The International Journal
of Not-for-Profit Law
Volume 1, Issue 3, March 1999
In reply to a question concerning the possibility of reducing the rate of VAT (currently 17.5%) levied on repairs to buildings used for religious purposes, the European Commission undertook to examine the idea in the context of the preparation of a wider-ranging Commission proposal to harmonise VAT rates in member states. (Official Journal C 402 of 22 December 1998)
A new decree clarifies the conditions to be satisfied by institutions involved in nature conservation or the protection of the environment in order to be eligible to be approved recipients of tax allowable donations. Such organisations must meet the following conditions:
- they have legal personality under Belgian law;
- they are nonprofit organisations;
- they carry out in Belgium activities devoted exclusively to nature conservation or environment protection;
- they play an important role in the perception of the public and the education of young people regarding the environment;
- their activities are regular and continuimg;
- they have been validly established and carrying on eligible activities for at least 2 years prior to the period for which approval is sought;
- they receive grant support for their activities from the federal authority or one of the regions;
- they are active in more than one commune;
- they do not spend more than 20% of their income on administration expenses.
Applications for approval must be sent to the Ministry of Finance by 31 December preceding the period for which approval is sought.
The decree has effect for donations made after 13 June 1996; organisations seeking retroactive approval for the years 1996 to 1998 must apply by 28 February 1999.
(Royal Decree of 29 October 1998 published 17 November 1998, amending Article 59 bis Income Tax Code 1992)
The Government has issued a draft bill to amend the law regulating nonprofit associations (associations sans but lucratif or ASBLs) and public benefit foundations (établissements d’utilité publique). The main proposed changes concerning associations include:
- a new definition of a nonprofit association permitting the carrying on of commercial activities provided that these are subsidiary to the main nonprofit purposes and that the profits are applied to such purposes;
- a judicial power to declare an association invalid where the declared objects contravene the law or public order, in which case the association must be liquidated;
- a minimum of 2 members and 3 board members;
- the right of creditors and heirs to go to court to annul transactions in favour of an association that constitute a fraudulent infringement of their rights;
- a requirement for larger associations (to be defined in terms of the number of staff employed and the consolidated receipts including other associations under common control) to produce annual accounts in accordance with the law of 17 July 1975 regulating accounts of commercial enterprises;
- a simplified accounting regime for smaller associations;
- the power of a local tribunal to order the dissolution of an association at the request of a member, a government minister or an interested third party in cases where the association cannot carry out its obligations, applies its funds to purposes outside its objects, fails to file accounts for 3 consecutive years, has less than 2 members, or otherwise contravenes its statutes, the law or public order;
- the removal of the requirement for at least 3/5 of the members to be Belgian nationals or residents, failing which the association cannot currently claim legal personality in its dealings with third parties;
- new requirements for the registration of an office in Belgium of an association established under foreign law, including the charging of the individuals responsible for the Belgian office with the same legal obligations to third parties as apply to the management of a Belgian association.
The bill also provides for the establishment of nonprofit private foundations (fondations privées). Several of the provisions applicable to associations are to apply to private foundations, including the power to conduct ancillary commercial activities and the registration of a Belgian office of a foreign private foundation. With government approval, private foundations can convert to public benefit foundations by complying with the relevant requirements of the law for the establishment of public benefit foundations; this change of status will not affect the legal personality of the foundation. It is also proposed that legacies and gifts to private foundations should receive the same tax treatment as gifts to associations, i.e. private foundations will be liable to the 8.8% reduced rate of inheritance tax on legacies under Article 59 of the Inheritance Tax Code (ITC) and to the 0.17% substitute inheritance tax on the annual gross value of their Belgian assets exceeding BEF 1 million (Article 148 ITC).
The bill does not include any proposals to amend the law of 25 October 1919 regulating international associations. Thus, the current requirement that the board of an international association includes at least one Belgian national remains, notwithstanding that the European Commission has decided to bring this matter before the Europan Court of Justice on the grounds that the requirement infringes Articles 6 (prohibition on grounds of nationality) and 52 (freedom of establishment) of the EC Treaty.
