The International Journal
of Not-for-Profit Law
Volume 16, Number 1
September 2014
A Publication of
The International Center for Not-for-Profit Law
1126 16th Street, NW, Suite 400
Washington, DC 20036
(202) 452-8600
www.icnl.org
Publisher
International Center for Not-for-Profit Law
1126 16th Street, NW, Suite 400
Washington, DC 20036
(202) 452-8600
www.icnl.org
Editor: Stephen Bates
Senior Editor: Douglas Rutzen
Contributing Editor: Stephan Klingelhofer
The International Journal of Not-for-Profit Law, ISSN 1556-5157, www.ijnl.org, is a forum for the discussion of
civil society, philanthropy, nongovernmental organizations, and the law, published by the International Center for
Not-for-Profit Law, www.icnl.org. Based in Washington, D.C., the International Center for Not-for-Profit Law
promotes an enabling environment for civil society and public participation around the world. Views expressed here
do not necessarily reflect those of the International Center for Not-for-Profit Law, its affiliates, or its funders.
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Except where otherwise noted, all contents copyright 2014 by the International Center for Not-for-Profit Law.
The International Journal of Not-for-Profit Law
Volume 16, Number 1
September 2014
Letter from the Editor ………………………………….………….………………………….. 4
Civil Society Regulations and Effects
New IRC Section 501(c)(4) Regulations Proposed, On Hold
Eric Gorovitz ………………………………………………………………………………………………………. 5
Sustainability and Operation of NGOs Influenced by Tax System:
The Case of Slovakia
Mária Svidroňová and Helena Kuvíková ………………………………………………………………… 8
The Proposal for a European Foundation Statute
and Its Influence on Italian Legislation
Renzo Rossi ………………………………………………………………………………………………………. 24
Articles
The Swiss Legal Framework on Foundations
and Its Principles About Transparency
Lucas R. Arrivillaga and Georg von Schnurbein ……………………………………………………. 30
Debating Civil Society:
Contested Conceptualizations and Development Trajectories
Jussi Laine ………………………………………………………………………………………………………… 59
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 4
Letter from the Editor
In this issue, the International Journal of Not-for-Profit Law looks at regulations and
their impacts on civil society in varied settings. Eric Gorovitz, an attorney specializing in
nonprofit and tax-exempt legal issues, outlines proposed regulations that seek to clarify the
permissible political activities undertaken by “social welfare organizations” in the United States.
Next, Mária Svidroňová and Helena Kuvíková of Matej Bel University (Slovakia) analyze the
Slovak Republic’s tax regime, specifically the tax assignation mechanism, and its effect on civil
society organizations. Renzo Rossi, an attorney and postdoctoral research fellow at Università
Cattolica del Sacro Cuore (Piacenza, Italy), considers the European Commission’s proposed
European Foundation Statute and its influence over Italian legislation.
We feature two additional articles as well. Lucas R. Arrivillaga and Georg von
Schnurbein of the Centre for Philanthropy Studies at the University of Basel (Switzerland)
evaluate Switzerland’s legal framework governing foundations, with particular attention to its
principles concerning transparency. Jussi Laine assesses the contemporary understanding of
civil society and recommends placing greater emphasis on organizations’ functions rather than
their forms.
We are grateful, as always, to our authors for sharing their expertise. And we invite
readers and their colleagues to share their own expertise: We welcome manuscripts addressing
legal aspects of civil society, philanthropy, and not-for-profit organizations around the world.
Stephen Bates
Editor
International Journal of Not-for-Profit Law
sbates@icnl.org
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 5
Civil Society Regulations and Effects
New IRC Section 501(c)(4) Regulations
Proposed, On Hold
Eric Gorovitz1
On November 29, 2013, the Internal Revenue Service (the “IRS”) issued a Notice of
Proposed Rulemaking (“NPRM”)2
setting forth new regulations purporting to clarify the
boundaries of political activities that may be conducted by “social welfare organizations,” which
are exempt from U.S. federal income tax under Section 501(c)(4) of the Internal Revenue Code
(the “Code”).3
The NPRM concluded a year that set the high-water mark for public discussion
surrounding the relatively little-known tax law concept of “social welfare” in general, and more
specifically the questions whether, and if so to what extent, social welfare organizations should
be permitted to conduct partisan political activity. Practitioners have been asking these questions
for years, because IRS regulations have long provided that (a) a social welfare organization
remains qualified for exemption so long as it “primarily” conducts social welfare activities,4
and
(b) “social welfare” does not include direct or indirect participation or intervention in a political
campaign on behalf of or in opposition to any candidate for public office.5
These questions gained urgency, however, in 2010 when the United States Supreme
Court, in Citizens United v. FEC,
6
struck down a rule under federal election law prohibiting
corporations and labor unions from making certain “independent expenditures” (that is,
expenditures that are not coordinated with political parties or candidate campaigns) at certain
times in connection with federal elections.7
Suddenly, social welfare organizations (most of which are corporations) acquired the
ability (for federal election law purposes) to make unlimited independent expenditures to

1 Eric Gorovitz is a principal in the firm of Adler & Colvin (www.adlercolvin.com) in San Francisco. His
practice focuses on nonprofit and tax-exempt legal issues, particularly those related to political advocacy and
nonprofit corporate governance. He can be reached at egorovitz@adlercolvin.com.
2
78 Fed. Reg. 71535 (Nov. 29, 2013).
3 Unless otherwise stated, all references herein are to the Code.
4 Treas. Reg. Sec. 1.501(c)(4)-1(a)(2)(i). The IRS’s assertion in the regulations of the “primarily” standard
is itself controversial because Section 501(c)(4) of the Code requires a social welfare organization to engage
“exclusively” in social welfare activities. In other contexts, the IRS has interpreted “exclusively” to mean not “more
than an insubstantial part”. See, e.g., Treas. Reg. Sec. 1.501(c)(3)-1(c)(1).
5 Treas. Reg. Sec. 1.501(c)(4)-1(a)(2)(ii).
6
558 U.S. 310 (2010).
7
2 U.S.C. 441(b). At issue in the case was the application of the prohibition to communications that
referred to a federal candidate within 30 days of the 2008 primary election. The specific communications in question
were a documentary film critical of Hillary Clinton, who at the time was a candidate for President, and
advertisements promoting the film, which Citizens United, the corporate producer of the film, wanted to distribute
via on-demand cable services.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 6
influence federal elections, so long as the organizations remained, for federal tax purposes,
“primarily” engaged in social welfare activities.
Perhaps most important, because social welfare organizations are not required by the tax
law to publicly disclose their donors, the financiers of these independent expenditures in support
of or opposition to federal candidates would remain hidden from public view. For funders
concerned about anonymity, this made social welfare organizations more appealing than political
organizations exempt from federal tax under Section 527, which solely conduct partisan political
activity but must publicly disclose their donors.8
Citizens United thus set the stage for the hubbub leading to the NPRM, which arose in
May 2013 after a top Exempt Organizations official at the IRS, Lois Lerner, disclosed, during a
public question-and-answer session at an American Bar Association meeting, that IRS agents
charged with evaluating exemption applications from social welfare groups had flagged for
further review applicants whose names contained certain words, such as “Tea Party” and
“patriot.”9
Swift and intense public outrage ensued, particularly from the political Right, which
perceived the focus on such terms, generally associated with conservative interests, as evidence
that the Obama Administration was specifically targeting conservative groups. In materials and
statements released after the initial firestorm, the IRS revealed that the use of watch-words was
actually broader, including left-leaning terms like “progressive” as well.
A crescendo of far-reaching Congressional and independent investigations ensued, some
of which continue today. None of these analyses have so far revealed persuasive evidence of
political meddling from outside the IRS (including, in particular, the White House), but the
scandal and its fallout put the rules governing the political activities of social welfare
organizations squarely on the public agenda.
The conversation has continued, with vigor. In response to the NPRM, the IRS received
over 160,000 comments, more than ten times the previous record, fueling speculation that the
summer might bring exciting (!) IRS hearings on the proposed regulations.10
However, under the weight of the public commentary, much of which leveled criticisms,
complaints, and concerns about the NPRM, the IRS announced on May 22, 2014, that it will not
hold hearings until after it issues a revised draft of the regulations.11 In an interview on June 17,
2014, IRS Commissioner John Koskinen indicated that the revised, proposed regulations will be
issued early in 2015, and will be broader in scope than the NPRM.12 Commentators such as the

8
26 U.S.C. 527(j)(3)(B).
9 Ms. Lerner has since retired from the IRS and declined to testify before a Congressional hearing
(invoking the Fifth Amendment). On May 7, 2014, the House of Representatives voted, along mostly partisan lines,
to hold her in contempt of Congress. Prosecution, which would fall to the U. S. Department of Justice, seems
unlikely.
10 For a look at 25 unscientifically-selected but well-crafted comments submitted by organizations ranging
from the ACLU to the NRA, visit Adler & Colvin’s blog, www.nonprofitlawmatters.com, and search for “Top 25.”
11 IRS Update on the Proposed New Regulation on 501(c)(4) Organizations. Retrieved from
https://www.irs.gov/uac/Newsroom/IRS-Update-on-the-Proposed-New-Regulation-on-501%28c%29%284%29-
Organizations on June 24, 2014.
12 Patel, J., (June 18, 2014). IRS chief promises stricter rules for ‘dark money’ nonprofit groups. Retrieved
from https://www.publicintegrity.org/2014/06/18/14960/irs-chief-promises-stricter-rules-dark-money-nonprofitgroups on June 24, 2014. Commissioner Koskinen was quoted as saying that the new regulations would address
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 7
American Bar Association Section on Taxation, among others, encourage the IRS to consider
expanding the reach of the new regulations to encompass political activities by organizations
exempt under other subsections of Section 501(c)(3), as well, such as labor unions (exempt under
Section 501(c)(5)) and trade associations, chambers of commerce, and business leagues (exempt
under Section 501(c)(6)).13
Meanwhile, political operatives on both sides of the aisle continue to take advantage of
the opportunity created by Citizens United, using social welfare organizations to gather
anonymous contributions and spending them lavishly to influence elections. We must wait to see
whether the IRS will take meaningful steps to restore transparency.

three aspects of political activity by social welfare organizations: “what should be the definition, to whom should it
apply, and how much . . . can you do before you jeopardize your exemption?” Id.
13 Available online, as of September 18, 2014, at
https://www.americanbar.org/content/dam/aba/administrative/taxation/policy/050714comments.pdf
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 8
Civil Society Regulations and Effects
Sustainability and Operation of NGOs
Influenced by Tax System:
The Case of Slovakia
Mária Svidroňová1
Helena Kuvíková2
In this article we summarize and analyze the tax system affecting
nongovernmental organizations in the Slovak Republic. We chose the field of tax
law based on results from questionnaire research with Slovak nongovernmental
organizations, results from an expert evaluation employing the Delphi method
used in the dissertation “Self-Financing Strategy and Sustainability of Non-Profit
Organizations,” and rankings of the American agency USAID. The most
important elements of the tax system which affect the sustainability and operation
of NGOs are, first, exemption of their core work from income/profit tax, and,
second, tax assignation – the mechanism of distributing a percentage of the
income tax to a qualifying NGO. The second element is enacted in only few
countries.
Slovakia is one of the four countries in the CEE region to adopt tax
assignation. The article analyzes the reasons for the introduction of the
mechanism in 2001, as well as the reasons for the amendments adopted since
then. We focus on the option for corporations to assign a share of their income
tax. The corporate income tax accounts for an important part of tax revenues, and
this option has undergone major changes since its first adoption. Our aim is to
analyze the tax laws affecting the sustainability and operation of NGOs in
Slovakia, as well as the changes in tax assignation and their impact on both
public finance and NGOs.
1. Introduction
One of the principles of the financing of nongovernmental organizations (NGOs) is tax
exemption. This principle is applied in two directions: it can refer to the legal form of the
organization, or it can refer to the activities of an organization irrespective of its legal form.
In this article we will focus on public funding of nongovernmental organizations,
especially the form of indirect support where the state waives certain income and thus enables
NGOs to “save.” This category includes the following:
• exemption from taxes (e.g., value added tax, customs fees)

1 Department of Public Economics and Regional Development, Faculty of Economics, Matej Bel
University, Tajovského 10, 975 90 Banská Bystrica, Slovakia. maria.svidronova@umb.sk
2 Department of Public Economics and Regional Development, Faculty of Economics, Matej Bel
University, Tajovského 10, 975 90 Banská Bystrica, Slovakia. helena.kuvikova@umb.sk
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 9
• tax reductions for NGOs
• tax reductions for donors (who can deduct donations from their tax base) and others
(Stejskal et al, 2012)
Indirect public support of NGOs confers advantages on these organizations in the field of
taxation as well as on those individuals and corporations that support the NGOs through
donations. NGOs must heed the non-distribution constraint principle: i.e., they can make a profit,
but it must be fully reinvested in their operations to support the mission and purpose for which
they were founded; it cannot be used to enrich the owners, members, or employees. Weisbrod
(1988) considers tax relief as a form of compensation for this restriction on profit distribution.
Other authors indicate different reasons for tax exemption, such as the fact that exemption based
on the character of NGOs’ activities enables them to fund charitable or generally beneficial
services in education, health, social care, or other areas (Anik et al., 2009; Billis & Glennerster,
1998; Hansmann, 1996; Sokolowski, 2012; Markowska-Bzducha, 2012).
This article analyzes the changes in the exemption of NGOs from different types of taxes
and the changes in the mechanism of assignation of the income tax, as well as the outcome of
primary research conducted for the dissertation “Self-Financing Strategy and Sustainability of
Non-Profit Organizations.” The outcome of the dissertation confirms the importance of the tax
laws that affect NGOs.
According to the U.S. Agency for International Development (USAID, 2013), which has
been assessing the sustainability of nongovernmental organizations in Central and Eastern
Europe since 1997, the legal environment should support the needs of the nonprofit sector, allow
the entry of new organizations, prevent political interference with NGOs, and provide conditions
under which NGOs can conduct entrepreneurial activities to ensure income and to enhance their
stability. Among the monitored factors are the difficulty of registering new organizations and the
laws governing their operations, their taxation, and their access to information.
The importance of the legal environment in general and the tax laws in particular is
confirmed not only by USAID but also by the results of the primary Delphi research, as
presented later in this article.
We examine the tax laws that affect the operation of NGOs, with emphasis on the law on
income tax. The article further provides an overview of changes in tax laws, particularly those
providing for tax assignation. Here we focus on the impact of this change on public finance and
the state budget. In the end we develop models to predict the amounts that NGOs in Slovakia
will receive from income tax assignation, and on the basis of these models we propose
recommendations for NGOs to ensure their financial stability.
2. Methodology
The aim of this article is to analyze the tax system affecting the operation and
sustainability of NGOs in Slovakia, the changes in tax assignation, and the impact on both public
finance and NGOs.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 10
The material consists of primary and secondary information on NGOs and the Slovak tax
laws. As secondary data we use the NGO Sustainability Index3
compiled annually by USAID,
which rates NGOs in Central and Eastern Europe and Eurasia on seven dimensions: legal
environment, organizational capacity, financial viability, advocacy, service provision,
infrastructure, and public image of NGOs. The scale runs from 1 to 7, where 1 means a very high
level of sustainability of a nongovernmental sector and 7 is a very poor level. According to their
scores on NGO sustainability, countries fall in three basic stages of development: Sustainability
Enhanced, Sustainability Evolving, and Sustainability Impeded (USAID, 2013).
Primary data was obtained though a structured questionnaire sent to 670 NGOs; 182
respondents completed the questionnaire with applicable information. Appropriate structure and
scope of the sample were confirmed by statistical significance of the results of a Chi-quadrate
test.
We also collected primary data by the Delphi method. We addressed a group of experts
on the nonprofit sector and NGOs with a questionnaire. Based on the analysis of the NGO
sustainability index and our research results, we confirmed the importance of the legal
environment on the operation of NGOs, particularly tax laws. The result led us to compose two
regression models for the development of the percentage of income tax assignation as stated in
the amendment of Act No. 595/2003 on Income Tax. The first model presumes that corporations
will provide an additional percentage from their own sources (direct donation); the second model
presumes that corporations will not give any direct donation.
The expert group in the Delphi research was made up of specialists from scientific,
public, and nongovernmental spheres. From the nongovernmental sector, we chose
representatives of the so-called umbrella organizations as well as significant figures in this field
who examine the issue from a practical point of view. We asked experts from all three spheres to
assess the significance of various factors that affect the sustainability of NGOs and to assess the
state of the six selected dimensions in Slovakia. The expert group was assembled based on
citation analysis (the most frequently cited names in scientific publications) and purposeful
selection (our own decision after consultation with another expert).
Electronically we contacted 40 experts. Of them, 22 responded to the questionnaire, four
did not want to be involved in the research, and three indicated by marking “other” that they did
not consider themselves experts in the field. After the first round we addressed 33 experts, of
whom 15 answered (for more detailed description of the selection process see Svidroňová,
2014). The participation of experts in both rounds of research and their expertise are shown in
Table I and Table II:
Table I: Number of participating experts in both rounds
TOTAL Public sphere Nongovernmental
sphere Scientific sphere other
Round 1 22 6 27% 8 36% 5 23% 3 14%
Round 2 15 4 27% 5 33% 5 33% 1 7%
Source: own research, 2012.

