The International Journal
of Not-for-Profit Law
Volume 2, Issue 2, December 1999
The French Ministry of Finance is undertaking some serious rethinking of the way income from economic activities of NPOs should be taxed. The Ministry of Finance has issued in a very short period of time two fiscal instructions as well as explanatory documents. In volume 1 issue 2 of IJNL, we discussed provisions from the ministerial instruction of September 15, 1998. The measures taken in that instruction were the result of a report (“Clarification of the tax treatment of NPOs”) prepared by Mr. Goulard, counsel of the Conseil d’Etat, to the Prime Minister on March 10, 1998. On February 19, 1999, a second instruction was issued by the Ministry of Finance, which provides further specifications to the instruction of 1998.
In this note we review the changes these instructions bring to the tax treatment of NPOs in France.
1. General Principle
It is now confirmed that the “exemption of NPOs from commercial taxes remains a general principle, and their liability the exception.” In order to guarantee the principle of equality before tax and avoid distortion of competition, NPOs engaging in business activities are liable for commercial taxes i.e., VAT, professional tax and company tax. The criteria established by the “doctrine des œuvres” (fiscal instruction of May 27, 1977) in order to determine the social utility, and therefore whether an NPO is tax exempt, is repealed. New criteria have been established.
Furthermore, according to the instruction of February 19, NPOs performing economic activities will be exempt from VAT and professional tax when:
- The turnover of the organization engaging in the delivery of goods, the sale of goods to be consumed on the premises of an establishment, or lodging activities, is less than FF 500,000 per year.
- The turnover of an organization engaging in any other economic activity is less than FF 175,000 per year.
2. Determination of the Tax Treatment of an NPO
A three-step approach, described in the chart below, aids in determining whether an NPO is liable for the payment of commercial taxes.
Step 1: Does the management have a financial interest in the NPO?
- Yes: The NPO is liable for commercial taxes.
- No: Go to Step 2.
Step 2: Does the NPO compete with the business sector?
- Yes: Go to Step 3.
- No: The NPO is exempt from commercial taxes.
Step 3: Does the NPO conduct its activities along similar lines to the business sector?
- Yes: The NPO is liable for commercial taxes.
- No: The NPO is exempt from commercial taxes.
The following discussion explains each of these steps.
2.1. Does the Management Have a Financial Interest in the NPO?
The management does not have a financial interest in the NPO when:
- The management and administration of the NPO are carried out on a voluntary basis.
- Profits are not distributed either directly or indirectly, but used for the statutory purposes of the NPO.
- In the case of dissolution, the assets of the NPO are to be transferred to another NPO and must not be distributed among members.
Since the last two points are self-explanatory, the only issue is when the management of the NPO is considered to be on a “voluntary basis”.
Prior to the latest ministerial instruction, it was required that directors not be remunerated. However, it is now accepted that they may receive 75% of the minimum wage (SMIC) as compensation for work performed in the NPO, in-kind contributions, bonuses and reimbursement of unverified expenses. Payment of rent at market rate for property used by the NPO or the payment of a reasonable salary to a relative of the director who is employed in the NPO are not to be considered as grounds for disqualification of the NPO.
This requirement is to be applied to each director on an annual basis. However, if a person is director of several NPOs, which are linked by their purpose, activities and common directors, the total remuneration of the director from all these NPOs should not be greater than 75% of the minimum wage (SMIC). It is accepted that a director may be an employee of the NPO and therefore receive a salary, but in this case, it is important that s/he be subject to the supervision of the governing body. Otherwise, if s/he were a de facto director and received remuneration greater than 75% of the minimum wage, the NPO would be liable for payment of commercial taxes.
Finally, the instruction dated February 19, 1999 clarified the issue of remuneration of employees serving on the directing body of the organization. Their remuneration is not limited to 75% of the minimum wage. These employees are considered employees’ representatives and should not compose more than one-fourth of the directing body.
2.2. Does the NPO Compete with the Private Sector?
Only identical activities (including secondary activities) carried out by an NGO and a business are to be taken into consideration. There is competition only when a particular need can be satisfied either by a business or an NPO in a given geographic area. It is further possible to evaluate whether the activity carried out by the NPO can effectively take clients away from the business entity and reduce its income.
