The International Journal
of Not-for-Profit Law
Volume 2, Issue 1, May 1999
The Ukraine, like many other CEE and NIS countries, faces a number of problems in the development of a legal framework for public benefit or charitable activities (hereinafter PBAs). In general, the Ukrainian government is unwilling to pay great attention to regulations governing PBAs because of the following factors:
- Historically, public services and redistribution in the Ukraine were provided through government bodies or state-owned enterprises and quasi-governmental institutions. The private channels of redistribution (family, friend societies, neighbours, churches) were not institutionalised legally. In terms of the drastic reduction of public services, the dominant social attitude is apathy and discontent with government activities instead of self-reliance.
- Private institutions are not commonly involved in PBAs. Instead, they provide mutual benefit services for mutual benefit or participate in political or advertising campaigns. The government perceives these entities and human rights organizations as lobbying instruments for their competitors’ interests.
- The focus on fiscal issues, such as which activities and organizations should be tax-exempt, leads to an inconsistent definition of the types of tax-exempt organizations and their PBAs as well as suspicions of tax avoidance. The tax authorities are especially sensitive to eventual losses, so their regulations are more restrictive than the legislation in effect.
- The public is occasionally informed about goals and opportunities of PBAs in the Ukraine. However, well-publicised cases of abuses in this field (especially in the distribution of humanitarian aid) make public opinion indifferent or suspicious. Thus, a large majority of Ukrainian NGOs “underenjoy” even the relevant current legislation. This discourages legislators from development of the legal framework for PBAs while many political and fiscal issues remain unsolved.
- The principal technical obstacle is a great disagreement regarding the general legal basis of PBAs. Speaking frankly, this legal basis has yet to be defined in such a way as to provide specific guidelines for drafting, enforcement and control on enforcement of laws concerning PBAs. This idea is expressed more and more clearly with the officials responsible for the PBAs legal framework.
These factors prevent the development of advanced legislation on PBAs and charities in the Ukraine. It is too difficult to modify these patterns while 130,000 (or half) of Ukrainian enterprises have shown losses, an average wage is about $40 per month and the budget deficit is drastically increasing. In 1998, 2,000 Ukranian tax-exempt charities earned about $25 million. (0.002% of GNP or 50 cents per capita), and practically 80% of their expenditures were funded with Western grants. However, tax authorities have tried to freeze even the inconsistent income tax exemptions in effect, notwithstanding eventual greater losses in tax revenues from the VAT, payroll taxes and hard currency exchange.
The functions of PBAs are complementary to securing individual rights from the government. The principal differences are that private institutions are not funded with budget (or obligatory fees and charges) and do not provide public services on the basis of legislative entitlement. They may enter contracts with their customers (beneficiaries), and are free to make decisions concerning: 1) entering the contracts; 2) choosing the counterparts; 3) the contents of the contracts; 4) the form of the contracts; 5) changing their terms; 6) or deceasing the contracts.
Because general criteria of PBAs is not clearly expressed in the laws, the emerging civic society in the Ukraine (and many other societies in transition) must pay close attention to the bureaucracy’s case studies. Even experienced lawyers are confused in distinguishing “charitable,” “not-for-profit,” “public benefit” and “related” activities in accordance with current legislation. PBAs may be interpreted as “businesslike,” “profitable,” or “unrelated,” as “sales” of goods and services or “intangible revenues”, like Ukrainian law on corporation income tax argues. This confusion in terms is unacceptable in itself, but it also hides a conceptual ambivalence.
Current Ukrainian legislation concerning PBAs contains only inconsistent lists of types of tax-exempt organizations, of their revenues and activities. The civil code draft pays no attention to not-for-profit activities or Public Benefit Organizations. The other possible approach is to regulate the legal status of the subjects of PBAs (their right to tax credit and other fiscal privileges) in an eventual tax code without classifying Public Benefit Organizations as a subgroup of legal entities. The legal concept of PBAs needs more formal advancement in logical and technical aspects of law. The principal components of such aspects are object, subjects and matters of PBAs.
The object of PBAs is to secure individual rights.
Every individual or legal entity acquires rights upon formal registration or other acknowledgement of legal status. Such registration is necessary to make clear the scope of subjects: for example, should a fetus or animal be recognized as an individual or not? The example of euthanasia may be too controversial, but is nevertheless illustrative: nobody may make the decision to commit suicide on behalf of another individual, just as nobody may exercise the right of another individual to commit suicide, even under the power of attorney. Nobody may enjoy rights to education, medical care or marriage on behalf of another person.
There is no exhaustive list used to define individual rights.
Equal individual rights belong to everybody despite personal circumstances (origin, civil status, beliefs, etc.). Administrative regulations or contracts may not restrict the manner by which individual rights are exercised. Only laws may make such restrictions. Individuals decide whether to exercise their rights and exercise them personally.
The exercise of individual rights should be secured with legal means, in particular, through contracts on PBAS. These contracts may provide for transfers of assets, title in or usage of property free of charge and are always personal.
This approach allows for the examination of some key standards in the regulation of the objects of PBAs.
Legislation shall not include an exhaustive list of individual rights to be considered the object of PBAs. Instead, legislation must provide general guidelines which merely state that individual rights are the object.
