The International Journal
of Not-for-Profit Law

Volume 15, Issue 2, December 2013

Petr Jan Pajas1

On September 12, 2013, the Senate of the Czech Parliament refused to ratify the Bill of Public Benefit Status. The Chamber of Deputies had adopted the bill on August 8, 2013, as one of the legal norms expected to come into force with the New Civil Code of the Czech Republic on January 1, 2014. This article provides details about why that happened and what it means for Czech civil society.

Attempts to develop a supportive legal environment for civil society organizations in the Czech Republic began long ago. The efforts to change a legal system distorted by 40 years of Communist Party rule started immediately after November 1989. The previous so-called socialist legal system was based upon the supervision of the Communist Party over all political and civic activities, including the appointment of persons to state and public administration offices; complete state ownership of industry, business, and services; and the imposed cooperative use of lands and animals in farms. Virtually any form of independent behavior was either directly banned or considered a suspicious attempt to overthrow the political system of the so-called people’s democracy.

During the 1950s, the regime dissolved nearly all clubs, unions, and voluntary associations, including those with a century-long history, especially when they cultivated active participation of citizens in the life of society. When Nazi Germany occupied Czechoslovakia during World War II, essentially all Czech foundations were abolished and their property confiscated or transferred to German foundations. Even so, the Communists were so afraid of the remaining foundations’ possible independence that they abolished all but one of those still remaining and confiscated their property. The property of foundations was never returned or compensated, even after November 1989.

When the Civic Forum took over political power and leading dissident Vaclav Havel became President of the Republic in November 1989, the reconstructed Czechoslovak Parliament began by abolishing those articles in the Constitution that provided exclusive power to the Communist Party of Czechoslovakia. Equal rights for all political parties were restored. Other laws transformed the Czechoslovak Federal Republic, as it was known then, into a liberal democracy. The first free democratic elections took place in June 1992. New laws also guaranteed human and political rights, such as the rights to assemble, associate, and petition, as well as the rights of minorities. As early as 1990, in addition, many laws regulating the economy and commerce were amended.

In 1992 it was decided to dissolve Czechoslovakia. The Czech Republic became a state on its own on January 1, 1993. The Constitution of the Czech Republic defined the new state as a parliamentary republic based upon three pillars of legislative, executive, and judicial powers, reflecting the role of the state as the guarantor of the freedom and security of its citizens within the rule of law. The new paradigm was reinforced by the addition of a list of basic human and civil rights as a constituent part of the Czech constitutional system, following the patterns of European continental law.

However, even under the new legal environment, many basic laws from the previous political system remained in force. It was not possible to change all parts of the executive branch within a few months or even years. The government structure, the courts’ structure, state security, the army, and most provisions for international relations remained unchanged, as did the basic civil code, criminal code, court procedures, and other laws and regulations relevant to the continuity of state powers and administration.

The transition from “people’s democracy” to “liberal democracy” in the Czech Republic lasted much longer than anybody expected. Actually, this transformation is not finished even now, twenty years later.

There are some examples of how much time it took to implement the political structures presumed by the Constitution. In 1996, the Czech Parliament was completed following the first direct elections of the members of its upper chamber, the Senate. In 2003, the Highest Administrative Court started to operate. Only now, in 2013, are we witnessing a serious discussion about such issues as hierarchy in the court and prosecution offices as well as the role of the Constitutional Court.

In order to fulfill the requirements of membership in the European Union, the Czech Republic undertook a tremendous effort in legislation from 1997 to 2003 to accommodate the Czech laws with the acquis communautaire or EU Law. That included the introduction of a new administrative system, providing the fourteen regions and all municipalities of the Republic the status of self-governing territorial units. One condition for entering the EU was to adopt a law on state service. Unfortunately, the entry into force of Act No. 218/2002 Sb., on Service of State Administrators, was postponed several times. That is characteristic of the approach taken by some Czech politicians to such obligations, despite their promises every election period concerning the adoption of norms that could better guarantee the stability, transparency, and reliability of the state administration.

As for the legal environment for civil society organizations, Act No. 83/1990 Sb., on Association of Citizens, was approved in 1990. In a rather liberal way, it allowed for establishing associations as juridical persons based on the membership of citizens who want to achieve common interests, excluding entrepreneurial, religious, military, or political purposes, so long as they do not limit the rights and freedoms of other citizens or interfere with the governmental, defense, or security roles of the state.

However, it took until 1997 to develop a proper law on foundations as a legal form that can take care of property set aside by a private person for a purpose of public interest, without any ownership title to the property on the part of its founder, the persons forming its governing structure, or its employees. Basic principles implemented in Act No. 227/1997 Sb., on Foundations [with Endowments] and [Money Collecting] Funds, were formulated as early as 1991 under the then Czech and Slovak Federal Republic, then in the Czech Republic again in 1995 to be finalized during 1996-1997. Also in 1995, Act No. 248/1995 Sb., on Public Benefit Corporations, was enacted, which treats as juridical persons not-for-profit organizations without membership if they provide commonly beneficial services to the general public under well-defined and accessible conditions.

