and other members of the drafting team that re-registration only means that the organization needs to amend its internal documents to the extent necessary to bring it into compliance with the new law and then submit them to the Ministry. Hence, the re-registration requirement does not mean that the organization must re-apply for the status of a legal entity (see Leon Irish and Douglas Rutzen: Re-registration Revisited, published in IJNL, Volume 1, Issue 3).
Unfortunately, in practice, the Ministry departed from its statement on re-registration. First, it required existing NGOs to re-register as new organizations in order to maintain their legal status. In some cases, because the new law specifies a minimum of five founders, the Ministry requested founding documents showing only five members/founders. For example, the association of judges, which has existed for more than 70 years, was entered into the registry as a new organization established by only five judges, while the membership status of other judges appears to be unclear and solely dependent on the good will of the “founders”. This gives rise to a number of other procedural and substantive issues. For example, some “new” associations have disposed of substantial property belonging to the “old” association to the personal benefit of the “new” founders.
As a result of this practice, a number of cases were brought before the Supreme Court. Interestingly, the Supreme Court seems to support the Ministry’s re-registration practice. In one case, the Forum of Women, an association that was registered under the prior law, appealed the Ministry’s decision to allow an association with the same name to be entered into the registry. The plaintiff contended that the person who submitted the documents for re-registration (which is necessary for re-granting the status of a legal person) was not authorized to represent the organization (although she was a member) and that the Ministry should have looked at the Forum’s founding documents that were submitted when the organization was first registered, which state the name of the person designated to represent the organization. However, the Court rejected the appeal (Decision of the Supreme Court, no. 701/99 of January 27, 2000). It held that the registration authority did not have an obligation to look at the plaintiff’s founding documents, as it was dealing with registration of a new organization, rather than with its predecessor. Consequently, the fact that the “new” organization is registered under the same name, which the plaintiff contended was also in violation of Art. 12(1) of the Law, is of no legal relevance, as the registration authority is only obliged to ensure that in the new registry, which it keeps following the provisions of the new Law, two or more organizations are not registered under the same name.
The re-registration practice in Montenegro clearly highlights the importance of providing ongoing training on NGO issues for judges, registration authorities, NGOs and other key stakeholders in the process. It also underscores the importance of providing timely, pertinent literature, such as commentaries to the law and brochures on establishment and registration, which would serve as a reliable guideline to all the parties involved in the implementation of the law. Art. 12(1) of the Law provides: “The name and the logo of a non-governmental organization must be distinguished from the name and the logo of another organization”.
Further emergency ordinances amending the profits tax and the VAT with effect from 1 January 2000 were issued by the government in December 1999 and February 2000. The profits tax amendments include the removal of the exemptions for associations and foundations, except testamentary foundations, regardless of the use of their funds. The VAT changes modify the list of supplies liable to the zero rate: this now includes goods and services directly funded by aid or non-refundable credits from foreign governments, international or nonprofit organisations, or individual donations; and construction of churches.
Structural and Systemic Issues Surrounding the Establishment and Management of Endowments in the Czech and Slovak Republics
By Bob Thomas
The Institute of EastWest Studies, with the generous support of the Charles S. Mott Foundation, undertook an analysis of the structural and systemic issues surrounding the establishment and management of endowments for foundations in the Czech and Slovak Republics. The motivation for this study was three-fold – the recent changes in legislation affecting endowments and foundations in both countries; the interest of many western donors in establishing endowments for non-profit organizations in the Czech and Slovak republics; and the development of a national endowment for foundations in the Czech Republic.
The purpose of the study was to analyze the current legal, financial and political environment and identify the critical issues that impact the establishment and management of endowments. A major concern was the ability of non-profits in both countries to create and manage endowments in a manner that would attract both domestic and international donations.
The project managers relied upon written documents and studies detailing the structure of the non-profit community and the analysis of existing legislation. The primary means for gathering information and insight was through interviews and meetings. Discussions were held with leaders and decision-makers from the non-profit community, legislative branches of government, public policy arena, financial institutions, legal community and organizations involved in supporting the third sector. Domestic and international donors were also interviewed.
The period in which this study occurred was marked by constant change in the political landscape of both countries. Elections were taking place in the Czech Republic, and a new government was being formed. The Slovak elections will be held before this report is finalized. Given the fluid nature of change in both countries, the researchers chose to accept the existing legislative, political and financial conditions.
The recommendations of this study are based upon the assumption that endowments established under the current conditions can be effective and possess the flexibility to adapt to future changes. The report will describe the current environment in each country with respect to legislation and legal issues, the financial community, political conditions, the capacity of indigenous non-profits to manage endowments, and the philanthropic culture.
The report will identify those issues that are deemed to be critical to the development and management of effective endowments. Recommendations will be offered as possible approaches to addressing these critical issues. It is not the intent of this report to dictate solutions to the critical issues but to create a dialog in which interested parties can work together to develop a system in which the goals and objectives of a civil society can be achieved. A strong foundation community, supported by effective management of endowments, is a key factor in the development of a civil society.
The Czech Republic
The fall of communism ushered in a period of explosive growth of non-profit organizations in the Czech Republic. As of the end of 1997, there existed over 48,000 non-profit organizations. The majority of these non-profits are registered as civic associations (28,000), that are defined as an association of citizens bound together for a common purpose. A civic association is characterized by its membership. Churches and religious societies have established approximately 3,600 special purpose church associations. Churches pursue their charity, educational and cultural programs through these organizations. Public benefit corporations provide services to the public in non-profit fields of activities. Their activities and all income define these organizations and profits are used to provide services to others. Foundations are the fourth types of non-profit organization allowed under existing legislation in the Czech Republic.
Foundations represent associations of property and are intended to be sources of finance for non-profit activities within the Czech Republic. At the end of 1997 there were 5,352 foundations according to the Czech Statistical Authority. Many of these foundations were established to raise money for a specific purpose or project. Some are actually program operating organizations. A limited number of these organizations are actually foundations whose primary activity is dispersing funds for non-profit activities. There was evidence of tax avoidance and financial abuses within the foundation community. Many felt that the foundations were not accountable to anyone. For these reasons the Czech parliament enacted legislation in the fall of 1997 intended to clarify the legal framework of foundations.
Legislative, Political and Legal Issues
The Act on Foundations and Endowment Funds (see Appendix 1) requires that all existing foundations must register with the local register court. It further dictates that each foundation must establish an endowment of at least 500,000 Czech Crowns ($15,000). The value of the endowment may not fall below this amount during the life of the foundation. These financial obligations will force many of the existing foundations to either disband or register as a public benefit corporation or foundation without an endowment.
