The International Journal
of Not-for-Profit Law

Volume 7, Issue 3, June 2005

By David Moore[1]

I. Introduction

The legal framework for nongovernmental, not-for-profit organizations (NGOs) typically permits organizations to be created in different forms and to pursue any legitimate aim, including both mutual benefit and public benefit interests. In most countries, however, the state does not want to extend benefits to all NGOs indiscriminately; instead, the state typically extends benefits to a subset of these organizations, based on their purposes and activities. By providing benefits, the state seeks to promote certain designated activities, usually related to the common good. NGOs pursuing such activities are given many different labels, including “charities” and “public benefit organizations.” Some countries, moreover, do not explicitly define this status in their laws, but certain purposes and activities are nonetheless linked to state benefits. In this article, we use the term “public benefit” to refer to this special status, and the term “public benefit organization” (or PBO) to refer to organizations legally recognized as having this status.

The practice of distinguishing PBOs and facilitating their activities is deeply rooted in European society. Codification of the common law system dates back to 1601 and the English Statute of Charitable Uses, which sought to enumerate charitable purposes and to eliminate abuse. Over time, the notion of public benefit expanded beyond the relief of poverty to include caring for the sick, training apprentices, building bridges, maintaining roads, and other, related purposes. As for the civil law tradition, foundations – which were dedicated to a public benefit purpose – existed in Europe in the fifth century B.C. Today, most civil law countries extend tax preferences to both foundations and associations, contingent on public benefit purposes.

This article seeks to present an overview of European practices for regulating organizations with public benefit status. We will focus on (1) the regulatory frameworks for public benefit status; (2) the definition of public benefit and the activities that qualify under it; (3) the appropriate decision-making authority; (4) the procedures for certification/registration; (5) the state benefits for public benefit organizations; and (6) the accountability of public benefit organizations.

II. Regulatory Context

There is no single “right” approach to regulating public benefit. While the need for public benefit regulation is consistently recognized (at least in Europe), the regulatory frameworks vary. This section seeks to identify the primary regulatory trends.

Fundamentally, public benefit status is an issue of fiscal regulation. To promote public benefit activity, the legal framework must link public benefit status directly to preferential tax treatment or other forms of government support. In exchange for these benefits, PBOs are generally subjected to additional supervision, to ensure that they are using their assets for the public good.

Public benefit status can be conferred on NGOs either explicitly – through provisions in framework legislation or in separate public benefit legislation – or implicitly – through provisions in various laws that create the functional equivalent of operational provisions in public benefit legislation. In many countries, such as Germany and the Netherlands, tax legislation lists public benefit activities and defines fiscal privileges for NGOs pursuing those activities. The advantage of this approach is administrative simplicity; because public benefit status is an issue of fiscal regulation, it is natural to regulate public benefit issues through the tax code. The disadvantage is that, in some legal traditions, it is inappropriate to impose operational requirements (such as requirements addressing internal governance and reporting) through the tax law.

By contrast, NGO framework legislation specifically defines public benefit status in Bosnia, Bulgaria, Romania, and other countries. The primary drawback of this approach arises in countries that address different organizational forms through separate laws: a law on associations, a law on foundations, etc. Regulating issues of public benefit status in each separate law increases the likelihood of inconsistent regulatory treatment. Public benefit organizations should be subject to a number of similar requirements regardless of the underlying organizational forms. What is important is the public benefit nature of the organization, not whether it is a membership or a non-membership organization.

Where NGO framework laws address public benefit status, furthermore, reform of the relevant tax provisions often lags behind. Organizations may have no incentive to apply for public benefit status if such status does not entail any financial benefits. In Bulgaria, for example, two years elapsed between the introduction of the public benefit concept (through a new NGO law) and the provision of some benefits for PBOs (through revision of the tax law). In Bosnia, tax reform has been pending since the 2001 enactment of a new NGO law incorporating the public benefit concept.