(Draft bill to amend the law of 27 June 1921; European Commission Directorate General XV infringement procedures 7 January 1998)
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On 18 December 1998 France ratified the European Convention on the Recognition of the Legal Personality of International NGOs dated 24 April 1986 and signed by France on 4 July 1996. (Law no. 98-1166 of 18 December 1998)
Legal reform in Germany – an update
Germany is still set on reforming its legislation concerning the civil law treatment of foundations and the fiscal law treatment of all nonprofits. But contrary to all expectations, the draft bill submitted to the last parliament in 1997 was not the first to be submitted to the present parliament. Apparently, the Green Party has not so far been able to convince its partner in the coalition government, the Social Democrats, of all details. So, surprisingly, the opposition Liberal Party has presented its own draft first, and it looks as if the Christian Democrats may also come up with some suggestions of their own. There does seem to be general agreement that something must be done, and a discussion process is under way which will probably influence the final wording. It looks as if the argument is gaining ground that the reforms are needed because civil society needs a better enabling environment in Germany.
The Bertelsmann Foundation and the Maecenata Institute are moving the issue forward by convening discussion groups, publishing papers, and providing arguments to politicians of all parties. A forum where the issues are to be presented to a wider audience will be held by these two organizations in Berlin on 11 May.
The original goal of passing new civil legislation before the end of the year may have been too ambitious, but the reform is definitely under way and is receiving considerable attention in the media.
The Budget proposals for the 1999/2000 financial year, which were announced on 2 December 1998, include the introduction of new tax reliefs for personal and corporate donations. With effect from April 1999, it is proposed that donations to public libraries of between IRP 100 and IRP 10,000, and donations over IRP 1,000 to the Scientific and Technological Education (Investment) Fund, will be allowable. (Revenue Commissioners Summary of Budget Measures 2 December 1998)
THE ECONOMIC VIABILITY AND DEVELOPMENT OF NON-PROFIT ORGANISATIONS IN THE ITALIAN CONTEXT
The Bocconi University of Economics (Institute of Business Economics)
The University of Bologna (Department of Business-Economic Disciplines)
The University of Parma (Institute of Business Research)
The University of Trento (Department of Information Technology and Business Stuches)
The University of Venice (Department of Business Management and Economics)
(edited by Prof. A Zangrandi)
DIFFERENTIATION AND AGGREGATION OF ORGANISATIONS INTO NON-PROFIT POOLS
The attainment of proper conditions of economic viability often requires organisations to establish relationships of operative and institutional collaboration with other organisations operating in the same field or on the same territory.
In general terms, it is possible to verify the existence of a relationship between the type of non-profit organisation and the contents of its institutional activities. In detail, it is possible to pinpoint the following ideal relationships:
- voluntary organisations are concerned with fund raising, with sensitising to and organising volunteers’ activities, and with social control, while they avoid the direct and complete management of services;
- social co-operatives are concerned with managing services in collaboration with foundations and with voluntary organisations, which also control the co-operatives’ activities;
- foundations are concerned with preserving and managing patrimonies and financial resources with a view to supporting the implementation of development projects for non-profit companies.
The strategic co-ordination among the various organisations can be carried out in the non-profit pool within which every organisation compares its own goals with the overall pool orientation, targeted on the effective and efficient pursuit of the unifying common mission. Within the non-profit pool, organisations are tied by financial, institutional and personal links that make coordination feasible. The development of the activities of non-profit pools can require the inclusion of public or for-profit entities in the pool itself which leads to the creation of mixed pools whose activities are however actually co-ordinated and controlled by the non-profit entities.
An organisation’s membership of a non-profit pool, and the institutional, organisational and financial relationships established by the organisations, within a pool, are the object of explicit, complete and transparent communication.
CONTRACTS WITH PUBLIC SERVICES
Many non-profit organisations draw a considerable amount of their proceeds and revenues from public entities either in the form of transfers or as fees for services delivered. This contracting-out policy is however pursued by government in order to make public structures more flexible, public services more efficient and, on the whole, more responsive to a continually evolving environment.