The law provides that a foundation can operate without an endowment, but all income from the property of the foundation without an endowment (nadacni fund) is subject to tax. There are reduced tax rates for these organizations. This provision of the law has caused confusion, especially with those who are familiar with Western foundations. A nadacni fund is similar to an operating foundation. It is expected that fewer than 200 organizations will establish an endowment and register as foundations. However, as of September of this year, less than fifty (50) organizations had registered and been approved by the court. The focus of this study is upon the foundations with endowments. For the purposes of this study, the term foundation or endowment refers to foundation with an endowment fund.
There are several key issues, which are critical to those organizations, which choose to register as foundations. The first is the decision to become a grant making organization. Many foundations operate programs and provide grants to other non-profit entities and activities. While both of these activities are allowed under the law, it is expected that most foundations will convert to grant making organizations. This is encouraged indirectly by the lack of distinction within the law between administrative expenses associated with program operations and those expenses linked to grant giving.
The law requires that foundations select one of three criteria defining administrative management expense levels. These criteria are percentages based upon the total administrative expenses of the foundation divided by one of the following factors:
- The total revenues from the endowment (or property of the foundation);
- The sum of all grants provided to third parties,
- The total value of the endowment at the end of the current year.
Whichever criterion is selected, the foundation cannot change the percentage or the criterion for a period of five years. Therefore, this election is a very serious matter. It must take into account the future plans for the foundations, as well as adjustments to funding sources, changes in the value and revenue stream of the endowment, and grant making policies. One interesting element is that the law does not specify that the percentage be less than 100%. This provides the foundation with some latitude in setting the administrative cost criteria, if the courts agree.
While it is expected that the public will use the administrative cost criteria to evaluate the effectiveness of the foundation, this will be very difficult in actual practice. The general public may not have the patience or ability to determine which criteria was used by the foundation. In addition, foundations, which continue to perform non-profit programs, will be at a disadvantage compared to those foundations that only act as grant making organizations. Finally, it will be difficult for the public to determine if the differences in the administrative percentages are based on poor management or changes in the financial characteristics of the endowment. These factors may have a negative impact on the ability of foundations to attract donors.
The strict requirements of the law could also have negative effects on the management of the foundation. For example, most foundations will choose to select a criterion that will give the foundation flexibility in the area of administrative expenses, by setting a percentage higher than is reasonable. While this is advisable given the current legislation, there is the possibility that the foundation may begin to think of this number as the benchmark. Under this scenario, management efficiencies may be lost in the desire to meet the dictates of the law. It will be difficult for some foundation managers to measure the real administrative cost structure and to judge if it is consistent with its peers.
Foundation managers may be swayed to make adjustments to grant making policies, investment strategies, and programs to insure that the legal administrative cost criteria are maintained. In the long term, this requirement may have the unintended consequence of reducing the incentives for improved managerial efficiency in foundations.
Another troubling aspect of the legislation is the potentially limiting effect on the active management of the endowment. According to the law, any change in the endowment must be registered with the court. Those not complying with this aspect of the legislation risk losing the tax exemption on the income earned on those assets not registered.
This places an increased administrative burden on the foundation and may limit the incentive to actively manage the assets of the endowment. It may have been the assumption of the Parliament that the assets of the endowment would generate sufficient current income, through dividend and rents, so that the foundation would not need to depend on capital appreciation. However, we live in a financial environment in which large portions of income from financial assets are generated by capital appreciation.
According to a recent article in the New York Times (July 26, 1998), the average dividend yield on the Standard and Poor’s 500 stock index is less than 1.25%. Without the ability to capitalize on the increase in value of the assets of the endowment, the foundation will greatly reduce its ability to generate a reasonable return and thereby, lower its grant making potential. The speed of the global capital markets requires that portfolios be actively managed.
Members of the Czech Parliament sought to insure that foundations were operated in a manner that was safe and secure. As such, they stated that the assets of the endowment must be invested in either state guaranteed instruments or placed in special accounts in a bank registered by the Czech National Bank. The Ministry of Finance has verbally agreed that the term “state” was not defined by the act and therefore could be interpreted as being the instrument of any sovereign government. The courts will ultimately decide this, but the Ministry was willing to support such an argument (this was prior to the recent change in government, which took place in September.) If the courts agree, foundations will be able to invest in the state bonds of other governments, providing them with some flexibility in investment strategy. The down side of this investment strategy is the foundations may elect to invest in high yielding bonds which could translate to increased credit risk (the risk of the original capital.).
The law states that foundations must place the assets of the endowment either in a special account of a bank or purchase state bonds. It does not place any restrictions on the type of investment or provide guidance with regard to how the banks invest the assets of the endowment. There is a strong possibility that a foundation could be encouraged (by a board member) to invest the assets of the endowment into a local bank. The foundation management and board may not be able to adequately assess the credit worthiness of that particular bank. And if the bank was to fail, the foundation may lose a sustainable portion of the endowment (the deposit insurance in the Czech Republic is limited to 400,000 Czech crowns per account.) Such an incident could have serious consequences for the entire foundation community.
The law concerning foundations allows an endowment to hold real estate as long as that property has the ability to produce income. However, there is a restriction that the assets of the endowment may not be used as collateral or serve as a lien. This restricts the ability of the foundation to enhance the value of a real estate asset. Most financial institutions will require that the property be used as security for improvement financing. If a foundation were given a building with limited commercial value but that value and the resulting revenue stream could be enhanced by renovation, the foundation would not be able to borrow the funds to develop the property.
There is some concern about the provision in the legislation that requires that foundations create a supervisory board to oversee the financial management of the endowment. This supervisory board is comprised of members who cannot be members of the Board of Directors of the foundation. Since it is assumed that the members of the supervisory board will be required to possess some financial abilities, a problem may arise for some foundations. There is evidence that competent and committed board members are difficult to recruit, so many of the smaller foundation may have difficulties in finding members for both a supervisory board and a Board of Directors. Foundations have the option of hiring an inspector to perform the function of the supervisory board; however, this would result in increased cost for the foundation.
There is a great deal of confusion surrounding the law on foundations. Lawyers, foundation executives, and members of the government have different perspectives on the interpretation of what the law means. This confusion will result in added administrative burden on the foundation and the expenditure of unnecessary human and financial capital. The executive director of a foundation outside of Prague reported one such incidence. The judge in the local registry court questioned the composition of the board of directors, noting that several of the members were not Czech citizens. Although the law specifically addresses this situation, the judge ruled that the commercial code took priority in this case. The judge ordered the foundation to produce evidence that the foreign members of the board had residence in the Czech Republic. Several of these foreign board members took offense to this request. After several months and much legal expense, the foundation was able to convince the court that the commercial code was not appropriate in this case and that the law on foundations covered foreign board members. The foreign board members were from the Slovak Republic.
The law on foundations requires that each foundation register with the court in their region. There are eight such courts in the Czech Republic. The judges are very independent, and there is not a principle of precedence in the judicial system. It is very likely that judges could have varying interpretations of the law and this may create additional confusion and administrative problems for foundation managers. Lawyers representing the interest of foundations are not in agreement about the meaning of the law.