3
In 2011 it was renamed the CSO Sustainability Index (Civil Society Organizations), but the subject of
analysis, methodology, and content remain the same. We use the term NGO to correspond with the abbreviation in
this article.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 11
The experts evaluated the significance of the selected determinants as well as the current
state of Slovak NGOs in terms of sustainability in accordance with the USAID methodology.
To examine the rating of the sustainability by the expert group we compiled a
questionnaire, which asked the experts first to identify the significance of the selected
determinants according to their impact on the sustainability of nongovernmental
Table II: Expertise of participating experts
Criteria of
expertise
TOTAL Public sphere Nongovernmental
sphere Scientific sphere
Round 1 Round 2 Round 1 Round 2 Round 1 Round 2 Round 1 Round 2
Years of
experience
4.5 4.6 5.5 5.5 5.2 5.5 4.4 3.9
Number of
expert
publications
6 7.2 4 6.6 7 8.6 9 7.7
Source: own research, 2012.
organizations, and, second, to assess the level of the determinants in Slovakia on a scale from 1
to 5, where 1 means the most important determinant and 5 the least important. The determinants
were grouped into six dimensions corresponding to those in the Index (legal environment,
organizational capacity, financial viability, service provision, infrastructure, public image). The
experts also had an option to propose their own determinant.
Based on the responses in the first round we evaluated the importance of the determinants
as ordinal variables using median and variance. We added other determinants stated by experts in
the first round. After one month we again sent the questionnaire to the experts with the results
from the first round. Experts could modify their opinions or could argue their original opinion.
After the second round we conducted an overall evaluation, and the changes of opinions resulted
in the changes of values of median and variance (Table III).
3. Legal environment affecting operation of NGOs in Slovakia
The U.S. Agency for International Development (USAID) annually publishes the NGO
Sustainability Index. It is a key analytical tool that measures the development of the civil sector
in Central and Eastern Europe and Eurasia. The Index analyzes and assigns scores to seven
interrelated dimensions: legal environment, organizational capacity, financial viability,
advocacy, service provision, infrastructure, and public image of NGOs.
The Index is always published retrospectively for the previous year; the currently
available document, from July 2013, evaluates the year 2012. In that year, the sustainability
index (overall score) for Slovakia was 2.7, which ranked Slovakia in the top five of the 29
countries from Central and Eastern Europe and Eurasia. In Slovakia, USAID has implemented
sustainability research since 1997 in cooperation with the Pontis Foundation. Individual
dimensions and their scores are in Chart 1.
In this article we focus only on the dimension of the legal environment. As mentioned
above, the legal environment should allow the entry of new organizations, prevent political
interference in NGOs, establish conditions under which NGOs are able to conduct
entrepreneurial activities to ensure income, and enhance their stability. Among the monitored
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 12
factors are the difficulty of registering new organizations and the laws governing the
organizations’ operation, taxation, and access to information. The index score for the Slovak
legal environment in 2012 reached 2.8, unchanged since 2009.
This score is affected by the acceptance of the proposal of the Ministry of Finance to
change the rules for the assignation of 2 percent of the income tax; the organizations expected a
reduction in income from this source. The need for legislation on volunteering has been filled by
Act no. 406/2011 Statuses on Volunteering. One positive factor in the score is the simple
procedure of establishing NGOs without unnecessary bureaucratic steps, although the report
suggests that the global trend is to place the documents for establishing NGOs online, which
Slovakia has not yet done. One negative influence is the changes in the Labour Code at the end
of 2012, which modified the conditions for various part-time workers other than contractual
employees. According to the amendments, the wages of these workers will be levied by
contributions to social insurance and health insurance as if they were employees on regular
contracts, which has increased the costs for NGOs. On the other hand, a positively perceived
factor is the activities of the first Slovak nonprofit center, which provides legal advice as well as
information on its website concerning legislative changes and proposals affecting NGOs.
Chart 1: NGO sustainability index for Slovakia, 2012
Source: USAID, 2013.
The respondents in the structured questionnaire evaluated (among other areas of
sustainability) legislation, especially the tax system in Slovakia. On a scale from 1 to 5, nearly 48
percent of NGOs said they consider Slovak tax laws complicated and unclear. On the other hand,
56 percent of respondents consider these laws favorable in terms of NGOs’ operations and
sustainability, or at least as neutral in this respect. Only 16 percent of respondents see the tax
laws as totally unfavorable, and 28 percent see them as more restrictive than favorable. From the
responses we calculated a rating for Slovak legislation environment, in the opinion of NGOs, as
2.78.
The evaluation of the experts in terms of significance and development (current state) of
determinants of the legal environment in Slovakia is summarized in Table III.
We can compare the three scores for the Slovakian legal environment. The experts scored
it at 3.4, placing it in the transit phase (Sustainability Evolving). USAID’s NGO Sustainability
Index scored it at 2.8, placing it in the consolidated phase (Sustainability Enhanced). The Slovak
NGOs assigned a score very close to USAID’s, 2.78. In other words, USAID and Slovak NGOs
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 13
place Slovakia in the consolidated phase, whereas the expert group puts it in the transit phase.
This disparity underscores the need to examine the legal environment and its influence on the
operation on NGOs closely. Because the topic is very broad, we focused on those determinants
that scored the worst median (in our case a value of 4). As shown in Table III, those determinants
Table III: Significance of the determinants influencing NGO sustainability
Determinants
Significance
Round 1 Round 2 Total significance of
the determinant
median variance median variance Round 1 Round 2
Legal environment 2,3 x 2,4 x 62% 60%
Suitability of laws
governing the operation of
NGOs
1,5 0,45 2 0,42 70% 60%
Clarity of laws governing
the operation of NGOs 2 0,62 2 0,49 60% 60%
Tax laws (allowances for
NGOs) 2 0,53 2 0,53 60% 60%
Availability of legal
advice for NGOs 3 0,6 3 0,46 40% 40%
Opportunities to apply for
government / public
contracts
3 0,55 3 0,43 40% 40%
Determinants
State in the SR
Round 1 Round 2
median variance median variance
Legal environment 3,4 x 3,4 x
Suitability of laws
governing the operation of
NGOs
3 0,41 3 0,37
Clarity of laws governing
the operation of NGOs 3 0,37 3 0,51
Tax laws (allowances for
NGOs) 4 0,44 4 0,29
Availability of legal
advice for NGOs 3 0,48 3 0,45
Opportunities to apply for
government / public
contracts
4 0,49 4 0,44
Source: own research, 2012.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 14
are “Tax laws” and “Opportunities to apply for government / public contracts.” We focus here on
the first determinant, reflecting its significance. In addition to the expert evaluation regarding the
current state of sustainability of NGOs, the research by the Delphi method provided an
assessment of the significance of individual determinants and dimensions. The significance of
the legal environment for the operation of NGOs reached the value of 60% after the second
round. Among the other surveyed dimensions, a higher ranking was achieved only by public
image, at 67%, and by organizational capacity and financial viability, both at 63% (on the
outcome of research, see Svidroňová, 2013; on enhancing financial viability with modern
managerial tools, see Vaceková, 2013).
We focused on determinants where the significance on NGO activities was identified as
important and deemed to be underdeveloped currently in Slovakia. From Table III it is clear that
the category of tax laws represents such a determinant. For this determinant, the difference
between significance and current state was 2 points. (Besides the legal environment, other
dimensions were financial viability, service provision, and public image, but these are not the
focus of this article.) Based on this result, we selected the tax laws affecting NGO activities and
sustainability for closer analysis.
Table IV: Taxation of NGOs in Slovakia
Revenue from the
perspective of income tax Definition of the income
Income subject to tax (§ 12) income from activities that generate a profit for NGOs
income from activities that may lead to generating a profit
Income not subject to tax (§
12)
income gained from the tax assignation
income gained from donation or inheritance
Income exempted from tax
(§ 13)
income from activities for which the NGOs (taxpayers) were
founded or activities that are their core work, except income
from business activities and income on which withholding tax
is levied
income from church collections, religious acts, and allowances
for registered churches and religious societies
income from membership fees stated in statute or constituent
documents received by civic associations, including
professional associations, trade unions, political parties, and
political movements
income from grants provided by international treaties by which
the Slovak Republic is bound
Income subject to
withholding tax (§ 43)
interest, win, or other income accrued on deposit saving books
or cash balances on current accounts
income from assets in a mutual fund, income from shares
obtained from redemption (repayment), income from deposit
certificates, income from bonds and treasury bills
Source: Own processing based on DUBIELOVÁ, V. 2011. Entrepreneurial activity and the taxation of non-profit
entities.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 15
4. Tax laws affecting the operation of NGOs in Slovakia
Due to their nature as organizations or the nature of their activities, NGOs are either
totally or partially or conditionally exempted from most taxes in the Slovak Republic. Tax
exemptions are mainly regulated in Act no. 595/2003 Statutes on Income Tax, as amended.
Table IV categorizes the types of NGO income and their tax status.
In the past, NGOs enjoyed additional tax benefits, including relief on property taxes,
VAT, income tax, and road tax. Income from entrepreneurial activities was also exempted up to
300,000 SKK, with income over this amount taxed (abolished in 2006). Amendments to the Act
on Income Tax in the years 2001 to 2006 eliminated these tax benefits and provided for the
possibility of tax assignation to NGOs, which will be discussed further below.
The current tax system of the Slovak Republic influencing NGO activities consists of the
major tax types listed in Table V.
Exemptions from the Income Tax are described in Table IV. Except for the motor vehicle
tax, the Acts allow tax exemption or tax relief for legal entities not founded or constituted for
business purposes, i.e., NGOs. The tax exemption or relief is regulated in some Acts; in other
cases, it can be established by a local tax collector applying a regulation to local conditions (local
taxes are determined by the municipality or higher territorial unit).
Table V:
Overview of selected taxes affecting the function of NGOs in the tax system in Slovakia
Type of tax Act
Income tax from individuals and legal
entities
Act no. 595/2003 Statutes on Income Tax as
amended.
Tax on transfer of property Act no. 554/2003 Statutes on Tax on Transfer
of property
Property tax Act no. 582/2004 Statutes on Local Taxes and
Fees for municipal waste and construction
waste
Motor vehicle tax (road tax)
Gift tax Abolished from 1 January 2004
Inheritance tax Abolished from 1 January 2004
Value added tax Act no. 222/2004 Statutes on Value Added
Tax
Source: Own processing based on relevant Slovak legislation valid to 31 August 2013
Act no. 563/2009 Statuses on Tax Administration (Tax Code) is also important. It
governs tax management, tax collection, tax control, filing of tax returns, remedies, and sanctions
that the tax authorities may impose.
5. Tax assignation
Tax assignation is a mechanism that allows individuals and corporations to assign a
percentage of the paid income tax to benefit a selected NGO. Tax assignation can be regarded as
a mixed source: it has the characteristics of public funding (the state foregoes part of the income
tax) and private funding (the allocations are based on the private choices of individuals and
corporations). In the event that they do not decide on a particular NGO, the entire amount of the
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 16
paid income tax remains in the state budget. Tax assignation thus can be seen as a unique form of
support, at the crossroads between public funds and private funds.
The tax assignation in Slovakia has been developed thanks to an initiative of the NGOs
themselves. The first impulse was at a conference in Stupava (1997) which brought together
representatives of the nonprofit sector. After the 1998 elections and the onset of a coalition led
by Mikulas Dzurinda, the representative of the Committee of the Third Sector succeeded with
the proposed amendments to the Income Tax and tax assignation. The main argument was a
gradual withdrawal of foreign foundations that had previously supported the Slovak NGOs but
now shifted their support to NGOs in the less developed countries of Eastern Europe.
Philanthropy was still underdeveloped in Slovakia, and NGOs sought further sources of funding.
Inspiration was found in implementing the tax assignation mechanism in Hungary.
In 1996, Hungary enacted a unique “tax designation” law that permits taxpayers to
designate 1% of taxes paid to be turned over to civil sector organizations, and an additional 1%
to be turned over to churches, provided that each of the two designated amounts is at least 100
HUF. In 2001, this law resulted in $25 million USD worth of 1% designations by 1.4 million
taxpayers. In the next three years, Slovakia, Lithuania, and Poland followed Hungary’s lead and
enacted 1% type laws, though Lithuania’s law allowed for a 2% designation (International
Center for Not-for-Profit Law, 2003).
This funding mechanism appeared to be successful, and the conditions were similar in
these countries. The goal was not only to bring additional resources to the nonprofit sector but
also to help build relationships between NGOs and citizens – the assignation of a percentage of
income tax would give corporations and individuals to participate a more significant way to
participate in financing NGOs.
The mechanism of tax assignation has undergone several important changes since its
introduction in 2001, which we briefly summarize.
Act no. 561/2001 Statutes on Income Tax amended the Act no. 366/1999, and one of the
changes allowed individual taxpayers to assign 1% of their personal income tax to the public
benefit services provided by defined nonprofit organizations which operate in the fields of
education, health care, social services, physical education and sport, environment, culture, and
restoration of cultural monuments. This amendment abolished the option of tax relief on the
value of the donations for public purposes, which had been up to 10% of the tax base for
individuals and up to 2% of the tax base for corporations.
In 2003, Act no. 595/2003 Statutes on Income Tax changed the amount to 2% of the paid
income tax and gave corporations as well as individuals the option of assigning this percentage
of income tax (hereinafter also referred as “2% law”). By allowing tax assignation to
corporations, Slovakia became unique in the world. Other amendments in this Act established
criteria for determining which organizations and which activities would be eligible for the tax
assignation. A tax assignation recipient must be registered by a notary. The received funds must
be used by the end of the next year for advancing the organization’s core work. If the recipient
fails to fulfill these obligations, it must return the funds within 90 days to the state budget, and it
is subject to a breach of budgetary discipline under a special regulation. An organization that
receives more than €3,319.39 from tax assignation in one year is required to specify precisely
the use of the received funds in the Business Journal (Obchodný Vestník) within 16 months from
the date that the Tax Directorate publishes the list of recipients. The organization must specify in
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 17
the amount of received funds and the purpose for which they were used, as well as provide an
auditor’s statement that conforms to special regulation.
Based on this amendment, the Ministry of Finance estimated that funds from the tax
assignation for nonprofit organizations should have been around 300 million SKK
(approximately 10 million Euros). The estimation of the 1st Slovak Non-profit Service Centre
doubled the sum, i.e. 600 million SKK (approximately 20 million Euros). There was shock when
the total amount of tax assigned was 845,222,347 SKK (over 28 million Euros) (Marček, 2007).
Act no. 504/2009 Statutes on Income Tax, which came into effect in 2010, amended the
responsibilities of recipients. Under it, a recipient of more than €33,000 in one calendar year
must within 30 days open a special account used only for the funds from tax assignation. The
recipient can use the funds for advertising but only for the purposes defined in Act no. 504/2009
and for the purpose for which the NGO was established. The recipient can also use the funds to
purchase movable and immovable property, if these are to be used for the core work of the NGO.
The core work is certified by a notary at registration for tax assignation.
A major change in the Act was the reduction of the percentage from 2% to 0.5% starting
in 2010. The main reasons for these changes were outlined in 2006 by Jan Počiatek, the Finance
Minister at that time, who argued that 2% of corporate income tax was too high; it threatened the
core goal of the tax assignation, which was to build relationships between NGOs and taxpayers.
Although research indicates that tax incentives help involve businesses with the nonprofit sector
(Guthrie, 2008), the tax assignation was not seen as the optimal tool for enhancing this
involvement. Another argument was that large companies established and assigned their 2% of
tax to their own foundations. An example is the SPP foundation, whose income from the
corporate tax assignation was on average about €3,375,590 (www.rozhodni.sk). Jan Počiatek
originally proposed the abolition of assignation of the corporate income tax. NGO
representatives campaigned to preserve the 2% assignation. Thereafter, a compromise was
implemented, under which the limit for corporate income tax assignation will gradually reduce
from 2% to 0.5% during the years 2011 to 2019.
This amendment also seeks to ensure that large corporations support the NGOs
established for public purposes from their own resources, and not solely via tax assignation. The
main aim of this amendment is thus to encourage corporate philanthropy. The state will assign an
Table VI: Possible development of Corporate Income tax assignation
Year
If corporations do not
donate directly, they can
assign:
NGOs
get:
If corporations
donate directly
State assigns
additionally:
NGOs
can get:
2012 1,5% 1,5% 0,5% 0,5% 2,5%
2013 1,5% 1,5% 0,5% 0,5% 2,5%
2014 1,0% 1,0% 1,0% 0,5% 2,5%
2015 1,0% 1,0% 1,0% 0,5% 2,5%
2016 0,5% 0,5% 1,5% 0,5% 2,5%
2017 0,5% 0,5% 1,5% 0,5% 2,5%
2018 0,5% 0,5% 1,5% 0,5% 2,5%
2019 0,5% 0,5% 1,5% 0,5% 2,5%
Source: Own processing based on Act no. 504/2009 amending Act no. 595/2003 Statutes on Income Tax.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 18
additional percentage of corporate income tax if a company provides a direct donation in that tax
year as a corresponding percentage of the tax paid. An overview is provided in Table VI.
Act no. 504/2009 also changed the percentage for individuals for 2012. An individual
who volunteered for at least 40 hours in 2012 could assign 3% of their income tax instead of 2%.
The overview of funds raised through the tax assignation for the period since the
introduction of the mechanism is shown in Table VII. From Table VII it is clear that the
mechanism of tax assignation is very popular among NGOs. The number of NGOs registered has
been growing since 2005 which corresponds to the development and increasing number of NGOs
in Slovakia (see more in Kuvíková & Svidroňová, 2013). The use of tax assignation is also
confirmed by the results of the primary research in 2011 focused on NGO funding, which found
that 92% of respondents received funds through tax assignation (Svidroňová & Vaceková, 2012).
Another obvious reason for the abolition or reduction in the percentage of tax assignation
mechanism, so far unmentioned, was the government’s effort to keep the full amount of the tax
in the state budget instead of assigning any percentage to registered NGOs. This trend was
associated with the economic crisis and efforts to sustain economic growth, which was reflected
in several countries (Izák, 2011). According to an estimate by the state, the decrease in the
percentage of corporate income tax assignation should have brought to the state budget about
€6.7 million in 2011 and about €7.3 million in 2012 (Faiglová, et al., 2010). Table VII shows
that in 2011 the amount assigned by corporations dropped by €3.15 million, which was less than
half of the estimated amount that should have remained in the state budget. This fact is due to
both a decrease in economic growth, which reduced the state revenue from corporate income tax,
and a decrease of 745 corporations that participated in tax assignation in 2010 (i.e. their income
tax automatically became part of the state budget; the state did not consider any percentage that
should be assigned to NGOs and Table VII does not show this amount).
Table VII: Income tax assignation from individuals and corporations, 2002-2012
Year Number of
recipients
Number of
participating
individuals
Number of
participating
legal entities
Personal
Income tax
assignation
(thousands
€)
Corporate
Income tax
assignation
(thousands
€)
Total amount
of Income tax
assignation
(thousands €)
2002 4 042 341 776 – 3 382 – € 3 382
2003 3 398 286 164 – 3 222 – € 3 222
2004 3 829 402 057 8 364 9 159 19 792 28 951
2005 5 746 418 241 14 063 10 371 20 525 30 896
2006 7 100 446 973 17 740 11 713 25 629 37 342
2007 7 662 408 277 21 632 12 819 29 306 42 125
2008 7 759 449 909 26 691 15 036 34 144 49 180
2009 9 098 503 253 30 078 17 684 37 496 55 180
2010 9 585 467 983 26 172 15 553 28 592 44 145
2011 10 049 475 843 25 427 16 526 25 444 41 970
2012 10 565 n/a n/a 18 548 26 146 44 694
Source: Own processing based on data the Tax Directorate of the Slovak Republic – Annual reports on the activities
of tax authorities for years 2004 – 2011(www.drsr.sk)
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 19
We cannot determine the number of corporations involved in the mechanism of tax
assignation for 2012, but from the overall tax collection on corporate income tax, the state
transferred €26.1 million for public purposes, i.e. the annual increase was € 0.7 million (2.8%).
Compared to 2010 (before the amendment) the total amount of corporate income tax assigned
declined by just €2.5 million, which is only about a third of the planned volume that had been
supposed to stay in the state budget.
From the above, it can be deduced, first, that the amendment has not had the expected
effect; and, second, that revenues from corporate income tax that actually stayed in the budget
and did not have to be transferred to the NGOs were not particularly high. The argument that
corporations support mainly their own foundations (founded by the corporations themselves)
contradicted by data from the Centre for Philanthropy, which finds that more than two-thirds of
the 2% of the corporate income tax is assigned to NGOs that are not directly linked to,
established by, or controlled by these corporations. That the tax assignation is not an enrichment
of corporations via their foundations can be proved by another fact: among the 200 largest
recipients of the assignment in 2011 were 16 corporate foundations which together received the
amount of €7.6 million. In the same year, however, the top 20 corporate foundations reallocated
grants to a total amount of more than €9 million (www.cpf.sk).
6. Models of development of raising funds from the tax assignment
Based on the experience with the corporate income tax assignation from 2004 to 2011,
we created two models to estimate the income for NGOs from the tax assignment up to 2015.
From a statistical point of view, an attempt to estimate beyond 2015 would decrease the
reliability of the model, given the relatively short period for which data is available.
The first model estimates the income if all corporations make direct donations to the
amount as shown in Table VIII, such that the total amount that NGOs can receive would increase
from 2% to 2.5%. To calculate the model we used a linear regression; because the share is fixed
(2.5%), it would not make sense to calculate a regression model based on the change in the
percentage. We therefore modeled the state budget revenues from corporate tax, which we
estimated up to 2015, and from that amount we calculated 2.5%, on the assumption that all
corporations would engage in tax assignment. We recalculated this amount using the coefficient
of 64.76%, which was the actual usage of the maximum allowable amount in 2011.
Table VIII: Estimated Development of Corporate Income Tax Assignation
Combined with Direct Donations from Corporations
Year
State budget revenues
(in €)
percentage
of corporate
income tax
paid
theoretical assignation
of corporate income
tax paid: maximum
possible amount
total amount if
participation remains
unchanged from
previous year
percentage of
maximum
possible
amount
2011 1 946 920 981,62 € 2% 38 938 419,63 € 25 216 755,00 € 64,76%
2012 2 048 692 491,43 € 2,5% 51 217 312,29 € 33 168 639,81 €
2013 2 150 464 001,24 € 2,5% 53 761 600,03 € 34 816 335,88 €
2014 2 252 235 511,05 € 2,5% 56 305 887,78 € 36 464 031,94 €
2015 2 354 007 020,86 € 2,5% 58 850 175,52 € 38 111 728,00 €
Source: Own processing based on data by the Tax Directorate of the Slovak Republic and own calculation.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 20
Table VIII shows that the total amount that NGOs could receive would be gradually
increased to €38 million in 2015. The significance of the model as a whole was confirmed at
level α = 0.05. The reliability of the model is 67%, and we can interpret it as follows: annually,
the volume of revenues to the state budget from corporate income tax increases by €101.77
million due to the time component. It will influence the increase of the corporate income tax
assigned by €1.65 million per year. The problem is that the model assumes 100% involvement of
corporations in the direct donation from their own sources (financial or non-financial), so the
total percentage for tax assignation would be 2.5%.
The second linear regression model estimates the income from the tax assignation for NGOs
if corporations do not allocate additional funds from their budgets, i.e. the total amount that
NGOs could receive would be gradually reduced from the original amount of 2% of the tax paid
to 0.5%. The significance of the model as a whole was confirmed at the level α = 0.05, the
reliability of the model is 90.6% and it can be interpreted as follows: 82% of the changes in the
total amount of assigned corporate income tax can be explained by the change in the percentage
of tax assignation (other changes can be explained, e.g., by a smaller volume of corporate
income tax due to a decrease in their income or by reducing the number of corporations, but we
do not know how to illustrate these influences in the model). The estimated amount of the
income that NGOs can acquire is shown in Table IX.
Table IX illustrates the real development of the percentage of corporate income tax paid
in years 2004 to 2011. As we can see, it rose until 2009 and then dropped in 2010 and 2011. In
the event that corporations would not support NGOs by additional direct donations, this drop
would continue. In 2015, the model estimates that the amount for NGOs would be less than a
third of what NGOs received in 2011. The model assumes that no corporation would support
NGOs with direct donations, which is probably exaggerated; corporate philanthropy is at least
partially developed in the Slovak Republic.
Table IX: Estimated Development of Corporate Income Tax Assignation
Without Direct Donations from Corporations
Year
percentage of corporate income
tax paid
corporate income tax assignation –
total amount
2004 2% 19 686 174,00 €
2005 2% 20 525 144,00 €
2006 2% 25 629 046,00 €
2007 2% 29 306 225,00 €
2008 2% 34 144 247,00 €
2009 2% 37 495 973,00 €
2010 2% 28 591 712,00 €
2011 2% 25 216 755,00 €
2012 1,5% 20 680 807,25 €
2013 1,0% 13 787 204,83 €
2014 1,0% 13 787 204,83 €
2015 0,5% 6 893 602,42 €
Source: Own processing based on data by the Tax Directorate of the Slovak Republic and own calculation.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 21
Comparing the calculated and real data available for 2012 from the Finance Directorate
of the SR, we can conclude the following: the first model, which assumes that all corporations
would engage in the tax assignation and also donate 0.5% from their own sources, indicated that
the amount which NGOs could have received in 2012 should have been €33.168 million.
However, the actual amount in that year was €26.148 million, which is 7 million less than the
estimation of model 1. The second model, which skeptically calculates that no corporation
involved in the tax assignation would donate the percentage from their own sources, forecasts for
2012 that NGOs should have received €20.68 million. The reality in 2012 shows that this amount
is lower by almost €5.5 million, i.e., model 2 underestimates the amount obtainable from the tax
assignment. The second model is closer to reality; however, a comparison based on one year
cannot draw decisive conclusions. It is interesting that averaging the amounts of model 1 and
model 2 comes to €26.924 million, which differs from the real amount in 2012 by only
approximately €778,000.
We believe the second model is more likely to apply to the development of raising funds
from the tax assignment, i.e., corporations will not be motivated to make up the percentage from
their own sources as direct donations to NGOs. The mere amendment in the legislation as an
incentive for corporations to undertake more philanthropic activities is not enough. NGOs must
have the reputation of credible and transparent organizations in order to attract more corporate
philanthropy. We therefore recommend that NGOs regularly inform their donors about their
activities and involve donors in the activities in order to raise awareness. We also recommend
that NGOs build long-term strategic partnerships with corporations identified with the values and
missions of NGOs. The long-term partnerships can be created either through networking or
through cooperation in the field of corporate social responsibility (CSR). These and other steps
based on the initiative of NGOs may lead to corporations willing to fund NGO activities from
their own resources.
7. Conclusion
NGOs are favored in many areas of the tax system of the Slovak Republic. One of the
benefits is the tax exemption, the terms of which we stated in the article. Another benefit is the
possibility of obtaining funds from tax assignation. After 12 years of the existence of this
mechanism, the NGOs have grown used to, it and the number of registered organizations as
recipients has been increasing since 2005. Therefore, NGOs will observe and comment on any
changes to the mechanism. Lobbying may seem to be the optimal solution regarding the tax
laws. This could improve the NGO Sustainability Index evaluation of the legal environment as a
whole from the current score of 2.8. On the other hand, the legal environment includes other
factors in addition to the tax laws, e.g. Labour Code, which the USAID evaluates for their impact
on the sustainability of NGOs.
NGOs may be able to stabilize their income from tax assignation by changes to the tax
laws. But doing so requires long-term effort, and the results are volatile; a new government may
disregard the previous government’s promises to the NGOs. Then there are the other possibilities
of cooperation between NGOs and corporations (networking, CSR, shared marketing) which
help to build long-term partnerships. In our opinion, these partnerships are more effective than
tax assignment. However, NGOs also have to make an effort if they want to be involved in the
mechanism of tax assignation; they must comply with the administrative regulations (register for
the tax assignation at a notary), and they have to persuade corporations and individuals to assign
the 2% of their taxes, e.g., by proving their reputation, transparency and credibility. Registering
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 22
as a recipient for the tax assignation might be sort of “lesson” for NGOs to learn how to act in a
transparent and credible way, which is another positive aspect of this mechanism. We
recommend that NGOs continue in their efforts to obtain funds from tax assignation, as these
activities contribute to building their sustainability.
There is only a short time series of data available for further expert analysis using the
relevant mathematical and statistical methods. We want to continue to monitor these issues in the
coming years and conduct more detailed analyses to establish the effects of the legislation.
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International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 24
Civil Society Regulations and Effects
The Proposal for a European Foundation Statute
and Its Influence on Italian Legislation
Renzo Rossi1
1. Introduction
The proposal for a European Foundation Statute presented by the European Commission
in February 2012 is an important innovation in the framework of the law of charitable
organizations.
The idea of a uniform tool in non-profit organizations is not new, but it is relatively
recent.2
In the last decade of the past century, the European Commission worked on a proposal
for a Statute of a European Association (which never has been transposed into a Regulation),
though the attention devoted to foundations has always been low, probably in consideration of
the wide diversity of national traditions across Europe.3 More precisely, the initial idea of the
community legislator was to discipline both associations and foundations in a unique Regulation
on a European Association. The preamble to the proposal for a Council Regulation on the Statute
for a European Association published in 1993 was explicit in referring to both forms.4
In the meantime, the number of foundations and founders willing to develop transnational
activities has grown significantly. Moreover, the foundations that operate across borders face
legal obstacles that raise operating costs and thereby reduce the funds available to pursue their
public benefit purposes. Therefore, the idea that foundations deserve special attention has
become widely shared. The failure of the proposal on the European Association has contributed,
too.
Several solutions have been examined by the EC.5
The first of them is the so-called
“baseline scenario,” which includes ongoing initiatives in order to support cross-border activities

1 Renzo Rossi (rossi@rzlaw.eu) is a postdoctoral research fellow in private law at Università Cattolica del
Sacro Cuore (Piacenza, Italy). In 2010 he received his PhD working on the issues of foundations. He also practices
as an attorney (avvocato) in private law and as a consultant for not-for-profit organizations.
2
Since the idea of a European Foundation was first presented in 2001 by Klaus J. Hopt, it has received
growing attention from legal scholars and, since 2003, from the European Commission, which first launched a
feasibility study on such a Statute. Cf. K. J. HOPT, The European Foundation: A New Legal Approach, Cambridge
University Press, 2006, p. 21.
3 As an example of diversity, we can consider that while in some countries foundations are legal bodies,
under common law foundations typically take the form of a trust which is not an organization but a relationship
between property and trustees. Even the United States, where the phenomenon of foundations is highly developed
(H.K. ANHEIER – S. TOEPLER (ed.), Private Funds, Public Purpose: Philanthropic Foundations in International
Perspective, New York, 1999, p. 8: “the modern foundation is often perceived as a genuinely American invention”),
in 1969 introduced a definition of this legal form through tax law, not civil law. See section 501 (c) (3) of the
Internal Revenue Code, which defines negatively foundations as tax-exempt organizations.
4 OJ n. C 236/1, 31.8.1993: “the introduction of a European form of organization should enable all
associations and foundations to operate outside their own national borders.”
5 The policy options considered by the Commission are fully explained in the Executive Summary of the
Impact Assessment accompanying the Proposal, 2012, pp. 3ff.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 25
and giving. In the Commission’s opinion, this would have a limited impact, because a Member
State might still impose tax discrimination between domestic and foreign foundations or between
donors. Further uncertainty might arise from the varying definitions of public utility across
States.
The second option examined by the EC is an information campaign aimed at educating
foundations about their prerogatives outside their national borders. In addition, a “European
quality charter” could be introduced, the compliance with which would ensure the
trustworthiness of the foundation. However, as a soft law instrument, this label would have a
limited impact.
A greater impact would result from the simple harmonization of laws on foundations,
with or without consideration of the fiscal aspects. This would mean harmonizing those
requirements that foundations need to meet to register and operate abroad, such as public benefit
purposes, minimum assets, registration requirements, and some aspects of internal governance.
In the opinion of the Commission, this option would encounter some difficulties due to the need
for changes in national laws and the difficulty of achieving compromise among Member States
on harmonized definitions.
Finally, the European Commission came to the conclusion that a Statute for a European
Foundation (Fundatio Europaea), with automatically applied non-discriminatory tax treatment,
would be the most appropriate option, removing cross-border obstacles for foundations and
donors and facilitating the efficient channeling of funds for public benefit purposes.
2. A possible effect: improving continental solidarity
Since its publication in 2012, the proposal has been welcomed by many scholars and
institutions. The European Foundation Centre (EFC) calls the EC proposal “a major step towards
having a new legal tool that will make it easier for foundations to support public-benefit causes
across the EU.” 6
Such a change should be considered alongside the European legislation already
developed in commercial law pursuant to article 352 TFEU, which aims at giving operators of
philanthropic organizations a tool to help expand their activities outside their individual Member
States.
In the field of philanthropy no less than in the market, the opening of single systems
across the European dimension seems fully justified. As has been noted, since the Second World
War all European Constitutions have returned the legal system to an ultimate moral order, which
recognizes the fundamental human rights and the related duties of solidarity. In other words,
given that the foundation of the Constitutions is the person, laws ought to encourage further
continental solidarity.7
The European Foundation Regulation, once adopted, would as its first effect set a
common core of purposes that can be considered of public benefit across Europe. The list of

6 EUROPEAN FOUNDATION CENTRE (EFC), Revised legal analysis of the European Commission proposal
for a Council Regulation on the Statute for a European Foundation (FE), 2012.
7 A. NICOLUSSI, Europa e cosiddetta competizione tra gli ordinamenti giuridici, in Europa dir. priv., 2006,
p. 90. This author refers to the European Constitutions entered into force after World War II having a moral
foundation as to “Post-Auschwitz Constitutions” (Costituzioni del dopo Auschwitz).
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 26
purposes, which is to be considered exhaustive, is broad enough to include most of the aims that
existing organizations pursue, but it is surprisingly too narrow in one respect: it does not include
religion. The exclusion of religion has been rightly criticized, whereas this purpose is
acknowledged in almost all Member States, whereas purposes that are not regarded as public
benefits in all Member States, such as amateur sports, are included.8
Indeed, the omission of
religion appears to go against the substantive law of all Member States and the common history
of our continent.
3. The leverage on national legislation
Although the European Foundation Statute would neither replace nor harmonize existing
foundation laws, it undeniably would affect national legislation, once adopted as a Regulation.
It has been noted that “in addition to providing solutions to the barriers that foundations
encounter in their cross-border work, a Foundation Statute would also provide further benefits to
the foundations sector. The Statute would help to clarify terms and the concept of foundations as
organizations with their own resources and independent governance. It would also help to
develop a common definition of public benefit purpose foundation, as currently the term
foundation is much too loosely used.”
9
3.1. The recent praxis of private foundations in Italy
One of the countries in which the term foundation is used too broadly is Italy. For some
time there have been attempts to hybridize associations and foundations, which have been
criticized in the literature. I am not referring to the forms of foundation specifically defined and
regulated by law, such as banking foundations, or those resulting from the conversion of public
institutions, but rather to the so-called foundations created by individuals exercising their private
autonomy.
In recent years in Italy, new institutional forms between association and foundation have
emerged, in the absence of a legislative framework that upholds their validity and outlines their
features. As a consequence, there seems to be question as to whether non-profit organizations
can continue to be categorized as associations and foundations.
The first feature of the new institutional forms is participation. This element distinguishes
them from the “historical foundations” (still solely taken into account by the civil code), in which
the founder establishes the purposes to be achieved, the assets, and the rules for the governance
and for the assignment of annuities, and then remains aloof from the new entity. Instead, in the
new foundations the founder actively participates in managing the legal body and in developing
operational strategies, following a model similar to a corporate company.
The second feature is the frequent plurality of founders, which allows for interaction
between public and private entities or even between individuals in order to carry out a project or
pursue a goal. But the peculiar—more problematic—characteristic is that the institution is