This financial relationship that is established between public and non-profit organisations, must be capable of generating economic viability in both organisations.
As far as the services delivered for or on behalf of government are concerned, it is highly important to evaluate appropriation modalities with regard to EU rules and regulations governing supplies and contracts on the one hand and, on the other, with regard to the development policies of non-profit organisations, that government wants to pursue.
It is most likely advisable that service supplies and/or public work contracts should be developed by government through ordinary procedures, thus leaving it up to other forms of relief or subsidies all actions aiming at reducing production costs and, consequently, economic offers.
In some specific realities and in some particular cases, it is possible to develop actions that are more targeted on specific categories of non-profit organisations or on organisations with specific requirements that are to be privileged. These cases should however be highly circumscribed.
As far as transfers are concerned, these must be linked to the activities carried out, so that non-profit organisations are stimulated to reduce production costs while, at the same time, transparent criteria for the appropriation of funds are thus highlighted.
Following this logic, moreover, government is able to develop greater attention to its own economic viability, by searching for greater correlation between the level of activities and resources used.
ENHANCEMENT OF HUMAN RESOURCES
For many non-profit organisations, work is a qualifying element and an essential production factor to achieve institutional purposes.
The valorisation and enhancement of work in these organisations, is of the utmost importance, in order to both favour employment and to generate conditions of economic viability within the organisations themselves. In this sense, any legislative reforms in this field take on great corporate and social importance.
In particular, it is advisable to develop policies concerning voluntary work in non-profit organisations, following two distinct guidelines:
- promoting both general and specific training activities in order to improve the performance level of organisations (which means promoting greater awareness and professionalism in society at large);
- developing activities that facilitate voluntary work in order to improve the conditions -under which activities are delivered within the organisations.
Furthermore, it is necessary to foster strong actions within the organisations, that should be linked to personnel promotion through any fashions that can enhance work with a view to targeting it on the achievement of institutional purposes.
In this direction, non-profit organisations, can implement forms of cooperation, of professional development and promotion that find fertile ground in the motivations of each individual to take active part in the pursuit of institutional purposes. The enhancement of this powerful potential needs ad hoc organisational actions that facilitate the implementation of forms of co-ordination that are capable of promoting and enhancing the potential itself. In this direction, non-profit organisations are an element of innovation under the organisational. profile.
CORPORATE INFORMATION SYSTEMS – THE REPRESENTATION OF OPERATING RESULTS
The representation of the operating results of these organisations is highly differentiated on the basis of the specific features of the various sectors, of the various types and dimensions of the organisations, and of the different legal status these organisations may assume. Considering that non-profit organisations are managed as delivery, production or mixed organisations, it is undoubtedly improper to suggest uniform accounting protocols comprising the budgeting system, so as to make it possible to enhance the distinctive features of the various types of organisations by also respecting their individual institutional, economic and legal peculiarities. All this holds true, it being understood that the budgeting system of non-profit organisations must nonetheless provide the transparent communication of the results achieved under the institutional profile, once the compliance with conditions of economic viability has been duly verified. The following documents are thus required:
- a cash statement that makes it possible to verify solvency;
- a statement of assets and liabilities that makes it possible to verify the degree of corporate patrimony growth;
- an income statement that makes it possible to verify the conditions of efficiency and management performance;
- an “institutional statement” (annual report) aimed at highlighting the degree of efficacy achieved during the mission of pursuing the specific institutional goals of the non-profit organisation.
All these documents should be accompanied by proper explanatory and additional notes.
As far as the interpretation of values is concerned, it is advisable to develop some reference principles valid for non-profit organisations, that allow them to draw up their final accounts according to some specific guiding principles (accounting principles for non-profit organisations).
These reference principles should not be drawn directly from the law, but rather they should be adopted by autonomous bodies and should be continually re-defined on the basis of specific concrete experiences.
In some sectors in which non-profit organisations are active, it seems advisable to introduce a new regulation that clarifies, specifies and rectifies the reference framework, similar to the already existing regulation on non-trading entities and on charities (ONLUS).