The banking community in the Czech Republic is in the process of transition. The current government has stated that the privatization of the banks is a major priority. Many analysts are concerned about the quality of the assets of the largest state owned banks. Estimates of non-performing assets range from 25% to 40% of total assets.
During the past few years the Czech government has closed or liquidated dozens of banks and has exhausted a major bailout fund established to deal with the banking problem. The banking community has attracted several international banks. Some have entered the market through investments in existing Czech banks, while others have established branches or independent entities.
Many of the Czech banks are unfamiliar with the concept of fund management, especially in regard to the endowments of non-profit organizations. Based upon interviews, most banks were not aware of the details of the law on endowments. While many banks expressed interest in attracting the endowment funds from the foundations, they were not in a position to provide the details of investment products. However, there were a couple of exceptions, and these banks expressed a sincere interest in working with the foundation community to create products and services which would enhance the performance of the endowments.
It would be very beneficial for foundations to develop a strong relationship with a bank that would have the desire and ability to serve the best interest of the foundations. One of the problems with achieving this objective is the size of the endowments and the cost of providing adequate service. If a foundation elects to capitalize its endowment at the minimum level of 500,000 crowns ($15,000), the bank would find it difficult to justify special attention to the client. Even at levels of 3,000,000 crowns, the economics of banking would preclude the bank from pursuing special arrangements to meet the needs of the foundation.
The law provides that a foundation may deposit its endowment in any banks doing business in the Czech Republic would be eligible to manage the endowment funds for the foundation community. Foundation mangers must weigh the expertise, which may reside in these banks, with any potential political problems associated with investing their endowment in a western bank. Given the size of most western banks operating in the Czech Republic, the foundation will still face the challenge of economies of scale and must insure that the bank is able to develop an investment strategy which matches the risk profile of the foundation.
One of the major concerns is the lack of financial management experience in the foundation community and the probability of a “New Era Fund” disaster. The New Era Fund was established in the United States and promoted as an innovative vehicle for endowment investments. The Fund promised high returns and attracted millions of endowment dollars from some of the most prestigious foundations in the United States. The New Era Fund was unable to maintain it performance and was forced to declare bankruptcy. Millions of dollars were lost, and many foundations were negatively affected. This occurred in an environment in which the securities and trust laws are well established and the financial management of the foundation community is mature.
The lack of effective oversight of the banking industry in the Czech Republic coupled with the lack of financial management experience in the foundation community creates an environment which could invite the type of abuses demonstrated by the New Era Fund. While the United States foundation community was able to absorb the impact of the failure of the New Era Fund, the foundations in the Czech Republic may not have that luxury. The consequences of fraud or mismanagement of endowments at this stage in the development of the endowment process could have devastating effects on the ability of foundations to attract donors or to fend off more restrictive government policies.
In addition to the difficulties involved in selecting a bank with the ability and capital resources adequate to handle the investment of the endowment, foundation leaders and board members must deal with the issue of inflation and currency risk. The current inflation rate in the Czech Republic is 9% and is expected to remain at this level for the next few years. Last year, the government devalued the Crown by 20%, and some experts are concerned about further reduction in the value of the currency. These factors further complicate the endowment investment decisions and add an additional burden to those charged with directing the foundation.
The tax code and the law on foundations provide that income from the assets of the endowment may be exempt from income taxes. The legislation is very specific about the nature of the endowment, and foundations may find that certain assets are considered to be taxable because they are not registered in the endowment account. The complicated nature of the law and its lack of flexibility will result in additional administrative burden. The tax code allows that certain items, which are used for non-profit activities, are not subject to Value Added Taxes (VAT). However, it is often difficult for non-profit organizations to receive the necessary documentation, which provides this tax relief.
The foundation community should better understand the purpose of an endowment that becomes the basis for the decision to elect the status as a foundation. The project mangers found the concept of an endowment is confusing to many in the foundation community. When asked about the purpose of the endowment, many expressed that it was a fund, which could be used for a “rainy day”. Others expressed the opinion that the endowment was being established so that the foundation could comply with the law, and the endowment will not have an impact on the organization for a long time.
Generally, foundations, which were primarily involved in programs, expressed confusion over the purpose of an endowment. The major motivation of these foundations was to attract funds for their own projects and activities. Rarely did foundation executives express that the purpose of the endowment was to generate revenue in order to fund innovative programs and to expand the goals and objectives of the organization by giving to other non-profit entities. Such an understanding is critical in investment strategies, grant making policies, and efforts to attract donors.
While, there many examples of generous giving by the citizens of the Czech Republic, domestic donations to non-profit organizations are minimal by Western standards. Reasons for this low level of philanthropy include the lack of a culture of giving, the role of the state and the church of taking care of social concerns, the state of the economy, and the lack of incentives in the governmental policy.
Currently, the tax code provides tax relief for individuals, who give to non-profit causes by allowing them to deduct contributions up to 10% of their taxable income. The limitations for corporations are 2% of taxable profits. In addition, the tax code does not differentiate between those non-profit activities, which may be promotional, and those that are social in nature. Therefore, many corporations use their philanthropic dollars to support sporting activities and other programs, which may be considered promotional in nature.
For years, the state was responsible for the social problems of society. This legacy has created a perception in the minds of citizens that it is not their role to contribute to social problems. Giving is charity, and charity is the responsibility of the church. There are positive strides being made to enhance the culture for giving, but it is still in the early stages of development. The majority of this progress has been achieved in the area of annual giving to non-profit organizations and for highly visible needs, such as the floods in Moravia in 1997.
The concept of an endowment and the role of a foundation are foreign in the minds of most citizens in the Czech Republic. The foundation’s ability to attract funds for endowments will be difficult and require a massive educational campaign. More importantly, it will take time given the restrictions in the legislation, some perception issues of foundations, and the scarcity of disposable income in the economy, the lack of tax incentives, and the lack of understanding of philanthropy. It may be a generation before one can expect that the Czech foundations can solely depend on their own citizens for an endowment campaign.
Much of the funding for the certain non-profit activities in the Czech Republic has come from international donors (the Czech government has provided a great deal of funding to many non-profit organizations). Their generous support has been the fuel for the growth in many non-profit organizations. Unfortunately, many of these international donors believe that it is time to focus their financial support in other parts of the world. Some believe that the Czech Republic is ready to stand on its own and that outside assistance is no longer necessary. While the project managers disagree with this assessment, it is a factor in the development of the foundation community.
There is a commitment by several Western donors to fund a series of endowments for foundations in the region. The nature of the endowments and how and where they will be managed is the subject of debate. While it is understandable that western donors would not feel comfortable having their contributions managed by the Czech foundations and financial community, it has also been one of the stated goals of these donors to build indigenous capacity in the country. The situation presents an opportunity to help the foundation and financial community to develop the ability to effectively and safely manage endowment funds.