8 Cf. S.J.C. HEMELS, The European Foundation Proposal: An Effective, Efficient and Feasible Solution for
Tax Issues Related to Cross Border Charitable Giving and Fundraising?, Paper for the 2012 EATLP conference
Taxation of Charities, p. 13.
9 G. SALOLE, Why Is the European Foundation Statute Needed?, International Journal of Not-for-Profit
Law, vol. 11, no. 1, 2008.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 27
conceived as open in its genetic code. It permits entry by subsequent founders with additional
assets, all of whom become members of an assembly that makes decisions for the foundation.
Accordingly, this new foundation model that emerged in Italy looks structurally more
like an association than a foundation. Such a hybrid, in the absence of a legislative reformation,
threatens to undermine postulates underlying the Civil Code. In particular, it calls into question
the criteria for differentiating between types of charities (associations and foundations) and for
distinguishing charities from commercial companies.
The new form seems to render outdated the old distinction between the foundation and
the association, according to which the first is a “universitas bonorum” and the second a
“universitas personarum,” because the foundation is presented not as current assets intended for
one purpose, but rather as a collective organization formed by directors that uses the assets to
achieve the purpose. Some statutes recognize that the assets can be not only current but also
subject to an expectation of addition.
In addition, the dichotomy between public purpose bodies and for-profit entities appears
much less marked than the tradition and the Civil Code suggest.
To be sure, the provisions of the Italian Civil Code, which refer only to the grant-making
foundation, need to be reformed. But the goal ought to be, not to abolish the traditional figure of
the foundation (grant-making), which remains relevant, but to make the legislation more closely
match the needs of non-profit organizations.
3.2. The possible influence of the European Foundation Statute in Italy
In fact, in countries such as Italy, where legislation on foundations is considered obsolete
or otherwise in need of reform, it probably would have been more effective to harmonize
disciplines rather than to introduce a new legal form, which may remain poorly applied. The
experience of the European Company Statute (SE) has fed skepticism about the ability of a
European Foundation Statute to resolve problems of organizations that want to work abroad.
10
Although harmonization would have met resistance from many States, it would have forced the
legislature to comply with the European directive, effectively changing the existing law and
making it better suited to needs of the times and at the same time open to the European
dimension.
In any case, a Regulation on European Foundations may also prod the legislature into
modernizing the foundation. Such modernization is more necessary than ever in Italy, given the
inadequacies of the law on foundations established by individuals.
In addition, the adoption of a Regulation, one that introduces the European Foundation
legal figure without having to replace or modify the national organizational forms, would create
a harmonizing effect within the jurisdiction of the Member States. In the process of European
integration, European private law—understood in its effectiveness as a system of regulating
private relationships—reflects formally different disciplines that are objectively oriented to
harmonization. This means that national rules should be interpreted not only in accordance with

10 O. B. BREEN, EU Regulation of Charitable Organizations: The Politics of Legally Enabling Civil
Society, International Journal of Not-for-Profit Law, vol. 10, no. 3, June 2008, notes, “It remains difficult … to see
how the introduction of a European Statute—even one tailored to the specific characteristics of nonprofit
associations or foundations—could hope to resolve the central structural problems encountered by such entities.”
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 28
the European Community law, but also in a harmonizing manner. Harmonization of legal
systems is one of the undeniable and unavoidable goals of the European Union.
11
It is clear, therefore, that a Regulation on European Foundations would lead to a
rapprochement between the legal systems of the Member States in the field of the third sector.
By identifying a common core of general principles, it could foster the process of European
integration in the field of philanthropy. Given this inherent ability of European law, the European
Foundation Statute could be a harbinger of conceptual cleanliness, specifically in Italy.
First, regarding the current flexible use of the term foundation, the European Foundation
could reemphasize that the association and the foundation are distinct concepts. Non-profit
organizations (like commercial entities) require standard legal forms through which individuals
can form distinct, autonomous legal bodies. The traditional types of organizations provide
certainty in legal relations. They establish a legal entity distinct from natural persons by referring
to an organizational model (the formation of contractual consent, representation, and publicity)
and to a discipline (responsibility for obligations). Moreover, clear definitions of an institution’s
type and structure are essential for the protection of third parties who provide funding.
Second, the introduction of the European Foundation would redefine the difference
between association and foundation from the point of view of their method of formation. The
association is necessarily an entity formed by a plurality of subjects, whereas the creation of a
foundation—through deed, testamentary disposition, or written declaration—is to be considered
a unilateral act. The act remains unilateral, according to the legal doctrine, even if several
subjects act simultaneously to create a foundation.
12 The wording of article 12 of the Proposal
(Methods of formation) appears to allow this interpretation in referring to the deed and the
testament. The same provision also seems to bar the foundation from subsequently accepting
more subjects in the role of founders.
The requirement with respect to assets follows from that. When the entity is established,
it must meet the minimum established by article 7 of the Proposal, without relying on the
possibility of adding assets later. In fact, although Italian law does not currently set a minimum
monetary threshold, the administrative authorities consider the adequacy of funds in the act of
recognizing the institution as a legal person.
Also, whereas some clauses allow managers to change the statute of a foundation with
virtually no limits, article 20 of the Proposal makes it clear that the foundation, by contrast to the
association, is a stable entity with a purpose—not immovable or perpetual, but stable. The
Proposal correctly distinguishes the common changes to the statute (§ 1 art. 20) from those
changes that affect the purpose. The purpose “may only be changed if the current purpose has
been achieved or cannot be achieved or where the current purpose(s) have clearly ceased to
provide a suitable and effective method of using the [foundation’s] assets” (§ 2). In any case, the
decision to change the purpose must be adopted unanimously by the governing board and
approved by the supervisory authority.
Defining the foundation’s ability to alter its purpose would be great news for the Italian
legislative scenario. Often, especially in relation to ancient foundations, the purpose is no longer

11 Cf. C. CASTRONOVO and S. MAZZAMUTO, Manuale di diritto privato europeo, vol. I, Fonti, persone e
famiglia, Giuffré, Milano, 2007, p. 13.
12 P. RESCIGNO, Persona e comunità, Cedam, Padova, 1987, p. 98.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 29
relevant to the needs of contemporary society. Under the Italian Civil Code (art. 15), the
foundation results from an act that becomes irrevocable when the institution obtains recognition
as a legal entity or starts its business. Amendments to the statute are permitted only if they do not
affect the original purpose. Otherwise the event of conversion must be arranged by the public
authorities (art. 28 c.c.).
13
The proposed European Foundation offers a balanced solution between, on the one hand,
the need to respect the will of the founder combined with the need for stability of the
institution—so that resources earmarked for a particular purpose are not diverted to a different
purpose—and, on the other hand, the need to ensure that the institution can evolve to reflect
changes in the needs of beneficiaries. The control by the supervisory authority gives a guarantee,
to the founder and to subsequent donors, that the change strikes the proper balance.
Finally, article 34 of the Proposal (Transparency and accountability) is interesting for the
Italian private law scholar. Currently in Italy, the Civil Code does not require non-commercial
entities to keep accounting records unless they run business activities.
14 Only the tax law requires
preparation of an annual report and a financial statement that provide information on the
institution’s management. Currently the founder, if he or she is not a member of the board of
directors, has no special rights of inspection, given that article 15 of the Civil Code provides that
the entity is detached from the founder. The provisions of article 34 read in conjunction with
article 4 (Disclosure) appear to provide the transparency that is appropriate, in light of the often
significant size of not-for-profit organizations. Moreover, making the accounts of a foundation
accessible can increase its reliability and enhance the trust of the public, thus helping it raise
funds and pursue public purposes.

13 M. COSTANZA, I soggetti: gli enti non commerciali, in Trattato di dir. civ. del C.N.N., diretto da P.
Perlingieri, ESI, Napoli, 2012, p. 74.
14 Art. 20, co. 1, D.P.R. 600/1973.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 30
Article
The Swiss Legal Framework on Foundations
and Its Principles About Transparency
Lucas R. Arrivillaga
Georg von Schnurbein*
“Sunlight is said to be the best of disinfectants.”
This article deals with issues of transparency applicable to grant-making
foundations in Switzerland and analyzes the legal regime in this regard. This
analysis is contextualized by functional aspects typically affecting the
performance of foundations.
The article concludes that the Swiss regime is minimalist and that it might
not be sufficient in terms of setting standards on transparency. However, we
identify positive developments in the self-governing rules included in the Swiss
Foundation Code (SFC). This Code provides a very effective complementary tool.
It constitutes a laudable effort on the part of Switzerland’s philanthropic sector to
reinforce self-regulation by setting transparency standards.
Introduction
Transparency is a contested issue in the regulation of grant-making foundations. In
principle, one might argue that transparency should be the norm under which foundations
operate. After all, grant-making foundations are institutions established by and for civil society.
Therefore, by definition, foundations themselves ought to be interested in opening access to the
flow and democratization of information within the philanthropic sector.1 Yet vehement criticism
has been voiced against foundations owing to their lack of compliance with transparency rules,
managerial omissions, and their tax-exempt status—failings perceived by many critics as
unjustifiable privileges.2 But at the same time, one must be cautious in dispensing criticism3
so
as to avoid false conclusions and unwarranted generalizations.4

* Lucas R. Arrivillaga is a lawyer and a research associate at the Centre for Philanthropy Studies (CEPS) at
the University of Basel, Switzerland. Georg von Schnurbein is professor for foundation management at the Faculty
of Economics and director of the Centre for Philanthropy Studies.
1 Third sector institutions engage civil society in their activities, such as advocacy, charitable assistance,
higher education, health care, arts performance, residential nursing, and religious ceremonies. Steinberg, R. &
Powell, W., Introduction, in The Nonprofit Sector: A Research Handbook, 2nd ed. (New Haven: Yale University
Press, 2006), pp. 1-9.
2
Indeed, non-profit and tax-exempt status do not entail a withdrawal from economic activity. Posner, R.
and Philipson, T., “Antitrust in the Non-Profit Sector,” NBER Working Paper Series, March 2006, p. 2.
3
Foundations, as legally tax-exempt institutions, have often been under threat for financial or political
reasons. Hammack, D., “American Debates on the Legitimacy of Foundations,” in The Legitimacy of Philanthropic
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 31
The need to formulate a legal regime5
aimed at increasing transparency across the third
sector is now seen as essential, not only by the government but also by these institutions
themselves.6
In this article, we focus on the legal regime of Switzerland.
In order to contextualize the rest of the article, we shall outline some preliminary
assumptions: (a) The revolution in digital technology is constantly diminishing the distance
between institutions, both private and public, and the community. (b) There has been an increase
in the amount of self-regulation undertaken, in the number of legislative reforms issued, and in
the scholarships awarded, all of which are aimed at improving transparency in grant-making
foundations’ managerial activities. This might indicate a greater need to adopt standards within
this sector.7
(c) The Civil Code reform8
does not appear to have satisfactorily addressed
transparency issues. (d) The Swiss philanthropic sector has autonomously adopted newer and
stricter rules on transparency standards with its introduction of the Swiss Foundation Code
(SFC).9
The article is structured in four parts. Part I provides a picture of the Swiss grant-making
foundation today. Part II categorizes the elements, tools, and limits of the grant-making
foundations. Part III deals with the issue of transparency and its limits from different functional
and socio-political angles: technological limits, limits of international legislation, limits imposed
by the internal legal structure of foundations, limits defined by the legislation on gift-giving, and
functional limits to the implementation of transparency standards. Part IV comments on Swiss
legislation relevant to foundations and relates these points to the provisions in the Swiss
Foundations Code.

Foundations: United States and European Perspective, Prewitt, K., Dogan, M., Heydemann, S., & Toepler, S. (eds.)
(Russell Sage Foundation, 2006), p. 49.
4 Examples of well-established organizations in the third sector are the Red Cross and the Salvation Army.
Although they might be considered standard organizations for this sector, they operate under very different strategic
management principles from most other institutions in this sector. Hansmann, H., “The Rationale for Exempting
Nonprofit Organizations from Corporate Income Taxation,” Yale Law Journal, Vol. 91: 54 (1981), p. 65.
5 The legal regime applied to foundations is complex and often diversified. Grant-making foundations
normally straddle different branches of the law: Private Law and Public Law; Federal Law and Local (Cantonal)
Law; Tax Law; Canon Law; Constitutional Law. Dr. Peter Lex, “Die Grundzüge des Stiftungsrechts,” in Stiftungen
in Theorie, Recht und Praxis: Handbuch für ein Modernes Stiftungswesen, Graf Strachwitz, R., & Mercker, F. (eds.)
(Duncker & Humblot, Berlin, 2005), pp. 205-209.
6 To assess the relevance of the discussions on the operation and management of grant-making foundations
in this regard, see, for example, “Public Policy for Nonprofits: A Report on ARNOVA’s Symposium of October
2010,” https://netforum.avectra.com/eWeb/DynamicPage.aspx?Site=ARNOVA&WebCode=symposium.
7
In 2011, the European Foundation Centre (EFC) issued the report Exploring Transparency and
Accountability Regulation of Public-Benefit Foundations in Europe (2011).
8 The Swiss Civil Code was reformed in 2007. The issue has become more relevant, since it is expected that
new tax-estate reforms are likely to introduce more changes to the sector, increasing the amount of capital channeled
to foundations annually. See Breitschmid P., “Sale”: Schlussverkauf für die Erbschaftssteuer (NZZ-23.11.11).
9 Numerous codes of conduct issued by European countries for the third sector deal expressly with the issue
of transparency. See EFC, Exploring Transparency.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 32
I. The Swiss NPS and Foundations at a Glance
Given the size of the country and its population, Switzerland has a large nonprofit sector.
Some 90,000 nonprofit organizations exist, accounting for 4.7 percent of GDP. When the value
of volunteering work is included, this figure rises to 6 percent of the GDP.10
The foundation sector in particular plays a unique role. By contrast to the AngloAmerican definition, a foundation in the Swiss legal context can be a grant-making, an operating,
or an organizing institution. Of the 12,715 charitable foundations in total, two-thirds are grantmaking.11
Over the past twenty years, more than half of charitable foundations have been less than
ten years old, and total foundation assets have risen from CHF 30 billion (USD 32 billion) to
CHF 70 billion (USD 75 billion). As a consequence of this enormous growth, public interest in
the foundation sector is increasing.12
Besides the statistical increase, the foundation sector has been subject to changes in
managerial and structural organization.13 Two associations that serve foundations currently exist,
covering activities such as lobbying, convening, and publications. In terms of management, the
Swiss Foundation Code has gained international attention; it is the first foundation governance
code in Europe.14
II. Location, Tools, and the Bottom-Line Foundations Today
In a civil law system such as the Swiss regime, a foundation is normally defined as legal
entity established by the endowment of assets for a specified purpose.15 In theory, this purpose
must be one of public interest. Besides the fundamental civil-law requirement that the founder
has an autonomous will (i.e., possesses legal capacity), a foundation’s constitution contains two
formation requirements: the endowment, as the material element; and the purpose, as the
subjective element. The endowment is what distinguishes a foundation from other institutions
within the non-for-profit sector16 (or civil society17), such as associations and advocacy groups.18

10 Cf. Helmig, B., Gmür, M., Bärlocher, Ch., & Bächthold, St., “Statistik des Dritten Sektors in der
Schweiz,” in Helmig, B., Lichtsteiner, H., & Gmür, M. (eds.), Der Dritte Sektor der Schweiz (Bern, 2010), p. 174.
11 Cf. Purtschert, R., von Schnurbein, G., & Beccarelli, C., “Switzerland,” in Anheier, H.K., & Daly, S.
(eds.), The Politics of Foundations (London, 2007), p. 310.
12 Cf. Eckhardt, B., Jakob, D., & von Schnurbein, G., Der Schweizer Stiftungsreport (Basel, 2012).
13 Von Schnurbein, G., & Timmer, K., Die Förderstiftung (Basel, 2010).
14 Sprecher, Th., Egger, Ph., & Janssen, M. (eds.), Swiss Foundation Code 2009: Principles and
Recommendations for the Establishment and Management of Grant-Making Foundations (Basel, 2011).
15 Art. 80 of the Swiss Civil Code: “A foundation is established by endowment of assets for a particular
purpose.”
16 This distinction comes from Roman law, which differentiates between foundations (Universitas Rerum),
as institutions based on assets, and associations (Universitas Personarum), as institutions based on membership.
Prewitt, K., “Foundations,” in The Nonprofit Sector: A Research Handbook, 2nd ed., Powell, W. & Steinberg, R.
(eds.) (New Haven: Yale University Press, 2006), p. 355.
17 The term civil society is used to describe associations of public interest that involve a nexus between the
family, the state, and the market. Departing from the notion of citizenship, the concept of civil society has been
defined by philosophers since the time of classical liberalism. See the definition in Anheier, K. H. et al., A
Dictionary of Civil Society, Philanthropy, and the Nonprofit Sector (Routledge, 2005), p. 54.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 33
Thus, foundations belong to an economic sector that emerges independently of markets
and states. But the tools of this sector differ considerably from the resources available to the
other sectors. While governments generate their incomes by exacting taxes (compulsory
payments), and markets generate their incomes by creating financial surpluses (profits),
foundations are not directed at generating income. The structure of society itself is a
consequence of government, as there would be no civil order without centralized power, and
anarchy would reign.19 Markets work properly when private initiative and individual ambitions
can flourish.20 The government, markets, and society act interdependently. The third sector, by
contrast, does not exist on the basis of a social mandate, nor do its institutions compete in a
market. However, it nevertheless realizes a purpose that may belong either to the government or
to the market.21
But the pursuit of these objectives is not per se a warranty of a foundation’s survival. If a
government considers that a foundation’s role is not being performed adequately, the
government might try to take over the task of the foundation or even eliminate it.22 Similarly, if a
company sees an opportunity for financial profit in any of the foundations’ activities, it might
seek to pursue them itself.
Therefore, foundations exhibit singular characteristics. First, they operate by performing
activities that originally belong to the public sector, yet they cannot obligate society. Second,
foundations can canvass for sponsors, resources, and popular support, but without offering profit
in return. Therefore, although they can attract resources, they cannot function like classical
investment schemes by offering a return on capital.
This commitment to delivering public goods without being subject to the controls of a
centralized power or for-profit incentives raises questions as to how foundations can exist and
sustain themselves over time.
23 These considerations lead us to ask what essential criteria allow

18 Together, these institutions form part of what is known as “the third sector.” The term was introduced by
Amitai Etzioni and later adopted by the International Society for Third-Sector Research (ISTR) as a unifying label.
The term highlights the fact that this sector emerged independently of the market (the first sector) and the State (the
second sector). Anheier et al. suggest that the term “the third sector” is being replaced by “the third system.” This
latter expression is used to identify an array of organizations that are neither governmental agencies nor for-profit
firms. The term is deemed broader than the third sector, as it includes elements of the informal economy. Anheier,
K. H. et al., A Dictionary of Civil Society, Philanthropy, and the Nonprofit Sector.
19 “When governments no longer provide public goods or services, failure looms.” Rotberg, R., “Failed
States in a World of Terror,” Foreign Affairs, vol. 81, no. 4 (July-August 2002), p. 131.
20 Applying also to John Locke’s views on freedom and the granting of property rights, the absence of
which would menace the freedom of human beings to achieve social and economic development. For example, the
Universal Declaration of Human Rights (UNHRD), Article 27 (2), states: “Everyone has the right to the protection
of the moral and material interests resulting from any scientific, literary or artistic production of which he is the
author.” UNHRD adopted in December, 1948.
21 Prewitt, “Foundations,” p. 356.
22 Or conversely, due to a foundation’s high level of performance, a government might find its legitimacy
threatened vis-à-vis society.
23 We are not suggesting here that either the public sector or market players have a guaranteed survival.
When a majority of the people turn against their government, they usually cause it to fail. At the same time, markets
work properly when some players win while others fail. See Prewitt, “Foundations,” p. 357.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 34
institutions to be defined as grant-making foundations and to investigate whether transparency
plays a role in establishing these criteria.
In principle, the fundamental assets that constitute a foundation are its dedication to its
purpose and the value of its endowment. Do other characteristics constitute a foundation’s
specific identity? The answer is yes: A foundation depends on the goodwill and financial support
that it receives from both public and private sources.
The various legal frameworks that govern foundations demonstrate the government’s
interest in ensuring that their status is protected by its regulations. These regulations support
foundations by granting them status as independent legal entities, by exempting them from the
tax regimes, and by introducing tax waivers on gifts and donations that may be capitalized. In
addition to these benefits, governments can support foundations directly by contracting with
them, granting them funds, and outsourcing certain public activities to them. Companies can also
support foundations by donating tax-exempt funds and by directly contracting with them to
develop charitable activities.
In fact, if a foundation is able to exploit a favorable legal framework, its activities can be
both permitted by the government and supported by the private sector. This privilege implies that
the foundation conveys its message to society and that society endorses its credibility. Reputation
is therefore important to foundations. It functions as a kind of “moral credit,” which can generate
resources and help establish a favorable regulatory environment.
Furthermore, foundations are normally not alone in their domain. They are compelled to
monitor the memberships and responsibilities of other foundations.24 Thus, the philanthropic
sector, like the for-profit sector, is driven by a kind of competitive dynamic.25 Because
foundations must strive to survive, this competitive dynamic must be embedded in their founding
criteria.
Therefore, in addition to the endowment, foundations need a strong relationship with the
public and the private sectors of society in order to function. The endowment gives the
foundation a kick-start, but its relationship with the community is what sustains it in the long run.
Consequently, if foundations rely on reputation to function successfully, it can be
logically assumed that rules and principles on transparency will play an important role. However,
this role must also be contextualized. Part III outlines the issues relating to transparency and its
limits in this context today.
III. Transparency and Its Limits
Here, we discuss the general aspects of transparency and its limits with regard to the
constitution and operation of foundations. These issues are of a functional character, and
therefore apply equally to Swiss- and non-Swiss-based foundations.
A. Transparency and Access to Information Today
First of all, it seems undeniable that today’s unprecedented access to information can
trigger changes in the relationship between economic actors and the community. Communication

24 Prewitt, K., “Foundations,” p. 355.
25 Posner, R. and Philipson, T., “Antitrust in the Non-Profit Sector,” NBER Working Paper Series (March
2006), p. 2.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 35
technologies matter more than ever before. Never before has the human being enjoyed such an
abundance of available information. The challenge is not about looking for the information; it is
rather about processing it.26 Although this surfeit of information does not necessarily result in
“improved” knowledge, it renders traditional cases of secrecy almost impracticable.
Issues such as digital technologies, the convergence of media, and the architecture for
distributing information—both legal and illegal—have dramatically changed with the
introduction of Internet Web 2.0.27 Furthermore, devices to process information are inexpensive,
and sophisticated skills are not required to operate, edit, and distribute information. This has
provoked a radical shift in the way society and its institutions communicate with each other.
Traditional practices based on secrecy are no longer acceptable. Foundations should follow this
trend and avoid old-fashioned strategies based on scarcity of information.28
B. Transparency as an Integral Component
of the Current International Legal and Economic Order
Today, transparency has an increasing role to play across different sectors. In the
converging dynamic that has existed since the early 1990s, national governments seem to “cede”
sovereignty, economic integration takes place,29 and private players progressively adopt business
models that operate across several jurisdictions.30 Issues of transparency are of particular
importance in intergovernmental operations and public-private sector relations,31 where it is
essential to avoid any secrecy that might undermine the business climate, sociopolitical
opportunities for change, or global security.32

26 Capurro, R., “Towards an Information Ecology,” in Wormell, I. (ed.), Information and Quality (London:
Taylor, Graham, 1990), 122-139.
27 An iconic example of this was the decrypting and releasing of a video, entitled CollateralMurder.com.,
which shows the murdering of civilians, journalists, and children in Iraq. Sifry, M., Wikileaks and the Age of
Transparency (New Haven: Yale University Press, 2011).
28 For example, a Spanish study provides a model that allows the level of transparency of different NGOs to
be assessed online. Gálvez Rodríguez, M., Caba Pérez, M., & López Godoy, M., “Determining Factors in Online
Transparency of NGOs: A Spanish Case Study,” Voluntas, International Society for Third-Sector Research and
Johns Hopkins University, 2011.
29 The conclusion of the GATT Uruguay Round and the establishment of the WTO are part of this trend,
which, in fact, can be traced back to the Bretton Woods Agreement in 1944 and the founding of the World Bank and
the International Monetary Fund, whose aim was to build a more integrated economic order. See Bhagwati, J.,
Protectionism (Cambridge: MIT Press, 1989), ch. 1.
30 For a critical view from the perspective of global economic regulation, see Braithwaite, J., & Drahos, P.,
Global Business Regulation, Part I (Cambridge University Press, 2000).
31 Transparency also plays a role in the financial sector, although it has been said that: “The money markets
rely more on trust than transparency, because transactions are so quick that there is little time to assess information.”
“Full Disclosure: The Case for Transparency in Financial Markets is Not Clear-cut,” Economist, Feb. 19, 2009.
32 For example, within the WTO System, transparency is a fundamental principle of the organization that
aims to regulate information flows among trading partners. Hoekman, B., & Kostecki, M., The Political Economy of
the World Trading System: The WTO and Beyond, 2nd ed. (New York: Oxford University Press, 2001), p. 61.
Likewise, International Standards of Supreme Audit Institutions (ISSAI) of the International Organization of
Supreme Audit Institutions (INTOSAI) sets transparency standards for public finance at Principles of Transparency
and Accountability ISSAI 20. www.issai.org.
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The third sector is also affected by this. For example, after the terrorist attacks of
September 11, 2001, financial regulations were among the first to be affected33 in order to trace
movements of capital by private players, especially in the recommendations of the Financial
Action Task Force (FATF) of October 2003 and its nine34 supplementary recommendations.35
The eighth recommendation addresses the regulation of non-profit organizations:
Depending on the legal form of the NPO and the country, NPOs may often be subject to
little or no governmental oversight (for example, registration, record keeping, reporting
and monitoring), or few formalities may be required for their creation (for example, there
may be no skills or starting capital required, no background checks necessary for
employees). Terrorist organizations have taken advantage of these characteristics of
NPOs to infiltrate the sector and misuse NPO funds and operations to cover for or support
terrorist activity. 36
In an economically integrated world, this recommendation constitutes a strong warning
call for the global philanthropic sector. The need for instruments and regulations aimed at
avoiding secrecy, albeit for different reasons, is just as clear for the third sector as it is for other
key economic areas, such as trade and public finance.
C. Transparency and the Essence of the Legal Structure of Foundations
If transparency is considered a key asset in the theoretical constitution of a foundation,
this must be reflected in its actual operations. Yet well-accepted legal principles are not
necessarily self-explanatory. However well accepted these principles are in theory, their
formulation does not easily translate into practice. Historical and structural factors can conspire
against the straight execution of accepted principles.
In the case of foundations, it might even be argued that, as legal institutions, they do not
appear to have any immediate connection with transparency issues. This might be because
foundations are not publicly associated with a democratic ethos that categorically requires
transparency. The fact that wealthy people can divert resources—which would otherwise have to
be contributed through taxes to the public budget—in order to satisfy what they personally and
independently determine to be an unmet need of public character, is hardly aligned to any
democratic axiom.37
In fact, the philosophical underpinnings of foundations reveal a laissez-faire heritage.
That is, this sector’s principles have little to do with public policy issues.38 The architecture of
third-sector institutions omits to identify precise beneficiaries who can assert rights against a

33 Pieth, M., Financing Terrorism (Kluwer Academic Publishers, 2002), p. 158.
34 https://www.fatfgafi.org/document/28/0,3746,en_32250379_32236920_33658140_1_1_1_1,00.html.
35 Of 2001, incorporating all subsequent amendment until 2008. https://www.fatfgafi.org/document/9/0,3746,en_32250379_32236920_34032073_1_1_1_1,00.html.
36 https://www.fatfgafi.org/document/22/0,3746,en_32250379_32236920_43757718_1_1_1_1,00.html.
37 Consequently, it is not astonishing at all that foundations have been labeled “quasi-aristocratic
institutions.” Anheier, H. K., & Daly, S., Politics of Foundations, p. 4; Prewitt, K., “Foundations,” p. 374.
38 Brody, E., “The Legal Framework for Nonprofit Organizations,” in The Nonprofit Sector: A Research
Handbook, 2nd ed., Powell, W. W., & Steinberg, R. (eds.) (New Haven: Yale University Press, 2006), p. 243.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 37
foundation—an approach adopted by many people who establish charities using a foundation.
These factors conspire against transparency.
For example, when contrasting the structure of a foundation to that of a company, one
marked difference is that the latter is vested with a board that is obliged to submit a periodic
account of its actions to its principal—that is, its shareholders.39 This requirement has a
tremendous impact on the field of corporate law.40 The structure of a foundation has no such
internal control mechanism. Once a foundation has been established, it operates by following the
directives of its board of management. As the foundation board does not have the duty to
distribute periodic benefits to stakeholders, there are no parties entitled to demand accountability
for the foundation’s actions. The foundation is not required to report on the size of gifts and
donations, for example, or on the use of the dedicated assets.41
Thus a foundation operates solely under the management of the board. The board’s main
duty is to fulfill the founder’s will (the foundation’s purpose). In this sense, the will of the
founder attains a sort of legal character vis-à-vis the authority before the foundation is registered,
and sometimes even in face of the tax authority. But as foundations are normally expected to
continue their existence beyond the life of the founder, the task of determining who has the right
to enforce the will of the founder is not simple. Of course, to some extent the public authority has
the right to monitor the functions of a foundation. But once a foundation has been established,
the supervisory vigilance of the state is not mandatory.
At the same time, if the government were to introduce an aggressive supervisory policy
over the foundations registered within its jurisdiction, there would very likely be a strong
reaction in defense of the foundation’s independent status. Beyond the standard accounting rules
common to all economic actors vested with a legal personality, foundations are not legally
compelled to provide information to the regulatory authority. In this sense, it can be said that,
even though the will of the founder has some legal character, and the status of legal entity
ensures that a framework exists to fulfill that will, there is no legislation to ensure that
foundation funds are handled systematically. Moreover, even in cases where the public authority
obliges funds channeled through foundations to undergo closer scrutiny, this is normally done to
identify dishonest tax avoidance, not to shed light on the foundations’ management activities.