And, last but not least, in 2012, after more than fifteen years of drafting and debating, new legal norms re-codifying the whole civil code (Act No. 89/2012 Sb., the [New] Civil Code) and replacing the current commercial law (Act No 90/2012 Sb., On Commercial Corporations and Cooperatives) were finally adopted. These innovative norms freed of “socialist” heritage should enter into force on January 1, 2014. The nearly two-year term for entering into force was provided in order to allow citizens, juridical persons, the state and public administration, the judiciary, and others to adjust to the new norms, terminology, procedures, and implementation rules. The time has also been used for development of legal norms and regulations accompanying the new codes.

The Government of a broad coalition of right-wing parties with a strong majority in the Chamber of Deputies (but since 2012 with a minority in the Senate) claimed that the two-year period should be sufficient for adapting to the new legal environment, with its regulation of the rights and obligations of both natural and juridical persons, issues of life and death, family life, heritage, and legally binding relations, as well as its procedures for decision making, care for property, and other issues of civil and commercial life. The period was also treated as sufficient to provide for adequate education and technical preparation of all affected by and involved in implementation and enforcement of the new norms. However, from the very beginning, many objections were expressed against the new paradigm. Some also objected that the change of the legal environment was too abrupt and too complex.

The New Civil Code brings important changes into the legal environment of juridical persons, including or even especially those forming organized civil society. Under the New Civil Code, juridical persons are divided into Corporations (those with members actively using their accorded rights and obligations – such as voluntary associations, trade unions, and commercial companies of all kinds), Foundations (those based on property assets endowed or given for concrete purposes, but without members or persons with ownership titles to the property assets), and Institutes (those established to develop activities socially or economically beneficial and accessible to everybody under well-defined conditions, also without members or persons with ownership titles to the organization’s property). When it enters into force, the New Civil Code will abolish Act No. 83/1990 Sb., on Associating of Citizens, and replace it with a set of mostly default provisions regulating all phases of life of voluntary associations, including members’ rights and obligations. Also, Act No. 248/1990 Sb., on Public Benefit Corporations will be formally abolished.

In order to simplify the changes, the New Civil Code enables existing associations of citizens to continue as they are, being considered automatically as voluntary associations established and governed under the New Civil Code. However, it also allows the existing associations to change their legal form into an Institute or a Social Cooperative (a special form of a corporation that systematically develops publicly beneficial activities supporting social cohesion, aimed at the social integration of handicapped persons and enabling their access to the labor market using local resources). This change may be accomplished within three years after the New Civil Code enters into force.

Moreover, early in 2013 the Parliament adopted Act No. 68/2013 Sb., on Transformation of Associations of Citizens into Public Benefit Corporations. By using it, existing associations were given a chance to change their legal form into public benefit corporations. These can no longer be established according to the New Civil Code, but may continue being regulated under the present laws or may change their legal form again and become Institutes, Foundations, or Funds.

While the New Civil Code has been drafted, discussed, reviewed, and debated, there has also been discussion of how to define public benefit as something that a juridical person should do in order to be eligible for certain benefits, like tax reduction, access to public financial sources, tax benefits for donors, and a preference in other matters.

Since the second half of the 1990s, a great deal of research at the international level has been supported by the International Center for Not-for-Profit Law (ICNL). The researchers have noted the importance in liberal democracies of defining what may be considered a publicly beneficial activity, including whether some overseeing authority or self-regulating entity ought to distinguish organizations operating in publicly beneficial manners from those operating mostly for the private interests of a closed circle of persons. In December 1999, researchers and representatives of leading civil society organizations from thirteen countries in Europe and North America summarized the experience from several legal systems on the notion of Public Benefit Status.2 ICNL later published this summary in the Model Law on Public Benefit Status.3

After many changes and amendments, the Czech New Civil Code includes a set of articles (§§ 146 – 150) concerning Public Benefit Status. A juridical person is eligible if it satisfies the following criteria: its incorporation documents show that it was established for the purpose of contributing to the common good; only natural persons of good character (not sentenced for willful criminal acts) may act on its behalf; its property has originated legally and fairly; and it uses its assets in an economically efficient manner for publicly beneficial purposes. Such juridical persons shall have the right to have their Public Benefit Status filed in the appropriate public register. With such a status registered, the juridical person can use it in connection with its name. The New Civil Code relegates the procedures for registering Public Benefit Status to a special law. Though unspoken, it follows that the tax and other laws shall provide benefits or preferential treatment to juridical persons with the Status and to those persons supporting them.