There appears to be a time gap between the time when the citizens of the Czech Republic will be willing and able to effectively fund non-profit activities and the present. Failure to minimize this gap may result in a stalling in the development of a civil society and the ability of the Czech citizens to address critical social issues. The benefits of continued support by international donors and their commitment to remain as partners in this process will greatly enhance the probability of success.
The Nadace Investment Fund
In 1992, the Czech Parliament made the decision (see Appendix 2) to contribute 1% of shares from the privatization process to an endowment which would benefit the non-profit sector. The original intent was that the shares would become an endowment generating revenue for the foundation community. Because of the danger of depreciation in 1995 and 1996, the Minister of Privatization elected to convert the shares set aside for this purpose to cash. The conversion is still in process.
In 1998, the government decided to distribute the first phase of the Foundation Investment to a selected number of foundations. The amount of the first distribution is expected to be 500,000,000 crowns ($15,000,000) and is scheduled to occur in the first quarter of 1999. The second distribution is scheduled to take place within one or two years of the end of the first stage. The amount of the second distribution is estimated at 1,500,000,000 crowns or $45,000,000. The process for selection of the recipient foundations is quite simple. Foundations, who were operating as foundation since January 1, 1996; who are currently registered as a foundation under the new law; and who have distributed at least 500,000 each year, are eligible.
The Council on Foundations (the name was changed to the Council on Non-Profit Organization in 1998) will select up to five foundations representing the following areas of non-profit activity:
- Social and humanitarian
- Health care
- Human rights protection
- Environmental protection
- Others, which are not defined above
While there is the potential that thirty-five foundations would receive a portion of the funds, most experts believe there are twelve to fifteen foundations that are eligible and able to receive approval. The decision will be made by the Council on Foundations and approved by the Parliament.
The funds will be disbursed to one or more banks, and there may be restrictions on how these funds are managed. The National Property Fund Executive Board will make the determination of the banks which will manage the funds and additional conditions attached to the management of the funds with approval by Parliament.
According to the act, which created the Nadace Investment Fund, all recipient foundations must distribute the proceeds from the endowment each year and must adhere to certain administrative reporting requirements. There is also a cap on the administrative cost associated with the management of the endowment. This is not to exceed 20% of the annual proceeds from the endowment.
The government, which was formed in the summer of 1998, has sent messages to the Council on Non-Profit Organizations that indicate that the distribution of the second phase of the program may be in jeopardy. It is felt that the first phase may take place, but that is not certain. The current government has not firmly stated its position on its support of the third sector. This is an area which will require strong political actions and the non-profit community could be greatly benefited by assistance from other sectors of the Czech society as well as international parties.
The Slovak Republic
The authoritarian nature of the Meciar government has been the primary catalyst for the growth in the non-profit sector in Slovakia. Not only has the sector grown in size, but also its professionalism, dedication and passion can be seen in its active engagement in every aspect of society.
As of June 1998, there were 12,599 non-profit organizations registered in Slovakia. Citizen participation in these organizations was among the highest of the countries of the former Soviet Union (according to a report by Civicus, New Civic Atlas, 1997). Many of the young urban population have turned to the non-profit community to express their concern and dissatisfaction with the political and economic situation. Strong cooperation and a desire to enhance its professionalism and managerial skills characterize the third sector. The presence of many of the intellectual and cultural leaders in the sector coupled with the active support of western donors is often credited.
Prior to the passage of the Law on Foundations (Appendix 3) there were 2,634 foundations. The law forced these organizations to register, and as a result, 422 became foundations, 161 converted to non-investment funds, and 259 registered as civic associations. The remaining foundations were either dissolved or chose another form of organizational structure. Slovakia boasts the creation of the first community foundation in East and Central Europe. The Healthy City Foundation was formed in 1992 in the city of Banska Bystrica . It was the first community foundation to develop an endowment. There is an estimated five to ten community foundations operating in Slovakia.
The strength of the non-profit sector can be best seen in the scope of its activities. The Gremium of the Third Sector, or G3S, is a group composed of democratically elected representatives of the non-governmental organizations. Its mission is to defend and pursue the interest of the NGO’s, and it explains and publicize the role of the Third Sector at home and abroad. G3S has developed strong relationships with representatives of the state, local government, the business sector, unions and national and international non-governmental organizations. G3S has have helped to create a better environment in which NGO’s can operate. The Gremium of the Third Sector works at both the national and regional levels. The 28 members, which are elected at the annual Stupava Conference, step out of their roles as leaders of their respective organizations and assume the responsibility for the whole of the third sector. The Gremium of the Third Sector was recognized by the United States and the European Union and presented the Award for Democracy and Civil Society in 1998.
The Stupava Conference is the annual conference of the third sector and has been held annually since 1991. Participants evaluate the development of the non-for-profit sector, determine goals for the upcoming year and elect the members of the Gremium of the Third Sector. The number of participants can demonstrate the success of the conference. The initial conference attracted just 24 participants from the Czech and Slovak Republics, along with many foreign quests. The 1997 meeting, held in Kosice, recorded an attendance of 250 from Slovakia and other countries.
“Campaign OK’98” is an open, non-partisan initiative by non-profit organizations to promote fair and just elections and encourage citizen participation. The campaign was organized by eleven NGO’s and cooperates closely with the Gremium of the Third Sector and the Donors Forum. OK’98 has been an effective and visible program for the NGO community and demonstrates not only the ability of the non-profits to address critical issues in the society, but also the ability and willingness of the sector to work together.
The Donors Forum is an informal group of grant making organizations that distribute financial resources to Slovak non-profit organizations. Its mission is to increase effectiveness in the distribution of grants and to create conditions for the improvement of financial support for the third sector in Slovakia. Members of the Donors Forum have been dedicated in pursuing these goals and have again demonstrated the strong desire and ability to work together for the betterment of the non-profit community.
The Donors Forum has commissioned reports, which have been critical in identifying the key issues facing the grant making foundations (much of the information contained in this report has been gleamed from the analysis undertaken by the Donors Forum). Building better relationships with the business community and the state, enhancing the culture of philanthropy, creating partnerships with international organizations as well as developing more effective mutual cooperation within the foundation community are all within the scope of the Donors Forum. Based on the past achievement, without any formal organizational structure, and their level of commitment, there is little doubt that they will succeed.
Legislative, Political and Legal Issues
Note: This research for this report was undertaken prior to the current elections in the Slovak Republic. While the election results appear positive for the third sector, the authors were not able to determine what changes will come about due to a change in the government.
It is no secret that the Meciar government is opposed to the third sector and will expend considerable energy to weaken the sector’s ability to operate. The Law on Foundations, passed in 1997, was enacted to accomplish such a goal. On the surface, the legislation appears to be reasonable. Closer examination of the political environment and the details of the law point out the problems.