The economic dimension of non-profit organisations takes on an important value in view of the attainment of the typically non-economic purposes of these organisations. This dimension is a key element upon which attention should be focussed in order to achieve those conditions of efficiency and productivity that can lead to continual improvement in the way resources are used, including the resources that non-profit organisations acquire free of charge.
The diffusion of widespread economic awareness is to be linked to the need to obtain positive results from management, that are apt to foster the consolidation and self-development of non-profit organisations. Economic evaluation must therefore become a key element against which to compare corporate policies and both short and long-term choices.
In this sense, it is necessary to devise methods and techniques that are capable of outlining the conditions of resource allocation, even over the long term, by evaluating the specific institutional purposes of individual organisations. It is also necessary to evaluate the role of investments and the ways in which development can be funded while, at the same time, guaranteeing the endurance and regeneration of the economic-financial, capital, organisational, and operative conditions that have allowed and will allow institutional purposes to be pursued over time.
In other words, it is a matter of improving the evaluation systems of these organisations, also with reference to the role of the “operating result” generated and re-invested in the organisation, that is of the economic enhancement modalities of intangible resources, which are however fundamental with a view to organisational continuity.
DIFFERENTIATION OF ORGANISATIONS, CORPORATE CULTURE AND MANAGEMENT
Non-profit organisations are a diversified and highly differentiated reality in Italy. The sectors in which they operate are manifold and differ greatly in many ways. The relevant production factors needed to carry out the various functions also differ in both quality and typology.
The institutional conditions and policies implemented with a view to fostering the development of non-profit organisations must always take into account this great structural differentiation, if they want to achieve the desired results. In fact. rigid institutional elements (governance of organisations) and the search for uniform control systems to be invariably applied to all non-profit organisations are both improper approaches. On the contrary, it is advisable to adopt highly flexible rules that permit non-profit organisations to build up an institutional framework suitable for the attainment of individual institutional purposes.
Corporate culture must always be considered as the unifying element of non-profit organisations. It is the awareness that economic viability and development can be achieved as a result of the joint and co-ordinated efforts of various corporate processes, rather than as a direct consequence of corporate specificity or of the sole consideration of some particular factors specific to an individual corporate reality, such as the enhancement of professional roles or how patrimony is used.
In this direction, training managers of non-profit organisations is an important success factor in order to help promote a more professional culture in the management of some key national resources on the one hand and, on the other, in order to help develop corporate culture that is oriented towards harmoniously enhancing all corporate resources from a strongly result-oriented perspective.
DEVELOPMENT AND ECONOMIC VIABILITY
Undoubtedly, economic viability is to be linked directly to the autonomy of non-profit organisations, that is to their ability to settle themselves within their environment of reference in ways and with actions that are not directly or are indirectly determined by third corporate realities. From a corporate autonomy perspective, the following aspects of unitary corporate management appear as highly relevant:
- Differentiation of organisations, corporate culture and management.
- Economic evaluation.
- Corporate information systems – the representation of operating results.
- Enhancement of human resources.
- Contracts with public services.
- Differentiation and aggregation of organisations into non-profit pools.
Malta introduced VAT with effect from 1 January 1999. The new tax, is substantially modelled on the VAT system in the European Union, which Malta has applied to join. VAT is levied at a standard rate of 15% on goods and services supplied by any person (including nonprofit organisations) carrying on economic activities. Certain supplies qualify for exemption from VAT: this may be in the form of exemption with credit (which entitles the taxpayer to reclaim VAT paid on its purchases) or exemption without credit (which carries no entitlement to reclaim VAT paid).
Exemptions with credit include supplies of education or research by recognised educational establishments or non-profit institutions, the provision of medical care by approved hospitals, and the supply of welfare services by recognised nonprofit organisations.