Increasingly, therefore, countries are adopting specific “public benefit” legislation in an effort to address the full range of issues comprehensively and consistently. Hungary adopted public benefit legislation in 1997; Lithuania adopted a Law on Charity and Sponsorship in 2002; Poland enacted a Law on Public Benefit Activities and Volunteerism in 2003; and most recently, in 2004, Latvia adopted a Law on Public Benefit Organizations. These specific laws generally address the full range of regulatory issues relating to public benefit status, including the definition of public benefit status, the criteria for obtaining it, the benefits it entails, and the obligations it imposes.

III. Definition of Public Benefit and Qualifying Activities

This section seeks to provide guidance and comparative information on the definition of public benefit and the qualifying activities. Although there is no single approach for defining public benefit, trends of international good practice are developing.

First, it is common to enumerate certain specific purposes that are deemed to serve the common good. Thus, a public benefit activity is any lawful activity that supports or promotes one or more of the purposes set forth in the law. The list below contains virtually all of the public benefit activities recognized in one or more countries in Europe:

1. amateur athletics;
2. arts;
3. assistance to or protection of physically or mentally handicapped people;
4. assistance to refugees;
5. charity;
6. civil or human rights;
7. consumer protection;
8. culture;
9. democracy;
10. ecology or protection of environment;
11. education, training, and enlightenment;
12. elimination of legally proscribed forms of discrimination, such as discrimination based on race, ethnicity, and religion;
13. elimination of poverty;
14. health or physical well-being;
15. historical preservation;
16. humanitarian or disaster relief;
17. medical care;
18. protection of children, youth, and disadvantaged individuals;
19. protection or care of injured or vulnerable animals;
20. relieving burdens of government;
21. religion;
22. science;
23. social cohesion;
24. social or economic development;
25. social welfare; and
26. any other activity that is deemed to support or promote public benefit.

Of course, this list may be too extensive for any one country. Countries choose public benefit purposes that reflect their needs, values, and traditions. In the Netherlands, for example, the public benefit purposes developed in fiscal jurisprudence include purposes that are ecclesiastical, based on a philosophy of life, charitable, cultural, scientific, and of public utility. German tax law includes public health care, general welfare, environmental protection, education, culture, amateur sports, science, the support of persons unable to care for themselves, and churches and religion. In France, the tax law defines public benefit to include, among others, assistance to needy people, scientific or medical research, amateur sports, the arts and artistic heritage, the defense of the natural environment, and the defense of French culture. In Hungary, separate public benefit legislation lists 22 purposes, including health preservation, scientific research, education, and culture. Similarly, Polish law lists 24 public benefit activities.

Many countries exclude certain activities or goals from qualifying as public benefit. Restrictions commonly include political and legislative activities, such as lobbying and campaigning (e.g., Hungary prohibits PBOs from undertaking direct political activities or providing financial aid to political parties). Some countries exclude purposes related to sports and religion; others do not.

Second, many countries include a “catch-all” category, which simply embraces “other activities” that are deemed to serve the common good. This is an effective way to ensure that enumerated purposes are not interpreted in an overly restrictive manner, and that the concept of public benefit remains flexible, keeping pace with changing social conditions; where public benefit definitions lack such a “catch-all” category, it may prove difficult to add new activities that serve the public benefit. The law may simply include a provision similar to the following: “Any other activity that is determined to support or promote public benefit.” As a common-law country, the U.K. relies on case precedent to define “charitable” purposes. Over time, courts in the U.K. have classified charitable purposes under four broad categories: (1) relief of poverty, (2) advancement of education, (3) advancement of religion, and (4) other purposes beneficial to the community. The courts thus recognize that the definition of “charitable purpose” must change to reflect current social conditions.[2]

Third, many countries require that the organization be created and operated principally to engage in public benefit activities, however defined. An organization is created principally for public benefit when its governing documents limit it principally to public benefit purposes and activities. An organization is operated principally for public benefit when its actual activities are principally public benefit. “Principally” may mean more than 50 percent or virtually all, depending on the country. The “principally” criterion is applied differently too – for example, by measuring the portion of expenditures, the portion of staff time, or the circle of beneficiaries.