The primary area for concern is that foundations must register with the Ministry of Interior. It is an approval process which allows the Ministry to question the activities, policies, and budget of the foundation. This is the primary reason that the non-investment fund has become an attractive alternative for endowments.
The non-investment fund allows organizations to attract, manage and distribute funds for the benefit of the community. It is defined in the law as, “a non-profit legal person, which gathers funds for the purpose of fulfilling general public benefits or individual humanitarian help for those individuals or groups who are under threat or who have suffered disaster in their lives.” A non-investment fund may own property, provided that the income from the property is used for the purposes defined by the statutes of the organization.
All financial assets must be held in a financial institution registered in the Slovak Republic. Business activities and lending are not allowed by the non-investment fund, and there is a cap on the management expenses of 15% of the total annual disbursements of the fund. All other regulations of the non-investment fund are similar to that of the foundation except for the registration process. All non-investment funds must register in the regional administrative centers. While these centers are under the supervision of the Ministry of Interior, the amount of scrutiny, reporting requirements, and controversy are greatly reduced.
The Law on Foundations requires that the value of the assets of the foundation must be at least 10,000 Slovak Crown (SK) ($300) at the time of registration. The value of the assets must be increased to a minimum of 100,000 SK ($3,000) within six months of registration. The assets of the foundation may be in the form of money, bank accounts, real estate, property which can be valued in currency, and securities. There are no restrictions on the composition of these assets or limitations on the type of securities or concentration in a single stock. There is also concern on the valuation of the assets used for the endowment and its ability to generate income. In some instances, furniture and autos were designated as the assets of the endowment.
There is a section of the Law on Foundations, which obligates the foundation to manage the assets of endowment with the goal of achieving the most economical use and highest yields. Foundations may engage in lotteries and similar games, organizing sporting or cultural events, and renting the assets of the endowment all of which generate revenue.
The requirements for the Non-Investment Fund are similar except that the minimum value of the assets must be 2000 SK ($60). Both laws require that the organization comply with administrative procedures including the adoption of statutes, election of a Board of Directors, selection of an administrator and compiling an annual report. The Act on Foundations requires that a supervisory board be established to oversee the financial management of the organization. This provision is not required in the Law on Non-Investment Funds.
There is hope that the current elections (to take place in September) will result in a more open and democratic government. The fact remains that political elite and corruption dominate Slovakia. While it will be difficult to make significant progress with the legislative environment, there is an opportunity. The majority of Slovak citizens (79%) and most political parties favor integration into Western European structures. This could provide an incentive for politicians to enact legislation which was in line with the expectation of Western European organizations. There is also the possibility that Western financial support to the non-profit community could be utilized to impact non-profit legislation.
Many policy makers have indicated that the current tax on income from foundation may be eliminated if western donors were to invest endowment funds in the Slovak banking system.
Financial and Economic Issues
Economic indicators tend to present a picture that Slovakia is growing and has a stable currency. In May of 1998, GDP growth was 6.5% above the previous year. This is compared to an average of 1.14% growth for the other East and Central European countries. The inflation rate is a little over 7%, and the unemployment rate is 13.6%. The Slovak Koruna has been stable due to high interest rates and a government policy to maintain current levels. However, much of this economic performance has come at the expense of the common citizen, high levels of both foreign and internal indebtedness and a concern about the reliability of the government’s data.
It is widely expected that the Koruna will be devalued after the elections in September. The amount of the devaluation ranges from ten to thirty percent. Interest rates are in the upper teens to low twenties, and the two-year state bond sold for a record 28.9% as late as May of this year. Given the inflation rate of 7%, the markets are indicating either an expectation of higher inflation or a credit risk associated with the state bonds. The major credit rating agencies downgraded the investment rating of Slovak bonds during the first part of 1998.
Tax rates on businesses remain at high levels at 40%. With these tax rates coupled with decreased tax revenues, there is a strong belief that tax avoidance is prevalent. The government continues to borrow money resulting in high and unsustainable foreign indebtedness. Evidence of cronyism and political manipulation can be seen in the dismal state of the privatization fund.
Many elderly Slovak citizens, who expect repayment of their privatization bonds, will be disappointed to learn that the National Property Funds does not have the cash to redeem these bonds. This is the result of a pattern of selling many state businesses to the political elite or their friends at prices greatly below market value. In addition, much of the banking system is controlled by the state. There is great concern over the actual viability of the banking sector and the reality of its ability to meet western capital performance standards. Overdue commercial liabilities increased 25% during the past year and now represent 18% of GDP. Classified bank credits are estimated at 30%.
Other factors impacting the economic environment are the weak capital market and the negative entrepreneurial climate. A growing tax burden, invisible legislation, high interest rates, bad payment discipline, growth of criminality, and cronyism characterize these factors. It is not an environment in which donors or investment managers would choose to put their funds. However, there are reasons to be hopeful. It is reasonable to expect that the country will continue to grow during the next fifteen to twenty years. The pressures to integrate into the European Union will be a motivating factor for the government, and it may have to address some of the major challenges, including budget deficits, price deregulation, and internal corruption. The country has an abundance of well-educated, professional, and dedicated citizens. Its strategic location and access to Western Europe and the former republics of the Soviet Union can provide it with opportunities for economic success.
As reflected by the income tax returns, the total value of financial contributions to non-profit purposes by corporations in 1995 was $13,000,000. This is an increase over the $9,000,000 donated in 1994. These numbers do not reflect the purpose of these contributions. Most observers believe that the majority was dedicated to highly visible cultural and sports activities. In both years, 30% of profitable corporations chose to use part of their income for charitable purposes despite the fact that the tax law limits the deductibility of the gift. In addition, the majority of profitable corporations have used the maximum tax deduction allowed under the law. This has lead many experts to conclude that it is likely that corporate contributions would rise if the maximum amount which can be deducted were increased.
While much of the economic activity in the Slovak Republic is concentrated in the larger firms, there are encouraging signs for philanthropy within the small and medium sized business community. Recent surveys indicate that close to 60% of small and medium sized businesses plan to make the maximum contribution (allowed under the tax law) to a charitable organization. These surveys report that small and medium sized businesses are more likely to give to causes which support children, the physically handicapped and health care. Over 50% plan to support local projects dedicated to these causes.
A disturbing aspect of corporate giving is the continued presence of corruption and fraud. Many companies have used the cover of charitable giving to disguise activities, which are intended to avoid taxation or circumvent conflict of interest laws.
The presence of the Mafia in Slovakia has created a strange form of giving, referred to as ‘forced philanthropy’. There are cases when business owners have given their assets to a charity as a way to escape the racketeering and extortion by the Mafia. In one such case, the owner of a car dealership gave his majority ownership to the Catholic Church rather than continues to be harassed by the Mafia. While these cases are rare, it does point to the dark side of philanthropy in the country.