Exemptions without credit include the supply of religious services; approved cultural or sporting services; services supplied by nonprofits of a political, religious, patriotic, philanthropic, philosophical or civic nature to their members provided no distortion of competition is likely; and the supply of staff in the course of providing, or the supply of goods and services in the course of raising funds for, health or educational supplies that qualify for exemption with credit. (Act No. XXIII of 1998)
The parliament approved on 9 December 1998 bill No. 7 1998/99 on group taxation regarding non-profit organizations and foundations (see IJNL Issue 2, Winter 1998). The rules are effective as from income year 1999. (1998/99:SkU8, SkU5, SkU2; Snabbprotokoll 1998/99:32)
The economic and taxation committee of the lower house of Congress is reviewing the exemption from VAT of the International Olympic Committee (IOC) in the light of the current reports of abuses in the procedures for the award of the Olympic Games in recent years. The IOC has also been exempt from income tax since 1981, but it appears that this exemption is not under review. (Tax Notes International, 11 January 1999)
A. Legal framework
1. The Charity Commission has announced progress in its review of the register of charities established in England and Wales (see IJNL Issue 1, September 1998). Following completion of the first stage of consultation, the Commission has issued four papers:
- “The Review of the Register of Charities”, which defines the common principles on the basis of which the review will proceed;
- “Promotion of Urban and Rural Regeneration”, which formally confirms that regeneration organisations can be recognised as charitable, and gives guidance on the law relating to such organisations;
- “Charities for the Relief of Unemployment”, which formally confirms that the relief of unemployment can be recognised as charitable, and gives guidance on the relevant law.
- “The hallmarks of a well-run charity”, which sets out the standards by which, in the Commission’s opinion, the public can have confidence in a charity.
At the same time the Commission launched the second stage of the review with the issue of three new consultation papers:
- “Maintenance of an Accurate Register”, which analyses the steps required to maintain an accurate record of institutions with charitable status;
- “The Recreational Charities Act 1958”, which explores the criteria used to determine whether recreational facilities are provided in the interests of social welfare;
- “Promotion of Community Development”, which examines the extent to which community groups can deliver benefits beyond their own community to society as a whole.
The consultation period for all three papers runs to 30 June 1999. (Charity Commission Press Releases PN 5/99, 6/99 and 7/99, all dated 18 March 1999)
2. The Charity Commission has published a summary report based on the 230 responses received to the consultation document issued on the Statement of Recommended Practice (SORP) for Accounting by Charities (see IJNL, Issue 2). The SORP Committee met in February 1999 to consider these responses and intends to issue an exposure draft towards the end of 1999.
3. The Charity Commission has issued new guidance for charities which provide services to the public under contract from local authorities and other public bodies. The guidance includes advice to charities on the extent to which they can legitimately provide services which a public body is legally required to provide at public expense, and on the legal implications of contractual relationships with puiblic bodies. (Charities and Contracts, Charity Commission leaflet CC 37, Otober 1998)
4. On 12 November 1998 a Compact on relations between government and the voluntary sector in England was launched. The Compact is a memorandum prepared jointly by representatives of both sectors but is not legally binding. The Compact applies to central government and its departments and agencies, but not to local government. However, the government intends to encourage its adoption and adaption by local government. Similar compacts have been launched in Northern Ireland (see IJNL, Volume 1, Issue 2 (December 1998), Scotland and Wales.
The Compact sets out a series of shared values and principles, undertakings by government, and undertakings by the voluntary sector. The shared values underpinning the Compact acknowledge that an independent and diverse voluntary sector is fundamental to the well-being of society and to the development of democracy.
Undertakings by government include:
- to recognise and support the independence of the sector;
- to develop a code of good practice for funding by government departments;
- to recognise the importance of, and support the development of, infrastructure for the sector;
- to appraise the implications for the sector of new government policies and procedures;
- to consult the sector on issues that are likely to affect it;
- to respect the confidentiality of information provided by the sector;
- to adhere to the principles of open government;
- to promote effective working relationships, especially where cross-departmental issues are involved.
Undertakings by the voluntary sector include:
- to maintain high standards of governance and conduct, including reporting and accountability obligations;
- to respect the law, including guidance from the Charity Commission on political activities and campaigning;
- to develop quality standards appropriate to the organisation concerned;
- to inform and consult service users, volunteers, members and supporters about activities and policies when making representations to government;
- to respect the confidentiality of government information;
- to promote best practice and equality of opportunity in activities, employment, involvement of volunteers, and service provision.