Because PBAs belong to individuals equally, they aim at securing the individual rights of an indefinite circle of persons and entities. Public services funded from budgets are a separate legal issue. Securing individual rights is the principal task of governments. So public money for such services is levied via fees and charges or tax distribution. Public and semi-public entities may act on contractual basis, unless the services are provided with budget credits or subventions. Private institutions that receive budget money or holding contracts with government bodies should have special legal and fiscal status. They may be representatives of national or local governments as well as international organizations funded by the Ukrainian government.
I should note that PBAs neither secure one’s own individual rights nor exercise these rights with third parties, such as representatives of disabled persons. If someone makes a gift for a public orphan school, the object of PBAs are rights of orphans, not the entity taking care of them. The participation of the school is limited to the party in the contract on PBAs.
PBAs aim at securing individual rights. Securing certain rights for individuals leads to discrimination on other grounds than that of securing the chances to exercise one’s individual rights.
Another cause of confusion is that individual rights are somewhat related to property rights. Thus, the right to life is hardly to be secured without minimal standards of living. If the government fails to provide these standards of living, transfers up to the sum at which the standards may be deemed to have been met should be interpreted as PBAs. The amount in excess of this sum may be taxable under a regular income or gift tax. Similarly, it is nearly impossible to secure rights to ambulance services, compulsory education or legal aid without reimbursement of expenses related to exercising them. Thus, the highest priority is the object of PBAs, not the matter itself.
PBAs do not concern themselves with the environment, natural resources, historical places or any material objects. In any case, the matter is securing individual rights of access to such objects (e.g., general enjoyment of health environment). Thus, restoration of an architectural monument (access limited with the proprietor) or cleaning the pond in a private site may not be recognized as PBAs, regardless of the importance of these material objects.
The matter of PBAs is not tangible things, but the obligation of transferring assets or titles or usage in property to non-specified circle of persons.
The beneficiary may be obliged to reimburse the costs of PBAs subjects related to providing public services (taxes, customs and fees, insurance, payments to third parties etc.).
Although benefits from PBAs are principally the taxable income of the beneficiaries, the fiscal regulations shall not prevent the owners from disposing their assets via refusal of them. The concept of animus donandi (will to reduce one’s assets in favor of another person, well-known in Roman law) and the formality of PBAs contracts (transfer of things by written contracts) allows one to conclude that things become ownerless and the actual beneficiary is presumed to receive unjust enrichment.
Obligations fulfilled under administrative or court decisions on personal torts shall not be considered PBAs, even if a breach of individual rights was the cause of action. But legal protection of individual rights by government shall not substitute totally the implementation with other persons. Otherwise centralization of public services would become excessive and non-effective.
The subjects of PBAs may be any individual or legal entity.
Everyone is entitled to secure the individual rights of other entities. Organizations with special legal status are subject to legal formalities only if they receive funding through the budget, contract or via specific tax exemptions. This legal status is such that the organizations may enter contracts in favor of third parties (to raise unconditional funds, to dispose the revenue derived from the donations, etc.).
Legal restrictions may concern only the disposal of the matter of PBAs. Thus, disabled persons may transfer the property titles only via their representatives; licensed services (even those provided free of charge, e.g. health care or legal aid) should be provided only with the required licenses and permissions; and assets may not be disposed of for other objectives, unless their owner decides otherwise.
Advocacy of individual rights may be considered as a PBA: moral damage may be remodeled as an unlawful restriction of individual rights instead of subjective tests on personal sufferers.
PBAs are regulated under the law of obligation (concept, parties, fulfillment, securing, rights of third parties, responsibilities, winding up). The unregulated issues are subject to contracts and court decisions.
The importance of PBAs in public law (constitutional and fiscal) is based on their instrumental role in securing individual rights declared by the state. The subject of PBAs may not get privileges and immunities from the state (neither indirectly through fiscal mechanisms, nor direct contractual or administrative) if it secures the individual rights of its beneficiaries on the basis of their race, origin, religious or political beliefs. Beneficiaries should be identified under any non-discriminative ground: all people in City A, may attend Museum B free of charge, if the costs are paid by a subject of PBAs.
Thus, there are two proposed key tests to find out whether the activities are of public benefit:
Transfer the titles of property or usage in order to secure individual rights of an indefinite circle of people in non-discriminatory way.
Subject/principal (individual or corporation); personal beneficiary; trustee; beneficiary’s representative.
It takes time and expertise to analyze what law should define the legal framework for PBAs – possibilities include the civil code or tax code, basic law on not-for-profit organizations or special law on charities. However, the crisis in providing public services makes the development of the legal framework for PBAs a crucial social problem. The regulations may focus on legal means for such types of PBAs as street charity and volunteerism; separate accounts for PBAs; trust or agencies for PBAs; and endowments for PBAs.
For more information, please, contact Alexander Vinnikov, legal counsel for Counterpart Alliance for Partnership (CAP). His e-mail: email@example.com
By Petr Pajas
The theme of whether and how to distinguish between public benefit and mutual benefit of not-for-profit organizations has become a perennial focus of many disputes at conferences dealing with the role of civil society.