There is no exact data on the amount of individual contributions to the non-profit sector; however, a recent survey provides some insight into this area of philanthropy. Forty-two (42%) percent of the citizens have provided either in-kind or financial contributions to an NGO within the past year. Over 30% of the contributors responded to a direct approach by the NGOs. Helping children and the physically handicapped were the primary areas in which citizen make contributions. The most prominent recipient of individual giving is the Catholic Church.
There have been several successful campaigns, which focused upon specific events or causes. The Dobra Novina door to door campaign raised $100,000 to aid small children in Kenya. A highly visible campaign, Account of Hope, was able to raise $100,000 by promoting the cause on television during the Christmas season. The contributions were used to support mentally and physically and abandoned children. The floods in 1997, which impacted the Czech Republic, and to a lesser degree, Slovakia, provide an example of the potential for local philanthropy. A nation-wide campaign generated over $1,000,000 for the victims as well as the donation of materials and manpower.
The concept of payroll deduction is not common in Slovakia, but in 1995, a program launched by the Children’s Fund of Slovakia demonstrated some success. While the program raised about $12,000 in 1995 and again in 1996, it highlighted some of the obstacles, which must be overcome to broaden this type of approach. For the individual, the amount contributed is often less than the $30 minimum required for tax deductibility. It also brings back negative images associated with forced payroll deductions under the communist regime.
Western donors have provided the majority of funds for the non-profit sector. This is due to the absence of a culture of giving in Slovakia and the lack of tax and political incentives for those possessing wealth. Many of the contributions by the financial and political elite are diverted to non-profit organizations, which promote their business or personal interest.
The tax law does not differentiate between donations to those organizations, which have a social purpose, and to those organizations involved in sporting activities. Both the environments of political influence and the rewards available to those in a favorable position with governmental officials, creates additional obstacles for those with wealth to donate to social non-profit organizations.
There has been broad engagement in non-profit activities by the citizens of the country. Much of this has been in the form of personal assistance and in-kind support rather than financial contributions. This is caused by the lack of disposable income, high taxes, and a culture in which the individual was not viewed as a part of the solution to social problems. While the economic environment may improve in the next few years, it is anticipated that the culture for philanthropy will take at least a generation to develop.
In addition to the challenges facing foundation investment managers regarding the selection of safe investment vehicles and banks, the tax code is unfavorable. All income on investments for foundations and non-investment funds are subject to a 15% tax and are held in banks registered in Slovakia. The bank withholds this tax. Profits generated by market investments other than bank deposits are taxed at 40%. These provisions will make it more difficult for Slovak foundations to attract international endowment funds, which will be subject to this tax. The tax code does not provide much incentive for private or corporate donations. Individuals can deduct contributions to non-profit causes up to 10% of their income. The limitation for corporations is 2% of taxable profits.
The development of the non-profit community in the Czech and Slovak Republics has been remarkable. This has been accomplished in an environment void of a culture of support of the third sector. Governments have hampered the development of the sector by passing legislation, which creates confusion and unnecessary administrative burdens, failing to address critical issues, and in some cases, outright opposition. In spite of these factors the determination and passion of those involved in the non-profit community have prevailed.
Today the sector is at a critical junction. Its lifeblood has been the generous financial support from Western donors. While this has been critical in building the infrastructure for the non-profit community, much work is still needed. The reality is that the economies and philanthropic culture has not reached the level of maturity needed to maintain the activities of the non-profit community. Distracted by urgent financial concerns, non-profit organizations will not be able to focus on the addressing the challenges in their society. It becomes a viscous cycle – by pursuing funding in a limited market, organizations will be forced to shift their emphasis from programs, which have visible and meaningful impact on society, to creating methods to raise funds. Citizens will react to this shift by lowering the perceived value of the non-profit, making it more difficult for these organization to attract funding.
Western donors are encouraged to reassess their decision to shift their funding from the region and to seek ways to continue to provide financial support while the non-profit community continues to develop. The role of the foundation is critical to this process. While 10 years of financial support from the west is admirable; it may not be sufficient in a process, which requires changing of attitudes and the development of a culture. This will take a generation.
The non-profit communities in both countries must also respond to this challenge. To date the journey has been long and difficult; and the participants have earned the respect and admiration of those who have witnessed the progress. While a rest is deserved, the challenge remains, and it will require continued diligence and perseverance. The foundation community must assume a pro-active role and take responsibility for the development of its members. Now is the time to take the next step away from reliance on the state and to act in a manner which will best serve the needs of the foundation community. There is the distinct possibility that the government will use it powers to stall this progression, but that is a reality of politics. By asserting itself in a prudent manner, the third sector can reach its proper place as equal partners, with the state and the private sector, in the creation of a civil society.
The legal and financial situations in both countries are confusing and in a state of constant change. However, this is the environment in which the non-profit community and foundation must live. It is imperative that each member of the community be provided with the information and knowledge critical to surviving in such an environment. Both countries have demonstrated that they have the ability and desire to work together for the betterment of their fellow organizations.
The existence of a Donor’s Forum in each country provides a natural vehicle for cooperation and growth. There is an excellent opportunity for the Donor’s Forum to create a platform in which members of the foundation community can explore various alternatives to the critical issues facing the third sector. Armed with the experiences for other countries and with an understanding of the environment in their country, innovative solutions can be created and promoted. Working together and with continued support from the West, there are rational expectations that these countries will achieve the civil society that they so richly deserve.
The suggestions offered in this report are intended to inspire dialog and discussion among interested parties involved in the development of the foundation community in both countries. Recommendations are presented as being relevant to both countries, however, several will be applicable to only the Czech or Slovak Republic. The recommendations are given in this format in the hopes that each country may be able to glean insight and information from the other situation.
Non-Profit Organizations Should Diligently Reflect Upon the Decision to Become a Fundation
The legislation on foundations provides an opportunity for many non-profit organizations to elect the status of a foundation. This decision should be thoughtful, serious, and well planned. The role of a foundation is different from that of an organization that provides services through programming. Individual organizations considering this decision should take time to sincerely explore if it should accept the responsibility of becoming a foundation and if it is the best use of its organizational resources. The process must include the process of deciding the primary focus of the organization – grant making or programs.
In a civil society, the role of a foundation is critical to its development. This role can be viewed as a fountain of innovation and inspiration. An effective foundation can be of great value, especially in the environment in which these two countries find themselves. Western organizations and foundations should facilitate and encourage this process and provide information and insight into the role and responsibilities of a foundation in society.
Legislation in both countries mandates a certain level of administrative expenses. Those levels appear to be reasonable as long as the foundation is operating strictly as a grant making entity. For those organizations which desire to continue to operate programs and act as a grant maker, it is suggested that a civic association (or public benefit organization) be created.