In the Netherlands, the decisive factor is the circle of potential beneficiaries. If the activities are aimed at too restricted a group of persons – persons belonging to a family, for example – then the organization is not eligible for public benefit status. If the organization serves its members and engages in public benefit activities, it may qualify for public benefit status if at least 50 percent of its overall activities are public benefit activities. In order to qualify as a PBO in France, similarly, an organization must engage primarily in at least one public benefit activity, and it must serve a large, undefined group of individuals in France.[3]

The Charity Commission of England and Wales requires more exacting adherence to public benefit. For an organization to be treated as a charity, its aims must be exclusively charitable, and it must be set up for the benefit of the public. The Charity Commission applies three criteria:

1. the organization must be capable of conferring clear benefits on the public;
2. those eligible to receive the benefits must constitute a large enough group to be considered the public or a sufficient section of the community, and no personal or private relationships can be used to limit those who may benefit; and
3. any private benefits to individuals must be incidental and not outweigh the benefits to the public.[4]

In connection with the second criterion, it should be emphasized that English practice allows the beneficiaries of an organization’s activities to belong predominantly to a particular racial, ethnic, religious, or other group, so long as the benefits are not restricted solely to members of that group.

Similarly, Germany requires that an organization receiving tax benefits carry out its public benefit activities exclusively, directly, and unselfishly (with disinterest). Poland likewise requires that a public benefit organization engage exclusively in public benefit activities. A Polish organization must meet the following requirements, among others:

• it conducts its statutory activities for the whole community or for a defined group of individuals whose living or financial situation is particularly difficult in relation to the rest of the society;
• the public benefit activities are the organization’s only statutory activities (except that membership-based organizations can also undertake activities serving the members);
• it does not conduct economic activities, or its economic activities are limited to the fulfillment of statutory activities; and
• its entire income is allocated to its public benefit activities.[5]

IV. Decision-making Body

This section focuses on the identity of the decision-making authority – who is responsible for granting and revoking public benefit status.

Who decides which organizations qualify for public benefit status? The question has critical implications for the regulation of public benefit organizations and the entire nonprofit sector. The decision-maker has the authority to grant public benefit status; often has the additional authority to revoke public benefit status; and in some countries is also responsible for supervising and supporting the work of public benefit organizations. By granting public benefit status, the decision-maker lays the foundation for distinct regulatory treatment – treatment that entails both state benefits (usually tax exemptions) and more stringent accountability requirements.

There is no single right answer to the question of who should make the public benefit determination. In some countries, the power is vested in the tax authorities. In other countries, the courts or a governmental entity such as the Ministry of Justice confers public benefit status. Still other countries assign the authority to independent commissions. Each approach has distinct advantages and disadvantages.

In many countries, the public benefit determination is made by the tax authorities. These countries may not recognize a “public benefit” legal form or status as such; often, the fiscal authorities decide which organizations are entitled to fiscal privileges based on their purposes and activities. Countries adopting this approach for at least some categories of public benefit activity include Denmark, Finland, Germany, Greece, Ireland, the Netherlands, Portugal, and Sweden. In Denmark, for example, the tax authorities grant public benefit status through an annually published list of qualified organizations. In Finland, the status is granted for a period of five years by the National Tax Board. In Germany, the local tax authorities are responsible for granting public benefit status and for verifying that requirements for retaining this status are met every three years. In the Netherlands, official recognition as a public benefit organization is not required, but an NGO may request it. Such recognition helps organizations avoid potential disputes, which is particularly important when large donations are involved. Fiscal authorities in the Netherlands have adopted certain criteria related to the applicant’s transparency and accountability.

Vesting the tax authorities with authority over the public benefit determination has the advantage of administrative convenience, in that one entity makes all such decisions. The entity’s degree of expertise may depend on whether the tax department assigns the task to a specialized department within it. In addition, the tax authorities in some countries demand this authority, because the determination affects the tax base. A potential disadvantage, however, arises out of the potential conflict of interest between the duty to maximize the tax base and the responsibility for granting a status that reduces the tax base.