39 Milton Friedman: “[T]he whole justification for permitting the corporate executive to be selected by the
stockholders is that the executive is an agent serving the interest of the principal.” Friedman, M., “The Social
Responsibility of Business is to Increase Its Profits,” New York Times Magazine, September 13, 1970.
40 “Much of corporate law can be understood as an effort to control the agency problems that arise from the
opportunist managers vis-à-vis shareholders, controlling shareholders vis-à-vis minority shareholders, and the
company vis-à-vis its non-shareholders’ constituencies such as creditors and employees.” Hertig, G., Kraakman, R.,
& Rock, E., “Issuers and Investor Protection,” in The Anatomy of Corporate Law: A Comparative and Functional
Approach, Kraakman, R., Davies, P., Hansmann, H., Hertig, G., Hopt, K., Kanda, H., & Rock, E. (eds.) (New York:
Oxford University Press, 2004), p. 195.
41 Albeit that active fundraising operations actually trigger some regulatory duties vis-à-vis the public
authority.
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D. Transparency and the Privacy Aspect of the Act of Giving
Apart from the initial endowment, foundations are nourished by gifts and donations. It
would therefore be reasonable to track not only where these funds originate, but also where they
go.42
In principle, a philanthropic gift in the form of a contribution or a donation constitutes the
voluntary, irrevocable transfer of an asset (money, property, rights of exploitation, etc.) by one
person to an organization dedicated to a public purpose. Generally, this act is made without an
expectation of receiving something in exchange. The only condition normally attached to this
transaction is that the assets given be dedicated to the purpose for which they were transferred.
43
Moreover, when a foundation ceases operation after receiving a gift, then the gift will most likely
be channeled to another charitable institution with a similar purpose rather than returned to the
donor. Gifts, once given, do not find their way back to the giver.
The act of giving anonymously can be especially revered. The reason for this is rooted in
religious traditions and other beliefs as well as in psychological motivations. From this
perspective, confidentiality may be important enough for the philanthropic sector to want to
protect it against hostile regulation or operating rules.44 However, anonymity certainly
contributes toward obfuscating the sector.
New trends in philanthropy suggest that the sector is being modernized. Donors are
increasingly assisted by well-established financial planners specialized in this sector, who can
provide a more holistic view of a charitable portfolio.45 However, nothing suggests that old and
new approaches to philanthropy cannot coexist.
E. The Work of Foundations and the Limits of Transparency
Rules on transparency are normally understood as a bulwark against institutional abuses
relating to trade, taxation, or other economic activities—that is, situations in which pernicious
private interests pursue objectives that undermine the market or the public.
Banks and foundations differ considerably, yet they perform similar roles. Banks reduce
the transaction costs between lenders and borrowers of money. Beyond their own endowment,
foundations perform a similar role in the philanthropic market, by gathering contributions and
donations to be channeled to the different social programs. Just as banks are intermediaries
between lenders and borrowers of credit, foundations are intermediaries between funders and

42 In Spain, for instance, there is a foundation that tracks the transparency of NGOs as a guide for donors.
See: https://www.fundacionlealtad.org/web/home
43 See also Anheier, H. K. et al.
44 For an economic analysis of the different reasons that prompt people to donate and provide gifts for
charitable purposes, from hedonistic motives to normative reasons, see Kolm, S., “Introduction to the Economics of
Giving, Altruism and Reciprocity,” in Handbook of the Economics of Giving, Altruism and Reciprocity:
Foundations, Vol. 1, Kolm, S., and Ythier, J. M. (eds.), Handbooks in Economics (Elsevier, 2006), pp. 52-90.
45 Havens, J. J., O’Herlihy, M. A., Schervish, P. G., “Charitable Giving: How Much, By Whom, To What,
and How?”, in The Nonprofit Sector: A Research Handbook, 2nd edition, Powell, W., and Steinberg, R. (eds.) (Yale
University Press, 2006), p. 560.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 39
beneficiaries of aid. In the end, both institutions mediate the problems created by information
asymmetries.46
Notwithstanding these similarities, banks are subject to far more regulation than
foundations. Banking regulations are substantially stricter in the realm of transparency. This is
related to the banking business model expressed in the deposit contract, by which the depositor
keeps the upside of the business (which is limited) and assumes the whole downside loss.47 This
context highlights why transparency is so important in this industry.48
However, transparency can at times undermine the banking business model. Particularly
in times of financial stress, full transparency can reduce a bank’s flexibility. Depositors may
withdraw their funds at once.
49 This may worsen the crisis and potentially induce a market
collapse.
In the foundation sector, the general trend towards transparency is facilitated by new
technologies and contemporary approaches to communication, as well as by recent international
legal recommendations. On their own, some foundations have started to provide detailed
information about their organization and activities on their websites.50 It is in the foundation’s
interest to implement transparency rules in all its operations. Improved transparency helps attract
funding, volunteers, and permanent memberships. It also communicates a message to society that
foundations warrant people’s trust. Such trust is a foundation’s most valuable asset.
Nonetheless, as illustrated by the banking regulation case, caution is appropriate.
Foundations undertake activities of a public character that are not addressed by the State or the
private sector.51 In pursuing their objectives, sometimes foundations need to operate under a veil
of discretion. This is because their activities often relate only to a small segment of society,
whose members do not have the opportunity or the skill to form a powerful democratic
presence.52 Furthermore, foundation activities can draw a harsh reaction. Examples of charitable
acts that might arouse public concern include attempts to integrate potential terrorists into
society, studies on the benefits of euthanasia, research on gender change, and help for asylum
seekers. In an open society, foundations should have the freedom to pursue social change53 and

46 As in the case of “lemons,” where the “the purchaser’s problem is to identify quality,” elaborated by
Akerlof, G., “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of
Economics, vol. 84, no. 3 (August 1970), p. 495. We can suggest that the primary problem people face when lending
or giving away money is identifying the most efficient institutions in which to place their assets.
47 Allenspach, N., “Banking and Transparency: Is More Information Always Better?”, Swiss National
Bank, Working Papers (2009/11), p. 3.
48 However, it has been said that the banking sector needs disclosure more than transparency. Since
financial information tends to be very complex, only the disclosure of relevant items of information by top managers
to rating agencies and insurance firms really has an effect on the market. See Healy, P. M., Krishna, G., Palepu,
K.G., “Information Asymmetry, Corporate Disclosure, and the Capital Markets: A Review of the Empirical
Disclosure Literature,” Journal of Accounting & Economics, 31 (2001), pp. 405-440.
49 Allenspach, N., p. 3.
50 See for example https://www.grstiftung.ch/en.html.
51 Or sometimes activities differently undertaken, either by the state or the private sector.
52 Otherwise these groups would be able to force the state to act on their behalf.
53 Prewitt, K., p. 355.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 40
to challenge established limits.
54 They must have sufficient autonomy to undertake unpopular
tasks.55
A foundation may also need privacy when it operates outside its jurisdiction in
undemocratic countries. A requirement at home that it fully account for its actions can produce
devastating consequences for the people it is trying to help and protect.56 Therefore, transparency
legislation must not obstruct the foundation’s mandate, its manager’s strategy, the assignment of
its assets, or any other aspect of its work.
57
To strike the optimal balance, a strategy should distinguish between structural
transparency and performance-related transparency. Structural transparency relates to the internal
framework of the foundation, including the purpose, quantity of assets, board members, and rules
on the destination and the granting of funds. Performance-related transparency relates to the
activities of the foundation, including their relationship to its purpose.
Arguably, the public wants principally to be able to assess the individuals responsible for
administering the foundation assets. Structural transparency is likely to suffice in establishing
credibility. By contrast, transparency regulations that focus on the activities of the foundation
can jeopardize its ability to fulfill its purpose.
As will be explained below, Switzerland’s transparency regulations deal predominantly
with a foundation’s structure rather than its activities.
IV. Swiss Legal and Institutional Framework for Foundations
Swiss law establishes three main forms of foundation: classic foundations, known also as
charitable foundations, which are regulated primarily in the Swiss Civil Code (SCC); family and
ecclesiastical foundations, which are not specifically regulated in the SCC; and foundations
consisting of retirement schemes for employees, which are regulated under other special legal
regimes. In addition, there are business foundations, which, though “unregulated” by the SCC,
seem to be recognized in jurisprudence.
58
In Switzerland, the law applicable to foundations is laid down in Articles 80 through
89bis59 of the Swiss Civil Code,60 whose last reformed version61 entered into force on January 1,

54 Id.
55 An example of this is the work of the Ford Foundation and the African-American civil rights movement
during the 1960s. Berman, H. E., “The Foundations’ Role in American Foreign Policy: The Case of Africa, Post1945,” in Philanthropy and Cultural Imperialism: The Foundations at Home and Abroad, Anove, R. F. (ed.)
(Boston: G. K. Hall & Co., 1980), p. 205.
56 For example, German foundations that are extensively involved in efforts to democratize foreign
countries since 1960 include the Friedrich Ebert Foundation, the Konrad Adenauer Foundation, the Henrich Boell
Foundation, the Hanns Seidel Foundation, and the Rosa Luxemburg Foundation. However, these foundations no
longer exist as foundations; in fact, today, they are associations. Alexander Mohl analyzes their work in Mohr, A.,
The German Political Foundations as Actors in Democracy Assistance (Boca Raton, FL: Universal-Publishers,
2010).
57 For example, for decades U.S. Government aid was not welcome in China, the Soviet Union, and many
developing countries, whereas U.S. foundations were allowed to operate in them. Berman, H. E., p. 205.
58 See the study by Würmli, M., Das gemeinnützige Unternehmen, (s. 901). Pratique Juridique Actuelle,
Dike Verlag AG, AJP (2010).
59 Article 89bis is not analyzed in this paper, as it concerns employee benefits schemes.
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2006,62 pursuant to Article 1 of the Concluding Section of the SCC.63 A legal regime applicable
to the auditors of foundations is stipulated in the Federal Ordinance of August 24, 2005.
64 The
Swiss Confederation, through the Federal Supervisory Authority on Foundations of the
Secretariat of the Federal Department of Home Affairs (FDHA),65 exercises oversight authority
over foundations registered in Switzerland which have a national (or sometimes international)
purpose.66 This supervisory authority is based on Article 84.2 of the SCC, by which “The
supervisory authority must ensure that the foundation’s assets are used for their declared
purpose.”67 (Foundations are also supervised locally at cantonal level, a topic that lies beyond the
scope of this article.)
A. Transparency and the Law
Few legal provisions directly address transparency; instead, provisions of this kind are
implicitly included within the different sets of legal regulations. Basically, the transparencyrelated regulations applicable to grant-making foundations can be divided according to two
implementation phases: when the foundation is formed, and when the foundation is administered.
The scope of regulation dealing with the formation of foundations can be extended to
investigate two issues. First, regulations seek to trace and determine the origin of gifts and
donations which are incorporated into the endowment, but which do not form part of the original
endowment itself. The purpose is to ensure that foundations do not host illegal assets and do not
get used to divert assets. Second, regulations may come into play when the foundation’s purpose
is changed, including upon the request of the founder. Such a change will alter the subjective
aspect of a foundation.
The scope of regulation dealing with the administration of the foundation covers three
areas. First is the management process for ensuring that grants are allocated on an objective and
systematic basis. Second, regulation addresses the obligations and duties associated with annual
reporting and accounting. These managerial functions aim to ensure predictable levels of
expenses and to provide a rational approach to administration that will help secure the
foundation’s long-term survival. A third category of regulations concerns the rules, duties, and
assignment of managers, as well as the organization of the foundation’s managerial bodies in
their relations with external auditors. These specifications seek to address and avoid the so-called

60 Swiss Civil Code (SCC), Part One: Law of Persons, Title Two: Legal Entities, Chapter Three.
61 It is the first reform of Swiss foundation law since 1907.
62 It is worth noting that the reform of the Swiss Civil Code provisions related to foundations occurred
independently, and not as part of any attempt to harmonize the Swiss Regime with European legislation. Sprecher,
T., Die Revision des Schweizerischen Stiftungsrechts (2006), p. 81.
63 Final Title: Commencement and Implementing Provisions.
64 www.bk.admin.ch/ch/f/as/2005/4555.pdf.
65 Art. 3, al. (alinéa) 2, let. A, de l’ordonnance sur l’organisation de Département Fédéral de l’intérieur (Art.
3, Abs. 2. Bst. a, Organisationsverordnung vom 28. Juni 2000 für das Eidgenössische Departement des Innern (OVEDI)) SR 172.212.1.
66 https://www.edi.admin.ch/esv/index.html.
67 https://www.edi.admin.ch/esv/00465/00466/index.html?lang=fr.
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agency problem. The structural problems of a foundation’s management do not relate directly to
agency problems, but rather result from a lack of agents.68
B. The Swiss Foundation Code
Beyond the SCC and related federal and cantonal regulations, the philanthropic sector has
formulated the Swiss Foundation Code in an effort of self-regulation.69 Self-regulation by private
parties can offer advantages over state compulsory regulation.70 Perhaps the most obvious
advantage that private-sector participants have over public authorities is specialized know-how
and experience. This permits them to more easily spot the weaknesses in stewardship that need to
be regulated. Nonetheless, self-imposed standards can have a downside if they are drafted by
better equipped players in the philanthropic sector, such as large foundations. The imposition of
sophisticated standards can cause small players to default without being culpable of any
transgression per se, simply because they lack the means to fulfill the standards. It is therefore
advisable to gather opinions from different members of the sector when fashioning selfregulation. Another point to consider concerns the relationship between the sector’s regulatory
body and the regulated parties. Parties within the sector are likely to have common interests. In
this regard, problems related to capturing regulatory omissions may arise between the sector’s
players and ad hoc regulators, as happens between regulated parties and the public authority.71
In the case of the SFC, Swiss foundations (the Association of Swiss Grant-Making
Foundations72) commissioned a working group of experts in 2004. The aim was to prepare
recommendations on the formation and management of Swiss foundations.73 The first version
appeared in 2005 under the heading Code of Best Practices, which was discussed and reviewed
by members of Swiss foundations, the public authority, academia, organizations related to the
philanthropic sector, and the private sector. The text was finally published under the name Swiss
Foundation Code. It includes three main principles and 26 recommendations. The SFC is a

68 Although certain voices suggest that foundations should adopt a “principal/agent” structure akin to the
organization of a company. See the section Discussion in EFC, Exploring Transparency and Accountability
Regulation of Public-Benefit Foundations in Europe (2011), p. 9.
69 Other European countries also have a panoply of self-regulations involving transparency. See Breen, O.,
“Through the Looking Glass: European Perspectives on Non-Profit Vulnerability, Legitimacy and Regulation,”
Brooklyn Journal of International Law, vol. 36, no. 3 (2011), available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1932653, p. 969.
70 Brody, E., “The Legal Framework for Nonprofit Organizations,” in The Nonprofit Sector: A Research
Handbook, 2nd ed., Powell, W. W., & Steinberg, R. (eds.) (New Haven: Yale University Press, 2006), p. 257.
71 Id.
72 Grant-making foundations are those foundations that have the means either to develop their own projects
or to finance the projects undertaken by other parties. These are foundations which, in their essence, can develop
independently.
73 Even though the foundations targeted by the SFC are the so-called “large” foundations, the introductory
part of the Code includes the caveat that its recommendations should not be applied too rigorously in the case of
smaller foundations, in order to prevent them from being overwhelmed by its provisions, and yet allow them to
profit from the Code guidelines. See SFC, p. 13.
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guideline for the activities of foundations formed in Switzerland.74 It is not a management
guide,
75 and its recommendations are not mandatory.76
The SFC is divided into four chapters, which address the foundation’s establishment,
77
leadership,
78 grant-making,
79 and finances.80 The code sets forth “three General Principles, which
must always be observed simultaneously by the management of any modern foundation. These
principles relate to: (1) the Effective Implementation of the Foundation’s Purpose; (2) Checks
and Balances; and (3) Transparency.”
81 The first principle aims to ensure that a foundation’s
work is executed pursuant to its legal purpose. The second principle addresses the foundation’s
managerial structure. The third principle focuses on the relationship between the foundation and
society in general.
C. The Swiss Legal System at Work
The rest of this article deals with the Swiss legal framework on foundations. It primarily
deals with the provisions of applicable federal law, such as the Swiss Civil Code, and presents
these in the context of regulated acts over the life of a foundation. Where relevant, the article
notes the interplay between the recommendations of the SFC and the provisions of the SCC. A
brief comment on the applicability of the principle of transparency closes the analysis of each
piece of regulation.
1. Formation and Registration of Foundations
a. Swiss Civil Code
Article 80 of the SCC (on formation)82 lays down the basic principle that defines the
foundation as being “established by the endowment of assets83 for a particular purpose.”84 The
act of allocating an endowment to a particular purpose and registering it in the commercial
register gives the foundation its legal personality.85 Article 81, para. 1, of the SCC stipulates that
a foundation can be established by a public deed—inter vivos—or by a testamentary

74 In its introductory section, the Code also contemplates the adjustment of its principles and
recommendations applicable to foundations that are initially established under a foreign jurisdiction. See SFC, p. 13.
75 See also SFC, p. 14.
76 See SFC, pp. 14-15.
77 Including Recommendations 1-3.
78 Including Recommendations 4-15.
79 Including Recommendations 16-19.
80 Including Recommendations 20-26.
81 Swiss Foundation Code 2009, Foundation Governance, vol. 9 (Helbing Litchtenhahn Verlag).
82 Article 80 A. Foundation I. In General.
83 In some countries, the law stipulates that the endowment must have a minimum threshold value. This is
not the case of Switzerland, though in practice the Swiss authority requests a minimum amount before registration.
84 In some European countries, the law requests that the purpose be published and expressly defined as
being of a public-benefit. See EFC, Exploring Transparency and Accountability Regulation of Public-Benefit
Foundations in Europe (2011). This level of precision is absent from the SCC.
85 Thus, in Switzerland, registration functions as a state approval for grant-making foundations; whereas in
other European countries, such as France, registration is not required. Alternatively, registration is achieved subject
to judicial approval and not by state approval. See id., pp. 12-13.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 44
disposition.86 A foundation can also be established by contract of inheritance (pacte
successoral)
87 under the jurisprudence developed by the Swiss Federal Tribunal.88 Article 81,
para. 2, of the SCC stipulates that a foundation must be entered in the commercial register,
pursuant to its charter, in accordance with any directions issued by the supervisory authority, and
naming the members of the board of trustees. Finally, Article 81, para. 3, stipulates that the
probate authority shall inform the commercial registrar of the creation of a foundation by
testamentary disposition.89 Upon subsequent notification of the supervisory authority, the
registrar will exercise supervision.90
b. Swiss Foundation Code
The first recommendation of the SFC concerns the examination of the founder’s intent. In
particular, the recommendation seeks (a) to ensure that the founder’s intent corresponds to a
societal need, and that that an independent foundation is an appropriate vehicle to deal with this
need, taking into account its assets; (b) to determine whether the foundation is to have a
permanent or limited existence, and, if permanent, to set up a framework for electing or replacing
board members; and (c) to ensure a level of coherence in terms of the foundation’s will, purpose,
organization, and assets disposed.91
The second recommendation of the SFC deals with the legal domicile of the foundation.
In principle, the recommendation states that the foundation should be established where its main
grant-making activity takes place. However, geographic proximity is not the only concern; a
foundation’s domicile determines its legal framework and supervisory authority. In addition, the
recommendation states that tax issues should be evaluated when setting the domicile of the
foundation.92
The third recommendation deals with the internal documents and bylaws of the
foundation.
93 The purpose of the foundation should be stated in the charter. Ancillary rules
concerning the work of the foundation, which need to be adaptable, can be established in other
documents or guidelines. In cases where the purpose is broadly defined, the founder should add a

86 The rules of formal testamentary disposition are governed by Article 498 A. Wills, I. Drawing up a will,
1. In general, Article 499 et seq. governs the requirements of testament established by public deed. The rules of
hand-written testaments are governed by Article 505 (on Holographic will). Article 506 (on Oral will, dispositions)
et seq. govern the rules on oral declarations of testamentary nature.
87 The requirements for contracts of succession are set forth in Article 512 et seq. of the SCC. In order to be
valid, the contract of succession must be vested with formal requirements of a will executed as a public deed and the
intention of the parties must be declared before the public authority.
88 Sprecher, T., New Features in Swiss Foundation Law (2006), p. 9.
89 Art. 81.3 of the SCC.
90 Sprecher, T. New Features in Swiss Foundation Law (2006).
91 See the Swiss Foundation Code 2009, with commentary. Sprecher, T., Egger, P., and Janssen, M.,
Foundation Governance, vol. 6., Helbing Lichtenhahn, Swiss Foundations (2009).
92 See id.
93 As the law does not have provisions on the bylaws of the foundation, this recommendation is very useful
for newly formed foundations.
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mission statement to serve as a strategic guideline for the board, which can be periodically
revised.94
2. Challenges by Heirs or Creditors
Article 82 of the SCC95 states that the foundation can be challenged by the heirs or
creditors in the same way that a gift may be challenged.
3. Organization of Foundations
a. Swiss Civil Code
The charter stipulates the governing bodies of the foundation and its method of
administration.96 If the authority of the commercial register sees a lack of coherence between the
way in which the foundation has been organized and its legal mandate, the authority will notify
the pertinent supervisory authority of the foundation, which will need to redress these
deficiencies.
97 The supervisory authority may set a deadline by which the foundation must
establish its legal status, appoint an executive body (assuming this is vacant), or appoint an
administrator (permanent or not) together with an assignment of competence. If the situation
cannot be redressed and uncertainties persist regarding the feasibility of the foundation’s
organization, the foundation’s assets can be donated to another institution that has a similar
purpose.
This is to be done irrespective of whether the deed of the foundation authorizes it or
not.98 This provision constitutes a departure from the established Swiss legal regime on
foundations, which did not give this power to the authority. Under such circumstances, the new
regime even allows the authority to transfer the assets against the will of the founder and the
members of the board, regardless what is stated in the deed.99
b. Swiss Foundation Code
The second cluster of recommendations of the SCF deals with organizational issues. The
last of the 12 recommendations stipulates that the foundation should share information on its
principles, grant-making activities, and procedures with the public. The recommendation aims to
inform the public about the purpose of the foundation, its structure, and its areas of activity. The
SFC advises that foundations make their “goals, guidelines and procedures governing grantmaking activities” accessible to the public via a website. The recommendation states that the
foundation should share this information with its beneficiaries, the public authority, and the
public in general.
Recommendation 4 provides rules for the functions of the board of trustees, which should
be included in the foundation charter. The first recommendation states that the board should