Create Organizational Structure and Policies to Meet Mission of the Foundation
Once the decision has been made to become a foundation, attention should shift to the development of its statutes, policies, goals, and organizational structure. The dictates of the legislation place a burden on the alignment of these elements to insure the organizational structure and management matches the statutes and policies of the organization. The organizational goals must be clear and understood.
In the case of the Czech legislation, this is critical to the election of the administrative cost criterion. The administrative cost criterion is a legal requirement, and while it is available to the public, it should be determined in such a way as to give the foundation the most latitude. The law does not prevent the foundation from selecting an administrative cost percentage over 100%. Therefore, the foundation should consider which criteria would give it the most flexibility during the next five years, and find acceptance by the court. The foundation must be concerned about the public perception of its management efficiency, so it must concentrate on achieving a reasonable level of administrative expenses. This goal can be articulated within the organization . Both efficiency and effectiveness can be communicated to the public via annual reports and other forms of correspondence.
Create Association of Foundations
The development of a strong association of foundations would provide benefits to the entire grant making entities in both countries. Foundations should not rely on government regulations to determine how to manage its endowments in a safe and prudent manner. If a “New Era Fund” were to occur, it would be devastating to the entire foundation community. This will impact all foundation’s ability to attract endowment funds and invite further governmental intrusion. The responsibility to assure that this does not happen lies within the individual foundation and the community as a whole.
In each country, there exists a Donor’s Forum. These organizations are actively involved in the development of the foundation community. The Donors Forum could evolve and act as a facilitator for discussion on critical issues for the foundation community, provide educational and training programs for its members, and serve as a united voice in public and political arenas. Also, the Donors Forum can serve as a monitor of the actions within the foundation community. By focusing upon increasing the professionalism of its members, these associations will strengthen all within the community.
The Donor’s Forum will be in a strong position to promote philanthropy in the country with a unified campaign. The Donor’s Forum could also provide its members with access to a pooled investment fund, which would reduce the administrative cost and burden for the individual foundations and may enhance the probability for better investment performance.
Develop Partnership with Financial Institutions
The economics of endowments provides an opportunity for a pooled investment fund for foundations. Currently, the amounts of funds held by individual foundations are not sufficient to warrant special interest by the banking community. However, by combining these funds into one pool, banks would have a strong financial incentive to work with foundations. A partnership could be developed between the bank(s) and the foundation community. In addition to providing the foundations with investment management services, the banks could bring additional value to the table. A bank could be encouraged to join with the foundation community to promote certain critical objectives. The bank could fund and support campaigns to promote philanthropy in the country.
The bank will see this as self-serving, as in increase of giving will result in expansion of its market for investment management. Such a program will help the bank in public awareness and prestige. The bank could provide foundations with legal assistance. This would be especially valuable in the Czech Republic where different local courts will determine how the law is interpreted.
Banks have tremendous political capital and access to politicians. A bank can help change the message of the debate about legislation impacting foundations- from serving the social needs of the country to enhancing economic performance of the country. The partnership between the banking community and the foundation community could result in amendments to the legislation based on technical problems identified by the bank as unacceptable. For example, a banker could more forcefully deliver the lack of ability to actively manage an endowment portfolio, without the court approval, than a leader of a foundation. The argument would be economic rather than social, and it would have a better chance to be received by a Member of Parliament or someone in the Ministry of Finance.
In the area of investment management, banks can play an expanded role. In addition to their capacity in advising how to invest and manage the endowment funds, the bank can provide service by converting certain contributions into income producing assets.
Foundations (especially in the Czech Republic) are restricted as to what they can do with cash donations. A bank may be able to intercede prior to the official contribution and work with the donor in converting cash into an income-producing asset. The converted asset would then be donated to the foundation and registered with the court. Banks could assist in non-cash donations such as real estate. Because foundations are prevented from borrowing on the assets of the foundation, its ability to enhance the income producing aspect of real estate is limited. A bank may be able to work with the potential donor and transform the real estate into some type of investment security. This security would provide the foundation with an income stream and eliminate any need for incurring a liability.
Develop Effective and Comprehensive Training and Educational Programs
Training and education are key elements in the development of foundations. There are several potential audiences for this training. Foundation executives and board members need to understand how to structure their policies and strategies in light of the existing legislation. By fully understanding the limitations and opportunities within the law, foundations can develop approaches which will help them in achieving their goals. It would be difficult to provide foundation leaders with the information needed to be competent financial managers. However, they can be given the knowledge which is critical in determining the appropriate investment managers, understanding the role of risk and appreciating the various elements involved in financial decisions.
Lawyers representing foundations need to be aware of the different interpretations of the legislation. The legal community representing foundations must have a united voice. A lack of consistency in arguments before the courts will result in confusion, and this confusion will increase the burden on foundations. The goal of this aspect of training is to come to a consensus on legal strategy and tactics. Lawyers could also help in identifying technical problems with the law, those issues which could be presented to parliament members as technical rather than political.
An educational program aimed at judges could be beneficial in helping the judiciary understand the law from the perceptive of the foundation community. Most judges value their independence and are reluctant to attend training programs, especially ones organized by a partisan party. Therefore, it would be beneficial to solicit a third party to provide this training. Another approach would be to have the subject attached to the agenda of an existing program or organization which has the respect of the judiciary.
The issue of training and education is critical to the development of the foundation community. Questions concerning the purpose of a foundation and an endowment are difficult to answer. But, the understanding of these issues will have a great impact on the ability of the foundation to serve society. Foundation leaders need to have an opportunity to discuss the pros and cons of endowments, how annual fund-raising can provide the non-profit organization with feedback from the public, and how to enhance the culture for giving.
Because endowments are new to these regions, there is an opportunity to investigate areas often off limits for Western foundations. There is an opportunity to create new vehicles for long-term financing and to develop instruments which can adjust to the changing needs and attitudes of society. But, such training and reflection will not take place in short-term workshops. A commitment to changing a culture and instilling the participants with knowledge and insight about every aspect of the role of the foundation is needed.
The Jan Hus Foundation (Czech Republic) took such an approach. Supported by a multi-year grant from the Ford Foundation, the Jan Hus Foundation began an endowment campaign by focusing on professionalism and developing strong management skills within its organization. In the second year, the project focus shifted to image building and public relationships. After building the supporting structure, the Foundation entered into the fund-raising stage, not by soliciting funds, but by learning the mechanics of fund-raising. The result has been above average success in attracting both operating funds and endowment funding. Also, the Foundation is blessed with a very committed board of directors, who are actively engaged in the investment management of the endowment.
Encourage Western Donors to Consider Investing Endowments for Czech and Slovak Foundation in those Respective Countries
Many Western foundations and funding agencies are considering establishing an endowment for the benefit of the non-profit community in the Czech and Slovak Republics. At the present time, the endowment funds would be managed in by a Western financial entity. The reasons given for this decision are valid. They include the lack of safety and security in the financial community in East and Central Europe, the shortage of financial management skills within the foundation community, and the desire to maintain oversight over the expenditure of the fund. At the same time, Western donors have sought to build indigenous capacity in the Czech and Slovak Republics.