In Bulgaria, the Ministry of Justice – specifically, a Central Registry within the Ministry of Justice – is responsible for public benefit regulation (certification and supervision). Court-registered NGOs pursuing public benefit activities must submit applications and documentation to the Ministry. Should registration be denied, the applicant may file an appeal within 14 days in the Supreme Administrative Court. The primary advantage of placing authority within a single ministry is the greater likelihood of consistent decision-making. A ministry may foster the development of expertise by creating a department devoted to public benefit issues, as in Bulgaria; however, a single ministry with many duties may fail to allocate sufficient resources to public benefit issues, in which case expertise is less likely to develop. Perhaps the greatest danger in assigning public benefit issues to a single ministry is the danger of arbitrary, politically motivated decision-making. In certain countries where ministries hold authority over registration, there has been a distinct chilling effect on NGOs pursuing registration.[6]

Indeed, it is in order to avoid politicized decision-making that some countries have opted to vest courts with the power to certify or recognize public benefit organizations. Such is the case in Greece, Hungary, and Poland; in France, the Conseil d’Etat – its highest administrative court – has authority to decide whether associations and foundations qualify for “public utility” status. Court-based registration can offer the additional advantage of accessibility, in cases where courts throughout the country hold the authority. Furthermore, courts can actually speed up the process of public benefit recognition, in countries where an NGO can apply simultaneously for registration as a legal entity and for recognition as a public benefit entity. Such is the case in both Greece and Hungary. But, because courts are usually overburdened, the registration process can be slow-moving. Also, courts must deal with a wide range of issues, making it difficult for them to develop specialized expertise in public benefit issues. Decentralized decision-making, finally, is unlikely to produce wholly consistent decisions.

Perhaps the most innovative approach is the Charity Commission for England and Wales. While the Charity Commission is part of the government, it is independent of the political process. Its powers are conferred by an Act of Parliament. Oversight is exercised by five Commissioners, all of whom are outside both the political process and the voluntary sector. The key benefits to the commission approach are its independence from political interference, and the quality and consistency of its decisions as a result of the concentration of expertise. The key disadvantages are the cost of creating and maintaining such a commission, and the fact that it is a centralized organ.

Interestingly, the Moldovan Law on Associations created a similar body, known as the Moldovan Commission. The Moldovan Commission consists of nine persons, with three appointed by the President, three by Parliament, and three by the Government. At least one of each of the three sets of appointees must represent a public benefit organization and not be a civil servant, a government official, or a Member of Parliament. The hope is that including public benefit representatives on the Commission will protect against repressive or discriminatory decisions and increase public confidence. Developing the proper mechanism for selecting the civil society representatives, however, remains a critical challenge.

It should be emphasized that a “public benefit commission” will only be effective if it is truly free from government interference. As is the case in England, and to a lesser extent in Moldova, commission members should represent civil society and not government. Indeed, the Charity Commission in England ranks independence as one of its core principles:

We act in the public interest in carrying out our independent role. We work in partnership with charities, umbrella bodies, local and central Government bodies, and to others to whom we are accountable. Although we will be receptive and responsive to the views of these interests, we will arrive at our own decisions without fear or favour.[7]

In stark contrast to the independent commission approach, a few countries grant public benefit status by governmental decree. In Belgium, for example, organizations engaged in cultural activities are granted public benefit status by royal decree. In France, associations and foundations are accredited as public benefit organizations by decree from the Conseil d’Etat. And in Luxembourg, public benefit status is granted by Grand-Ducal decree after application to the Ministry of Justice. These practices reflect particular historical, cultural, and legal contexts, and need not represent models for emulation.

The power to grant public benefit status generally also includes the power to evaluate and, where circumstances warrant, the power to revoke the status. Once public benefit status is obtained, however, there should be a presumption that it will endure, unless and until revocation is warranted based on monitoring/reporting requirements. Although most countries require annual reporting, some countries grant public benefit status for a longer period: three years in Belgium and Germany, for example, and five years in Finland.[8] Should the authorities revoke public benefit status based on an adverse evaluation, the process should provide the right to appeal to an independent arbiter and other procedural safeguards.

V. Certification / Registration Procedures

This section compares European registration procedures for organizations seeking public benefit status, with particular focus on Hungary and Poland.

Whichever organ the state designates to rule on applications for public benefit status, the certification or registration process should be clear, quick, and straightforward. The specific procedures of course vary, depending on the country’s regulatory scheme.