One argument used to frame the concrete discussion on the theme is as follows: The right to associate must be respected and the existence of any association, society, union, club or other common activity of human beings is a part of the social structure, which we call civil society. It does not make much difference whether the association is established for mutual interest of its members only, or it fulfills also some more general public benefit purpose or is engaged in some activity of specific public interest. Moreover, in many cases, it is simply dubious to say how far an activity is just of mutual interest and when it serves a public interest: collecting stamps by philatelists serves to the promotion of culture and arts, playing golf is serving health of otherwise stressed managers, politicians, businessmen, etc.
Another argument of similar reasoning concerns different public needs in different national, regional, or local levels and also in different historical epochs or under different political, social or just temporary circumstances. Therefore, it would be difficult to define any generally acceptable rules of how to define what is and what is not of public benefit or in the public interest.
Finally, what makes up “the public?” Is it comprised of complete nations, ethnical minorities, a group of a thousand people or any group of more than three people? Where is the boundary that distinguishes the public from the non-public?
The May 1999 conference in Budapest organized by ICNL in close co-operation with Hungarian NGOs under the title “European Civil Society in the 21st Century – Standards and Mechanisms for Regulating Public Benefit Organizations” examined several problems related to the topic of public benefit. While finding some answers the conference raised more questions and illustrated how different the scope of what is recognized as being of public benefit in various countries may be.
In order to build a base for further discussions, this paper attempts, first to summarize what is recognized as a public benefit in a set of countries, and, second, to propose a way how to establish categories of what should be considered of higher or lesser importance from the point of view of the general public, and how to take into consideration the global, national, regional and local manifestations of how public benefit activities are perceived.
II. Modes of Use of Public Benefit Definitions
The notion of public benefit concerns mainly those activities which are either provided to some one or received by a beneficiary subject.
The main providers of such activities are the non-governmental not-for-profit established organizations. The state (national, regional or local governments or self-governments) and its organizations are also providers of certain public benefit activities. But, since that is usually their obligation under each country’s legal system, an examination of government public benefit activities may be omitted from this overview under some circumstances, as described in more detail in Part IV.
The recipients of public benefit are usually natural persons in need of assistance, or not-for-profit organizations that provide public benefit services or funds for a public benefit purpose. However, in some countries, as is shown in Part III, the notion of public benefit is also connected with assistance to the state organizations or limited to assistance which does not serve individuals.
In most countries, the non-governmental not-for-profit organizations are of several distinct legal forms. In the case of membership based organizations, we shall talk about associations. Associations may be formed by a combination of natural persons or legal entities, known under several other denominations – unions, societies, clubs, brotherhoods, etc. Associations are usually governed by a supreme organ formed by its members, who elect or otherwise nominate an executive body responsible for the association’s activities.
In the case of non-membership organizations that grant or otherwise distribute funds, we usually speak about foundations. These may be also known as funds, trusts and several other denominations. In some countries, service providing non-membership organizations might be established as centers, public benefit corporations, as companies with limited liability or stock holding companies. However, in such cases, these should also be defined as not-for-profit legal entities by some additional statement. Foundations and centers are usually governed by a board and have an executive officer charged with statutory powers.
The notion of public benefit activity or public benefit interest is of special importance for the state when it is not only willing to tolerate the providers of public benefit activities, but when it is also prepared to contribute to their activities by giving some benefits in exchange. These benefits usually include tax benefits (tax exemptions, tax reductions, special tax rates), customs benefits (customs free import of certain goods, special rates for customs fees), registration benefits (free of charge registration of legal entity, easier registration procedures compared to entrepreneurial companies), licensing benefits (provision of special license or status for some activities or service provision). However, there are usually also special obligations and requirements connected with these arrangements, ranging from special tax or annual reporting obligations through special registration procedure to supervising bodies charged with the right to intervene in the activities of the organization.
III. Comparison of Public Benefit Activities in a Set of Countries
The sources of information for the following discussion are papers, existing laws or drafts of laws, dealing with the issue of public benefit and related requirements or benefits provided by the governments.
Very detailed information has been available from several countries of the Central and Eastern Union and from the New Independent States, especially Hungary, the Czech Republic, Slovakia, Albania, Croatia, the Russian Federation, the Ukraine, Georgia and Uzbekistan, where not only existing laws were available, but also some very advanced drafts of laws already submitted to the legislative bodies of these countries. Detailed information is available on the revenue laws of United States and charities laws of England and Wales. In comparison, the data from other European countries is general and poorly documented. Some data on countries from other regions (e.g. Ecuador) was included as a reference to a special kind of definition of what also may be considered a public benefit activity. Also included is the case of Bohemia in 1811, referring to the Imperial Edict of Austrian Emperor, which shows, what was already included as characteristics of foundations nearly two centuries ago in Central Europe.
An overview of what is considered to be a public benefit activity or purpose has been summarized in a table of 25 entries for countries and 50 public benefit characteristics. With some exceptions, it is difficult to find identical descriptions of very closely related activities in all countries. Therefore, it must be used with certain respect for generalization, allowing the use of one specific description of the activity in regard to so many countries.
The table uses four codes to express the degree of specificity, which may be found in the laws or draft laws of the countries.
Code 3 (green or dark gray) is used for those cases where the specific activity or purpose may be found directly in a more or less clear statement in the source used. Therefore, such activities might be considered with rather high certainty to be defendable as of public benefit in the relevant country.