By maintaining control over the management of the endowment funds, the foundations and financial communities of the Czech and Slovak Republic will miss an opportunity to develop the necessary financial management skills critical to attracting and managing endowment funds.
Western donors should explore the possibility of creating a structure in which financial institutions in the Czech and Slovak Republics would participate in the management of these endowments. Some type of strategic alliance with a western investment manager may be a reasonable approach. The Western donors could achieve a level of confidence in the safety and security of investment decisions while the Czech and Slovak financial institutions would gain needed experience.
Another benefit for such an approach would be the influence it could have on existing or pending legislation in both countries. Western donors could use this concept as leverage to have positive changes made to the laws that impact endowments. For example, in the Slovak Republic, it is widely believed that the tax on endowment income would be waived with this type of arrangement.
Preliminary discussions with financial institution in the region as well as Western investment managers have generated interest in such a concept. The development of a strategic alliance between western investment managers, banks, and financial institutions could become a model for other countries in the region. While the safety and security of the western donation must be a primary factor in the ultimate decision, there are other alternatives which will achieve much-desired objectives. The funds represented by the western endowment would provide the foundation community with additional leverage in developing a strong relationship with the banking community.
Recommendation for Western Donors to East Central European Trust Fund
The United States government and several American based foundations are exploring the concept of establishing a trust fund for the non-profit sector in East and Central Europe. One of the stated goals of these organizations is the development of indigenous capacity relative within the countries, relative to managing endowment funds. There are valid reasons for the management of these trust funds to reside in the United States.
However there is an opportunity to enhance the investment management skills in the region by expanding the selection criteria for a funds manager to include the following non-financial elements:
- A commitment to build the capacity of the financial community in the target countries, in the area of endowment management.
- A commitment to assist managers of foundations in developing their competence in decision making, relative to endowment investment.
- A commitment to assist in the promotion of a culture of philanthropy in the target countries.
These criteria would insure that the trust fund would be a catalyst for the development of the foundation community and would be accomplished at a very reasonable cost. The fee to manage the assets of the fund would be higher to reflect these non-financial commitments, but it would result in added benefits for the entire non-profit community.
The donors to the East Central European Trust Fund could also encourage countries in the region to pass legislation which would create a more favorable environment for the non-profit community by rewarding those countries which take such action. The formula for allocation among the countries could be designed to recognize and reward countries such as the Czech Republic (for the NIF act) or Hungary (for its 1-% check-off program). This could also be used as an incentive for other countries to develop innovative public policies, which would enhance the vitality of the non-profit community.
For the Czech Republic – Exert Influence on the Decisions Concerning the National Investment Fund
This is a critical time for foundations in the Czech Republic. The new government is expected to take some action on the disbursement of the first round of the National Investment Fund, and there is concern that the subsequent distributions may be in jeopardy. The foundation community should take this opportunity to devise a strategy to create support for the endowment and to develop public relations campaign that draws support from various sectors of society. By involving others in developing this strategy, the foundation community could shift the message-from helping the non-profit organizations to promoting the good of society. The flood in Moravia demonstrated that the citizens of the country would respond when there is a visible need. The citizens of the country must see the need for this endowment as beneficial.
It is an opportunity for the foundation community to build ties to the major corporations in the country. Several large companies expressed interest in seeing that the non-profit community flourished. A coalition which involves major corporations could sway many politician who may hold a less than favorable opinion of the third sector. The foundation community’s message must include the role that the non-profit community plays in creating a better society. The political and marketing strength of the business community could be critical in achieving this goal.
In the event that the Parliament re-opens discussions on the form that the distribution of the National Investment Fund will take, the foundation community should be well aware of the financial consequences of various alternatives. The lack of financial knowledge may hinder foundations in pursuing alternative means of distribution, which may be more appealing to the government. While it is hoped that the Parliament will proceed with the original commitment to distribute cash, foundation leaders should be prepared to enter into discussions with the government which would result in a more timely distribution. Foundations are advised to accept a reduced financial package in exchange for total distribution in the near future. To estimate the acceptable level of reduction, a thorough understanding of the financial ingredients of alternatives is critical.
The FR Yugoslavia Draft Law on Associations
By Dragan Golubovic
The Yugoslav government has recently prepared the new draft law on associations, which has already stirred a great deal of controversy. The draft contains a number of regressive provisions, some of them unparalleled in the region.
As for the scope of the draft, it regulates political parties and syndicates, as well as associations. Provisions on the establishment, registration and dissolution of a political party will analogously apply to an association (Art.18). Hence, registration of an association is mandatory and results in granting the association the status of a legal entity (Art. 1 and 2). Fines ranging from 9,000 to 90,000 dinars (app. $ 2100) are levied against an association that has engaged in any activities before it is entered into the registry. The same provisions apply to the association’s representative (Art. 21). In addition, fines ranging from 3,000 – 30,000 dinars are prescribed for an association and its representative, if it fails to submit the application for registration in the period of 30 days following the establishment of the association (Art.22).
The draft provides that at least a hundred (!) citizens are required to establish an association, while the current law requires only ten citizens. Only Yugoslav citizens can be the founders of an association. Hence, foreign citizens and legal persons, regardless of their seat, cannot be the founders. Children at the minimum age of 14 (and presumably Yugoslav citizens) can be the founders of an association, with the consent of their parents or trustees (Art. 19). Interestingly, the draft does not contain any specific provisions with respect to the internal governance.
The draft severely limits the association’s sources of income. Thus, an association cannot receive grants or donations from foreign governments or other “foreign persons.” In addition, domestic donations cannot exceed 1% of the organization’s taxed income generated in the prior fiscal year (Art. 8).
Provisions on the association’s dissolution also give rise to grave concerns. For example, the draft provides that the organization will dissolve should its activities become prohibited but does not cite any reasons whatsoever that would lead to the prohibition of the organization’s activities. Nor does it specifically provide for the right to appeal or refer to procedural rules that would apply in such situations. It also provides for dissolution of the organization if the number of members falls below the prescribed threshold without providing for any deadline in which it could increase the number of members up to the prescribed threshold (Art. 14).
Closing and transitory provisions in the draft are confusing and inconsistent. For example, it is not clear what the deadline is for an organization to amend its internal documents to comply with the new law and then submit them to the registration body. In addition, it appears that the draft requires that associations that have been registered at the respective republics (Serbia and Montenegro) also apply for entry into the federal registry (Art. 27).
In summary, the recent legislative developments in Yugoslavia/Serbia are extremely worrisome, although they do not come as a surprise. If the draft passes Parliament, it will pave the way for a purge of all of those NGOs that, for one reason or another, the government perceives as hostile or detrimental to the regime.