2.3. Does the NPO Conduct its Activities Along Lines Similar to the Business Sector?
The new method used to determine whether an NPO is exempt from commercial taxes is an evaluation of the product, the public targeted, the price applied, and the publicity given to the product. The importance of these criteria, also called the “rule of the 4Ps”, is to be applied in decreasing order. The product and the public are the key elements in determining the social utility of the activity.
2.3.1. The Product
“An activity satisfying a need which is not satisfied or is poorly satisfied by the market” is of social utility. When an “agrément” (accreditation) cannot be granted to a business entity, and so is granted to an NPO by the State, the activity undertaken by the NPO is recognized as being of social utility.
2.3.2. The public
The term “public” is understood to encompass the persons who purchase goods or services from an NPO. The activity is considered of social utility when the grant of specific advantages to the public is justified or the economic and social situation of the public justifies it.
2.3.3. The Price
The price established for the provision of a good or service must be:
- Significantly lower than the market price (commercial taxes paid by business entities must be subtracted in order to compare the prices);
- Sanctioned by public authorities; or
- Variable, depending on the situation of the public.
Finally, it is necessary to evaluate how the organization manages its marketing campaigns. For that purpose, it is necessary to establish whether the NPO carries out informative marketing, which is acceptable, or commercial marketing, which is not.
3. Management of Commercial Activities
3.1. Division of Activities Into Two Classes: “Sectorisation”
For purposes of the VAT, the “sectorisation” (division of activities into two classes, one for-profit and one not-for-profit) of activities was already a requirement. Now this system can be adopted by an NPO in order to escape company tax and professional tax on those activities that qualify as not-for-profit. The not-for-profit activities must remain dominant, and the accounting standards adopted should allow for the evaluation of each class of activity. The organization will achieve the “sectorisation” of its activity in adopting accounting standards that will allow the use of separate accounts for the activities qualifying as commercial and those qualifying as not-for-profit according to the “rule of 4Ps”. However, other parameters more difficult to account for, such as volunteers’ time, will be taken into consideration. The assets of the organization will then have to be allocated either to the commercial sector, the not-for-profit sector, or both. Further, donations allocated to the “not-for-profit sector” will be tax deductible for the donor.
3.2. Creation of Subsidiaries- “Filialisation”
The active or passive (i.e., as a shareholder) participation of an NPO in a business entity can be of interest when the NPO carries out significant taxable activities. Indeed, transferring the commercial activities into a subsidiary prevents the NPO from losing its exemption from commercial taxes. However, if the activities of the NPO are carried out for the benefit of the subsidiary created (e.g., helping the subsidiary reduce its expenses, increase its profits, obtain more customers, improve its management, etc.) the NPO may lose its tax exempt status.
The grace period, which had been granted until March 31, 1999, was extended to January 1st, 2000. NPOs must now comply with the new regulations. Furthermore, NPOs that consult the “association correspondent” from the tax authorities in order to clarify their tax status before January 1st will not be liable to tax adjustment for the prior tax periods. This is in addition to the measure already taken in September 1998 to revoke income tax assessment previously issued by the tax authority disputing the non-profit character of an organization.
Further changes to the taxation of NPOs have been adopted in the finance law 2000 promulgated on December 31, 1999. As had been announced by the French Prime Minister during the “Conference on Associative Life” held in Paris on January 20 and 21, 1999, article 15 of the finance law 2000 contains provisions that grant organizations whose revenue from activities qualifying as “for-profit” according to the rule of 4Ps, exemption from commercial taxes as long as such revenues do not exceed FF 250,000. Regarding VAT, this provision will be applied for activities carried out by the organization on the following fiscal year the requirement was met. If the revenues of the organization exceed the franchise during the year the organization is entitled to VAT exemption, the organization will loose this benefit as soon a its revenues exceed the FF 250,000.
In addition, the finance law 2000 harmonizes tax deductions of donations by individuals to organizations recognized as being of “public utility” (associations et foundations reconnues d’utilité publique) and donations to other organizations of general interest (charities and accredited organizations). The maximum credit received for donations to organizations of general interest was 50% of the amount of the donation, limited to 1.75% of taxable income. The credit is still 50% of the donation, however the limit is now 6% of taxable income, as was already the case for donations to associations and foundations of public utility. Donations to organizations supporting persons in difficulties receive a credit independently from other donations at a rate of 60% of the donation, up to FF 2070 of income per taxable year.
