Liability of Not-for-Profit Organizations

Country Reports: Central & Eastern Europe

The International Journal
of Not-for-Profit Law

Volume 4, Issue 2-3, March 2002


Model Provisions for a Law on Public Benefit Organizations

By Piotr Gajewski*

Virtually all countries in Central and Eastern Europe are struggling to define and regulate “public benefit” organizations entitled to preferential tax/fiscal treatment.  To address this problem, ICNL convened twenty experts to discuss principles and possible provisions to be included in such a law.  This group –comprised of government officials, NGO representatives, international experts, and even a Supreme Court Justice from the region — first met in Zakopane, Poland in December of 1999.  This meeting led to the preparation of model provisions for a law on public benefit organizations, which was introduced to the broader NGO legal community at ICNL’s regional conference held in May 2001 in Sofia, Bulgaria.  Revisions were made to take into account comments heard at that meeting.  The Model PBO Provisions are already being used by drafting groups throughout the region.

Taxation of NGO’s in Central and Eastern Europe
Summary Report by ICNL Staff in Budapest


From January 17-20, 2002, the International Center for Not-for-Profit Law (ICNL) gathered 32 participants together in Budapest to examine the most pressing taxation issues currently affecting NGOs in Central and Eastern Europe, focusing on the countries of former Yugoslavia.   Ministry officials, tax experts, and NGO representatives from seven CEE countries participated, including Bosnia and Herzegovina (State level, Federation, and the Republic of Srpska), Bulgaria, Croatia, Hungary, Macedonia, Slovenia, and the Federal Republic of Yugoslavia (Serbia and Montenegro).  In addition, NGO tax experts from Italy, the U.K. and the U.S. participated in the meeting.

In convening this regional workshop, ICNL focused attention on how the fiscal framework governing NGOs can most effectively support the financial sustainability of NGOs while simultaneously ensuring the necessary financial accountability of NGOs.  All Central and Eastern European countries represented at the workshop have recently amended tax laws affecting NGOs or are contemplating doing so.  Thus all countries are confronting certain critical fiscal issues, such as criteria for public benefit organizations; creating incentives for philanthropy; the taxation — or exemption from taxation — of various categories of income, including income from economic activities; and value added tax (VAT).

Through the workshop, participants were able to exchange ideas, compare approaches to a variety of problems, and profit from the experience of others.  In addition, the workshop strengthened links between sectors and among countries, leading to the emergence of a network of NGO tax specialists.

Summary of Proceedings

The workshop opened with a panel presentation on “The Role and Value of NGOs” led by Pasquale Ferraro, Deputy Director General of the International Development Law Institute, and by Dr. Leon Irish, President Emeritus of ICNL.  As long-term experts in the fields of taxation affecting NGOs, they sought to place the issue of taxing NGOs in the broader context of the value of NGOs in society and to offer a variety of rationales for beneficial tax treatment.  Against this backdrop, the workshop then turned to address four substantive taxation issues.

First was the issue of public benefit status for NGOs.  Through a panel discussion led by Catherine Shea (ICNL Program Director), Nilda Bullain (ICNL Senior Legal Advisor), and Zivka Vasilevska (Legal Advisor with the Center for the Development of the Not-for-Profit Sector in Yugoslavia) several critical issues were raised.  These included how to define public benefit status, what kind of benefits, tax and otherwise, should be available to public benefit organizations (PBOs), who should have authority to grant public benefit status, and responsibilities required of PBOs.  Participants were able to more deeply explore these questions through working group sessions.

The second issue studied was incentives for philanthropy (both individual and corporate).  Mihail Boyadijev, ICNL’s consultant in Bulgaria, introduced the issue.  Nilda Bullain presented an overview of the Hungarian “one percent” law, which is proving to be a model law throughout the region, with Slovakia having enacted a similar law in 1999, and with both Lithuania and Poland contemplating similar legislation.  Katalin Ertsey, Managing Director of United Way Hungary, supplemented Nilda’s presentation by focusing on incentives for corporate philanthropy.

On the following day, workshop participants turned their attention to the proper taxation treatment of a variety of sources of NGO income, including donations, grants, membership dues, passive income and business income.  Dr. Leon Irish and Dr. Hrvoje Arbutina, Deputy Professor of the Faculty of Law at the University of Zagreb in Croatia, led this session and raised what are often controversial questions, especially regarding the taxation of income from business activities.  Debate continued in working group sessions.