94 See the Swiss Foundation Code 2009, with commentary.
95 SCC, Article 82 III., Challenge by founder’s heirs or creditors.
96 SCC, Article 83B, Organisation, I. In general.
97 The foundation bears the cost of these diligences. Article 83d, IV, para. 3, of the SCC.
98 SCC, Article 83d, IV. Organisational defects, point (2)
99 Sprecher, T., New Features in Swiss Foundation Law (2006), pp. 9-10.
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possess discretionary authority over its judgments and be free to hold independent opinions.
Even if the founder is a member of the board, the other board members must remain
autonomous. The board is entrusted with setting up the foundation’s short-, medium-, and longterm strategies to achieve its purposes. Taking into account the foundation’s charter, the board
also has the power to periodically evaluate strategies of managers along with performances and
policies of the foundation.
Recommendation 5 states that in the absence of stipulations in the foundation’s charter,
the board of trustees should draft procedures regarding the election of its members, their terms of
office (two to five years per term), and rules governing their succession. Recommendation 6
deals with the number of members of the board of trustees (ideally five to seven). It suggests
rules ensuring that foundation employees and board members receive adequate time to perform
their functions and opportunities to benefit from training courses.
Recommendation 7 suggests rules on board members’ remuneration, which ought to be
commensurate with individual skill and experience, expended time, and performance. Although
the recommendation indicates that board members will optimally perform their duties on a
voluntary basis, it recognizes that members may require remuneration for their professional
services. In this regard, the terms must be agreed in writing.
Recommendations 8, 9, and 10 deal respectively with the board’s organization, the role of
its chairperson, and the role of its committees. Meetings of the board should take place at least
twice a year; they must be announced; decision-making procedures should be easy to
comprehend; and minutes should be recorded. If necessary, the board should determine when to
consult external experts. Recommendation 9 specifies the tasks entrusted to the chairperson visà-vis the board and the management of the foundation. The chairperson moderates board
meetings and communicates timely information to board members so that they are appropriately
informed before each meeting. The chairperson’s duties, areas of competence, responsibilities,
and term of office should be laid out in the foundation’s regulations or guidelines.
Recommendation 10 outlines cases where the board might decide to set up permanent or ad hoc
committees for specific tasks, such as overseeing finance, investments, grant-making, human
resources, and remuneration. The board must ensure that the external members of these
committees are independent and in no way associated with the people they must evaluate. The
board of trustees should lay down the committee’s tasks in the foundation’s regulations and
guidelines.
Recommendation 11 deals with the rules governing potential conflicts of interest between
a person’s role as a foundation board member or management member and his or her other
professional or personal activities. The board is charged with drafting the rules on this. As a
matter of principle, any situation presenting a potential conflict of interest should be avoided.
Should such a case occur, it must be disclosed to the board. It may also have to be disclosed in
the annual report.
Recommendation 12 outlines the foundation’s tasks regarding public communication.
The foundation has a duty to provide its members, its beneficiaries, the government, the public,
and the media with information concerning its purpose and structure, along with its grant-making
policy, strategies, and activities. It should purvey this information using modern media channels,
such as a website.
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The function of management is addressed in Recommendation 13. The board of trustees
should determine the skills, experience, duties, responsibilities, and compensation that its
management should have and hire the management. Once hired, management should run the
foundation’s operations under the supervision of the board of trustees.
Recommendation 14 seeks to ensure that the auditing agency is not assigned any task
other than what is required by statutory obligation. In particular, the board of trustees is
cautioned against entrusting the auditing agency with the responsibility of managing foundation
assets. The board must also make sure that the auditing agency or at least the head auditor is
periodically replaced.
Recommendation 15 deals with the appointment of permanent or ad hoc advisors and
consultants. When the board needs new skills or simply assistance, it can employ an external
work force. The foundation’s regulations or guidelines should state the task, areas of expertise,
and responsibilities of such external workers. The rules on independence and remuneration of
board members should apply equally to advisors, advisory committees, and other foundation
bodies.
4. Recommendations on the Work of Grant-Making Foundations
a. Swiss Civil Code
The Swiss Civil Code is silent about the work undertaken by grant-making foundations in
practice.
b. Swiss Foundation Code
SFC Recommendation 16 advises the board of trustees to document foundation policy in
writing in order to serve as a reference framework. Grant-making and investment policies should
be coordinated, and strategies should periodically be reevaluated in consideration of both
society’s needs and the activities of other private and public grant-making institutions. The board
should set midterm goals as well as possibilities for collaboration.
Recommendation 17 addresses grant-making. In accordance with its investment
strategies, the board of trustees should determine distributable foundation income and disburse
available funds in a timely manner. A foundation should conduct grant-making activities in a
professional, business-like fashion. There must be communication with other private and public
institutions to operate efficiently and to avoid duplicate granting. There should be an optimal
ratio between administrative costs and grant-making activities. The foundation should have
established criteria to determine its efficiency.
Recommendation 18 advises that projects be evaluated and selected pursuant to the grantmaking guidelines. The foundation should ensure that competent persons are in charge of such
evaluation, and that it is done in an objective and timely manner. External committees or
consultants may be used as well.
Recommendation 19 recommends that once a grant has been awarded, the foundation
enter into a contract with the beneficiary for the duration of the project. The foundation should
define the terms of the contract. A foundation can attach conditions to the funding and monitor
the fulfillment of those conditions.
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5. Recommendations on the Financial Management of Grant-Making Foundations
a. Swiss Civil Code
Article 83a (1) of the Swiss Civil Code on Foundations’ Accounting obliges the board of
trustees to maintain the foundation’s accounts pursuant to the Code of Obligations on
commercial accounting.
Article 83a (2) addresses the situation where a foundation conducts a commercial
operation in order to pursue its objects. In such a case, the foundation is required to follow the
provisions in the Code of Obligations100 in respect to presenting public annual financial
statements mutatis mutandis.101
The obligations to submit annual financial statements and to keep accounts apply even to
foundations that have been exempted from the obligation to designate an external auditor.
b. Swiss Foundation Code
Whereas the Swiss Civil Code (SCC) and Swiss Code of Obligations (SCO) provide
standard rules on accounting and auditing applicable to grant-making foundations, the SFC
provides rules on financial management specifically drafted to deal with a grant-making
foundation’s daily activities. Recommendations 20 to 26 deal with finance.
Recommendation 20 entrusts the board of trustees with the duty to guard against
improper funds—those derived from money-laundering, terrorism, corruption, or any other
criminal activity. Such funds must not constitute either the original endowment or the income
from foundation activities. The board should also ensure a sound balance between the cash flow
of the foundation’s assets and its grant-making activities.
Recommendation 21 deals with investments. The board of trustees should prepare an
explicit policy covering the investment process. Then the foundation should follow this policy in
determining the investment strategy, implementing the strategy, and overseeing the results.
Recommendation 22 states that the board should evaluate the foundation’s “risk-carrying
capacity.” The foundation’s assets should be invested pursuant to a strategy consistent with the
foundation’s purpose and its investment capacity, regardless of the personal preferences of the
board.
Recommendation 23 stipulates that the board should use a competitive and open
submission procedure to determine what entity will implement its investment strategy.
Recommendation 24 advises that the board of trustees systematically review investment
results twice a year. Also, the investment strategy should be reviewed every two to three years.
Results from the examination of investment returns and investment strategy should be recorded
in writing.
Recommendation 25 deals with the foundation’s investment plan. It advises that the
board establish a plan for investing the foundation’s assets efficiently. The components of the
plan should be specified in the investment regulations. In addition, the plan should mandate that
investment and oversight are strictly independent of one another. If the foundation holds stock,

100 SCO, Arts. 957 to 962.
101 SCC, Article 83a II. Accounting
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the investment regulation of the board of trustees should establish rules for exercising rights on
stocks.
Recommendation 26 advises that the board of trustees administer the financial
management of asset investment, budget planning, and the rendering of accounts. The annual
financial reports should provide a complete, accurate, and transparent picture of the financial
standing of the foundation. In addition, the board of trustees should generate a budget on the
basis of its investment and disbursement plan. The foundation’s board should use the annual
budget as well as financial reports as tools for management and supervision.
6. Audit of Foundations102
In principle, classic foundations must undergo a normal audit. Article 83b (1) of the
Swiss Civil Code on Foundations’ Auditors mandates that the board of trustees appoint external
auditors.103 However, this obligation can be waived by the supervisory authority. Article 83b (2)
states that the Federal Council determines the conditions for such a waiver.104
If there are no special provisions applicable to foundations, the rules of the Swiss Code of
Obligations concerning external auditors of public limited companies are applicable mutatis
mutandis.
105 If the foundation has the duty to carry out a limited audit, the supervisory authority
can order a full audit in order to obtain a reliable financial assessment of the foundation’s
finances.106 The external auditors must provide the supervisory authority with a copy of the audit
report as well as all important communications it had with the foundation.107
Thus, in principle, the law stipulates that foundations must have auditors, and this is
understood as a fundamental rule of transparency that increases credibility and offers confidence
to donors.108 Nonetheless, the board of a foundation can request that the supervisory authority
exempt it from the duty to designate an external auditor.109 The supervisory authority can agree,
subject to the fulfillment of conditions specified by the Swiss Federal Council and stipulated by
Article 1 of the Ordinance on the Audit of Foundations. These are:
 The foundation has a balance sheet that amounts to less than CHF 200,000.-, in two
successive business years (subpara. (a)), and
 The foundation refrains from raising capital either through public calls for donations
or other contributions (subpara. (b)).
These conditions are cumulative. The first condition demands that a foundation seeking to obtain
this waiver must have undergone an external audit for at least two years prior to application,

102 This part on Audit of Foundations is based on Sprecher, T., New Features in Swiss Foundation Law
(2006), pp. 10 ff.
103 SCC, Article 83b III. Auditors (1).
104 SCC, Article 83b III. Auditors (2).
105 SCC, Article 83b III. Auditors (3).
106 SCC, Article 83b III. Auditors (4).
107 SCC, Article 83c 2. Supervisory authority.
108 Sprecher, T., New Features in Swiss Foundation Law (2006), p. 10.
109 This request by the foundation’s board implies that the exception is not granted ex officio by the
supervisory authority.
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which is thus a mandatory step in the case of newly formed foundations. The second condition
implies that exemption can only be granted to foundations that are not seeking donations.110
Although this waiver is unlimited in duration, it may be revoked by the supervisory authority if
the requisite conditions change or if an audit is necessary in order to make a reliable assessment
of the financial situation of the foundation.111
Since an auditor might be a legal entity, a foundation might act as auditor for another
foundation. This act must be pursuant to the foundation’s charter, and the requirements of
independence must be satisfied “under the law governing audits.”112
One of the innovations introduced by the law is the requirement that auditors be
independent of the foundation. Sprecher points to four cases where independence can be
questioned:
113
 The persons commissioned to undertake the audit must not be members of another
executive body of the foundation which is to be audited. If the auditors are members
of an associated body, the obligations and responsibilities of the foundation
executive bodies should be strictly divided from each other.
 Where the person commissioned to undertake the audit is an employee of the
foundation, independence is jeopardized.
 In principle, cases where the persons in charge of the audit are also beneficiaries of
the foundation’s activities should be avoided.
 In principle, cases where the persons in charge of the audit have a close relationship
with members of the foundation’s executive bodies (e.g., family ties) should be
avoided.
In view of the above issues, Article 2, para. 1, of the Ordinance on the Audit of
Foundations instructs the foundation to engage a qualified auditor:
 if the foundation is raising funds and has received as gifts, donations or other
contributions amounts exceeding 100,000 CHF in each of two successive business
years; or
 if the foundation’s finances exceed “any two of the following parameters” (subpara.
b) during two successive business years:
1) an overall balance sheet total of CHF 10 million, or
2) a cash flow of CHF 20 million, or
3) an annual average workforce of 50 full-time employees.

110 Sprecher, T., New Features in Swiss Foundation Law (2006).
111 Id.
112 Id.
113 Id.
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7. Supervisory Authority and Oversight of Foundations
The Swiss Confederation itself, the Cantons, and within them, the Communes are entitled
to supervise foundations. In principle, a foundation is supervised by the public authority to which
it has been assigned. Nonetheless, the Swiss cantonal authorities can demand that a foundation
supervised at communal level be supervised by the respective canton.114 This provision allows
the cantonal public authority to supervise the activities of the foundation. The supervisory
authority must make sure that the assets of the foundation are used for their declared purpose.115
8. On the Over-Indebtedness and Insolvency of Foundations
If a foundation is about to fall into insolvency or there are serious doubts about its
financial capacity to meet its obligations, the board of trustees must draw up an interim balance
sheet at liquidation values and submit this to the external auditors or, in the absence of external
auditors, to the supervisory authority. If the external auditors identify such circumstances, they
must notify the public authority directly. The supervisory authority must then command the
board of trustees to take the necessary steps to redress the situation. If the board fails to do so,
the supervisory authority will take these measures itself. As a last resort, the supervisory
authority can take legal enforcement measures. The provisions of company law on
commencement or deferral of compulsory dissolution apply to the foundation mutatis
mutandis.
116
The “revocation of the foundation as a matter of civil law” does not represent a financial
restructuring measure. This might also not be possible if the foundation is over-indebted or if it
runs counter to the will of creditors. Revocation is possible only if the legal enforcement process
has been concluded and a surplus remains.117
A foundation may fall into bankruptcy. If financial restructuring is no longer feasible, the
Swiss Debt Enforcement and Bankruptcy Law (DEBL) will apply to the foundation, mutatis
mutandis, as it does in the case of corporate bankruptcy.
Finally, a foundation can issue a self-declaration of insolvency, pursuant to Article 39,
para. 1, clause 12, of the DEBL.
9. Bookkeeping
Article 84b of the SCC118 sets the rules on bookkeeping for foundations. Foundations are
subject to the duty to keep accounts, which is essential for auditing annual accounts as mandated
by Article 83a, para. 3, of the SCC.119 The provisions on commercial bookkeeping of the Code
of Obligations also apply here.120

114 SCC, Art. 84 C. Supervision 1bis.
115 SCC, Art. 84 C. Supervision 2.
116 SCC, Art. 84 Cbis, 4, Measures in the event of overindebtedness and insolvency.
117 Sprecher, T., New Features in Swiss Foundation Law (2006), pp. 16-17.
118 SCC, Article 84b.
119 SCC, Article 83a II. Accounting.
120 SCO, Arts. 957 et seq.
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10. Changes in the Purpose of the Foundation
Under Swiss law, the purpose of a foundation can be changed by the federal or the
cantonal authority pursuant to a proposal made by the overseeing authority or by the board of
trustees of the foundation.121
11. Changes in the Foundation’s Object at the Founder’s Request
Traditionally, foundations have been conceived of as being institutions that pursue
perennial objects. When establishing a foundation, founders devote a good deal of wealth to the
pursuit of an object that they expect will survive them. This intent of the founder is the
motivational force underlying the foundation’s charter. The SCC recognizes the force of the
founder’s will in Article 86a, which introduces the right of the founder to amend the foundation’s
object by request, subject to the classical legal framework of foundations.
The request to change the purpose of a foundation can be made by the founder directly or
by testamentary disposition. However, some conditions have to be fulfilled:
 At the time of setting up the foundation, the founder must have reserved the right to
amend the purpose of the foundation.
 The request should be directed by the founder to the competent public authority.
This request can be made directly or by testament. If the request is by testament, the
authority disclosing the testament should inform the relevant authority of this
request.
 This right to change the purpose of a foundation is personal. It cannot be passed to
heirs or acquired by third parties. Therefore, if it is not exercised, it will end with the
life of the founder.
 In the case of several founders, the request for change of purpose may only be
exercised jointly by all the co-founders.
 In order to request the change, at least ten years must have elapsed since the creation
of the foundation or the last change in the purpose of the foundation requested by the
founder. This period of ten years ensures stability in the foundation’s activities.
 If the founder is a legal entity, the right to change its purpose lasts for 20 years and is
subsequently extinguished. This rule is aimed at preventing misuse of the right to
change the foundation’s purpose and abuse of the foundation as a legal entity.122
 If the purpose of the foundation which is to be changed is of a public or charitable
nature in the sense of Article 56, subpara. G, of the Direct Federal Tax Act,123 the

121 A change in the purpose of the foundation might take place when the foundation’s original object has
changed to such a degree that it is necessary to redirect the foundation’s purpose to the founder’s original intention
in a more coherent way. SCC, Art. 86 II. Amendment of objects, 1. Request by the supervisory authority or the
board of trustees 75.
122 Sprecher, T., New Features in Swiss Foundation Law (2006), p. 20.
123 DBG, Article 56, let. g, de la loi fédéral du 14 décembre 1990 sur l‘impôt fédéral direct, Art. 56, Bst. g,
Bundesgesetz vom 14. Dezember 1990 über die direkte Bundessteuer; Art. 56, lit. g, Federal Income Tax Statute of
14 December 1990; SR 642.11.
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new object of the foundation must also be a “public or charitable object” under the
terms of that law.124
Whereas Article 86 assigns the federal authority the competence to amend the
foundation’s purpose, Article 86a assigns the supervisory authority the task of ensuring that the
request for the foundation’s change of purpose has been executed according to the requirements
of the law. Once the supervisory authority has ascertained this to be the case, it must order the
change of purpose and notify the Commercial Register Office. The authority, however, has no
mandate to make subjective evaluations of the new purpose or to suggest alternative purposes.125
12. Dissolution of the Foundation and Deletion from the Register
Article 88 gives the federal or cantonal authority the right to dissolve a foundation if its
object has become unattainable and the foundation cannot be maintained by following the deed,
or if the objects of the foundation become illegal or immoral.126 Any interested party has the
right to apply to the public authority for the dissolution of a foundation. Once this request has
been granted, the commercial registrar must be informed so that the foundation can be deleted
from the register.127 Finally, courts have the power to terminate family or ecclesiastical
foundations.
128
V. Concluding Remarks
This article has provided an account of the current Swiss legal regime applicable to
foundations from a pro-transparency point of view. We began with a summary of the sector as it
exists in Switzerland today. Our analysis focused on the legal provisions of the Swiss Civil Code
and the Swiss Code of Obligations, together with the Swiss Foundation Code. We have also
illustrated our analysis with functional aspects that are applicable to foundations beyond the
borders of Switzerland. As a general conclusion, we hold that, in terms of the principles and
practices related to transparency, the SFC provides a highly important self-regulation tool for
Switzerland’s philanthropic sector.
We close with comments on the analyzed provisions:
[A] On formation of a foundation: A foundation can be established by an act inter-vivos
or an agreement as to succession. An issue of transparency might arise if the heirs of the testator
do not fulfill the will expressed in the testament. However, the SCC permits the formation of

124 Sprecher points out that this was a highly disputed issue during the drafting of the law, as there were
concerns that the new right to alter the purpose of a foundation could become a loophole for tax abuse and give the
founder an opportunity to repatriate assets. On the other hand, this limitation is aimed at guaranteeing that the
individuals who contributed to the foundation by donations or other instruments are reassured that their assets
remain devoted to a “public or charitable” purpose, even if the new purpose is not the same as the original one.
Sprecher, T., New Features in Swiss Foundation Law (2006), p. 21.
125 SCC, Article 86b gives the right to the supervising authority—upon hearing the board of trustees—to
provide ancillary modifications to the foundation charter, if these are demanded for objective purposes and do not
affect third parties’ rights. These minor changes provided by the supervising authority aim to simplify the
procedures for establishing a foundation. SCC, Art. 86b III. Minor amendments to the charter.
126 SCC, Article 88 F. Dissolution and deletion from the register. Dissolution by the competent authority.
127 SCC, Article 89 II. Right to apply for dissolution, deletion from the register.
128 SCC, Article 88 F. Dissolution and deletion from the register. I. Dissolution by the competent authority.
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foundations by testamentary disposition. This ruling reflects the institution’s regard for
individual freedom.
The SCC addresses this issue, albeit not in the section expressly dedicated to the
regulation of foundations. So the duty of the heir to submit the will to the SCC129 must be read in
conjunction with the provisions on “Reading the will” of the SCC, Article 557.130 The authority
in charge of opening the testament must therefore notify the competent commercial register. The
performance of this duty is the key to ensuring the fulfillment of the founder’s will.
The more specific recommendations of the SFC address the functionality of the grantmaking foundation. First, the recommendations suggest a kind of proportionality test to evaluate
the feasibility of a foundation’s achieving its objects given its means and organization.
Recommendations 2 and 3 specify the level of coherence expected between the laws that are
applied to foundations—including the tax regime—and the activities that foundations engage in.
By anchoring the regulatory authority to the foundation’s legal domicile, the SFC intends to
discourage forum shopping. At the same time, however, given today’s globalized economy, this
provision should not limit foundations from operating across borders.
Recommendation 3 of the SFC outlines essential documents that a foundation should
provide regarding its internal organization, which should remain valid for the first five years of
the foundation’s existence. Other documents include the foundation’s constitution, its internal
organization, and its mission statement. This material provides fundamental, prima facie
evidence of the new foundation’s objectives and principles.
The first three SFC recommendations relate to regulatory requirements for the formation
of foundations: the founder’s intent, the foundation’s legal domicile and regulatory authority, and
the founding documentation. Although none of these recommendations directly address
transparency, they deal with issues that are central to it.
[B] On Article 82 of the SCC (Challenges by Heirs or Creditors): The SCC provision
seeks to prevent foundations from being used as depositaries for assets diverted from their
original legal destination by dishonest means: diluting assets entailed to a legal inheritance, or
simulating a situation of insolvency by transferring assets to a foundation. Since these abuses do
not directly concern to the functionality of foundations, the SFC does not refer to them
specifically.
[C] On Article 83d of the SCC (IV. Organizational defects of foundations): The Swiss
Civil Code provides the public authority with the power to intervene and directly restore
situations where a foundation fails to organize itself pursuant to requirements of the authority.
Under some circumstances the authority might even dispose of the foundation’s assets, assigning
them to another foundation of similar purpose. In theory, this is a way to ensure that foundations
registered with the authority are internally structured pursuant to the law and supervisory
regulations. But at the same time, such a disposition imposes a more compelling level of
responsibility on the authority when assessing and endorsing any foundation in its registry. This
provision does not concern issues of transparency vis-à-vis the public as such. However, it is not

129 SCC, Article 556 (on Duty to submit the will) mandates that a will be submitted to the public authority;
the public authority can afterwards release the estate to the statutory heirs on a provisional basis or designate an
estate administrator.
130 SCC, Art. 557 II. Reading the will.
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detrimental either. Conversely, Recommendation 12 expressly addresses the issue of sharing
information on a foundation’s organization, activities, grant-making procedures, and purposes.
This provision constitutes a plausible approach aimed at enhancing transparency between the
foundation and the public, so that in conjunction with the ensemble of Recommendations 4
through 15 on Leadership, it provides for a level of transparency.
[D] With regard to the recommendations aimed at providing a framework of rules and
conditions for the granting of funds, taking into account cost-analysis and the fact that
foundations are not alone in the sector: Although these recommendations are directed more
toward implementing a rational management of the foundation’s funds than transparency as
such, the fact that the SFC recommends that these policies be stipulated in writing provides
grant-making applicants with a set of instructions drafted ex ante, which should help enhance
grant permissions and at the same time reduce arbitrary refusals.
[E] On the finance of grant-making foundations: One of the responsibilities imposed on
board members is the duty to check the origin of the assets introduced to the foundation. In
general, the recommendations relating to this duty of care do not deal with issues of transparency
directly. Nevertheless, they do provide foundations with principled guidelines that help the sector
to function smoothly.
[F] On the accounting procedures of foundations: The Swiss Civil Code does not provide
any rules specifying accounting procedures for foundations. This omission leaves numerous
options open to the managers who are charged with fulfilling the foundation’s purpose. The SCC
regulations together with the rules and procedures for extending grants, as well as the SCF’s
general rules on finance, should help foundations offer a clearer picture of their activities.
Recommendation 26 of the SFC constitutes a valued tool for achieving this.
[G] On auditing procedures for foundations: The authority has the power to exempt a
foundation from the obligation to appoint external auditors. This potentially undermines the
credibility of the authority in cases where the foundation becomes insolvent. In this sense, the
Code’s conditions might not always suffice to shield the authority from this risk. To address this
risk, Sprecher presents a case where a group of foundations could create a foundation whose sole
purpose would be to independently audit that group of grant-making foundations. Provided that
the sector has sufficient resources for this purpose, the creation of an independent auditing
foundation would promote transparency by giving specialists in the sector the opportunity to
provide clear accounting procedures for foundations.
[H] On the supervisory authority and the oversight of foundations: Supervision should
become more coherent throughout Switzerland. A highly confederated country, composed of 26
independent cantons, can only welcome such a provision. The SFC recommendations on the
supervision of foundations therefore contribute to the sector’s transparency.
[I] On insolvent or over-indebted foundations: None of the provisions concerns the
transparency of grant-making foundations. At the same time, the fact that the law applies
corporate rules on insolvency and bankruptcy to foundations shields the philanthropic sector
from being hijacked by spurious financial maneuvers exercised by either local or foreign players.
[J] On bookkeeping: This legal aspect is not directly linked to transparency, but it is an
instrumental item for achieving high standards in transparency.
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[K] On changes in the foundation’s purpose: In principle, the intervention of the public
authority in providing clearance for a change in the foundation’s purpose is likely to contribute
favorably to transparency issues.
[L] On changes in the foundation’s object at the founder’s request: Whereas the SFC is
markedly silent on this issue, SCC commentators suggest that the purpose should be defined as
broadly as possible. However, the public authority has virtually no power to decide on the new
purpose. Once the conditions required for changing the object have been met, the authority can
do nothing in order to object. In this sense, the legislature clearly considers the legal
requirements sufficient to ensure that the system is not abused. While this is possibly a
disputable approach, the alternative would be to grant the public authority the right to designate a
new purpose, which would conflict with the nature of the foundation as a legal, liberal
institution. Moreover, if the authority does not have the right to determine the foundation’s
purpose at the moment of its registration, why should it acquire such a right later on?
[M] On the dissolution of foundations and deletion from the register: This provision also
contributes to the transparency of this sector. It provides the public authority and interested
parties with the right to request the liquidation of a foundation that has become estranged from
its initial purpose over time due to changes in the purpose or the deed’s restrictions.
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Article
Debating Civil Society:
Contested Conceptualizations
and Development Trajectories
Jussi Laine1
The concept of civil society is back on the agenda. However, ambiguity
still surrounds the concept. While there is no need to strive for a universal
understanding of civil society, it is nevertheless essential to scrutinize the concept
thoroughly, for what is understood by it defines largely what can be expected
from it. This article conceptualizes civil society as an arena, a public space with
blurred borders, where diverse societal values and interests interact. It argues for
a framework that is better able to take into account the entire range of civil
society actors, by placing less emphasis on organizational forms and a stronger
focus on the functions and roles of informal associations, movements, and
instances of collective citizen action.
Introduction
During the last two decades, the concept of civil society has been, once again, on the rise.
Today, it is on various agendas. As a concept it is much used, perhaps overused, certainly
misused if not abused. Few political speeches, action plans, or program documents go without
reference to civil society. But this presents a problem. Are we all talking about the same thing?
As Grimond notes, it is universally talked about in tones that suggest it is a Great Good, but for
some people it presents a problem: What on earth is it? All the talk with little action has
downgraded the concept into a fashionable buzzword, a sort of an attention-directing device with
limited usability. Such a development is deleterious, for it overshadows many of the ideas and
accomplishments stemming from civic action.
Defining what is meant by civil society is a political project in itself. However, it is
essential to scrutinize the concept thoroughly, for what is understood by it defines largely what
can be expected from it. Using the term “civil society” in a global sense obscures as much as it
illuminates. The basic premise here is that what is meant by civil society remains open to diverse
interpretations (Cohen & Arato 1992; Wiarda 2003; Edwards 2004). Its definitions have changed
over time, but even in the current use the concept means very different things in different
countries and languages (Kocka 2004, p. 65). Certainly, civil society is a product of the “West,”
but that tells us little, for there are several models of civil society in the West: the French one
differs from the British; the American conception is quite different from that of, say, Germany.
In order to get to the root of the issue, one is forced to deal with some of the major
divisions in social and cultural studies, and trace how the utilization of different traditions and