In 2009, at the initiative of legal experts from both civil society and government, the Governmental Substantive Design of the Bill on Public Benefit Status was drafted and approved. It was prepared under auspices of the Governmental Council for Non-Governmental and Not-for-Profit Organizations. The draft raised the possibility that any juridical person (and not only those established according to special laws regulating civil society organizations) should be eligible for Public Benefit Status and the attendant tax benefits and preferential treatment. The draft assumed that the registering court would ensure the validity of the claim by reviewing the juridical person’s application and documents. In general terms, the draft described what should be considered a public benefit service or activity, how to apply for Public Benefit Status, and what kind of benefits the Status would confer. It also addressed the withdrawal of the Status when sought by the juridical person or when ordered by the court.

In 2010, following discussions within civil society organizations, the Government decided to withdraw the Design and ordered the Ministry of Justice to draft the special Bill on Public Benefit Status that would reflect the conclusions of previous debates.

The Ministry of Justice started work on the new draft in 2011. Starting in January 2012, it cooperated with civil society organizations. Some of the organizations operated under the umbrella of the Association of Publicly Beneficial Organizations, established in order to promote the idea of the Public Benefit Status. Others joined together as the Association of Non-Profit Organizations in order to oppose the idea; they favored retention of the current flatly offered tax and other benefits.

The draft of the Bill on Public Benefit Status was prepared in September 2012. After further debates and exchanges between the Ministry of Justice and the Ministry of Finance, the Czech Government approved it in March 2013. In April 2013 it was submitted to the Chamber of Deputies of the Czech Parliament, despite the fact that the exchange of opinions between the Ministry of Justice and the Ministry of Finance had failed to clarify the issue of tax benefits provided under the bill. By contrast, the Bill of Changes of Tax Laws submitted by the Ministry of Finance leaves the tax benefits for associations, foundations, funds, and institutes largely unchanged. The one significant change in the proposed tax laws stipulates that only donations from natural and juridical persons that are given to juridical persons with Public Benefit Status shall be deductible from the tax base of the donor. The new tax regulation was supposed to enter into force on January 1, 2014, alongside the New Civil Code.

The Bill on Public Benefit Status was discussed in the Parliament Chamber of Deputies. Its adoption was not considered necessary, since according to the opinion of the opposition parties (Czech Social Democratic Party, Communist Party of Bohemia and Moravia, and Public Affairs Party), the New Civil Code should not enter into force so soon; instead, a much longer time should be left for courts, public administration, and citizens to become acquainted with it and to prepare technical norms. At the time of these discussions, only three to four months remained to absorb all the new provisions, amendments, and changes in more than forty such laws.

A second objection raised to the Bill on Public Benefit Status relates to the fact that it lists as a publicly beneficial activity “professing religious faith and providing spiritual support” (Article 5, Item z/ of the Bill). This happens to be a sensitive issue in the Czech Republic. During 2012–2013, the coalition Government (formed by the Civil Democratic Party, TOP09 Party, and a tiny Liberal Democratic Party) forced through the Parliament a law providing for restitution of the property and assets of registered churches and religious communities confiscated after the Communist Coup in February 1948. The law also provides for complete separation of the churches from the state within a thirty-year period of time. The law will cost a huge amount of money, representing about 1 per cent of the state budget for many years. Given this context, it is no surprise that a deputy from the Communist Party objected to the mentioned provision of the Bill. She asked: “Is it not another gift of the State to the Churches? Is it necessary to have it in the Bill separately when charity activities are there explicitly mentioned under other items of Article 5?” Actually, this was the only explicit objection to the list of 25 publicly beneficial activities in Article 5 of the Bill.

The deputies finally approved the Bill with a few amendments, making it perhaps a bit less friendly to civil society organizations but not as sharply oriented against them as some coalition representatives wished. The final vote was taken in the absence of 45 percent of deputies and thus with quorum of 60 (out of 200): 62 voted for and 43 against the Bill—a very tiny majority, indeed!

It should be noted that the Bill on Public Benefit Status as well as most of the other bills accompanying the New Civil Code were submitted to the Parliament during a deep governmental crisis. Prime Minister Nečas and the whole coalition Government had to resign due to abuse of the state security services and other conflicts of interest. At that time, the Chamber of Deputies was divided equally, so it was not clear whether a majority still supported the coalition. On August 16, 2013, the Chamber of Deputies by a majority of 140 members decided to propose that the President of the Republic dissolve the Chamber. President Zeman did so on August 28. With that, all the bills left as approved by the Chamber of Deputies went to the Senate, where they could be only confirmed as submitted or refused without any possibility of a corrective action.