The workshop concluded with consideration of value-added tax (VAT).  Paul Bater, Senior Research Associate at the International Bureau of Fiscal Documentation, opened the discussion by presenting an overview of how VAT works.  Mateja Vranicar, Counsellor to the Government, with the Ministry of Finance in Slovenia, outlined the Slovenian approach to VAT, which caused much interest among participants.  Finally, Marija Zuber, tax expert with the Croatian Association of Accountants, presented an overview of VAT issues in Croatia.  Discussion followed.

Results and Next Steps

The workshop proved immediately successful in encouraging the exchange of ideas across sectors and borders.  During the workshop, representatives from the Ministry of Finance in Macedonia drew on Hungary’s experience in enacting the “one percent” law and met with the Slovenes to discuss tax exemptions for monetary donations.  The representative from Montenegro advised the Bosnian delegation on the recent implementation of the VAT law in Montenegro.  Croatian representatives discussed the means of harmonizing their VAT law with European Union requirements with the Slovenian representatives.

The workshop also encouraged participants to more clearly define the issues facing the respective countries.  Participants were asked to work together in country-specific groups – Bosnia and Herzegovina (4), Bulgaria (2), Croatia (4), Macedonia (2), Slovenia (4), and Yugoslavia (5) – to discuss what taxation issues deserved the most attention in their countries, potential solutions to the issue, and how ICNL might support them in their efforts.  Out of these sessions emerged more clearly defined issues and more nearly concrete plans to resolve them.  ICNL is committed to working closely with all participants to carry out the next necessary steps.

In Bosnia and Herzegovina (BiH), for example, all four participants to the ICNL regional workshop are likely to participate in an upcoming tax workshop in Sarajevo, which will be co-sponsored by ICNL.  The goal of the workshop will be to formulate recommendations regarding amendments to the fiscal framework in BiH.  The Bosnian participants may serve as workshop facilitators and will be better able to guide other participants toward solutions that are in the best interest of BiH and also comply with international standards.

The four Croatian representatives agreed on the need to establish criteria for tax authorities to interpret what constitutes an “unjustified market advantage,” triggering taxation of income from economic activities.  ICNL will work with them and other local contacts in Croatia to discuss the possibility of a roundtable on tax issues this spring.  The Macedonian delegation agreed on the importance of creating incentives for philanthropy and will lobby for the adoption of new legislation modeled on the Hungarian “one percent” law.  ICNL is continuing discussions and providing further materials on this issue.  In addition, ICNL will likely support a roundtable on taxation in Montenegro and a tax reform working group in Hungary.

The real impact of the workshop will be measured in the coming months and years as the contacts made between ICNL and the participants and among the participants themselves are developed and strengthen.  But initial indications are promising that tax reform initiatives in several participating countries have gained a significant boost from the ICNL regional workshop.

Note: The workshop materials will soon be available at  Posted on the website will be the ICNL Survey of Tax Laws Affecting NGOs in Central and Eastern Europe, the Model Provisions on Public Benefit Organizations, the Sixth Council Directive and Case Note related to the EC Sixth Directive, a Summary on the Hungarian 1% Law, and an Overview of the fundamental provisions of the Hungarian 1% Law.  All materials will be available in English, and most will be available in Croatian, Serbian and Macedonian.

See also for the region: Legal Issues Affecting Volunteers and Volunteering: A report on a meeting of regional experts in Warsaw

Bosnia and Herzegovina

Law on Associations and Foundations

By Dragan Golubovic, Senior Legal Adviser, ICNL

The Parliament of Bosnia and Herzegovina passed the Law on Associations and Foundations (Official Gazette No. 32 of December 28, 2001), which, for the first time, allows NGOs to register at the state level and hence to operate throughout the country without further administrative requirements.  A number of the provisions in the Law complies with international standards and regional best practices, and are the result of collaborative efforts that included the Office of the High Representative, government officials, USAID, and domestic and foreign NGOs active in Bosnia and Herzegovina (BiH). Through generous USAID support, ICNL has been engaged in the process of preparing the Law. Among other provisions, the Law:

  1. Introduces a general principle of voluntary registration of associations, the only exception being “public benefit” associations  (Art. 28);
  2. Requires only three natural persons who are citizens or residents of BiH, or legal persons registered in BiH, to establish an association (Art. 9);
  3. Places on equal footing foreign and domestic persons as founders of a foundation (Art. 22);
  4. Allows associations and foundations to engage directly in related economic activities (Art. 4, Para. 1). However, the Law prescribes that surplus generated from unrelated economic activities, which an organization can only engage in through a separate corporation, may not exceed 10,000 convertible marks (approximately 5,000$) or one third of the organization’s overall budget, whichever amount is higher (Art. 4, Para. 3). Not only this extraordinary provision establish an unreasonable threshold for surplus generated through unrelated economic activities, but is also potentially unconstitutional as it discriminate on the market those corporations that are established by associations or foundations. In addition, it is not clear what the consequences are if the prescribed threshold is indeed exceeded; whether it will be taxed or simply expropriated.
  5. Provides that associations and foundations may be entrusted with duties of public competence (Art. 6);
  6. Provides for a flexible structure of internal governance of the organization (Art. 16, 25);
  7. Places on equal footing foreign and domestic persons as members of the board of a foundation (Art. 26). Interestingly, however, such an explicit provision is missing from the part dealing with the governing structure of an association (Art. 19), which could ultimately give rise to an issue whether foreign persons, in addition to domestic ones, may be members of the board of an association;
  8. Applies the conflict of interest rule to the members of the organization’s bodies when deciding on matters in which they have financial interest (Art. 20, 27);
  9. Allows the organization to generate income from any legitimate source (Art. 46).

The Law introduces the concept of “public benefit” organization and sets forth criteria for distinguishing associations and foundation pursuing public benefit from those pursuing mutual benefit purposes as well as the procedure for granting the status of public benefit organizations (Art. 13, 21). It is not clear however, why the legislature sought to address this issue in the general framework law, given that this is ultimately tax issue and that no tax or other benefits are currently attached to this status.


The Republic of Croatia New Law on Associations

By Dragan Golubovic, Senior Legal Adviser, ICNL

The Parliament of the Republic of Croatia passed a new Law on Associations (Official Gazette No. 88 of October 11, 2001), which replaces the much criticized 1997 Law on Associations.  The new Law resulted from collaborative efforts that included government officials from the Ministry of Justice and the Government Office for Cooperation with NGOs, experts from the Council of Europe, and representatives from local non-governmental organizations.  Through generous USAID support, ICNL played the leading role in providing technical assistance to the Ministry of Justice’s drafting team and in ensuring that the Law complies with international standards. In its exposition to the Law, the Ministry of Justice specifically acknowledged ICNL’s role in the drafting process.

Among other noteworthy provisions, the Law:

  • Provides for voluntary registration of associations (Art. 14);
    Under the prior framework, in violation of international standards, registration was mandatory and an association was subject to fines for engaging in any activities before being entered into the registry.  Hence, any kind of ad hoc civic initiative – or informal association — was technically prohibited.
  • Requires only three natural or legal persons to establish an association (Art. 10);
    Under the prior framework, no fewer than ten (10) natural or legal persons were required to establish an association.
  • Places domestic and foreign persons on an equal status as potential founders (Art. 10);
    Under the prior framework, foreign citizens could act as founders of an association only if they resided in Croatia for a period longer than one year and under condition of reciprocity (where the foreign state allows Croatian nationals to act as founders).  The reciprocity requirement also pertained to foreign legal entities that sought to be the founders of an association in Croatia.
  • Streamlines the procedure for the establishment and registration of an association, and reduces the government’s unwarranted discretionary power in the registration process (Art. 15 – 17);
    The prior framework set forth a burdensome registration procedure and an overly detailed list of required registration documents and also allowed for excessive government intervention during the registration process.
  • Significantly liberalizes conditions for the registration of foreign associations and places the registration of domestic and foreign associations on essentially the same footing (Art. 20);
    Under the prior framework, the consent of the Croatian Ministry of Foreign Affairs was required for the registration of a foreign association in Croatia.  No deadline was specified in which the Ministry had to act on the registration, nor did the Law provide for any legal remedies against the Ministry’s unfavorable opinion.
  • De-centralizes the registry of associations (Art. 14);
    The prior framework envisaged a central registry, which was run by the Ministry of Justice.  In order to facilitate the registration procedure, the new framework provides for an association to be entered into the registry of the local administrative body where the association has its seat.
  • Clarifies procedures for the prohibition of an association, empowers the court to decide on prohibition, and abandons the institute of temporary prohibition (Art. 35- 38);
    Under the prior regime, the registration authority, rather than the court, was empowered to rule on the temporary prohibition of an association, on grounds that were vaguely defined.  The new framework no longer provides for the temporary prohibition of an association and strips the registration authority of the power to decide on prohibition.
  • Returns to associations property that was nationalized under the prior framework (Art. 43);
    Under the prior framework, any real estate subject to disposition by associations that were established before 1997 was nationalized.  The new framework has rejected the nationalization of association property and instead declared those associations the owners of that property.
  • Significantly reduces fines prescribed for misdemeanors (Art.39);
    The prior framework prescribed excessive fines for misdemeanors, which could have easily resulted in the effective dissolution of an association.