1 Dr. Jussi Laine, jussi.laine@uef.fi, is a researcher at the University of Eastern Finland, Joensuu Campus,
as well as the Treasurer and Vice Executive Secretary of the Association for Borderlands Studies.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 60
models have led to different manifestations of civil society. This article aims to show that the
frame of interpretation and the related assumptions about civil society vary greatly, depending on
the tradition that is followed and the conception or model that is applied. The article outlines the
historical premises for the formation of civil society and then discusses the current usage of the
concept. It concludes by presenting an interpretation of civil society as an arena, with an
argument that instead of fixating on civil society’s organizational form, the focus needs to be on
what is actually being done.
Bringing History Back In
Classical Civil Society as Partnership of Individuals
Even though the contemporary understanding of civil society refers commonly to the
public sphere, as set apart from the state and the market, it has not always been so. Many of early
European political thinkers saw civil society as a synonym for a type of political association
whose members are subject to laws which ensure peaceful order and good government (Keane
1989). The origins of the concept of civil society trace back to the communal life in the polis, the
Greek city-state. Socrates proposed that “dialectic,” a form of public argument to uncover truth,
was imperative to ensure “civility” (in contrast to barbarity) in the polis and “good life” of the
people (O’Brien 1999). This rational dialogue was to test the individual’s arguments against
societal arguments in order to find the proper balance between the needs of the two (Setianto
2007). For Socrates’ prized student, Plato, the ideal state was a society that was just and allowed
people to dedicate themselves to the common good and to practice civic virtues of wisdom,
courage, moderation, and justice (Ehrenberg 1999, pp. 5–6).
Aristotle was the first to use the term koinonía politiké, a political association. For him,
koinonía politiké was an independent and self-sufficient association of free, equal, and likeminded persons united by an ethos, a common set of norms and values approved and honored by
its members (Barker 1946). As Cohen and Arato (1992, p. 84) bring forth, koinonía politiké was,
however, only a koinonía among many; the term koinonía was used to designate all forms and
sizes of human association, the members of which were held together by something they had in
common and could share with each other. However, while all associations have an end, the
political association has the highest: it channels the collective pursuits to serve the common goal
of attaining a good society.
Whereas today a political association or a community is often understood as being a state,
for Aristotle the state was a foreign concept. For him, koinonía politiké designated above all a
politically united community, a city as a political “partnership” of individuals coming together
not for the sake of social life but rather for the sake of performing good actions and attaining
self-sufficiency (Barker 1946, p. 5). Aristotle thus saw that contiguity and consanguinity, as well
as the social life arising from these ties, are the necessary basis, but that the essence is
cooperation in a common scheme of good life, and the ultimate form of such cooperation is the
polis, on which individuals are dependent. Individuals are by nature political animals; when
perfected, they are “the best of animals” who engage in political pursuits because they are
“furnished” with capabilities such as speech, which allows for communication and the ability to
perceive and determine what is just (ibid. p. 7). Thanks to these capacities, human beings can be
habituated to virtue, which can be best done through participation in the communal life in the
polis, the civil society.
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Cicero in turn referred to a civilized political community, which was the equivalent of res
publica (commonwealth), “an assemblage [of men] associated by a common acknowledgment of
right and by a community of interests” (Cicero 1966). It includes groups, communities, and
individuals united by laws and institutions, which organize their activities in such a way as to
create a flexible equilibrium among them. Because justice and reason are rooted in man’s natural
“social spirit,” such organizations induced individuals to forgo a measure of self-interest in the
interest of the common good (Islamoglu 2001, p. 1891).
Community with Virtues Derived from Natural Laws
Willem van Moerbeke used communicatio politica and civilis communitas as translations
of koinonía politiké in approximately 1260. It was not, however, until the fifteenth century that
Leonardo Bruni, a Florentine humanist, challenged the earlier translation with societas civilis, a
term that would famously enter into all European languages (Hallberg and Wittrock 2006, p. 30).
In the sixteenth century, Jean Bodin built upon Aristotle by arguing that the state is a
natural fact: “The state is the civil society that can exist on its own without associations, and
other bodies, but it cannot do so without family” (Bodin in Bobbio 1989, p. 35). Bodin claimed
that there are various forms of the political ethos (mores), which affect the shaping of various
forms of government: monarchy, aristocracy, and democracy. Bodin’s main idea was to create an
ethos of pacification, peaceful coexistence, and cooperation between citizens, which would
secure the stability of public goods and institutions even in a society lacking consensus on its
highest values. In Bodin’s eyes, the best way to guarantee this was through the absolute
sovereignty of state power (Rhonheimer 2005, p. 21).
The Aristotelian logic of a society as a work of nature was not challenged until the
seventeenth century, when most notably Thomas Hobbes and John Locke argued that societies
are formed as the result of a social contract between human beings. Hobbes believed that in their
original state of nature, people lived in a society of “all against all” and had to compete for
scarce resources. This, he argues in Leviathan, creates a war in which every person is governed
by his own reason and has a natural right to do anything to preserve his own liberty or safety
(Hobbes 1909). As constant war and insecurity allowed no development and made the life
“solitary, poore [sic], nasty, brutish, and short,” Hobbes saw that people needed agreements
based on the natural precepts and the general rules of reason among each other in order to create
peace and, hence, improve their lives (ibid.).
Through such mutual contracts between individuals, the state of nature could be left
behind and the formation of a common power, the Leviathan, the civil government, the state,
could become possible. Whereas individuals in the state of nature fought against each other, in
civil society the impartial state maintained peace in a community of people acting in a civic
manner (Hobbes 1909, pp. 105–109). The motive to come together was not that people were
naturally inclined to do so, as Aristotle had asserted; they were driven by the fear of coercive
common power (ibid. p. 101). The existence of such a power, the state, thus created a condition
in which the state of nature gave way to civil society; i.e., it became rational for people to act in a
civil manner and to cooperate rather than fight for their vested interest.
Skinner (1996) suggests that Hobbes actually repudiated the entire classical theory of
eloquence and its ideal of the vir civilis, the good citizen, the virtuous, wise, rational
man. Instead, according to Skinner’s interpretation (1996, p. 291), Hobbes had claimed that
reason unaided by eloquence would be sufficient to persuade others of the truths of civil science,
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 62
that eloquent men would have not sustained but destroyed civil life, and that the most important
duties of citizenship are grounded in the private sphere.
Whereas Hobbes wanted all lawmaking, both judicial and executive powers, to be
exercised by a single body and to have authority even over the individual’s religious doctrines
and beliefs, Locke made a separation between the legislative and executive powers in order to
prevent the power of government from threatening the rights of the society (Locke 1965).
Locke’s ideas were grounded in the doctrine of a God-given Natural Law, which posits that
individual citizens have certain natural rights as human beings that cannot be taken away from
them (Locke 1965; Laslett 1960).
Locke promoted the civic virtue of tolerance and advocated that individuals be allowed to
meet together, to form associations, and to enter into relations of their choice – the government
being a unitary outgrowth of the freedom to form an association. He saw that communities are
formed when people unite in order to further their own and their community’s interests. By
agreeing to form a legislature, people give their individual power up to the community. Like
Hobbes, Locke did not generally hold that the state and civil society would be separate realms
but rather that they would coexist. In Two Treaties of Government, he did, however,
inconsistently assert that the dissolution of legislative power does not necessarily mean the end
of society, whereas if society is dissolved its government cannot remain.
Enlightenment Ideal and the Epistemological Centrality of Morality and Reason
During the Age of Enlightenment, a number of thinkers contributed to the advancement
of the concept of civil society. Human beings were rational and capable of shaping their own
destiny without an absolute authority exerting control over them. Montesquieu further developed
the distinction between a nonpolitical civil society (l’état civile) and the state (l’état politique).
Largely under Bodin’s influence, he came to believe in the “rule of law” within a civil society.
Whereas governments use laws to influence and steer human conduct, civil society uses moeurs
(nonlegal, internalized restraints established by custom) and manières (conduct not regulated by
law or religion) (Montesquieu 1949; Richter 1998). Rousseau maintained that Locke’s idea of
expanding individual rights ignored common goods and would ultimately lead to a war among
people. Instead he proposed a new social order that would maintain harmony and provide
equality and freedom for all. The State, as a supreme power, would govern, enact laws, and
define the common good (Colás 2002). Civil liberty would emerge when all people were willing
to abide by the general will out of a belief that it would lead to common good.
It was first and foremost the Scottish Enlightenment thinkers David Hume, Adam
Ferguson, and Adam Smith who began to refer to civil society clearly as a network of human
relationships separate from the State. The distinction, according to Ferguson (1995), was
necessitated by the rise of state despotism, i.e., the state’s endeavor to “cover” society by forcing
its way through it “from above” (Holenstein 2009, p. 16). Hume suggested that people set their
goals on the basis of morality but use reason in achieving them. By using reason to follow their
self-interests in an enlightened manner, people would eventually achieve the interests of society
as a whole. While rejecting the social contract theory, Ferguson presented civil society as a
developed and redefined society, where civil liberties were safeguarded by the government and a
certain level of social, political, and particularly economic advancement has been reached. He
saw civil society as opposed to a rude nation (Pietrzyk 2001) and believed that through
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 63
governmental policies, education, gradual knowledge, and development, rude society might be
transformed into civil society (Setianto 2007).
Smith agreed with Ferguson that the binding principle of civil society is a private
morality predicated on public recognition by one’s peers, joined through bonds of moral
sentiment (Smith 1976). He laid the foundation for civil society as an economic society separate
from but protected by the State and mediated by a social order constituted by private property,
contracts, and “free” exchanges of labor (Smith 1993, p. 36). For Smith, civil society was not
only a refuge from the economic realm but also a wellspring of economic abilities. In Smith’s
view, liberal commercial society both required and encouraged civic virtue. Inspired by Ferguson
and Smith, the firm distinction between the civil society, family, and the state became key to the
German conception of civil society later advanced by Hegel.
Whereas Smith understood individuals to be motivated mainly by self-interest, for
Immanuel Kant this was an inadequate basis upon which to construct a moral order because it
was not grounded in a sense of mutual obligation and respect (Calabrese 2004, p. 318). Instead,
for Kant, civil society meant that the ends sought by one should not be won at the expense of the
wellbeing of another (Kant 1997, 28). For him, the public sphere was the place where the private
interests of members of civil society could be reconciled with the universal moral obligations; he
believed that individuals need to accept a political authority (the State) in order to achieve a
condition of justice and rights (Kant 1991, pp. 54–55). Accordingly, the main purpose of civil
society is to force human beings to respect one another’s rights (Setianto 2007). Kant was ahead
of his time by suggesting that civil society would not need to be nation-bound but rather could be
universal.
Classical Modernity and the Distinction between State and Civil Society
Whereas the classical thinkers emphasized the identity of the state and society, during the
modern era the two began to be seen as independent entities. G. W. F. Hegel, the leading thinker
of Romanticism, saw human needs, the satisfaction of individual interests, and private property
as the defining features of civil society. He treated civil society as a “system of needs” in which
individuals reconcile their particular private interests with social demands and expectations,
which are ultimately mediated by the universal state (Hegel 1991).
For Hegel, the significance of civil society is that individuals find satisfaction only in
relation to other free individuals who are not family members but rather independent persons
(Peddle 2000, pp. 118–120). Hegel argued that civil society is well suited to balancing the
diverse range of human needs and interests, but that the state, as the highest form of ethical life,
gives order to the system of needs by ensuring the stability of private property, social class, and
the division of labor. Occupying the realm of capitalist interests, civil society was not necessarily
civil and without conflict. The state’s task was thus to correct the faults of civil society. In short,
a well-functioning civil society cannot exist without the guidance of the state.
Hegel’s modern understanding of civil society changed the meaning of civil society
entirely: whereas for Kant “bürgerliche Gesellschaft” and “Staat” had been synonyms, for Hegel
they became antonyms (Zaleski 2008, p. 264). He used the German term “bürgerliche
Gesellschaft” (bourgeois society) to denote civil society as “civilian society”; i.e., a sphere of
economic and social arrangements regulated by civil code rather than directly dependent upon
political state itself (Honderich 2005, pp. 367–368). In contrast to the preceding dyadic models,
Hegel provided a triadic scheme, in which civil society as an intermediate moment of ethicity
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 64
(i.e., being ethical) became situated between the macro-community of state and the microcommunity of the family (Bobbio 1989, p. 31). Whereas both the family and state had welldefined categories, Hegel’s civil society was a fuzzier concept that encompassed practically
everything outside those two realms.
Hegel’s followers split based on their political leanings. To the right, Hegel’s theory led
to a liberal distinction between political society and a civil society that encompassed all non-state
aspects of society, including culture, society, and politics (Zaleski 2008, p. 263). Alexis de
Tocqueville followed Hegel’s perception of social reality in general terms by distinguishing
between political society and civil society but contested Hegel by putting weight on the system
of civilian and political associations as a counterbalance to both liberal individualism and
centralization of the state. According to his liberal stance, the effectiveness of civil society as an
“independent eye of society” depends upon its organizational form (Tocqueville 1969). Building
on Montesquieu’s template, Tocqueville used the term mores to denote the totality of intellectual
and moral state of a nation, the totality of customs, public opinion, and beliefs, which he saw as
having a greater influence upon democracy than laws and the physical environment (ibid.).
On the left, Hegel’s ideas became the foundation for Karl Marx’s civil society as an
economic base, in contrast to the “superstructure” of the political society, the state (Marx 1977).
Marx gave civil society a more politically charged name, “bourgeois society,” as for him it was a
product of a historical subject, the bourgeois, which legitimated its struggles against the
absolutist state in the language of the rights of man and citizen, whereas in reality it served only
the particular interests of the bourgeois (Richter 1998, p. 33). He rejected the positive role of the
state put forth by Hegel, as he believed that under capitalism, the state functions as a repressive
apparatus, an instrument of class domination (Bobbio 1989, pp. 27–29; Marx 1970). He agreed
with Hegel that civil society was where the real action is, yet he conceived it to be so robustly
shaped by class antagonism that it could not ensure the common good among competing interests
(Brown 2001, p. 74). In a bourgeois society, people treat one another as a means to their own
ends and, in so doing, are isolated from other people (Anheier, Glasius and Kaldor 2001, pp. 12–
13).
Gramsci (1971) followed Hegel in distinguishing civil society from the State, but
preferred the Marxian thought that the historical development of society occurred in civil society
and not in the State. However, whereas Marx had considered civil society as coterminous with
the socioeconomic base of the state, Gramsci located it in the political superstructure and made it
the locus of the formation of ideological power. For him, civil society was a sphere wherein
ideological apparatuses operated and whose task it was to exercise hegemony and through
hegemony to obtain consensus (Bobbio 1989, p. 29). While in Marx’s writings civil society is
portrayed as the terrain of individual egotism, Gramsci described civil society as a sphere of both
the individual and organizations with the potential for rational self-regulation and freedom.
Even though Gramsci portrayed civil society as the arena, separate from state and market,
he specified that the distinction between the state and civil society was only methodological, for
even a policy of non-intervention like laissez faire is established by the state itself (Gramsci
1971). He presented a fully developed civil society as a system able to resist the “incursions” of
economic crises and to protect the state (ibid. p. 238). The state, narrowly conceived as
government, is protected by hegemony organized in civil society, while the coercive state
apparatus fortifies the hegemony of the dominant class. However, while Gramsci accepted a role
for the state in developing civil society and in shaping public opinion, he warned against
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 65
perpetuating state worship (ibid. p. 268). Civil society, he came to believe, explained why a
communist revolution had been much easier in Russia than in Italy. Whereas “[i]n Russia the
state was everything…, in the West, there was a proper relationship between state and society,
and when the state trembled, a sturdy structure of civil society was at once revealed” (ibid. p.
238).
As Fleming (2000) notes, Gramsci’s work drove twentieth-century analysts to add three
crucial components to the understanding of civil society. First, it was understood that civil
society was more than a mere transmitter of established practices or beliefs; it formed a site of
social contestation, in which collective identities, ethical values, action-orienting norms, and
alliances were forged. Second, the dynamic, creative side of civil society became emphasized in
the formation of informal networks, initiatives, and social movements, which transcended the
framework of formal associations. Third, largely thanks to Habermas (1991), civil society came
to be seen as “public sphere,” a coercion-free arena for discussion and mutual learning, detached
from the systematizing effects of the state and the economy, where people come together to form
a common discourse, the public, and in doing so compel the state to legitimate itself before
public opinion.
Postmodern Influences
Just as the French Revolution had fueled an adjustment of the concept of civil society in
the early nineteenth century, so did the emergence of political opposition to the authoritarian
regimes in the former Soviet bloc in the late 1980s. While civil society had been in limbo for
decades, the concept was suddenly revived in the early 1990s as its role in democracy,
democratization, and development became understood (Jensen and Miszlivetz 2005, p. 3). Since
then, globalization and the related formation of a “global civil society” have been the leading
forces behind the civil society development. The 1990s witnessed not only a multiplication of
NGOs but also a globalization of New Social Movements (NSMs). Kumar (2000) explains that
even though the NSMs had linked people together to bring about a social change at the regional
or national level since the mid-1960s, with the help of global or international organizations, these
movements were able to establish cross-border linkages and operate at international level, thus
becoming mega-movements or trans-national social movements (TSMs).
Along with NSMs, postmodernism brought along, inter alia, a heavy emphasis on
transformation theory (Collard & Law 1989), organization theory (Greenwood & Hinings 1996),
social capital (Coleman 1988; Putnam 1995), political opportunity structures (Kitschelt 1986;
Kriesi 1995), and resource mobilization (McCarthy & Zald 1987). Furthermore, New Public
Management (Osborne & Gaebler 1992; Borins 1994; Hughes 1998) became an increasingly
dominant paradigm for public sector reform. The “Washington Consensus” of the early 1990s,
which combined neoliberal economic strategy with an emphasis on liberal representative
democracy (Edwards & Hulme 1995), portrayed the state more as a problem than a solution,
which in turn had a significant influence on the theoretical debate. The new conditionality
presumed by the related funding mechanism portrayed civil society as a sort of panacea, the
“magic bullet” (ibid.), replacing the state’s service provision and social care.
The Tocquevillean line of thought, which placed citizens’ associations in the core of civil
society and thus of democracy, was famously refreshed by Putnam (1995), who stressed the
production and accumulation of social capital. For him, social capital is an essential element of
good performance of any society, for civic virtue is most powerful when embedded in a sense
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 66
network of reciprocal social relations. Putnam’s basic thesis was not, however, altogether new.
Social capital had already been elaborated on by Bourdieu (1986) and Coleman (1988), both of
whom stressed the less normative aspect of civil society, the importance of civic participation
and the various social benefits generated by it. Nevertheless, Putnam popularized its utilization
and fueled further interest on the topic. Forming associations—the coming together of people for
a common purpose—is thought to teach the “habits of the heart” (Bellah et al. 1996) of social
behavior and to bind individual citizens to an idea of unity larger than selfish desires, thus
forming a self-conscious and active political society as well as a vibrant civil society functioning
independently from the state.
Current Understanding
While the twentieth century, in aggregate, was about the neglect and even the systematic
destruction of civil society through statist ideologies, the twenty-first century has so far allowed
its rediscovery and restoration. Such a civic renaissance was an outcome of fresh outpouring of
social entrepreneurship and civic reinvention, lost faith in centralized systems of government,
and increased efficiency and credibility of CSOs, as well as a renewed quest for values and
interest in volunteerism (Eberly and Streeter 2002, p. 3). Also, increased new and inherited
wealth has made unprecedented resources available for charitable investment (Havens and
Schervish 1999, p. 1). As a result, civil society has became understood as to form an essential
mediating structure not only because it stands as a buffer between the individual and the large
impersonal structures of the state and the market but also because it plays a crucial role in
cultivating citizenship as well as generating and maintaining values in society. Without civil
society, “values become another function of the megastructures, most notably the state” (Berger
& Neuhaus 1977, p. 2).
That being said, the growth of the anti-globalization movement and obvious bumps on
road towards democracy, for instance in Russia, caused the universality and legitimacy of civil
society to be questioned. The neoliberal Washington Consensus became replaced by a “postWashington Consensus” that now acknowledged that the state does indeed play an important role
in democratic development (Öniş & Şenses 2005). As apparent particularly in times of
challenging crisis, state-centered policies became again very en vogue and civil society relegated
to the role of a supporting actor at best (Freise, Pyykkönen & Vaidelyte 2010). What also stands
out is that the current use of civil society has been moving away from the field of politics and
state building. It has become a sphere, an arena operating beyond the confines of national
societies, polities, and economies. What hold it together are not the borders of a nation-state but
rather ideas, values, networks, and social capital.
Toward Social Economy
Social economy (SE) has become a major institution of civil society, contributing to the
organization of its associative fabric and the development of participative democracy but also of
a potent economic and societal actor. As an activity, the SE is historically linked to grassroots
associations and cooperatives, which make up its backbone (European Economic and Social
Committee 2007, p. 7). In general, the social economy refers to the part of the economy proper
that is neither private nor public but consists of constituted organizations, with voluntary
members, undertaking activities for the greater good of local communities and marginalized
groups, a possible surplus of which is used for the good of the community of members or for
society. (Social Economy Lisburn 2012.) It can be further broken down into three sub-sectors:
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 67
1) Community sector (usually small, local, modestly funded, dependent on
voluntary effort)
2) Voluntary sector (formal, independent, not-for-profit and strong volunteer input)
3) Social enterprise sector (businesses with primarily social objectives, surpluses
principally reinvested for that purpose in the business or in the community)
In this view, the SE is interpreted in the broader sense of civil economy and constitutes a
key component of the broader economy and not a parallel or niche market or a dependent sector
(Restakis 2006, p. 10). According to the prominent definition of SE, it includes those
organizations that are animated by the principle of reciprocity for the pursuit of mutual economic
or social goals, often through social control of capital (ibid. p. 12).
What is noteworthy is that this definition includes also those for-profit businesses that
share their surpluses and benefits with their members (and/or the wider community) in a
collectively owned structure. However, the definition would exclude those non-profit and
voluntary organizations that are entirely dependent on grants or donations (Restakis 2006, p. 12).
Its applicability stems from the fact that it recognizes the central role of reciprocal (noncommercial and non-monetary) transactions as economic activities in their own right (Ninacs &
Toye 2002). The various organization of the social economy can thus be seen as a sort of hybrid
enterprises that perform a blend of commercial activities (sale of goods and services), noncommercial but monetary activities (public funding, donations), and non-monetary activities
(volunteer work) to achieve their goals (Restakis 2006, p. 9).
The conceptual delimitation of SE has been presented in the Charter of Principles of the
Social Economy promoted by the European Standing Conference of Co-operatives, Mutual
Societies, Associations and Foundations (CEP-CMAF). The principles in question are (1) the
primacy of the individual and the social objective over capital, (2) voluntary and open
membership, (3) democratic control by the membership, (4) the combination of interests of
members/users and/or the general interest, (5) the defense and application of the principle of
solidarity and responsibility, (6) autonomous management and independence from public
authorities, and (7) most of the surpluses have to be used in pursuit of sustainable development
objectives, services of interest to members or the general interest.
In its review on the evolution of Social Economy in Europe, the European Economic and
Social Committee (EESC), a EU consultative body that proclaims itself as a “bridge between
Europe and organized civil society” [emphasis added], acknowledges that the concept of the SE
is closely linked to the concepts of social cohesion, local and regional development, innovation,
and employment, as well as with the project of building Europe (European Economic and Social
Committee 2007, pp. 29–33). SE has demonstrated its capacity to increase the levels of social
cohesion by complementing and, above all, paving the way for public action. The SE has
contributed to the social and work integration of clearly disadvantaged people and geographical
areas, but it has also increased the entire society’s democratic culture, boosted its degree of
social participation, and managed to give a voice and negotiating capability to social groups
previously excluded from the economic process and from the process of drafting and applying
public policies.
The SE also constitutes a strategic motor for local and regional development by
contributing to endogenous economic development, restoring competitiveness to extensive areas
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 68
and facilitating their integration at the national and international level as well as rectifying
significant spatial imbalances. The SE’s capacity for innovation stems from its direct contact
with the broader society, which endows it with a special capacity for detecting new needs,
channeling them into the public administration and traditional profit-making private enterprises,
and, where appropriate, coming up with creative innovatory responses.
“To reach the levels of welfare and progress that the ‘Western’ countries of the European
Union enjoy,” the EESC (2007, p. 33) explains, “the European social and economic model has
needed the contribution of the SE, which has proved capable of occupying a space that balances
economic and social aspects, mediates between public institutions and civil society and evens out
social and economic imbalances in a plural society and economy.” At the European level, Social
Economy Europe, the EU-level representative institution for the social economy, has represented
and promoted social economy in Europe since 2000. The European Parliament’s “Social
Economy Intergroup” provides a forum for a dialogue between all social economy players and
members of the European Parliament. The social economy is also represented in the European
Economic and Social Committee through the “Social Economy Category” that brings together
members from cooperatives, mutual societies, associations, foundations, and NGOs with social
aims (Social Economy Europe 2012).
Figure 1
As Restakis (2006, p. 5) notes, there are two broad currents of thought in the debate on
the defining elements of the social economy (Figure 1). The first is commonly traced back to the
French sociologist Frédéric Le Play, who saw the social economy as functioning apart from the
market, which he interpreted to mean the economic sector that was populated by capitalist firms
and the state. For him, the social economy was a niche, a sort of a parallel market that was also
dependent on the state for its survival. It was needed in order to create an institutional order to
correct the undesired effects of the market. The objective that Le Play was pursuing was not
welfare or wealth, but social peace that is the reconciliation of morality and economics through
the moralization of individual behavior.
According to Restakis (2006, p. 6), the second current reaches back to the idea of the
civil economy, which is conceptualized as a dimension of the market. In this view, the market is
not identified exclusively with private enterprise but rather as an open domain in which the state,
the commercial sector, and the social economy all play a role. Within this current, the recent
neoliberal attitudes that direct and restrict the social economy to utilitarian and economic
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 69
purposes have brought the term into closer association with the operations of the conventional
market. The apparent outcome of this has been the equation of the social economy with “social
enterprises” understood as revenue generating, non-profit activities that are meant to serve social
or community purposes (ibid. p. 8.).
Figure 2
The three sectors of the overall market are distinct above all in that the institutions within
them operate on different economic principles (Figure 2). The first sector is the domain of
governments of various levels, and as such its central economic goal is greater equality. The
economic principle central to the private sector is, in turn, efficiency, while social economists are
working towards the reinsertion of social goals, reciprocity/solidarity, into economic thinking
and decision-making. Even though distinct, these sectors are not hermetically sealed off from
each other; there are incalculable transfers and borrowings. Moreover, certain organizations
operate at the boundaries of these distinctions (Restakis 2006, p. 12; Lewis 2006, p. 3).
Figure 3
Pearce (2003) prefers to use the word “system” instead of “sector,” as the latter implies to
him a homogeneous economy that can be divided in to three parts. Otherwise his vision parallels
closely with Restakis’s ideas. He argues there are three main ways of thinking about how to
manage our economic life, each sector essentially stemming from a different way of managing
the economy, from a different mode of production (Figure 3).
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 70
The first sector/system is about redistribution and planning, whereby it has come to be
viewed by many as bureaucratic, paternalistic, centralized, and inefficient, and as such
counterproductive to the profit-driven and competitive private sector seeking to maximize
financial returns to individual owners. The third sector/system is about citizens working together
to meet and satisfy needs themselves (Pearce 2003, p. 26).
Who’s Making Whom?
It is hard to define civil society without defining its relationship with state. Chambers and
Kopstein (2008) have made an important move beyond the binary traditional division by
suggesting that civil society does not have to be either against or in support of the state, but
depending on the context it may also be apart from, in dialogue or partnership with, or even
beyond the state. As a result, civil societies, Miller et al. (2009) propose, can be depicted as
being contentious, manipulated, disciplined, competitive and interest-oriented, repressed, or
normative.
All that is certain is that civil society is not a stand-alone concept. As the discussion
above shows, it is paired historically with the concept of the state; they are not just linked but
help define each other. Bobbio (1989, p. 42) argues that two processes, the state-making-society
and the society-making-state, are contradictory. The completion of the former would lead to a
state without society, i.e., the totalitarian state; the completion of the latter would lead to society
without the state, i.e., the extinction of the state. As they are indeed contradictory, the two
processes are unattainable. Society and state act as two necessary elements that are separate but
contiguous, distinct but interdependent, internal articulations of the social system as a whole
(Bobbio 1989, p. 44).
The weaker the layer of civic association, the stronger the vertical relationship of the
individual and the state becomes—a relationship characterized not by voluntary action and
cooperation but by power, authority, and dependence (Eberly and Streeter 2002, p. 8). The
reciprocal, interdependent, and constantly realigning interaction between civil society and the
state is well explained by Putnam’s (1988) two-level game theory. It admits a reciprocal
interaction between the domestic and the international arenas affecting the foreign policy
construction in a given country. At the national level, the domestic groups pressure the
government to adopt politics favorable to their interest and the politicians seek power while
constructing these coalitions. At the international level, the national government seeks to
maximize its own ability to satisfy domestic pressures, while minimizing the adverse
consequences of the actions developed abroad (ibid.).
Increased transnationalism on the one hand and international agreements and coalitions
on the other can make the game more complex. In the EU context, for instance, the two-level
game model can be inserted in the relation between the member states and their domestically
organized civil society. On the other hand, Putnam’s model can be applied in the relation
between the European-level organized civil society and the EU. Civil society no longer acts only
at the national level but has become more transnational and asserted its role as an independent
actor in the world society. As the EU increases its supranational mechanisms, it also increases
the importance of organized civil society in the EU multi-level governance system.
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 71
Plurality of Civil Society
Recognizing that civil society does mean different things to different people is one of the
keys to moving forward, because it gets us beyond false universals and entrenched thinking
(Edwards 2004). Civil society is equally traditional and modern (Kocka 2007, pp. 85–86). As
described above, its meaning has changed on a number of occasions. Despite its opposite origins,
in everyday contemporary practice civil society is assumed to form the antithesis of the state. If
civil society is defined in opposition to the state then it is difficult to provide a positive definition
of “civil society” because it is a question of listing everything that has been left over after
limiting the sphere of state (Bobbio 1989). It is, however, even more important to acknowledge,
as Giner (1995, p. 304) has done, that “[t]here is no such thing as the classical conception of civil
society. There is a Lockean interpretation, but there is also a Hegelian one; and then there are
Hobbesian, Marxian and Gramscian theories of it.” Different conceptions are based on different
interpretations of classical traditions. These interpretations lead to different outcomes and
expectation on what can be expected from civil society.
Wiarda (2003, p. 137) makes the valid observation that in theory civil society sounds
wonderful, yet in reality it is often less than that. Civil society cannot be seen as a magic formula
that will inevitably lead to democratic and socially just outcomes and save the world. It can be
seen to include also less civil actors, operations, and objectives that are, for instance,
disintegrative, clientelistic, unrepresentative or otherwise biased, divorced from power realities,
or even illegal. It is beneficial where it works; yet it has also been conceived in statist and
corporatist terms or as an arena of elitist competition rather than self-sustaining cooperation
underpinned by a strong popular base (ibid.).
Civil society is a product whose origins are inherently and distinctly Western (Kocka
2004, p. 76). Western, particularly Western European and North American, urban societies are
regarded to have been better suited to the development of a stable pluralist civil society than
others, yet even there the development might have occurred as an “unintended outcome” of the
efforts of state-makers as argued by Tilly (1975, p. 633). Be it as it may, this type of ethnocentric
account overlooks the great diversity of the concept of civil society, and fails to see its different
manifestations in different (non-Westerns) societies.
Being fundamentally Western ought not to be taken to suggest that civil society cannot
exist elsewhere. Rather an analysis has to acknowledge and address this bias (Warkentin 2001).
It has become palpable that transplanting a workable model from its original context to another
with dissimilar history, economy, societal structure, and political culture is a problematic task.
Recognizing that civil society does indeed mean different things to different people provides us
with the keys to move forward for it gets us beyond broad generalizations and normative
thinking.
In general terms, “Western” is used to refer to an emphasis on individualism, absence of
feudal and semifeudal restraints, freedom of association, liberty, and participatory and pluralist
politics, along with middle-class, entrepreneurial, and free-market economics (Wiarda 2003, p.
13). Most frequently, it refers to the Montesquieuan understanding of civil society as a multitude
of independent citizens’ associations that mediate between the individual and the state and, if
needed, defend the freedom of the individual against usurpation by the state. The logic stressing
the civil society’s associational core and the development of individual meaning and identity was
then promoted and developed further by Tocqueville and fuelled the contemporary
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communitarian theorists, such as Etzioni, Bellah, Taylor, and Putnam, in their critique of the
presentation of humans as atomistic individuals put forth by Locke, Hobbes, and more recently
Rawls (1971).
Edwards (2004) suggests that in addition to civil society as “associational life” or as “the
good society,” its function as the “public sphere,” as the arena for argument and deliberation as
well as institutional collaboration, ought not to be forgotten. Edwards, acknowledging that all of
these three schools of thought have something to offer, yet none of them provide complete and
convincing picture of civil society by themselves, calls for integrating these different
perspectives into a mutually supportive framework. In all three schools civil society is an
essentially collective, creative, and value-based action, providing thus an essential counterweight
to individualism, cynicism, and overbearing influence of state authority (ibid.).
Civil Society as an Arena
A number of conclusions can be drawn from what is described above. From civil
dialogue come great ideas that can lead to important solutions. While not all civil society
organizations are necessarily civil nor do they necessarily pursue the common good, the
democratizing role of civil society as a whole cannot be denied. By virtue of their mere existence
as autonomous actors, the various types of CSOs have pluralizing effect and consequently
strengthen the institutional arena and the entire society. As Mercer (2002, p. 8) explains, “more
civic actors means more opportunities for a wider range of interest groups to have a ‘voice,’
more autonomous organizations to act in a ‘watchdog’ role vis-à-vis the state, and more
opportunities for networking and creating alliances of civic actors to place pressure on the state.”
Given that many CSOs work at the grassroots level and include marginalized groups, they not
only widen but also deepen possibilities for citizen participation (ibid.).
This being said, civil society remains one of the most misunderstood and misused
concepts there is. The reason is obvious. What has been meant by the term has fluctuated
considerably through time. In addition, the concept continues to mean very different things in
different countries and languages. Using it in a global context easily obscures more than it
illuminates. As a concept, it remains normative, loaded, complex, and context-dependent. The
liberal democratic assumptions that often shine through Anglophone literature on civil society
only restrict the exploration of this complexity and limit the extent to which these studies may
actually engage with broader debates about the politics of development. A less value-laden and
more contextualized approach is needed to better understand the role that various civil society
organizations play in different contexts.
Looking back to the very beginning and going back to the basics, the concept of civil
society is very revealing in this respect. The largely undisputed linkage to the concept of the
state, which has formed the very basis of the Western (post-Hegelian) thought, should be
rethought or at least broadened as to allow for more innovative solutions to issues commonly
restricted within the national frame. After all, civil society is a social construct invoked not just
in debates on democracy and governance but also with respect to intercultural understanding,
progress, and social cohesion.
Civil society preceded the state. Aristotle knew no concept of state as we know it today.
His koinonía politiké was a coercion-free association that channeled the collective pursuits to
serve the common goal of attaining a good society. Not until the Scottish Enlightenment
thinkers, most notably, was a clearer distinction developed between a nonpolitical civil society
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and the state. No matter what the linkage is—be it juxtaposition, symbiosis, or something in
between—it restricts the concept of civil society within the frame of a particular nation state. In
so doing, it limits civil society’s characteristic intent of building an association of free, equal, and
like-minded persons united not by a citizenship but by ethos.
The commonly used concept of the third sector is misleading in two crucial respects: It is
not the third and it is really not even a sector. Through recent years, the borders between the
public, private, and the community sectors have become increasingly blurred. A substantial
range of practices and new organizational arrangements that blend their own missions either with
business practices or public service production have emerged, creating something that is now
referred to as a “fourth sector.” While the three-sector model surely helps us to make sense of
society, the boundaries it implies remain arbitrary. Civil society is not so much embedded in the
third sector as it is linked to the processes that that produce social capital and common action. As
Gilbert (2004, p. 116) suggests, “[i]f state-supported nonprofit groups enlarge the social capital
of civil society, then why not for-profit, company sponsored bowling teams.”
Figure 4
Inspired by the model put forth by CIVICUS, the World Alliance for Citizen
Participation, this article aims to conceptualize civil society as an arena, a public space or realm
where diverse societal values and interests interact. The borders of this space are complex, fuzzy,
blurred, negotiated and yet easily penetrable as people come together to discuss and seek to
influence the broader society. As such, it does not belong to the distinct arenas of the market,
state or family but exists where these amalgamate (Figure 4). There are clear overlaps and
incalculable transfers between the different arenas. For some organizations located at or near the
International Journal of Not-for-Profit Law / vol. 16, no. 1, September 2014 / 74
border, these distinctions form the very core of their existence. Social economy organizations
that have both value and profit-based goals are good examples of this.
Civil society is the arena that occupies the space where the other arenas of the society—
namely the family, the state, and the market—interact and overlap and where people associate to
advance common interests. To associate refers to uncoerced and self-generating collective action
that is not part of the formal political decision-making process, controlled directly by state
institutions, or dependent on the state interests. While it is true that voluntary associations form
the basic building blocks of Western notions of civil society and the Putnamian idea of their
ability to foster social capital is by now well established, one cannot but ponder whether
participation in associations really makes individuals more “civic” and active. Could it simply be
that active citizens tend to join associations more often their less-engaged counterparts?
The civil society arena more generally is part of a complex dual transition from industrial
to postindustrial society and from national state to transnational policy regimes (Anheier 2008).
The further it develops, the further it comes to compose not just an increased number and range
of groups and organizations but also increased linkages between them. This only amplifies the
corrective voices of civil society as a partner in governance and the market (Connor 1999). Civil
society should not be seen only passively, as a network of institutions, but also actively, as the
context and product of self-constituting collective actors (Cohen and Arato 1992). It occupies the
space reserved for the formation of demands (input) for the political system and to which the
political system has the task of supplying answers (output) (Bobbio 1989, p. 25). A framework
that places less emphasis on organizational forms and allows for a broader focus on the functions
and roles of informal associations, movements, and instances of collective citizen action makes it
more difficult to dictate strictly who is in and who is out. Only such an action/function-oriented
definition is able to take into account the entire range of civil society actors.
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e are tired of tolerating IBIS’ political
interference in Bolivia.” 119
 A September 2014 article in the New York Times asserted that foreign “money is
increasingly transforming the once -staid think -tank world into a muscular arm of foreign
governments’ lobbying in Washington.” 120 The following week, United States
Representative Frank Wolf wrote a letter to the Brookings Institution, in which he urged
them to “end this practice of accepting money from … foreign governments” so that its
work is not “compromised by the influence, whether real or perceived, of foreign
governments.” 121
Some governments assert that foreigners are not only seeking to meddle in domestic
political affairs, but also seeking to destabilize the country or otherwise engage in “regime
change.” Accor dingly, they argue that foreign funding restrictions are necessary to thwart efforts
to destabilize or overthrow the government currently in power.
 In 2013 in Sri Lanka , the government justified a recent registration requirement for all
CSOs on the grounds that it was necessary to “thwart certain NGOs from hatching
117 Jonathan Lis, “Draft bill: NGOs with foreign funding to be defined ‘foreign agents,’” Haaretz , May 26,
2013, accessed September 8, 2014, https://www.haaretz.com/news/national/.premium -1.592754 .
118 “Some Azerbaijani NGOs Cooperated with Armenian Special Services Under ‘People’s Diplomacy,’”
Trend, August 15, 2014, accessed September 8, 2014, https://en.trend.az/news/politics/230 3147.html .
119 Agence France -Presse, “Bolivia expels Danish NGO for meddling,” Global Post , December 20, 2013,
accessed September 16, 2014, https://www.gl obalpost.com/dispatch/news/afp/131220/bolivia -expels -danish -ngo –
meddling -1.
120 Eric Lipton, Brooke Williams, & Nicholas Confessore, “Foreign Powers Buy Influence at Think Tanks,”
New York Times , September 6, 2014, accessed September 17, 2014,
https://www.nytimes.com/2014/09/07/us/politics/foreign -powers -buy -influence -at-think -tanks.html?_r=0 .
121 Letter from Representative Frank Wolf to Strobe Talbott of the Brookings Institution, September 9,
2014, accessed September 17, 2014, https://s3.amazonaws.com/s3.documentcloud. org/documents/1301186/rep –
frank -wolfs -letter -to-strobe -talbott -at.pdf .