In the same way, documentation requirements can vary. Generally, however, NGOs applying for public benefit status must submit documentation indicating (1) the qualifying public benefit activities; (2) compliance with internal governance requirements, including safeguards against conflict of interest and self-dealing; and (3) compliance with activity requirements (the extent of public benefit activity) and limitations (for-profit, political, etc.). To be eligible for tax benefits under the German tax framework, for example, an organization must have a governing document specifying a public benefit purpose and stating that the public benefit activities will be carried out exclusively, directly, and unselfishly; furthermore, the organization must be governed in accordance with the rules laid down in the governing document.[9]

Where courts are responsible for public benefit registration, as in Hungary and Poland, separate public benefit legislation sets forth detailed procedures and requirements. The goal is to ensure that an organization focuses predominantly on public benefit activities, that it does not engage in other activities to the detriment of its public benefit mission, and that it maintains appropriate standards of transparency.

Hungary’s 1997 Public Benefit Act lists the specific provisions that must be included in the organization’s founding instrument, including the following:

• the list of public benefit activities;
• a clause stating that the organization conducts entrepreneurial activities solely in the interest of and without jeopardizing its public benefit activities;
• a clause stating that the organization does not distribute business profits, but devotes them to its statutory activities;
• a clause stating that the organization is not involved in direct political activities and does not financially aid political parties; and
• clauses relating to internal governance, conflict of interest, and reporting requirements.[10]

Similarly, Poland’s 2003 Law on Public Benefit Activities and Volunteerism lays down specific registration requirements for organizations pursuing public benefit status, including the following:

• the organization conducts its statutory activities for the sake of the whole community or a defined group of individuals in a particularly difficult living or financial situation;
• the public benefit activities are the only statutory activities of the organization;
• it does not conduct economic activities, or its economic activities are limited to the fulfillment of statutory activities;
• its entire income is allocated to public benefit activities;
• it has a statutory collegiate institution for monitoring or supervision that is separate from the management board; and
• its statutes prohibit certain types of self-dealing and conflicts of interest described in the law.[11]

Procedural safeguards to protect applicants are the norm.  These include time limits and a right to appeal adverse decisions to an independent arbiter. Hungarian courts must decide on public benefit applications within 30 days, extended to 45 if additional information is required; an adverse decision can be appealed to the superior courts within 15 days. Polish courts must rule on applications within three months, but in practice take about six weeks. Bulgaria has imposed even stricter limits. The Ministry of Justice must decide on public benefit applications “immediately,” and the failure to grant registration within 14 days is considered a tacit denial of registration. In the case of a denial, the applicant may appeal to the Supreme Administrative Court within 14 days.

As a procedural shortcut, countries granting separate public benefit status often allow an organization to register simultaneously as an NGO (association, foundation, or other organizational form) and as a public benefit organization. Such is the case in Greece, Hungary, and Kosovo. Bulgaria is an exception; there, courts register NGOs and, subsequently, the Ministry of Justice processes applications for public benefit status.

Facilitating the recognition of public benefit organizations is in the state’s interest. Registration requirements that delay recognition will only interfere with the work of public benefit organizations. Whether contained in the law or in accompanying regulations, the legal framework must set forth clear procedural requirements that facilitate registration while imposing appropriate standards of accountability and transparency.

VI. Benefits for Public Benefit Organizations

This section underscores the importance of linking public benefit status to state benefits by providing a brief overview of typical kinds of state support.

For public benefit recognition to have any real meaning, it must provide state benefits that aid the work and sustainability of PBOs. State benefits typically come in the forms of tax exemptions on the organization’s income, tax incentives for the organization’s donors, and VAT relief. PBOs may also receive state subsidies or grants, and preferential treatment in procuring certain government contracts. Whatever form the benefits take, a cornerstone principle is that the benefits should be linked to the regulation of PBOs.

Most commonly, the state extends tax benefits to PBOs.[12] Tax exemptions may take a variety of forms and are usually available only if the income is used to support the public benefit purpose. The following categories of income may be exempt from taxation:

• income from grants, donations, and membership dues;
• income from economic activities;
• investment income;
• real property tax;
• gift and inheritance tax; and
• value added tax.