The Senate of the Czech Parliament has a strong majority from the opposition. So it could have been expected that the bills dealing with the New Civil Code would be in jeopardy, given the steady opposition to it as well as the repeated requests to further postpone its entry into force.

The debate on the New Civil Code and some of the accompanying bills made it clear that the majority of the Senate would refuse to accept parts of the legislation. This included the package of amendments and changes to the tax laws. Provisions dealing with the tax on dividends were especially criticized.

When the Senate started to deal with the bills on September 12, 2013, the above-mentioned expectations were met only partially. The Senate passed the main package of so-called technical amendments to more than forty laws, adopting the changes needed for general implementation of the New Civil Code. Similarly, it accepted laws changing the procedures of the courts and the manner of maintaining the public registers, as well as several other important laws for implementing the New Civil Code. However, the Senate refused both the tax package and the Bill on Public Benefit Status.

What were the main arguments mentioned in the Senate debate over the Bill on Public Benefit Status? First of all, as in the Chamber of Deputies, the issue of churches and religious communities arose—whether activities motivated by religion and faith should be deemed publicly beneficial. In a refinement to this argument, some contended that the list of activities considered publicly beneficial should not automatically include activities of certain types of juridical persons: not only churches and religious communities, but also trade unions and associations of employers (Article 5, Items z/ and zb/ of the Bill). Moreover, some argued that defining publicly beneficial activities would be especially difficult concerning voluntary units of firemen operating under the auspices of municipal self-governments; however, in general this would fit one of the items of Article 5 of the Bill.

The Bill was also subjected to new criticism in the Senate. Under the Bill, the juridical person should apply to the civil court for registration of Public Benefit Status. The court, due to another law on procedural rules, must issue its decision within fifteen days. If the decision is positive, the registering court must file the Public Benefit Status into the appropriate public register within five days. Some senators argued that 10,000 out of the Czech Republic’s 100,000 civil society organizations could seek Public Benefit Status immediately. Such an avalanche of submissions could cause the collapse of the courts or at least a tendency to postpone their decisions by returning proposals as incomplete. This possibility was cited as a reason to refuse the Bill on Public Benefit Status. It was also argued that damage might result to civil society organizations, given the changes in tax laws (already refused in the immediately preceding vote of the Senate) according to which donors will have their donations subtracted from the tax base only when given to juridical persons with Public Benefit Status. The result, it was said, could be a chaotic situation lasting for months if not years.

Finally, according to some senators, refusal of the Bill would not necessarily complicate implementation of the New Civil Code. The new Government that would come into power after the extraordinary elections held on October 27-28, 2013, should prepare a revised version of the Bill, which could include a reasonable term during which the registration of Public Benefit Status would not affect access to donors’ gifts and public administration grants or other possible fiscal and preferential benefits.

The current Czech Government of Mr. Rusnok, which replaced the former coalition Government, is acting as a provisional one, since it failed to obtain the vote of confidence from the Lower Chamber before that was dissolved. In the present situation, only two options remain for the Government: (1) to propose an extraordinary legal regulation of the Senate, by which some gaps in the legislative norms needed to allow the New Civil Code to enter into force may be covered without including controversial issues; or (2) to propose in the same manner a postponement of effectiveness of the New Civil Code for another term. But even if the Senate would accept such extraordinary measures when there is no active Chamber of Deputies, these measures would be valid only when confirmed by the new Chamber of Deputies on its first session after the elections. That might not happen before the end of 2013.

Thus, the Czech Republic is facing a situation of either chaos in its legal system after January 1, 2014, or a period of time when nothing will be known with certainty as regards the rights and obligations of persons with respect to the state authorities. The political crisis is one cause. Another cause, perhaps, is the previous Government’s failure to work intensely enough on laws accompanying the New Civil Code and the Act on Commercial Corporations and Cooperatives. The result may be substantial amendments to the above-mentioned basic codes and all already approved accompanying laws, unless the new political representation assumes responsibility for improving the heavily damaged role of the state. Let us hope for the latter.

Regardless of developments during the remainder of 2013, the Senate’s decision to refuse the Bill on Public Benefit Status is a loss of a unique opportunity to implement this needed legal norm. It was expected to bring about transparency and responsibility regarding the use of public resources in Czech civil society, where, unfortunately, some organizations continue to abuse the liberal rules and thereby distort the image of the not-for-profit sector. Remedying this unnecessary and ill-advised action of the Senate may take not months but years, during which civil society will be subjected to divisive disputes over the meaning of Public Benefit Status and over the likely effects of its introduction. Czech civil society should be concentrating on issues of self-sustainability, independence of state subsidies and benefits, enhancement of citizens’ participation, and promotion of a civilized way of life; instead, it may return to the dark times of hatred, envy, and harsh competition for donors’ support. Let us hope that this will not happen.