International Journal of Not -for -Profit Law / vol. 17 , no. 1, March 2015 / 23

conspiracies to effect regime change by engaging in politics in the guise of doing social
work.” 122
 A drafter of the Russian “foreign agents” law justified the initiative when it was pending
in pa rliament, stating, “There is so much evidence about regime change in Yugoslavia,
now in Libya, Egypt, Tunisia, in Kosovo — that’s what happens in the world, some
governments are working to change regimes in other countries. Russian democracy needs
to be prot ected from outside influences.” 123
 In 2005, the Prime Minister of Ethiopia expelled civil society organizations, explaining,
“there is not going to be a ‘Rose Revolution’ or a ‘Green Revolution’ in Ethiopia after the
election” 124 — a reference to the so -called “color revolutions” that had recently occurred
in Georgia and elsewhere.
 In June 2012, Uganda’s Minister for Internal Affairs justified the government’s threats to
deregister certain CSOs, stating that CSOs “want to destabilize the country because that
is what they are paid to do…. They are busy stabbing the government in its back yet they
are supposed to do humanitarian work.” 125
 In the process of driving civil society organizations out of Zimbabwe , President Mugabe
justified his policies by claiming that the CSOs were fronts for Western “colonial
masters” to undermine the Zimbabwean government. 126 Similarly, the central committee
of Mugabe’s party claimed, “Some of these NGOs are working day and night to remove
President Mugabe and ZANU PF from power. They are being funded by Britain and
some European Union countries, the United States, Australia, Canada and New
Zealand.” 127
 In a March 2014 interview justifying a draft “foreign agents” law, Kyrgyzstan’s
President Atembaev argued, “Activities conducted by CSOs are obviously aimed at
destabilization of the situation in the Kyrgyz Republic…. Some CSOs do not care about
how they get income, whose orders to fulfill, which kind of work to execute…. There are
122 Xinhua, “Sri Lanka to Investigate NGOs Operating in Country,” Herald , June 13, 2013, accessed
September 8, 2014, https://www.herald.co.zw/sri -lanka -to-investigate -ngos -operating -in-country/ .
123 “Russian parliament gives first approval to NGO bill,” BBC , July 6, 2012, accessed September 8, 2014,
https://www.bbc.com/news/world -europe -18732949 .
124 Darin Christensen & Jeremy M. Weinstein, “Defunding Dissent,” Journal of Democracy 24(2) (April
2013): 80.
125Pascal Kwesiga, “Govt gets tough on NGOs,” New Vision , June 19, 2012, accessed Septembe r 9, 2014,
https://www.newvision.co.ug/news/632123 -govt -gets -tough -on-ngos.html .
126 Thomas Carothers, “The Backlash Against Democracy Promotion,” Foreign Affairs , March/April 2006,
accessed September 9, 2014, https://www.foreignaffairs.com/articles/61509/thomas -carothers/the -backlash -against –
democracy -promotion .
127 “29 NGOs banned in crackdown,” New Zimbabwe , February 14, 2012, accessed September 9, 2014,
https://www.newzimbabwe.com/news -7189 -29+NGOs+banned+in+crackdown/new s.aspx .

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forces interested in destabilizing the situation in Kyrgyzs tan and spreading chaos across
Central Asia and parts of China.” 128
 In July 2014, the vice chairman of the China Research Institute of China -Russia Relations
argued that China should “learn from Russia” and enact a foreign agents law “so as to
block the way for the infiltration of external forces and eliminate the possibilities of a
Color Revolution.” 129
2. Transparency and Accountability
Another justification commonly invoked by governments to regulate and restrict the flow
of foreign funds is the importance of upholding the integrity of CSOs by promoting transparency
and accountability through government regulation. Consider, for example, the following
responses by government delegations to the UNSR’s Resource Report:
 Egypt : “We agree with the principles of accountability, transparency, and integrity of the
activities of civil society organisations and NGOs. However, this should not be l imited to
accountability to donors. National mechanisms to follow -up on activities of such entities,
while respecting their independence have to be established and respected.” 130
 Maldives : “While civil societies should have access to financing for effective operation
within the human rights framework, it is of equal importance that the organizations must
also ensure that they work with utmost integrity and in an ethical and responsible
manner.” 131
 Azerbaijan : “The changes and amendments to the national legisl ation on NGOs have
been made with a view of increasing transparency in this field…. In that regard, these
amendments should only disturb the associations operating in our country on a non –
transparent basis.” 132
Similarly, in response to a United Nations Hum an Rights Council panel on the promotion
and protection of civil society space in March 2014, the following government delegations
responded with justifications invoking transparency and accountability:
128 “Алмазбек Атамбаев: “Хочу максимально успеть,” Slovo.kg , March 23, 2014, accessed September
9, 2014, translated by Aida Rustemova, https://slovo.kg/?p=35019 .
129 Simon Denyer , “China taking the Putin approach to democracy,” Washington Post, October 1, 2014,
A7.
130 UN Office of the High Commissioner for Human Rights, “Clustered ID with the WG on HR and
Transnational Corporations and the SR on The Rights to Freedom of Assembly an d Association: Intervention
delivered by the Permanent Delegation of Egypt,” May 30, 2013, accessed September 9, 2014,
https://extran et.ohchr.org/sites/hrc/HRCSessions/RegularSessions/23rdSession/OralStatements/Egypt_10_1.pdf .
131 UN Office of the High Commissioner for Human Rights, “Interactive Dialogue with the Special
Rapporteur on the Rights to Peaceful Assembly and of Association, M aldives Oral Statement,” May 31, 2013,
accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/ 23rdSession/OralStatements/Maldives_12.pdf .
132 UN Office of the High Commissioner for Human Rights, “Remarks by Azerbaijan,” May 31, 2013,
accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/23rdSession/OralStatements/Azerbaijan_12.pdf .

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 Ethiopia , on behalf of the African Group: “Domestic l aw regulation consistent with the
international obligations of States should be put in place to ensure that the exercise of the
right to freedom of expression, assembly and association fully respects the rights of
others and ensures the independence, accou ntability and transparency of civil society.” 133
 India, on behalf of the “Like Minded Group”: “The advocacy for civil society should be
tempered by the need for responsibility, openness and transparency and accountability of
civil society organizations.” 134
 Pa kistan , on behalf of the Organisation of Islamic Cooperation members : “It may be
underscored that securing funding for its crucial work is the right of civil society,
maintaining transparency and necessary regulation of funding is the responsibility of
sta tes.” 135
Kyrgyzstan has also employed this argument to justify a draft “foreign agents” law. The
explanatory note to the draft law claims that it “has been developed for purposes of ensuring
openness, publicity, transparency for non -profit organizations, inc luding units of foreign non –
profit organizations, as well as non -profit organizations acting as foreign agents and receiving
their funds from foreign sources, such as foreign countries, their government agencies,
international and foreign organizations, fo reign citizens, stateless persons or their authorized
representatives, receiving monetary funds or other assets from the said sources.”
3. Aid Effectiveness and Coordination
A global movement has increasingly advocated for greater aid effectiveness, including
through concepts of “host country ownership” and the harmonization of development
assistance. 136 However, some states have interpreted “host country ownership” to be
synonymous with “host government ownership” and have otherwise co -opted the aid
effectivene ss debate to justify constraints on international funding. For example:
133 UN Office of the High Commissioner for Human Rights, “Statement by Ethiopia on behalf of the
African Grou p at the 25th session of the Human Rights Council On the Panel Discussion on the Importance of the
Promotion and Protection of Civil Society Space,” March 11, 2014, accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/25thSession/OralStatements/Ethiopia%20on%20b
ehalf%20of%20African%20Group_PD_21.pdf .
134 UN Office of the High Commissioner for Human Rights, “Joint Statement: India on behalf of like –
minded countries,” March 11, 2014, accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/25thSession/OralStatements/India_on%20behalf
%20of%20LMG_PD_21.pdf . The “Like Minded Group” consists of Algeria, Bahrain, Bangladesh, Belarus,
Chi na, Cuba, Egypt, India, Indonesia, Malaysia, Pakistan, Russia, Saudi Arabia, Singapore, South Africa, Sri
Lanka, Sudan, Uganda, United Arab Emirates, Vietnam , and Zimbabwe .
135 UN Office of the High Commissioner for Human Rights, “Statement by Pakistan on be half of OIC:
Panel Discussion on Civil Society Space,” March 11, 2014, accessed September 9, 2014,
https ://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/25thSession/OralStatements/Pakistan%20on%20b
ehalf%20of%20OIC_PD_21.pdf .
136 See the Aid Effectiveness Agenda of the Paris Declaration (2005), the Accra Agenda for Action (2008),
and the Busan Partn ership for Effective Development Cooperation (2011).

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 In July 2014, Nepal ’s government released a new Development Cooperation Policy 137
that will require development partners to channel all development cooperation through
the Ministry of Fi nance, rather than directly to CSOs. The government argued that this
policy is necessary for aid effectiveness and coordination: “Both the Government and the
development partners are aware of the fact that the effectiveness can only be enhanced if
the owne rship of aid funded projects lies with the recipient government.” 138
 Sri Lanka ’s Finance and Planning Ministry issued a public notice in July 2014 requiring
CSOs to receive government approval of international funding. Justifying the
requirement, the Ministry claimed that projects financed with international funding were
“outside t he government budget undermining the national development programmes.” 139
 In response to the UNSR’s Resource Report, the representative of Egypt stated, “The
diversification of the venues of international cooperation and assistance to States towards
the fund ing of civil society partners fragments and diverts the already limited resources
available for international assistance. Hence, aid coordination is crucial for aid
effectiveness.” 140
 At the recent Africa Leaders Summit, the Foreign Minister of Benin s poke a t a workshop
on closing space for civil society. He asserted that CSOs “don’t think they are
accountable to government but only to development partners. This is a problem.” He said
Benin needs “a regulation to create transparency on resources coming from a broad and
the management of resources,” stating that the space for civil society is “too wide.” 141
 The Intelligence Bureau of India released a report in June 2014 claiming that foreign –
funded CSOs stall economic development and negatively impact India’s GDP growth by
2 to 3 percent. 142 The report stated, “a significant number of Indian NGOs, funded by
some donors based in the US, the UK, Germany, the Netherlands and Scandinavian
137 Government of Nepal Ministry of Finance, “Development Cooperation Policy, 2014,” unofficial
translation, accessed September 9, 2014,
https://www.mof.gov.np/uploads/document/file/DCP_English_20140707120230_20140721083326.pdf .
138 Government of Nepal Ministry of Finance, “Development Cooperation Policy, 2014,” unofficial
translation, Article 2.2, acces sed September 9, 2014,
https://www.mof.gov.np/uploads/document/file/DCP_English_20140707120230_20140721083326.pdf .
139 “No foreign funds without approva l: Ministry,” Daily Mirror , July 22, 2014, accessed September 9,
2014, https://www.dailymirror.lk/news/50038 -no -foreign -funds -without -approval -ministry.html .
140 UN Office of the High Commissioner for Human Rights, “Clustered ID with the WG on HR and
Transnational Corporations and the SR on The Rights to Freedom of Assembly and Association: Intervention
delivered by the Permanent Delegation of Egypt,” May 30, 2013, accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/23rdSession/OralStatements/Egypt_1 0_1.pdf .
141 Personal notes of author.
142 “Foreign -funded NGOs stalling development: IB report,” Times of India , June 12, 2014, accessed
September 9, 2014, https://timesofindia.indiatimes.com/india/Foreign -funded -NGOs -stalling -development -IB –
report/articleshow/36411169.cms .

International Journal of Not -for -Profit Law / vol. 17 , no. 1, March 2015 / 27

countries, have been noticed to be using people centric issues to create an enviro nment
which lends itself to stalling development projects.” 143
4. National Security, Counterterrorism, and Anti -Money Laundering
As discussed above, governments also invoke national security, counterterrorism, and
anti -money laundering policies to justify restr ictions on international funding, including cross –
border philanthropy. For example, the Financial Action Task Force (FATF), an
intergovernmental body that seeks to combat money laundering and terrorist financing, stated:
The ongoing international campaign against terrorist financing has unfortunately
demonstrated however that terrorists and terrorist organisations exploit the NPO
sector to raise and move funds, provide logistical support, encourage terrorist
recruitment or otherwise support terrorist organi sations and operations. This
misuse not only facilitates terrorist activity but also undermines donor confidence
and jeopardises the very integrity of NPOs. Therefore, protecting the NPO sector
from terrorist abuse is both a critical component of the globa l fight against
terrorism and a necessary step to preserve the integrity of NPOs. 144
Governments have leveraged concerns about counterterrorism and money laundering to
justify restricting both the inflow and outflow of philanthropy. For example: 145
 The governm ent of Azerbaijan justified amendments relating to the registration of
foreign grants, stating that the purpose of the amendments was, in part, “ to enforce
international obligations of the Republic of Azerbaijan in the area of combating money –
laundering.” 146
143 Rake sh Krishnan Simha, “Why India Should Follow Vladimir Putin’s Lead on NGOs,” Russia & India
Report, June 15, 2014, accessed September 9, 2014,
https://in.rbth.com/blogs/2014/06/15/why_india_should_follow_vladimir_putins_lead_on_ngos_35945.html .
144 Financial Action Task Force, “International Standards on Combating Money Laundering and the
Financing of Terrorism & Proliferation: The FATF Recommendations,” Financial Action Task Force Report, 2013,
54, accessed September 9, 2014,
https://www.fatfgafi.org/media/fa tf/documents/recommendations/pdfs/FATF_Recommendations.pdf . See also
Financial Action Task Force, “Risk of Terrorist Abuse in Non -Profit Organisations,” Financial Action Task Force
Report, June 2014, https://www.fatf -gafi.org/media/fatf/documents/reports/Risk -of-terrorist -abuse -in-non -profit –
organisations.pdf .
145 Constraints by donor governments on the outflow of cross -border donation s, albeit beyond the scope of
this article, similarly present significant barriers to cross -border philanthropy. These states assert that they have an
international responsibility to regulate the outflow of cross -border donations in order to ensure that fu nding destined
for other countries will not support criminal or terrorist activities in those foreign jurisdictions. For more information
about the justifications employed and the implications for civil society, please see: Ben Hayes, “Counter -Terrorism,
‘Policy Laundering’ and the FATF: Legalizing Surveillance, Regulating Civil Society,” Transnational
Institute/Statewatch Report, February 2012, https://www.statewatch.org/analyses/no -171 -fafp -report.pdf .
146 Charity & Security Network, “How the FATF Is Used to Justify Laws That Harm Civil Society,
Freedom of Association and Expression,” Charity & Security Network , May 16, 2013, accessed September 9, 2014,
https://www.charityandsecurity.org/analysis/Restrictive_Laws_How_FATF_Used_to_Justify_Laws_That_Harm_Civ
il_Society .