The application of the Compact will be developed by the preparation of codes of good practice in the areas of funding, consultation and policy appraisal, volunteering, community groups, and ethnic minority organisations. Representatives of government and the voluntary sector will meet annually to review the operation and development of the Compact, and a report of each meeting will be published. It is envisaged that disagreements should be resolved as far as possible by the parties themselves, possibly with the aid of mediation. Cases of maladministration can be referred to the Parliamentary Commissioner. (Compact on relations between Government and the Voluntary and Community Sector in England, November 1998)
1. The Treasury has issued a consultation document setting out proposals to reform the tax regime for charities following a review of the existing system that was announced in July 1997.
The main proposals are:
- to reduce the minimum donation eligible for tax relief under the Gift Aid scheme from £250 to £100, and to permit donors to aggregate smaller donations to reach the new threshold;
- to remove the maximum limit on allowable donations under the Payroll Giving scheme, and to permit employers to distribute employees’ donations directly to charities (currently, all donations are collected by approved agency charities);
- to extend the existing relief for gifts to educational and international aid charities by businesses of trading stock (inventory) or equipment to similar gifts to any charity;
- to examine, as an additional option to the existing schemes, the feasibility of introducing a form of tax relief for individual donations based on the current system in the United States;
- to align the direct and indirect tax rules for the exemption of fund raising events by or for the benefit of a charity;
- to consider the introduction of an exemption from income and corporation tax of profits below a de minimis threshold that are derived from commercial activities conducted by charities;
- to co-ordinate the guidance given by the inland Revenue and Customs & Excise to provide an integrated service to charities.
The document specifically rejects a number of submissions made during the review, notably the proposal for a government rebate scheme to reduce the burden of irrecoverable VAT incurred by charities on activities that do not amount to a business.
Comments on the proposals in the document are sought by 31 August 1999, following which specific proposals for legislation will be finalised. (Review of Charity Taxation Consultation Document, HM Treasury March 1999)
2. The new transfer pricing legislation introduced in the Finance Act 1998 effects a comprehensive reform of the tax laws restricting the ability of organisations under common control to conduct transactions with one another other than on arm’s length terms. In principle the new law covers transactions between charities and their affiliated trading companies. However, the Inland Revenue has said that, in accordance with paragraph 1.55 of the OECD Guidelines on Transfer Pricing, it will respect such transactions when they follow the guidelines and advice given by the Charity Commission, provided that no tax avoidance is involved, and will be prepared to offer pre-transaction advice to charities. (Inland Revenue Tax Bulletin, Issue 37, October 1998).
3. Customs & Excise have issued an information sheet giving guidance on the liability to VAT of routine domestic tasks provided by charities as part of a home help service supplied on a non-profit basis. Following the 1998 decision of a VAT Tribunal (Watford Help in the Home Service), Customs & Excise have accepted that domestic help services can qualify for exemption from VAT when provided to promote the physical or mental welfare of elderly, sick, distressed or disabled persons. (VAT Information Sheet 6/99, March 1999)
The Institute of Fiscal Studies (IFS) has issued a report on the scope for improving the tax incentives for charitable giving. The IFS was commissioned to consider the case for adopting the US system of tax deductible donations. The report concludes that the evidence that tax reliefs lead to an increase in charitable giving is inconclusive and considers that many of the benefits claimed for the US system could be achieved by minor reforms to the existing UK rules. (Taxing charitable giving, Institute of Fiscal Studies, December 1998)
An article titled Creating an Enabling Environment for Private Philanthropy: the Role of Charity Law in Northern Ireland by Kerry O’Halloran can be found in the articles section of this issue!
The Scotland Act was passed on 19 November 1998 and came into force on 16 December 1998, paving the way for the establishment of a separate Scottish Parliament sitting in Edinburgh, to which elections will be held in May 1999 and which will open for business on 1 July 1999. The Act specifies the legislative powers of the Scottish Parliament, which include the law relating to charities established in Scotland, and those powers which are reserved to the United Kingdom Parliament sitting in London.
(Scotland Act 1998, 1998 Chapter 46)