Another measure relevant to the non-profit sector was promulgated on April 8, 1999: New accounting standards for NPOs, which had been adopted in February by the National Council on Accounting.
In another development, the requirements for granting public benefit status to a foundation or an association (“reconnaissance d’utilité publique”) are currently being discussed and a report on the concept of public benefit was adopted by the Conseil d’Etat on November 25, 1999. A paper about this matter will appear in the March issue of IJNL.
Caroline L. Newman
ICNL would like to thank Michel Doucin, General Secretary of the High Council of International Cooperation attached to the of the French Prime Minister’s office, and Yan Kergall, attorney in the Paris law firm UGGC and associés, who both provided access to materials that were used in writing this note.
Notes Press communiqué of the Prime minister of September 15, 1998.  Section 1 of the Fiscal instruction of September 15, 1998.  « Organismes sans but lucratif, critères d’appréciation de la non-lucrativité, nouvelles règles », Edition Francis Lefèvre, FR 46-98, p. 7.  SMIC (Salaire Minimum Interprofessionnel de Croissance) is the minimum monthly salary an employee should receive. The SMIC is established by the government.  Undated document by the tax authorities addressed to the Interministerial Delegation to Social Innovation and Social Economy published in Edition Francis Lefèvre, FR 24-99, p. 3.  Ministry of Economy and Finance, Nouveau régime fiscal des NPOs, Coll. Guide pratiques, La Documentation Française, Paris, 1999, p. 21.  Undated document by the tax authorities addressed to the Interministerial Delegation to Social Innovation and Social Economy, op. cit. p. 3.  Nouveau régime fiscal des NPOs, op. cit. p. 21.  Nouveau régime fiscal des NPOs, op. cit. p. 23.  An “agrément” is granted by the Ministry relevant to the activity the organization is carrying out. It can be granted for licencing purposes, when a contract is established between the State and a legal entity. Some “agreements” are specific and can be only granted to NPOs such as to consumers organizations, sports organizations, popular education organizations, environment organizations…  Nouveau régime fiscal des NPOs, op. cit. p. 25.  Undated document by the tax authorities addressed to the Interministerial Delegation to Social Innovation and Social Economy, op. cit. p. 5.  Ibid.  Nouveau régime fiscal des NPOs, op. cit. p. 32.  Nouveau régime fiscal des NPOs, op. cit. p. 27.  Nouveau régime fiscal des NPOs, op. cit. p. 3.
Legal and Tax Frameworks
There has been ongoing discussion in Germany of various aspects of legal reform for the foundation sector and the larger public benefit sector. The Commission formed by the Bertelsmann Stiftung and the Maecenata Institut for Third Sector Research to consider these matters has completed the first phase of its discussions, with a concluding public forum held on 20 January 2000. The proposed principles for legal reform developed by Bertelsmann and Maecenata were presented at a meeting of the Committee on Culture and Media of the German Bundestag on December 15, 1999. A fuller discussion of the principles can be found in Maecenata Actuell No. 19, which can be obtained (in German) from Dr. Rainer Sprengel of the Maecenata Institut at email@example.com.
In addition to the proposals developed by the Foundation and Institute, all the political parties in Germany have been developing positions of their own, some of which are in the form of legislative proposals. Difficulties remain and developing a legislative draft that will satisfy all the interest groups will not be easy. The sensitive issues include: 1) deciding whether it is necessary to deal with the law affecting public benefit organizations generally or only with the law affecting foundations; 2) deciding whether there should be a focus only on tax reform or on broader legal reform for the sector; and 3) deciding how to divide responsibility for the eventual oversight of public benefit organizations between the federal government and the state (Laender) governments. Naturally the details will need to be worked out over time.
ICNL will be following the developments in Germany and reporting on them from time to time. For additional information, please contact Dr. Sprengel at the Institute, as suggested above. See also the previous discussion of developments in Germany in the March 1999 issue of the Journal.