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 The British Virgin Islands (BVI) enacted a law requiring that CSOs with more than five
employees appoint a designated Anti -Money Laundering Compliance Officer. 147 The
law also imposes audit requirements for CSOs that are not required of businesses. These
burdens were justified with explicit reference to FATF’s recommendation on nonprofit
organizations and counterterrorism. 148
 In response to the UNSR’s Resource Report, a group of thirteen African states responded,
“It is the responsibility of governments to ensure that the origin and destination of
associations’ funds are not used for terrorist purposes or directed towards activities which
encourage incitement to hatred and violence.” 149
 In 2013, a Sri Lankan government representative similarly stated, “While w e agree that
access to resources is important for the vibrant functioning of civil society, we observe
that Mr. Kiai does not seem to adequately take into account the negative impact of lack of
or insufficient regulation of funding of associations on natio nal security and counter –
terrorism.” 150
 In a National Security Analysis released in August 2014, Sri Lanka’s Ministry of
Defence claimed that some civil society actors have links with the Liberation Tigers of
Tamil Eelam, a group with “extremist separatist i deology,” and that these CSOs thereby
pose “a major national security threat.” 151 During the same period, the Sri Lankan
government announced that it was drafting a law requiring CSOs to register with the
Ministry of Defence in order to have a bank account and receive international funding.
5. Hybrid Justifications
While these categories and examples represent the types of justifications offered by
governments for restricting foreign funding, in practice, official statements often combine
multiple justifications. A recent example is the statement made at the UN Human Rights Council
by India on behalf of itself and twenty other “like minded” states, including Cuba, Saudi
147 “Non -Profit Organisations,” British Virg in Islands Financial Investigation Agency, accessed September
9, 2014, https://www.bvifia.org/non -profit -organisations .
148 Charity & Security Network, “How the FATF Is Used to Justify Laws That H arm Civil Society,
Freedom of Association and Expression,” May 16, 2013,
https://www.charityandsecurity.org/analysis/Restrictiv e_Laws_How_FATF_Used_to_Justify_Laws_That_Harm_Civ
il_Society
149 UN Office of the High Commissioner for Human Rights, “Oral Statement — Gabon on behalf of the
African Group,” 30 May 2013, accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/23rdSession/OralStatements/Gabon%20on%20be
half%20ofAG_10_1.pdf .
150 UN Office of the High Co mmissioner for Human Rights, “23rd Session of the HRC Statement by Sri
Lanka —Item 3: Clustered ID with the SR on the rights to peaceful assembly & of association,” May 31, 2013,
accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/23rdSession/Pages/OralStatement.aspx?MeetingN
umber=12.0&MeetingDat e=Friday,%2031%20May%202013 .
151 Gotabaya Rajapaksa, “Sri Lanka’s National Security,” Ministry of Defence and Urban Development of
Sri Lanka, August 19, 2014, accessed September 9, 2014,
https://www.defence.lk/new.asp?fname=Sri_Lankas_National_Security_20140819_02 .

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Arabia , Belarus, China, and Vietnam ,152 which weaves together a number of different
justifications, including foreign interference, accountability, and national security:
[C]ivil society cannot function effectively and efficiently without defined
limits…. Civil society must also learn to protect its own space by guarding against
machinations of donor groups guided by extreme ideologies laden with hidden
politicized motives, which if allowed could potentially bring disrepute to the civil
society space…. There have also been those civil society organizations, who have
digressed from their original purpose and indulged in the pursuit of donor -driven
agendas. It is important to ensure accountability and responsibility for their
actions and the consequences thereof and also guard against compromising
national and international security. 153
Similarly, Ethiopia, in its statement in response to the UNSR’s Resource R eport,
referenced justifications relating to state sovereignty, aid coordination, and accountability and
transparency:
It is our firm belief that associations will play their role in the overall
development of the country and advance their objectives, if a nd only if an
environment for the growth of transparent, members based and members driven
civil society groups in Ethiopia providing for accountability and predictability is
put in place. We are concerned that the abovementioned assertion [about
lightening the burdens to receive donor funding] by the special rapporteur
undermines the principle of sovereignty which we have always been guided by. 154
Similarly constructed statements have also been put forward by Pakistan and other states. 155
152 The “Like Minded Group” consisted of Algeria, Bahrain, Bangladesh, Belarus, China, Cuba, Egypt,
India, Indonesia, Malaysia, Pakistan, Russia, Saudi Arabia, Singapore, South Africa, Sri Lanka, Sudan, Uganda,
UAE, Vietnam, and Zimbabwe. UN Office of the Hig h Commissioner for Human Rights, “Joint Statement: India on
behalf of like -minded countries,” March 11, 2014, accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/25thSession/OralStatements/India_on%20behalf
%20of%20LMG_PD_21.pdf .
153 Ibid.
154 UN Office of the High Commissioner for Human Rights, “Oral Statement: Ethiopia,” May 31, 2013,
accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/23rdSession/OralStatements/Et hiopia_12.pdf .
155 See, e.g., UN Office of the High Commissioner for Human Rights, “Statement by Pakistan on Behalf of
OIC: Panel Discussion on Civil Society Space,” March 11, 2014, accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/25thSession/OralStatements/Pakistan%20on%20b
ehalf%20of%20OIC_PD_21.pdf : “By virtue of its dynamic role civil society is well poised to build convergences
with the view to develop synergies between state institutions and their own networks. These synergies would
facilitate proper utilization of resources at the disposal state institutions an d civil society actors. In this regard, it
may be underscored that securing funding for its crucial work is the right of civil society, maintaining transparency
and necessary regulation of funding is the responsibility of states…. Within this social space, the civil society can
play its optimal role by working in collaboration with state institutions. Better coordination between civil society
actors and state institution [sic] would also facilitate enhancement of international cooperation in the field of hu man
rights.”

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In this section, the a rticle briefly surveyed justifications presented by governments to
constrain the inflow of international funding, including philanthropy. In the following section,
we analyze constraints and their justifications under international law.
International Legal Framework
1. International Norms Protecting Access to Resources and Cross -Border Philanthropy
Article 22 of the International Covenant on Civil and Political Rights (ICCPR) states,
“Everyone shall have the right to freedom of association with others….” 156 Acco rding to the
UNSR: 157
The right to freedom of association not only includes the ability of individuals or legal
entities to form and join an association 158 but also to seek, receive and use resources 159 —
human, material and financial — from domestic, foreign and in ternational sources. 160
The United Nations Declaration on Human Rights Defenders 161 similarly states that
access to resources is a self -standing right:
“[E]veryone has the right, individually and in association with others, to solicit, receive
and utilize reso urces for the express purpose of promoting and protecting human rights
and fundamental freedoms through peaceful means….” 162
According to the Office of the United Nations High Commissioner for Human Rights, this right
specifically encompasses “the receipt of funds from abroad.” 163
156 United Nations International Covenant on Civil and Political Rights, Article 22, December 16, 1966,
https://www.ohchr.org/en/professionalinterest/pages/ccpr.aspx .
157 While reports of the UNSR are not binding international law, his reports are referenced here because
they provide a comprehensive articulation and explanation of international law.
158 International law generally recognizes the freedom of association, and t his section follows that
formulation. Addressing the applicability of international law to non -membership organizations is beyond the scope
of this article, but for more information, please see: International Center for Not -for -Profit Law & World Movement
for Democracy Secretariat, “Defending Civil Society Report, Second Edition,” June 2012, 35,
https://www.icnl.org/research/resources/dcs/DCS_Report_Second_Editi on_English.pdf .
159 The UNSR defines “resources” as a broad concept that includes financial transfers (e.g., donations,
grants, contracts, sponsorship, and social investments), loan guarantees, in -kind donations, and other forms of
support. See United Nation s Human Rights Council, Report of the Special Rapporteur on the rights to freedom of
peaceful assembly and of association, Maina Kiai, para. 10, UN Doc. A/HRC/23/39 (April 24, 2013) at
https://freeassembly.net/wp -content/uploads/2013/04/A.HRC_.23.39_EN -funding -report -April -2013.pdf .
160 Ibid., para. 8.
161 The UNSR notes that while “the Declaration is not a binding instrument, it must be recalled tha t it was
adopted by consensus of the General Assembly and contains a series of principles and rights that are based on
human rights standards enshrined in other international instruments which are legally binding. Ibid., para. 17.
162 United Nations General Assembly, Declaration on the Right and Responsibility of Individuals, Groups
and Organs of Society to Promote and Protect Universally Recognized Human Rights and Fundamental Freedoms ,
UN Res. 53/144, Article 13, https://www.un.org/Docs/asp/ws.asp?m=A/RES/53/144 .
163 United Nations Office of the High Commissioner for Human Rights, “Declaration on Human Rights
Defenders,” UN OHCHR, accessed September 9, 2014,
https://www.ohchr.org/EN/Issues/SRHRDefenders/Pages/Declaration.aspx .

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Reinforcing this position, 164 in 2013 the United Nations Human Rights Council passed
resolution 22/6, which calls upon on States “[t]o ensure that they do not discriminatorily impose
restrictions on potential sources of funding aimed at supporting the work of human rights
defenders,” and “no law should criminalize or delegitimize activities in defence of human rights
on account of the origin of funding thereto.” 165
The freedom to access resources extends beyond human rights defenders. For example,
the Declaration on the Elimination of A ll Forms of Intolerance and of Discrimination Based on
Religion or Belief states that the right to freedom of thought, conscience, and religion includes
the freedom to “solicit and receive voluntary financial and other contributions from individuals
and in stitutions.” 166 Access to resources is also an integral part of a number of other civil,
cultural, economic, political, and social rights. As the UNSR states: 167
For associations promoting human rights, including economic, social and cultural rights,
or those involved in service delivery (such as disaster relief, health -care provision or
environmental protection), access to resources is important, not only to the existence of
the association itself, but also to the enjoyment of other human rights by those benef itting
from the work of the association. Hence, undue restrictions on resources available to
associations impact the enjoyment of the right to freedom of association and also
undermine civil, cultural, economic, political and social rights as a whole. 168
Acc ordingly, “funding restrictions that impede the ability of associations to pursue their statutory
activities constitute an interference with article 22” of the International Covenant on Civil and
Political Rights. 169
2. Regional and Bilateral Commitments to Pro tect Cross -Border Philanthropy
164 This article briefly examines international norms governing global philanthropy. But it also recogniz es
that there are distinct limits to the impact of international law. For example, there is often an implementation gap
between international norms and country practice. In addition, there are few binding international treaties, such as
the ICCPR, and de tails are often left to “soft law,” such as the reports of the UNSR. At the same time, there is
concern that any effort to create a new global treaty on cross -border philanthropy or foreign funding would lead to a
retrenchment of existing rights.
165 United Nations General Assembly, Protecting Human Rights Defenders, March 21, 2013, UN Human
Rights Council, Resolution 22/6, para. 9, https://ap.ohchr.org/documents/dpage_e.aspx?si=A/HRC /RES/22/6 .
166 United Nations General Assembly, Declaration on the Elimination of All Forms of Intolerance and of
Discrimination Based on Religion or Belief , November 25, 1981, UN General Assembly Resolution A/RES/36/55,
Article 6(f), https://www.un.org/documents/ga/res/36/a36r055.htm .
167 In similar fashion, the UN Committee on Economic, Social and Cultural Rights recognized the link
between access to resources and economic, social and cultural rights, when it expressed “deep concern” about an
Egyptian law that “gives the Government control over the right of NGOs to manage their own activities, including
seeking external funding.” See Egypt, ICESCR, E/2001/22 (2000) 38 at paras. 161, 176,
https://www.bayefsky.com/themes/public_general_concluding -observations.php .
168 United Nations Human Rights Council, Report of the Special Rapporteur on the rights to freedom of
peaceful assembly and of association, Maina Kiai, para. 9, UN Doc. A/HRC/23/39 (April 24, 2013) at
https://freeassembly.net/wp -content/uploa ds/2013/04/A.HRC_.23.39_EN -funding -report -April -2013.pdf .
169 Human Rights Committee, communication No. 1274/2004, Korneenko et al. v. Belarus, Views adopted
on October 31, 2006, para. 7.2.

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While this article is focused on global norms, cross -border philanthropy is also
protected at the regional level. For example:
 The Council of Europe Recommendation on the Legal Status of NGOs states:
“NGOs should be free to s olicit and receive funding — cash or in -kind donations —
not only from public bodies in their own state but also from institutional or
individual donors, another state or multilateral agencies ….” 170
 According to the Inter -American Commission on Human Rights, “states should allow and
facilitate human rights organizations’ access to foreign funds in the context of
international cooperation, in transparent conditions.” 171
 In May 2014, the African Commission on Human and Peoples’ Rights (ACHPR)
adopted, in draft for m, a report of the ACHPR Study Group on Freedom of Association
and Peaceful Assembly, with a specific recommendation that States’ legal regimes should
codify that associations have the right to seek and receive funds. This includes the right to
seek and re ceive funds from their own government, foreign governments, international
organizations and other entities as a part of international cooperation to which civil
society is entitled, to the same extent as governments.
 The European Court of Justice (ECJ) has issued a series of important decisions about the
free flow of philanthropic capital within the European Union. 172
In addition, many jurisdictions have concluded bilateral investment treaties, which help
protect the free flow of capital across borders. Some treaties, such as the U.S. treaties with
Kazakhstan and Kyrgyzstan, expressly extend investment treaty protections to organizations not
“organized for pecuniary gain.” 173 Indeed, the letters of transmittal submitted by the White
House to the U.S. Senate sta te that these treaties are drafted to cover “charitable and non -profit
entities.” 174
170 Council of Europe, “Recommendation CM/Rec (2007)145 of the Committ ee of Ministers to member
states on the legal status of non -governmental organisations in Europe,” adopted October 10, 2007, Article 50,
https://wcd.coe.int/ViewDoc.jsp?id=1194609 .
171 Inter -American Commission on Human Rights, Report on the Situation of Human Rights Defenders in
the Americas , March 7, 2006, Recommendation 19, https://www.icnl.org /research/resources/assembly/oas -human –
rights -report.pdf .
172 For more information on these decisions, see: European Foundation Center and Transnational Giving
Europe, “Taxation of Cross -Border Philanthropy in Europe After Persche and Stauffer: From landloc k to free
movement?”, European Foundation Center Report, 2014,
https://www.efc.be/programmes_services/resources/Documents/TGE -web.pdf ; European Foundation Centre, “ECJ
rules in favour of cross -border giving ,” EFC briefing, January 27, 2009, accessed September 9, 2014,
https://www.efc.be/programmes_services/resources/Documents/befc09 08.pdf .
173 U.S. -Kyrgyz Bilateral Investment Treaty, Article 1(b); U.S. -Kazakh Bilateral Investment Treaty, Article
1(b). See also Article 1(2) of the China – Germany BIT: “the term ‘investor’ means … any juridical person as well
as any commercial or other c ompany or association with or without legal personality having its seat in the territory
of the Federal Republic of Germany, irrespective of whether or not its activities are directed at profit.”
174 Letters of Transmittal available at the U.S. State Departm ent website:
https://www.state.gov/documents/organization/43566.pdf and
https://www.state.gov/documents/organization/4 3567.pdf .

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A detailed discussion of investment treaty protection for cross -border philanthropy is
beyond the scope of this article. This issue is presented in brief form, however, beca use it is a
significant avenue for further exploration, as it expands the international legal argument beyond
human rights and implicates bilateral investment treaties with binding enforcement
mechanisms. 175 For further information on this issue, please see International Investment Treaty
Protection of Not -for -Profit Organizations 176 and Protection of U.S. Non -Governmental
Organizations in Egypt under the Egypt -U.S. Bilateral Investment Treaty. 177
3. Restrictions Permitted Under International Law
Continuing the discussion of global norms, ICCPR Article 22(2) recognizes that the
freedom of association can be restricted in certain narrowly defined conditions. According to
Article 22(2):
No restrictions may be placed on the exercise of this right other than those wh ich are
prescribed by law and which are necessary in a democratic society in the interests of
national security or public safety, public order (ordre public), the protection of public
health or morals or the protection of the rights and freedoms of others. 178
In other words, international law allows a government to restrict access to resources if the
restriction is:
(1) prescribed by law;
(2) in pursuance of one or more legitimate aims, specifically:
o national security or public safety;
o public order;
o the protection of public health or morals; or
o the protection of the rights and freedoms of others; and
175 In addition, the European Court of Human Rights has held that Article 1 of the First Protocol of the
European Convention on Human Rights protects the right to peaceful enjoyment of one’s possessions. (Article 1 of
the First Protocol of the Euro pean Convention reads: “Every natural or legal person is entitled to the peaceful
enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to
the conditions provided for by law and by the general p rinciples of international law. The preceding provisions shall
not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of
property in accordance with the general interest or to secure the payment o f taxes or other contributions or
penalties.” In addition, the right to property includes the right to dispose of one’s property (Clare Ovey & Robin
White, The European Convention on Human Rights , 3rd edition (Oxford: Oxford University Press, 2002)), which
would seem to embrace the right to make contributions to CSOs for lawful purposes.
176 Luke Eric Peterson & Nick Gallus, “International Investment Treaty Protection of Not -for -Profit
Organizations,” International Journal of Not -for -Profit Law 10(1) (December 2007),
https://www.icnl.org/research/journal/vol10iss1/art_1.htm .
177 Nick Gallus, “Protection of U.S. Non -Governmental Organizations in Egypt under the Egypt -U.S.
Bilat eral Investment Treaty,” International Journal of Not -for -Profit Law 14(3) (September 2012),
https://www.icnl.org/research/journal/vol14iss3/art2.html .
178 United Nations International Covenant on Civil and Political Rights, Article 22, December 16, 1966,
https://www.ohchr.org/en/professionalinterest/pages/ccpr.aspx . Article 22, ICCPR

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(3) “necessary in a democratic society to achieve those aims.” 179
Moreover :
States should always be guided by the principle that the restrictions must not im pair the
essence of the right … the relations between right and restriction, between norm and
exception, must not be reversed. 180
The burden of proof is on the government. 181 In addition:
When a State party invokes a legitimate ground for restriction of freed om of expression,
it must demonstrate in specific and individualized fashion the precise nature of the threat,
and the necessity and proportionality of the specific action taken, in particular by
establishing a direct and immediate connection between the [ activity at issue] and the
threat. 182
The following section amplifies this three -part test contained in Article 22(2).
A. Prescribed by law
The first prong requires a restriction to have a formal basis in law. This means that:
restrictions on the right to free dom of association are only valid if they had been
introduced by law (through an act of Parliament or an equivalent unwritten norm of
common law), and are not permissible if introduced through Government decrees or other
similar administrative orders. 183
As discussed above, in July 2014, the Sri Lankan Department of External Resources of
the Ministry of Finance and Planning disseminated a notice to the public, declaring that any
organization or individual undertaking a project with foreign aid must have appro val from
relevant government agencies. Similarly, in July 2014, Nepal’s government released a new
Development Cooperation Policy that will require development partners to channel all
development cooperation through the Ministry of Finance, rather than directly to civil society. In
both cases, the restriction s were based on executive action and not “introduced by law (through
179 Case of Vona v. Hungary (A pp no 35943/10) (2013) ECHR para. 50,
https://hudoc.echr.coe.int/sites/eng/pages/search.aspx?i=001 -122183 .
180 United Nations Human Rights Council, Report of the Special Rappo rteur on the rights to freedom of
peaceful assembly and of association, Maina Kiai, para. 16, UN Doc. A/HRC/20/27 (May 21, 2012),
https://www.ohchr .org/Documents/HRBodies/HRCouncil/RegularSession/Session20/A -HRC -20 -27_en.pdf .
181 UN Office of the High Commissioner for Human Rights (OHCHR), Fact Sheet No. 15, Civil and
Political Rights: The Human Rights Committee, May 2005,
https://www.ohchr.org/Documents/Publications/FactSheet15rev.1en.pdf .
182 United Nations Human Rights Committee, General Comment No. 34, para. 35, UN Doc.
CCPR/C/GC/34 (September 12, 2011), https://www2.ohchr.org/english/bodies/hrc/docs/GC34.pdf .
183 See UN Special Rapporteur on the situation of human rights defenders, Commentary to the Declaration
on the Right and Responsibility of Individuals, Groups and Organs of Society to Promote and Protect Universally
Recognized Human Rights and Fundamental Fre edoms, July 2011, 44,
https://www.ohchr.org/Documents/Issues/Defenders/CommentarytoDeclarationondefendersJuly2011.pdf : “It would
seem reasonable t o presume that an interference is only “prescribed by law” if it derives from any duly promulgated
law, regulation, order, or decision of an adjudicative body. By contrast, acts by governmental officials that are ultra
vires would seem not to be ‘prescribe d by law,’ at least if they are invalid as a result.”

International Journal of Not -for -Profit Law / vol. 17 , no. 1, March 2015 / 35

an act of Parliament or an equivalent unwritten norm of common law).” Accordingly, they
appear to violate the “prescribed by law” standard required under Article 22(2) of the ICCPR.
This prong of Article 22(2) also requires that a provision be sufficiently precise for an
individual or NGO to understand whether or not intended conduct would constitute a violation of
law. 184 As stated in the Johannesburg Principles, “The law must be accessible , unambiguous,
drawn narrowly and with precision so as to enable individuals to foresee whether a particular
action is unlawful.” 185
This prong helps limit the scope of permissible restrictions. As discussed above, certain
laws ban funding of organizations that cause “social anxiety,” have a “political nature,” or have
“implied ideological conditions.” These terms are undefined and provide little guidance to
individuals or organizations about prohibited conduct. Since they are not “unambiguous, drawn
narrowl y and with precision so as to enable individuals to foresee whether a particular action is
unlawful,” there is a reasonable argument that these sorts of vague restrictions fail the
“prescribed by law” requirements of international law.
B. Legitimate aim
The second prong of Article 22(2) requires that a restriction advance one or more
“legitimate aims,” 186 namely:
 national security or public safety;
 public order;
 the protection of public health or morals; or
 the protection of the rights and freedoms of others.
This prong provides a useful lens to analyze various justifications for constraint. For
example, governments have justified constraints to promote “aid effectiveness.” As the UNSR
notes, aid effectiveness “is not listed as a legitimate ground for restricti ons.” 187 Similarly, “[t]he
protection of State sovereignty is not listed as a legitimate interest in the [ICCPR],” and “States
cannot refer to additional grounds … to restrict the right to freedom of association.” 188
Of course, assertions of national security or public safety may, in certain circumstances,
constitute a legitimate interest. Under the Siracusa Principles, however, assertions of national
security must be construed restrictively “to justify measures limiting certain rights only when
184 Though not a fully precise comparison, this concept is somewhat similar to the “void for vagueness”
doctrine in U.S. constitutional law.
185 Article 19, Johannesburg Principles on National Security, Fre edom of Expression and Access to
Information (London: Article 19, 1996), Principle 1.1(a),
https://www.article19.org/data/files/pdfs/standards/joburgprinciples.pdf . The Johannesburg Principles were
developed by a meeting of international experts at a consultation in South Africa in October 1995.
186 Case of Vona v. Hungary (App no 35943/10) (2013) ECHR para. 50,
https://hudoc.echr.coe.int/sites/eng/pages/search.aspx?i=001 -122183 .
187 United Nations Human Rights Council, Report of the Special Rapporteur on the rights to freedom of
peaceful assembly and of association, Maina Kiai, para. 40, UN Doc . A/HRC/23/39 (April 24, 2013) at
https://freeassembly.net/wp -content/uploads/2013/04/A.HRC_.23.39_EN -funding -report -April -2013.pdf .
188 Ibid., pa ra. 30.

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they are taken to protect the existence of the nation or its territorial integrity or political
independence against force or threat of force.” 189 In addition, a state may not use “ national
security as a justification for measures aimed at suppressing opposition … or at perpetrating
repressive practices against its population.” 190 This includes defaming or stigmatizing foreign
funded groups by accusing them of “treason” or “promoting regime change.” 191
Accordingly, under international law, governments cannot rely on generalized claims of
“state sovereignty” to justify constraints on global philanthropy. In the words of the UNSR:
Affirming that national security is threatened when an association receives funding from
foreign sources is not only spurious and distorted, but also in contradiction with
international human rights law. 192
This brief analysis is not intended to explore the details of the aid effectiveness and
sovereignty justifications. Rather, the goal is to illustrate how the “legitimate aim” requirement
of in ternational law can help inform the analysis of certain justifications presented by
governments, such as arguments based on “aid effectiveness” and “sovereignty.”
C. Necessary in a Democratic Society
Even if a government is able to articulate a legitimate aim , a restriction violates
international law unless it is “necessary in a democratic society.” As stated by the Organization
for Security and Co -operation in Europe, the reference to necessity does not have “the flexibility
of terms such as ‘useful’ or ‘conv enient’: instead, the term means that there must be a ‘pressing
social need’ for the interference.” 193 Specifically, “where such restrictions are made, States must
demonstrate their necessity and only take such measures as are proportionate to the pursuance of
legitimate aims in order to ensure continuous and effective protection of Covenant rights.” 194
As stated by the UNSR:
In order to meet the proportionality and necessity test, restrictive measures must be the
least intrusive means to achieve the desired ob jective and be limited to the associations
189 See the “Siracusa Principles” [United Nations, Economic and Social Council, U.N. Sub -Commission on
Prevention of Discrimination and Protection of Minorities, Siracusa Principles on the Limitation and Derogation of
Provisions in the International Covenant on Civil and Political Rights, Annex, UN Doc E/CN.4/1985/4 (1984)],
which were adopted in May 1984 by a group of international human rights experts convened by the International
Commission of Jurists, the International Association of Penal Law, th e American Association for the International
Commission of Jurists, the Urban Morgan Institute for Human Rights, and the International Institute of Higher
Studies in Criminal Sciences. Though not legally binding, these principles provide an authoritative s ource of
interpretation of the ICCPR with regard to limitations clauses and issue of derogation in a public emergency. They
are available at: https://graduateinstitute.ch/f aculty/clapham/hrdoc/docs/siracusa.html .
190 Ibid.
191 United Nations Human Rights Council, Report of the Special Rapporteur on the rights to freedom of
peaceful assembly and of association, Maina Kiai, para. 27, UN Doc. A/HRC/23/39 (April 24, 2013) at
https://freeassembly.net/wp -content/uploads/2013/04/A.HRC_.23.39_EN -funding -report -April -2013.pdf .
192 Ibid., para. 30
193 OSCE/Office for Democratic Institutions and Human Rights (ODIHR), Key Guiding Principles of
Freedom of Association with an Emphasis on Non -Governmental Organizations , para. 5
194 United Nations Human Rights Committee, General Comment No. 31 (2004), para. 6, UN Doc.
CCPR/C/21/Rev.1/Ad d. 13, May 26, 2004.

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falling within the clearly identified aspects characterizing terrorism only. They must not
target all civil society associations…. 195
Consider, for example, Ethiopian legislation imposing a 10 percent cap on the for eign
funding of all CSOs promoting a variety of objectives, including women’s rights and disability
rights. As discussed above, Ethiopia has asserted a counterterrorism rationale to justify foreign
funding constraints. Ethiopia does not establish a “ direct and immediate connection between the
[activity at issue] and the threat.” 196 In addition, the cap is not the “least intrusive means to
achieve the desired objective and … limited to the associations falling within the clearly
identified aspects characterizi ng terrorism.” Accordingly, the counterterrorism objective fails to
justify the Ethiopian cap on foreign funding.
The UNSR also applied this test to the “aid effectiveness” justification. In response, he
stressed that:
even if the restriction were to purs ue a legitimate objective, it would not comply with the
requirements of “a democratic society.” In particular, deliberate misinterpretations by
Governments of ownership or harmonization principles to require associations to align
themselves with Government s’ priorities contradict one of the most important aspects of
freedom of association, namely that individuals can freely associate for any legal
purpose. 197
In addition, “longstanding jurisprudence asserts that democratic societies only exist
where ‘pluralis m, tolerance and broadmindedness’ are in place,” 198 and “minority or dissenting
views or beliefs are respected.” 199
Applying this test, the UNSR has note