Tax incentives for individuals and corporations donating to PBOs are a crucial means of encouraging private philanthropy to support public benefit activity. Such tax incentives may take the form of tax credits or, more typically, tax deductions. Almost invariably, donor incentives are linked either to the public benefit status of the recipient or to enumerated public benefit activities in which the recipient is engaged. For example, France and Germany allow only public benefit organizations to receive tax-deductible donations.[13]

The state may also provide other forms of support to public benefit organizations, including the following:

• many sources of grants, including the National Lottery, are available either exclusively or more easily to charities (UK);
• a PBO may purchase “the right of perpetual usufruct of estates that are owned by the State Treasury or local self-government units” (Poland);
• users of PBO services are entitled to a personal tax exemption for the value of the service received (Hungary); and
• a PBO is entitled to employ a person fulfilling his civil service duty (Hungary).

VII. Accountability of Public Benefit Organizations

This section outlines the common European approaches to ensuring the accountability and transparency of public benefit organizations.

Public benefit organizations – as recipients of direct and/or indirect subsidies from the government – will naturally be subject to greater government scrutiny. The purposes of this scrutiny are to protect the public from fraud and abuse by NGOs, and to ensure that public support is linked to public benefits. In positive terms, the goals of supervision are to support good management, appropriate to the size of the organization; and to ensure that the organization is accountable to its members, beneficiaries, and users, as well as the public. The degree of supervision should be proportionate to the benefits provided, and not so intrusive as to compromise the organization’s independence.

Regulatory Authorities. The identity of the PBO regulator varies widely from country to country. In some cases, the registration/certification body also regulates; such is the case in England (the Charity Commission) and Bulgaria (the Central Registry of the Ministry of Justice). Elsewhere, specific government bodies play a regulatory role. In Hungary, for example, where a PBO has received funding from the state budget, the State Audit agency may monitor the use of the funds. In Romania, a special government department monitors associations and foundations with public utility status.

Reporting. To ensure that public benefit organizations are transparent and accountable, the state has legitimate interests in requiring information about how public subsidies are being spent, including both financial information (e.g., annual financial statements, or an accounting of the use of assets obtained from public sources and supposedly used for public benefit), and programmatic information (e.g., a report on activities undertaken in the public interest).

Most commonly, a PBO files reports with the tax authorities, including annual tax returns (even if the organization is exempt) and/or applications for tax benefits (submitted voluntarily), as well as annual activity reports with the supervisory ministry or agency. Poland follows a somewhat different approach by requiring a PBO to submit annual activity reports and annual financial statements to the Ministry of Social Security. Hungary has adopted a third approach: a PBO must prepare and make available a public benefit report, which contains an accounting report, a summary of public benefit activity, and information on the organization’s use of public support, its use of its own assets, the amounts of budgetary subsidies it received, and its remuneration of senior officers. Once such information is gathered, it should be made available so that the public can exercise oversight.[14]

In England and Wales, the accountability framework is graduated according to the size of the charity. The threshold is set at 10,000 British pounds in annual income. Those below the threshold need provide only basic details of activities, receipts, and payment accounts, so as to maintain the accuracy of the register; those above the threshold must complete a more detailed return and send in their report and accounts.

Audits and Inspections. In addition to reporting obligations, authorities often employ government audits, inspections, and other monitoring tools, though sometimes with procedural safeguards. In Germany, for example, an NGO must be given notice and an adequate time to prepare before a regular tax inspection; only VAT inspections may be conducted without notice. In Bulgaria, PBOs are subject to financial audits for the use of state or municipal subsidies or grants under European programs. The responsible auditing body must have cause to justify the audit, but prior notification is not required. Hungarian PBOs are subject to supervision by the State Audit Office for the use of budgetary subsidies. In Poland, the Ministry of Social Security has a right of access to an organization’s property, documents, and other carriers of information, as well as the right to demand written and oral explanations. Such an inspection must be performed in the presence of a representative of the PBO or other witness. The inspecting officials must prepare a written report; the head of the PBO then has 14 days to submit a written explanation or objections to the content of the report.