As of 1 January 1999, associations and foundations which obtain income through the use of volunteers are exempt from corporate income tax on a basis similar to legal entities that carry on specified public benefit activities. The volunteers must be engaged in activities that contribute to the production of income (Press Release 99/082 of 14 April 1999).
The tax changes for 1999, which took effect from 1 January 1999, included the introduction of an additional 7% deduction (in addition to the actual cost) of training expenses for those nonprofit organizations that are subject to corporate income tax, e.g. if they carry on regular business activities that compete with the commercial sector (Bill 26245).
New Tax Rules on Corporate Sponsorship (Patronage) of Social Activities
In March 1999 the government passed the Patronage (Sponsorship) Statute (PS). This Decree, effective from 1 of January 1999, has three main objectives:
- to provide for separate regimes of social, cultural, environmental, scientific, and sporting patronage;
- to provide a harmonized framework for such donations; and
- to grant more favourable tax treatment to social patronage than to the other types of patronage
Under the PS regime tax relief will be given for donations in cash or in kind to NGOs which do not involve the receipt of any monetary or commercial benefits by the donor. This relief, with the exception of the donations made to the central, regional or local government or to exempted public utility entities, is dependent upon recognition by means of a Joint Dispatch of the Minister of Finance and of the Minister responsible for the relevant sector of activity.
Corporate Income Tax
For these purposes relief will be granted as costs or operating losses for an amount equal to a percentage of the total amount donated up to a limit that is defined by reference to the company turnover or services rendered.
- 130% of the total amount donated to IPSS or legal entities considered comparable to an IPSS by law, legal entities of public administrative utility, cooperatives of social solidarity engaged in activities of charity, assistance, benevolence or to the cultural and sporting centres prescribed up to a limit of 0.8% of income;
- however, this limit may be disregarded if the recipient’s activities were considered of high social interest;
- the deduction is increased to 140% of the gift when the donation is connected with the support of nurseries and elderly people, drug addiction, AIDS, cancer, diabetes and rehabilitation through the promotion of working opportunities for individuals, families or socially excluded groups.
Cultural, environmental, scientific, technological, sporting and educational patronage:
- 120% of the total amount donated to associations, foundations and cooperatives engaged in the pursuit of the above-mentioned activities (e.g. defense and promotion of cultural heritage, music, dance, museums, libraries, environmental NGOs, Olympic Committee of Portugal) up to a limit of 0.6% of income;
- however, this limit may be disregarded if the recipient’s activities were considered of high social interest;
- a percentage of 130% will be applicable when the donations are made under an agreement lasting more than 1 year.
Donations to associative bodies:
- the total amount, up to a limit of 0.1% of income, donated by the member in order to allow the pursuit of the stated purposes.
Donations made to central, regional or local government, to foundations where the said levels of government contributed at least 50% of the initial endowment of the foundation, or to foundations of private initiative aimed at the accomplishment of social or cultural goals by means of the initial endowment:
- 140% of the total amount donated when connected to the pursuit of social goals;
- 120% for donations to NGOs pursuing cultural, environmental, scientific, technological, sporting or educational goals;
- 130% when made under an agreement lasting more than 1 year
Further, there is no limit to such donations.
Individual Income Tax
For this purpose relief will be granted to resident individuals as a deduction from net income for donations towards the above-mentioned purposes, subject to the following limits:
- 25% of the total amount donated whenever there is no limit for corporate income tax purposes; or
- 15% of the donor’s total net income, whenever there is a limit
This latter limit also applies to donations made to religious entities. In such a situation the donation shall be regarded as 130% of its amount.
Deductions included in the expenses of a business are disallowed in computing the taxable income of the business.
(Decree-Law 74/99 of 16 March 1999, as amended by Law 160/99 of 14 September 1999)
Provision for allowable donations for earthquake relief is made in certain special laws (e.g. the Disaster Act of 1999). Pursuant to this legislation, the Ministry of Finance announced new rules for donations provided for earthquake relief. Donations given to the public institutions, local administrations, the Turkish Red Crescent and certain other relief agencies which is to be used to repair the damages of the earthquake can now be deducted by individuals and companies without any limitations, provided that the donations are substantiated with proper documents. Furthermore donations of goods and services for earthquake relief will not be subject to VAT.