Code 2 (light green or gray) indicates that, with some greater degree of generalization, one may derive from available sources a good probability that the item to be considered is of public benefit in the relevant country. This is typically the case of Netherlands, where from the statement defining as charitable any activity which does not serve for sole benefit of an individual or a closed group of individuals, one may deduce, with some hesitation many purposes that might be covered by such a broad definition.
Code 1 (sky blue or shaded) is used, when there are explicit constraints to the scope of the activity in its more general aspects applied in the country. So, when only orphans or elderly or otherwise incapacitated persons may be the beneficiaries of certain human rights protection activities while others will be excluded, it is considered a partial attribution of public benefit status to the human rights protection activity in the relevant country.
Finally, code 0 (white) is used where there are either no direct or general statements in the available sources, when the characteristics used are contradictory to other statements, or with the general approach of the legal system of that country. There are exceptional situations in any country and none of the characteristics might be completely excluded from, nor explicitly included among those which, under specific conditions, would be acceptable as in the public interest.
The table was organized in such a manner as to order the countries according to the sum of points “obtained” for assigned codes. The public benefit activities are ordered according to the sum of code points assigned in the whole set of the countries. Therefore, at the top of the table are the most often specified activities, while at the left of the table are the countries with broadest or most specific and detailed definitions of public benefit activities.
Thus, the most “popular” and, with few exceptions, globally inclusive in the given set of countries, are the following public benefit activities:
- Promotion of education, training, skills development, knowledge dissemination.
- Social care, assistance to families, elderly people, handicapped, others in need.
- Promotion of science, research and development.
- Support of culture and promotion of arts.
- Promotion of religion and support of activities of religious communities.
- Care for health, prevention of decease, health rehabilitation.
- Protection of children and youth and advocacy of their interests.
- Support of sports (mostly amateur), tourism and physical education.
- Protection of nature and animals.
- Environmental care.
A second group of activities, seemingly more cherished in the Central, Eastern and Southern Europe then elsewhere, is formed by the following items:
- Protection of human rights.
- Assistance in vocational training to the unemployed.
- Support and/or promotion of labor market reintegration training for handicapped and similar services.
- Protection of cultural heritage.
- Provision of equal access to employment to groups of persons in disadvantageous social position.
- Support to brotherhoods, orders or associations which provide all their profit for public benefit purposes.
- Assistance to refugees.
- Protection of historical monuments.
- Protection of public order and traffic security, voluntary fire departments or rescue service, prevention of disasters and incidents.
- Services provided exclusively to public benefit organizations.
The rest of activities included to the list seem to be mentioned in only a few countries or may be considered to be specific for a country or a region. Some more prominent examples are:
- Minimization of state expenditures, support of governmental organizations (Hungary, Bulgaria, Macedonia, Albania, Ecuador and in lesser degree some other countries)
- Assistance to refugees (Several European countries and Independent States)
- Fostering of peace, friendship and harmony between nations and prevention of social, national, ethnical or religious conflicts (Independent States)
- Activities of labor, agricultural or horticultural organizations (USA, Ireland Austria)
- Support of small and medium enterprises (England and Wales, Austria, Uzbekistan)
- Alternative energy production from renewable sources (solar, wind, and chemical energies) (Central Europe)
- Activities of brotherhoods, orders or associations providing for the payment of life, sick, accident or other benefits to the members or their dependents and similar cooperative services (USA)
- Recycling raw materials from waste (Hungary)
- Support of common activities of individual farmers (Austria)
- National or local defense (Lithuania)
The author would appreciate any comments, suggestions or additional information concerning the data in the table from those readers who would like to contribute to this comparative exercise or from anybody who might become interested in the topic.
IV. Possible Categories of Public Benefit Providers and Tax Benefits or other Compensations Available to Them
The comparative table of public benefit activities and its discussion above shows that there are certain categories of activities which are more or less generally acceptable or which are specific to the regions or local political and law systems.
Hungary has become a pioneer country with the introduction of a special scheme, under which there are two main categories of publicly beneficial organizations – “ordinary” and “prominent” ones. For each of these categories of organizations, there are different benefits and requirements, as well as different benefits to those who support these organizations. Moreover, there is also the well known Hungarian 1% plus 1% direct income tax assignment law, which required a special campaign organized by the Non-Profit Information and Training Center (NIOK) to encourage tax payers to make use of their right. As a result, a substantial number of donations reached the organizations listed in one of the two categories.
Hungarian PBOs in general must comply with the following rules:
- If the PBO is of a membership type, the public benefit services provided by the PBO must be accessible to non-members.
- The PBO may engage only in such business activities which support its main public benefit activity.
- There must be a declaration of non-distribution of any profit made by the PBO to its founders, eventual members or members of its governing bodies.
- The PBO may not be engaged in any political activity, including financing political parties.
- The governing body of the PBO must meet at least once a year and there must be clearly defined rules for the order of convening the meetings of the governing body and its decision-making procedures, including publicity and quorum.
- There must be assured rules protecting the PBO against conflicts of interest.
- The PBO must have a supervisory or auditing body or procedure.
- The PBO must publish a detailed annual report approved by its governing body.
Prominent PBOs in Hungary include those which have been authorized to fulfill certain public duties for which the state or local governments would otherwise be responsible. Moreover, prominent PBOs must disclose data on its activities and management to local or national press.