Decision in the Foundation for Polish Science Case

On Wednesday, March 13, 2002 Poland’s Supreme Court reversed a ruling of the Supreme Administrative Court, which required that monies invested by foundations in securities be subject to corporate income tax.  The case before the Supreme Court stemmed from an attempt by Poland’s Treasury Chamber to tax revenues that the Foundation for Polish Science invested as part of its endowment during the years 1995-1997.  The amount of assessed tax was in excess of $20 million.

Last year, Poland’s Supreme Administrative Court sided with the Treasury Chamber, ruling that “an expenditure” of funds to purchase securities could not be considered a furtherance of the Foundation’s statutory purposes.  Inexplicably, the Supreme Administrative Court ruled that the only place where a foundation could invest its funds was a bank.  Any other type of investment, according to the Court, would constitute “an expenditure” inconsistent with a foundation’s statutory purposes and thus taxable under Poland’s corporate income tax law.  Wednesday’s Resolution of the Supreme Court reverses this ruling.

According to Gazeta Wyborcza, Poland’s most popular daily newspaper, the Supreme Court, deciding the case in its complete complement of seven justices, deliberated for approximately 90 minutes, before rendering the decision.  “In a short justification of the resolution, the leader of the panel, Walerian Sanetra, confirmed that the acquiring of securities by the Foundation falls within its statutory purposes.”  A written justification of the resolution should be available within a few weeks and will be published in IJNL.


In February, the government’s Council for Non-governmental Organizations recommended that the cabinet approve legislation under which NGOs would receive Sk 1.5bn from privatization proceeds to finance their activities.  The proceeds will be allotted to ten groups of NGOs, and divided up according to their activities, each receiving Sk 150m.  The NGOs will only be entitled to use
income from the privatization proceeds however, with the principal to remain untouched.  NGOs welcome this news, in large part because both state and non-state institutions will have access to this aspect of state financing.

Republic of Srpska

The New Law on Associations and Foundations For the Republic of Srpska

by Dragan Golubovic*

The Parliament of the Republic of Srpska (RS) passed a new Law on Associations and Foundations (Official Gazette No. 52 of October 17, 2001), which replaces the 1990 Law on Citizens Associations and 1994 Law on Foundations and Funds.  The new law resulted from collaborative efforts that included government officials, USAID, the Office of the High Representative, and domestic and foreign NGOs active in Bosnia and Herzegovina (BiH).  Through generous USAID support, ICNL played the leading role in providing technical assistance to the drafting team and in ensuring that the Law complies with international standards.  Among many significant improvements, the Law:

  • Provides for voluntary registration of associations (Art. 9);
    Under the prior framework, in violation of international standards, registration was mandatory and an association was subject to fines for any activities engaged in before the association was entered into the registry. Hence, any kind of ad hoc civic initiative was technically prohibited.
  • Requires at least three natural or legal persons to establish an association (Art. 9);
    Under the prior framework, at least thirty (30) natural persons were required to establish an association, which clearly violated international standards. In addition, legal entities were not allowed to be the founders of an association.
  • Allows associations and foundations that are registered in the Federation of BiH to freely operate in Republic of Srpska (RS), without further administrative requirements (Art. 7);
    Under the prior framework an association or a foundation was allowed to operate in the RS only if it was registered in the RS.
  • Places domestic and foreign persons on an equal status as founders (Art 9,18);
    Under the prior framework, foreign citizens were generally not allowed to be founders of an association. In addition, foreign legal entities were not allowed to establish a foundation.
  • Streamlines the procedure for the establishment and registration of a foundation, and reduces the government’s unwarranted discretionary power in the registration process (Art. 18 – 33).
    Under the prior framework, the government had authority not only to decide whether the statutory goals of a foundation comply with the law, but also to decide whether the establishment of such a foundation was necessary. Hence, a foundation could be denied registration even if its statutory goals were perfectly legitimate.
  • Allows foreign foundations to establish branch offices, and prescribes reasonable conditions for their establishment (Art. 35)
    The prior framework envisaged the establishment of branch offices only for foreign associations.
  • Prescribes specific standards of diligence for the members of the management board of an organization (Art. 38).
    Under the prior framework, it was not clear which standards of diligence applied to the members of the management board, especially if an organization engaged in economic activities.
  • Specifically provides that associations are allowed to engage directly in economic activities related to their statutory goals (Art.4).
    It was not clear under the prior framework whether an association was allowed to engage directly in such activities.
  • Provides that both associations and foundations can be entrusted the performance of public authority (Art. 8) 
    The prior framework envisaged such a possibility for associations, but not for foundations.

* Dragan Golubovic is Senior Legal Adviser, ICNL and can be reached at,hu.