In England, the government has no powers to investigate NGOs as such. The authorities do, of course, have a range of powers that affect NGOs – including powers related to terrorism and criminality (police), financial malpractice by companies and banking agencies, and childcare (Social Services Inspectorate) – but these are generic rather than specific to the charitable sector. Independent of government, the Charity Commission is vested with supervisory and investigatory power, through which it seeks both to encourage good practices (as a support and advisory body) and to tackle abuse (as an investigative body).

The Commission’s Support Division is responsible for giving organizations advice and guidance on a range of legal, governance, management, and financial issues. To make these services more widely available, the Support Division engages in outreach, including visits to individual charities, road shows open to charities, and conferences. The Commission’s Investigation Division is responsible for combating abuse; it can suspend trustees, freeze bank accounts, and appoint a receiver and manager to act in place of the trustees. Although the Commission does not have the power to de-register a charity, it can act to dissolve a charity by transferring all of its assets to a comparable charity. These two Divisions, along with the Registration Division, are supported by a team of lawyers and accountants who provide professional expertise.

The key to Commission action is proportionality. Smaller charities (those with an annual income of less than 10,000 British pounds) are handled deferentially. The Commission does not use the term “audit”; instead, it has developed the practice of pre-announced visits to examine a charity’s administration. The Commission more closely scrutinizes larger charities in order to promote good practice, but only with cause; initiating an investigation without cause runs against the ethos of the Commission.

State Enforcement and Sanctions. State sanctions against NGOs often include fines for violations such as the failure to file reports.[15] The continued failure to file reports can lead to termination and dissolution of the organization in most countries. Termination, however, should occur only after the organization is given notice and an opportunity to remedy the deficiency. With both fines and termination orders, the NGO usually has the opportunity to file an appeal.

Additional sanctions may be available against public benefit organizations; these typically include the loss of tax benefits or the termination of PBO status. In Bulgaria, for example, no fines can be levied against PBOs; instead, systematic non-compliance with reporting requirements can lead to the PBO’s termination. In Kosovo and Romania, too, PBOs that fail to file reports may lose their public benefit status. Somewhat similarly, public benefit companies in the Czech Republic may lose comprehensive tax benefits in the year of breach and other, more limited tax benefits in the following year.

Revocation of public benefit status should be an available sanction only under exceptional circumstances. If an organization in Hungary violates the law or its founding charter, for example, the court can revoke its public benefit status at the request of the public prosecutor, but only after notifying the organization and giving it the opportunity to remedy the situation. In Poland, if the PBO fails to eradicate problems identified during the inspection process within a given time period, the Minister of Social Security can file to have the organization removed from the State Court Register. Note that in both cases (1) the government must first notify the organization and give it an opportunity to eliminate the problem, and (2) the decision on revocation is made by the court.[16]

Notes

[1] David Moore is Program Director for Central and Eastern Europe for the International Center for Not-for-Profit Law. This article is excerpted from the forthcoming ICNL book Procedures for Granting Charitable, Public Benefit, or Tax-Exempt Status Around the World, and was made possible by funding received from the Third Sector Foundation of Turkey (TUSEV), Istanbul, as well as the Institute of Urban Economics, Moscow.

[2] Recognizing the need for modernization, the British government has introduced legislation to reform charity law. The draft Bill contains no statutory definition of “public benefit,” as the Government believes the current non-statutory (common law) approach provides flexibility and the capacity to adapt to changing circumstances. Instead, the draft Bill sets a framework listing the main charitable purposes, as follows:

• prevention or relief of poverty;
• advancement of education;
• advancement of religion;
• advancement of health or the saving of lives;
• advancement of citizenship or community development;
• advancement of arts, culture, heritage, or science;
• advancement of amateur sport;
• advancement of human rights, conflict resolution, or reconciliation or the promotion of religious or racial harmony or equality or diversity;
• advancement of environmental protection or improvement;
• the relief of those in need by reason of youth, age, ill health, disability, financial hardship, or other disadvantage;
• advancement of animal welfare; and
• other currently charitable purposes together with new purposes analogous to or within the spirit of purposes now or in the future as charitable.