Similarly, in the Czech Republic, foundations and public benefit corporations (centres) may be established only for public benefit purposes (see the Table). The law provides certain tax and other fiscal benefits to them, while requiring regulations similar to those which govern Hungarian PBOs. In July 1999, the Czech Government and Parliament decided to provide contributions to endowments of 44 Czech granting foundations from privatization funds. At the present, there is an acute need to revise the laws governing registration, operation and state support of associations and public benefit corporations. For these reasons, the Czech Government has requested the Council of Non-Governmental Organizations, its advisory body composed of representatives of Czech NGOs and governmental officials, to draft a proposal defining PBOs. Additionally, the proposal may introduce categories of PBOs, a method for registering such PBOs and enforcement mechanisms.
The proposal to the Czech Government is based on two main points of view: first, what is the main target group of the activity, and, second, what is its possible impact on the public welfare?
The target factor distinguishes the activity on the scale of its impact: national or international, general public, open groups of persons, closed groups of persons or individuals. The “closed” groups are those formed by the members of a family, by the employees of a company or corporation, members of a governing body or the membership of an organization, if not open to everybody. The Czech legal system provides definitions of these classes of closed groups.
The public welfare factor ranges from very positive and publicly recognized to negative or even causing a harmful impact. This qualification, of course, depends rather strongly on the concrete social, political and cultural environment and may change with time and vary regionally even in one country.
Under some circumstances, it also may be important whether and to what extent the activity is based on voluntary work and how one guarantees that the activity is essentially a not-for-profit activity. This should not exclude just and adequate reward for the work done in the public interest or for public benefit.
Based on the above philosophy, the proposal constructs the following main categories of public benefit activities and the PBOs which are engaged in such activities:
Category A. The activities done in the name of the state and in the interest of its integrity and the security of its citizens.
This category includes mainly the activities of state agencies and budgetary and subsidiary governmental organizations which are still rather abundant in the Czech Republic. The scope of activities includes the extended services connected with the public administration, enhancement of the legal system and democratic institutions, national defense and security of citizens and realization of international obligations on the level of independent organizations. However, even in this field of activities there are several independent and non-governmental organizations which operate under contracts and provide training of state officials, organize symposia, forums and conferences, and work on the development of the legal system. There are still some Quasi NGOs, established by the state in the past to mimic real independent organizations fulfilling representative roles in international organizations.
Category B. Preferred and public beneficial activities of national importance.
This category includes mainly the activities of either state or local governmental organizations plus several public benefit corporations (NGOs) which carry out the distribution of drinking water, provide flood prevention operations, maintain roads, guard buildings of public or strategic importance, care for national and local parks and natural monuments or architectural monuments of national importance, etc. Also included may be institutions caring for the development of science (Academy of Sciences), education (four main universities) and spiritual values (prominent churches), which depend on the resources from the national budget.
Category C. Publicly beneficial activities of regional or local importance.
There are many NGOs and public institutions active in this broad field of activities which are independent in their economic activities from the government but still have certain privileged relations to the state budget. Naturally, these are:
- institutions of all levels of public education, including minor universities and research centers,
- important hospitals and social care institutions, centers for the prevention of drug abuse and criminality, and
- important national cultural institutions (National Theater, National Gallery,National Museum). In short, this category includes, more or less, those activities listed in Part III under Table items 1 to 21. Also included is the promotion of civil society itself and all of those activities which would have to be provided by the state agencies if no NGOs were available.
Category D. Mutually supporting activities made in public interest.
This important category includes the activities of associations which are supported in large part by foundations and complemented by service centers. They are established by and serve more or less exclusively the handicapped, fulfill some generally accepted, special interest, or serve the needs of a well-defined group of persons.
There are subcategories to this category of activities, which might be characterized as follows:
- Subcategory D1 is formed by professional chambers or international organizations, like the Red Cross, Union of Judges, associations of scientists, advocates, auditors, etc.Subcategory D2 includes mutual support associations of citizens or municipalities. Examples of organizations which belong to this subcategory are:
- groups of handicapped people, gardeners’ mutual-support organizations , animal care services, ecological and agriculture groups, etc;
- co-operation of municipalities concerning public transport, telecommunications, water distribution, utility networks maintenance, sewage and waste removal, as well as cooperation of farmers in the less arid zones;
- cultural, sport and other free time activities of youth and adults clubs, societies and associations, which are open to general public and serve to its local needs.
- Subcategory D3 is formed by those citizen initiatives, which serve to protect the basic human rights of its members. Included in this subcategory are associations and centers organized by and for ethnic minorities, not-for-profit mutual insurance companies or cooperatives, associations advocating environmental protection, amateur sport clubs, dance training clubs and similar activities.
- Subcategory D4 includes specific collective activities which serve the general public in promoting the arts, competition in sportive, cultural and social activities, etc.
Category E. Mutually beneficial activities of groups of persons
This category includes the mutual benefit activities of organizations which are explicitly reserved for its organizers and participants, such as, e.g., associations of collectors of ordinary objects, interest associations of legal entities or companies established for not-for-profit activities and self-supporting cooperatives of citizens or municipalities aimed at the not-for-profit construction of dwellings, unless they fall under another category.
Category F. The activities beneficial only to individuals or closed groups of persons
The activities in this category do not receive any special support from public resources or obtain any special tax or other fiscal benefits. The category includes, e.g., various entertainment activities, commercial and entrepreneurial activities that have not been contracted by public authorities, private parties and clubs, etc.