(See Corporate Tax Communiqué No. 65 dated 3 September 1999)
1. The Finance Act 1999 amended the Millennium Gift Aid Scheme in the following respects:
- the relief for cash gifts was extended to apply to gifts for the relief of poverty of refugees from designated countries or territories (Sec. 56). Kosovo was designated as such a territory with effect from 21 August 1999 (Statutory Instrument SI 1999/2118);
- the relief for cash gifts was amended to enable charities to reclaim basic rate tax on donations received in installments straddling one or more income tax years at the tax rate applicable in the year in which the first installment is paid (Sec. 57).
In addition, the existing Millennium Gift Aid relief for gifts of equipment and trading stock was abolished and replaced by a broader relief with no time limit for similar gifts in kind to all UK charities wherever they operate (including heritage bodies and similar institutions within TA, Sec. 507) with effect from 27 July 1999 (Sec. 55).
2. On 9 November 1999 the government announced details of its proposals for legislation following completion of its review of charity taxation (for prior coverage see IJNL Spring 1999). The proposals, which are intended to be introduced with effect from April 2000, include:
- abolishing the £1,200 maximum limit on allowable donations under the payroll giving scheme;
- abolishing the £250 minimum limit on allowable single donations under the Gift Aid scheme, and removing the requirement to complete a form for each gift under the scheme;
- replacing the rules for gifts under deeds of covenant with the Gift Aid rules;
- removing the requirement for corporate donors to withhold income tax from their donations;
- allowing a deduction for income tax purposes of charitable gifts of listed shares and securities based on their market value;
- exempting from income and corporation tax the profits of small fund-raising events run by charities, and aligning the conditions for exemption with those applicable for VAT purposes;
- extending relief from VAT to the supply of advertisements to charities, bathrooms in day care centres and donated goods sold to people with disabilities and on low incomes.
Further details of the new measures are expected to be announced in the March 2000 Budget.
(HM Treasury Press Release, 9 November 1999) For further discussion of these proposed changes see Debra Morris, How Does The Common Law Assess Public Benefit In Order To Define A Charity? in IJNL Vol. 2, Iss. 1.
News from the Charity Commissioners for England and Wales
1. The Charity Commission has announced the next stage of its review of the register of charities established in England and Wales (see IJNL Volume 1 Issues 1 and 3). The Commission has issued four new consultation papers:
- “Trustee Remuneration”, which discusses the circumstances in which it is appropriate for charity trustees to be paid for their duties;
- “The independence of charities from the state”, which explores the criteria used to determine the charitable status of bodies established by central or local government;
- “The public character of charity”, which examines the nature of the public benefit test of charitable activity; and
- “Preservation and conservation”, which reviews the charitable status of organisations dedicated to the built or natural heritage.
The consultation period for the paper on trustee remuneration runs to 31 December 1999 and for the other three papers runs to 31 January 2000.
(Charity Commission Press Releases PR 17/99 dated 15 September 1999 and PR 20/99 dated 28 October 1999)
2. The Charity Commission has issued guidance on the law and best practice on the use of charity funds to pay for a the cost of preparing a will as part of a fundraising programme.
(Paying for wills with charity funds, Charity Commission briefing note, 24 September 1999)
3. In June 1999 the Charity Commission published its Annual Report for 1998. During 1998 the Commission registered over 6,200 new charities and de-registered about 4,400. At the end of 1998, some 70% of the 186,000 registered charities had an annual income of less than £10,000, whereas the largest 271 charities represented 40% of the £19,700 million total annual income of registered charities.
The Commission’s activities during 1998 also included:
- assisting an umbrella charity to revise model governing documents for use by its members;
- facilitating the creation of 5 new charities to take over the assets of 90 small charities with purposes that had become out of date;
- modernising the investment powers of a 13th century charity;
- removing charitable trustees who had committed a breach of trust involving the improper use of charitable funds;
- intervening to protect funds raised in the name of charity by a non-charitable body.
The Commission employs 540 staff and has an annual budget of £21 million.
(Report of the Charity Commissioners for England and Wales for the year 1998)