[3] France has two forms of public benefit status: (1) general interest status and (2) public utility status. As stated in the text, an organization qualifies for general interest status when it engages primarily in a public benefit activity and it provides services to an appropriate group of beneficiaries. To qualify for public utility status, an organization must also adopt statutes in compliance with model statutes provided by the Conseil d’Etat (with provisions regarding internal structure, use of funds, and distribution of assets upon dissolution) and satisfy other requirements relating to financial viability and size of the organization.

[4] See Debra Morris, “How Does the Common Law Assess Public Benefit in Order to Define a Charity?”, April 1999, International Journal for Not-for-Profit Law, Volume 2, Issue 1, https://www.icnl.org/journal/vol2iss1/plenary_1.htm.

[5] See Law on Public Benefit Activities and Volunteerism of Poland, Article 20.

[6] Very few countries have placed decision-making authority within line ministries. Romania is one exception. This approach may offer an advantage, in ensuring that ministries with appropriate expertise evaluate public benefit activities (e.g., the Ministry of Health reviews the public benefit application of an NGO pursuing health-related activities), but there are far more disadvantages. The danger of political decision-making remains; consider an environmental NGO seeking to engage in environmental advocacy and litigation that must apply to the Ministry of the Environment for certification/registration. The problem of inconsistent decision-making between ministries, further, is acute. In addition, jurisdictional gaps will inevitably arise, where the applicant will not know which ministry is competent to handle its application. In Romania, furthermore, the law has left the formulation of qualifying criteria to each line ministry, which creates uncertainty for those ministries that have issued no criteria while inviting inconsistency given the variation of criteria from ministry to ministry.

[7] “The Charity Commission and Regulation,” as contained on the Commission’s website, https://www.charity-commission.gov.uk/spr/regstance.asp.

[8] In European practice, organizations generally must demonstrate ongoing compliance with public benefit criteria through reporting, but they are not required to seek accreditation on a project-by-project basis. Such an approach would clearly impose administrative burdens on both NGOs and regulatory authorities.

[9] See footnote 3, supra, for information on France.

[10] See Section 4 of Act CLVI of Hungary, 1997.

[11] See Article 20 of the Law of Poland on Public Benefit Activities.

[12] For a comprehensive overview of tax benefits associated with NGOs and PBOs, both tax treatment of the organizations and incentives for their donors, covering 16 jurisdictions of Central and Eastern Europe, see ICNL’s Survey of Tax Laws Affecting NGOs in Central and Eastern Europe and Survey of Tax Laws Affecting NGOs in the Newly Independent States, https://www.icnl.org/programs/cee/pubs/taxsurvey/p10.pdf

[13] In France, only general interest associations, public utility associations, and public utility foundations (all categories of PBOs) are entitled to receive tax-deductible donations. In Germany, only certain public benefit organizations may receive tax-deductible contributions (those pursuing general public benefit purposes, benevolent or church-related purposes, or especially support-worthy general purposes).

[14] Preferred methods of disclosure include publishing it in newspapers (Czech Republic) or on a website (Hungary), or making it publicly available at the organizational premises (Hungary).

[15] Such is the case in Bulgaria, where the state may penalize NGOs from 50-500 EUR. In Poland, an association that does not comply with requests for documentation is subject to a one-time fine not to exceed 50,000 zlotys (approximately 11,300 EUR), which may be waived if the association complies immediately after the fine is imposed. In Slovakia, a foundation failing to file a report may be fined from SKK 10,000 to 100,000 (approximately 250-2,500 EUR). In many countries (Bosnia, Croatia, Serbia, and Montenegro), fines may be levied against both the organization and its responsible representative.

[16] In Bulgaria, similarly, the Minister of Justice is authorized to revoke PBO status, on the request of the public prosecutor for bodies of the State Financial Control, if the organization routinely fails to submit information required for entry into the register, or undertakes activities contrary to the provisions of law, or routinely fails to pay public amounts receivable, or has fewer members than required by law for more than six months. Revocation of PBO status can be appealed for 14 days after notification.