Category G. The activities contradicting the interests of the general public or harming individuals or groups of persons
This category is included into the system in order to treat those activities which are considered harmful or otherwise inconvenient and thus may be restricted by the government because they cause conflicts with the constitution and the laws. Covered under this category are paramilitary or ideologically aggressive organizations, associations or sects with enforced membership, activities endangering freedoms or property of third persons, activities designed to evade tax payments or that are harmful to the good morals of society, etc. Very careful consideration is needed before making a decision whether the activity in question belongs to some other, harmless or public benefit categories. Nevertheless, the current legislation of many countries includes propositions of this negative definition, which excludes some associations of this category from becoming legal entities or even from exercising the right to associate for a purpose which is explicitly defined in the law. This is a much better situation compared to such legal systems in which there is only a reference to the abolishment of any activity considered to be contradictory to the Constitution or current laws, or which has not been a priori approved by some governmental body.
In many countries, the legal systems provide tools for several kinds of extra or special tax, administrative or fiscal benefits for the activities belonging to the categories A and B. Similarly, in some countries, including the Czech Republic, foundations and centers may be established only to support activities or provide services included in categories A to D or E. However, extending the access to public resources to a growing number of NGOs will not be possible without differentiating between types of activities of organizations, without enabling some adequate form of public supervision and without additional self-regulation measures enforcing transparency, accountability and ethical behavior of NGOs competing for the public support to their goals, projects or activities.
However, in many respects PBOs are in a poor position regarding entrepreneurial activities. In the Czech Republic, PBOs accounting obligations are very restrictive compared to those of commercial companies, which makes even the provided tax benefit only an illusion for very active PBOs. In addition, the uneven position of governmental subsidiary organizations and NGOs with access to donations from public budgets or to the tenders for public contracts is evident and has become a target of criticism at nearly every NGO conference. Last but not least, the shadow of the communist past is still visible in the system of state support to NGOs, which for decades has provided disproportionate portions of the budget to several governmental ministries to be distributed among a few long established associations. The present situation in the Czech Republic is so evidently out of proportion that it became one of the main causes of the attempt to provide some new philosophy behind the classification and supervision of the public benefit activities discussed above.
V. Prospects for the Future Developments
Besides the arguments and facts discussed in previous parts of this paper, it is also necessary to mention the important factor of self-sustainability and real independence of NGOs. The problems of financing the activities of NGOs is not only by far the largest problem of the post-communist and developing countries, but it may become a crucial problem for the further development of civil society even in industrially very advanced countries, like those forming European Union or even the USA.
There is one distinctive difference between the economically advanced countries and those which are behind. This is the existence or absence of a potential for voluntary work, formed in the advanced countries by the women caring exclusively for their family, retired professionals living on a good rent, rich people living on their own account, etc. Most of the less developed countries are either completely lacking this potential or dispose only with a tiny layer of mostly very young and inexperienced enthusiasts or with charitable activists driven by the faith or altruistic feelings. Civil society organizations in these countries are mostly poor and very much dependent on some external support.
This underlines the great importance not only of the foreign governmental or independent private support of NGOs, but also of a legal system which makes the subsidized services permissible, which enables PBOs to provide paid services or to be engaged in subsidiary economic activities with adequate but reasonable limits on income. It is also essential to make private donations and sponsorship of PBOs attractive to corporations and individuals. A constructive discussion would be about how to allow, and to what extent to limit, the PBOs’ participation in entrepreneurial activities or capital investment. These sources of income might become essential to sustain PBOs.
It is necessary to consider how to assign the status of a public benefit provider to an NGO so that it may become a registered or otherwise recognized PBO. Many countries have considered or already have special laws regulating the registration, licensing, governing and supervision of PBOs.
There are several options in addressing these needs. The competency to decide on the PBO status may be given to a self-regulatory organ, or to a state agency like the Charity Commission of England and Wales.
The differentiation of public benefit activities or PBOs may be balanced by substantial but differentiated tax and subsidy benefits, as well as other rights and obligations of PBOs.
The modes of supervisory activities include simple self-regulation based on ethical codes and strict obligations concerning accounting rules, reporting and publication of the annual reports. These requirements are in contrast to other rather costly, less transparent and corruption prone administrative and licensing approaches.
Of course, no effective legal solution may exist without some registration obligations, and without appropriate sanctions and penalties against misuse, non-obeisance and with a guaranteed and effective right of appeal.
When introducing PBO categories and differentiated benefit regulation, it is essential to take into account the high risks connected with the introduction of any state agency supervision and/or strict registration/licensing regulations to the free development of the civil society in the fragile democracy in the post-communist and post-dictatorship part of the world.
Notes See the attached [Web Maters Note: the document does not lend itself to be printed from the website. Therefore, it can be downloaded here in Microsoft Excel for proper printing.]  See also the Report on the Czech Republic by the author, as available in the IJNL  See also P. Pajas: Draft Law of Georgia on Charity Activity and Charity Organizations, to appear in IJNL
By Petr Pajas
An inspiring draft of the Law on Charity Activities and Charity Organizations, which deals also with the coordination of charitable activities by a state agency similar to the Charity Commission of England and Wales has been prepared by jurists of the Georgian Business Law Center in Tbilisi in collaboration with several Georgian NGO leaders and with the International Center for Not-for-Profit Law.
Why is the draft inspiring? The draft deals with several important issues of contemporary not-for-profit law:
- the definition of a charity and activities of public benefit,
- the rules governing economic activities,
- the acquisition of tax and other fiscal benefits, and
- a mechanism for state supervision of the compliance with the requirements and duties stemming from charity status.
The draft, in its text as available to the author, contains some provisions which might be considered unclear or incomplete. However, the core of the draft seems to be one of the best examples ever produced in such complexity in the region of the Central and Eastern Europe and that of the Independent States replacing the former Soviet Union.
Some aspects of the draft, as well as possible risks it may cause to the not-for-profit organizations of Georgia are discussed in this short overview.
Let us start with the definition of the charity and public benefit activities, as provided in Chapter 1 of the draft law. Charity is limited to voluntary and gratuitous assistance provided to persons in need. Therefore, any planned assistance which may be provided by service centers, or an activity for which a reasonable price covering the costs of necessary operations might be excluded from the scope of charitable activities. This might be one of the weaker points of the draft, unless the benefits provided by the state in support of voluntary charitable assistance will be defined to such an extent as to make the services possible and feasible. The draft law mentions the obligation of the state, but remains silent on any concrete formulation of the scope of the benefits concerned.
Nevertheless, the definition of charity is specific as far as some types of organizations are concerned. In addition to assistance provided directly to persons in need of social protection or social adaptation and poor persons, the draft considers as charitable assistance / aid to:
- religious organizations,
- organizations taking care of orphans, elderly and disabled persons,
- organisations which are active in the fields of human rights, education, environmental protection, science, health care, fitness and sport, arts and culture and those engaged in the establishment of democratic society.
The draft law excludes the actions provided by governmental bodies at both the national and local levels, as well as activities of enterprises, political parties or those persons who take part in political campaigns. In addition, any act in favor of relatives is not considered charitable.
The list of charitable activities may be considered comprehensive enough. However, The International Center For Not-for-Profit Law justly recommended to maintain the list explicitly open, so the Charity Organizations Commission will have the right to add other kinds of activities to it.
Similarly, the exclusion provisions are not totally clear and uniquely interpretable, which might cause problems in implementing the law.
The draft law introduces the notion of a status of a charitable organization which may be claimed and granted to any non-entrepreneurial legal entity whose main activity is the provision of charity in compliance with the law. Specifically named in this context are resident foundations, societies and associations, not-for-profit organizations, or representatives in Georgia. What seems to be missing in the draft law is a statement that would clearly provide the right to be engaged in charitable activities without obtaining the status of a charitable organization. Such a statement could certainly be included in the draft, accompanied by a limitation of access to benefits to registered organizations
The draft law proposes the creation of a special Charity Bureau as a state agency and a Charity Organizations Commission for the purpose of coordinating charitable activities and state assistance to charitable organizations, as well as granting and revoking the status of a charity organization and maintaining a central register of these organizations.
The President will nominate the head of the Charity Bureau. The Bureau is conceived as an administrative organ, which should act pursuant to directives issued by the President. The Charity Organization’s Commission is to be composed of seven natural persons: the Director of the Charity Bureau – ex officio – as the chairperson, five persons elected by conferences composed of different public interest constituent groups, and one person nominated by foreign and international organizations, their branches or representatives operating in Georgia.
The five electing conferences should represent:
- organizations defending the social rights of the disabled, veterans, the elderly, children, women and similar persons,
- organizations active in environmental field,
- organizations acting in the fields of culture, health care, fitness and sport,
- organizations defending human rights, and
- organizations supporting the establishment of democratic society.
The conferences electing the members of the Commission are to be initiated by the Charity Bureau. Any organization willing to participate in the electorate, may do so by applying to the Bureau in a specified period of time. Only one conference may be chosen from these applicants and a single vote is given to a registered organization.
At least one tenth of registered organizations must come up with a common nominee for membership in the Commission. The nomination must take place within 30 days from the announced starting day. The election takes place in a secret ballot during the conference proceedings. The draft law deals with details such as:
- required quorum (simple majority of registered organizations),
- the composition and election of an electoral committee (four elected persons plus one from the Bureau),
- the majority required to win the election (simple majority of present voters),
- the sequence of voting routs in case of non-decisive vote,
- a second chance at a vote by the conferences in case the first fails, etc.
Even in the case when no conference for the field of activities was summoned, the draft law indicates a default solution: the nomination of a member for the vacancy by a simple majority of the elected members of the Commission.
The term of office for a member of the Commission is three years, and the same person may serve only for two consecutive terms. The member may resign or s/he may be removed by the request of a majority of the organizations which formed the conference. Even when the commissioner is found unable to perform his/her duties, the Commission may, upon the initiative of its chairperson and by a two-thirds majority of votes, decide to remove the Commissioner from office.
The Commission’s main activity is to decide upon granting, depriving or revoking the charitable status of an organization. The Commission takes decisions in sessions, which must be attended by at least two- thirds majority of its members (five out of seven). The same majority is required to make a decision. The members are not considered to be employees of the Bureau, but the latter may determine the amount of the honorarium received by the Commissioner for attending a Commission’s session.
In order to be granted charitable status, an organization must prove at least one year of experience in the specified charitable activity. The organization must provide basic documents proving its registration as a legal entity, the identification of its founders and members of the governing body, a report describing its activity during the last calendar year, and a detailed balance sheet certified by an independent auditor. Similar documents and data are to be presented by a non-resident organization, branch or representative.
An important provision of the draft law orders the Commission to decide upon an organization’s status as a charitable organization within two months of the submission of the application. If the Commission is unable to make a decision within this time, the charitable status is presumed to be granted.
Organizations granted the status obtain a certificate identifying the status, but they must prior to that amend their charter to become in full compliance with the law. This includes:
- first, the not-for-profit statement of non-distributing any profit to the founders or members (hopefully including members of any governing body) and its use only for the charitable purpose,
- second, obligatory reporting to the Charity Bureau of Georgia on performed charitable activities in Georgia, including detailed balance sheet of incomes and expenditures,
- third, restriction to make any changes into the organizational or legal status or main goals of the organization in the process of organizational changes,
- Fourth, the prohibition to divide liquidation balance among the founders or members, and
- ifth, the limits must be set to supplementary economic activities, as described below
Upon recommendation of the Bureau, the Commission may require an examination of the activities of a registered charitable organization. The draft law limits this examination to cases of doubt concerning information reported or where there has been a violation of the organization’s charter or the law. The examination may be carried out by an expert nominated by the Commission but acting on his/her own expense. However, the examination procedure should not infringe upon the normal activities of the organization. Otherwise, the Bureau has no right to intervene in the activity of the charity organization.
The status of a charitable organization may be deprived upon violation of the requirements of the law or in the case where the registration of the legal body has been terminated. This apparently may be caused by a violation of other laws concerning registration of legal entities.
As far as supplementary economic activities are concerned, charity organizations may not perform any entrepreneurial activity in their own name, but they may set up a separate legal entity to do so. The limitation does not include activities like performing educational, consulting and publishing activities when related to the main goals of the organization. The draft law permits lotteries, performances, sport and other similar activities carried out by the organization in order to generate income.
Setting up a separate entrepreneurial legal entity is possible only under the special competence given in the charter to the supreme executive body of the organization. The amount of money which may be invested by a charity organization in its entrepreneurial entity must be limited to a maximum of fifty percent of its income incurred during the same year. The Charity Bureau may provide an exception to this rule, but only once within three years for the same charity organization.
As follows from the above discussion, the notion of charity organization might become well defined in Georgia. Typically, the draft law provides many details concerning registration rules, rules governing the provision of charitable status, administrative and nomination tasks connected with the creation of supervisory and regulating body. However, no concrete and clearly defined benefits for the organizations are included. The argument that such benefits belong to the sphere of other types of laws (tax laws, customs law, court procedure law, civil code, commercial code, etc.) should not be taken seriously. The answer is to include the provisions that should be used to amend these other specific laws into the draft. The omission of the Georgian draft law in this regard may be easily remedied. It is of great interest to see to what extent the Georgian government and Parliament are willing and able to support the charitable activities of the country, once regulatory rules are established when the draft law comes into effect.
Dr. Wino J.M. van Veen
associate professor, Faculty of Law, Vrije Universiteit, Amsterdam
The Dutch legal system belongs to the Civil Law tradition. An important characteristic of the civil law tradition is a distinction between public law and civil (private) law. With regard to public benefit organizations, the issues generally taken to belong to the domain of civil law include:
- the legal forms (association, foundation or other);
- legal capacity;
- governance and representation; and
- liability of the organization and its managing directors.
Belonging to the field of public law are the issues such as
- registration; and
- State supervision.
Admittedly, the boundaries between the areas of public law and civil law are not always crystal clear. For example, the competencies of the public prosecutor in relation to the supervision of foundations are given in the Civil Code, as well as the consequences of a failure to comply with registration requirements.
Within the legal system, the issue of public benefit status, is part of public law and not civil law. Both foundations and associations can be established for public and private benefit purposes under Dutch law, but in order to be eligible of fiscal privileges, public benefit status is required. Consequently, the conditions for public benefit status is a matter of primarily fiscal law whereas the legal form – being a matter of civil law – is not conclusive.
Criteria for Public Benefit Status
The criteria that apply to public benefit status are developed in fiscal jurisprudence, in particular the jurisprudence regarding §24(4) of the Law on Succession Taxes 1956. This article grants fiscal privileges in the field of gift and death duties to certain organizations. Such organizations will have purposes which are:
- based on a philosophy of life;
- scientific; and
- of public utility.
The common denominator for these organizations is that they are of public benefit. Interestingly, there is no requirement to be officially recognized as a public benefit organization by the fiscal authorities. However, one could request the fiscal authorities to officially recognize the organization as a public benefit organization. This way, potential disputes can be avoided, which is particularly important when large donations and donations in the form of annual installments are involved. When recognition is requested, the fiscal authorities apply certain criteria:
- the foundation must be established in the Netherlands;
- it shall not aim to make a profit;
- it shall have at least 3 managing directors, two-thirds of whom must be unrelated through blood or marriage (including an unmarried couple who cohabitate);
- all directors shall have only one vote; the directors shall receive no remuneration or excessive reimbursement of expenses;
- upon dissolution, the remaining assets shall be spent in accordance with the purpose of the foundation or by another public benefit organization;
- prior consolation of the inspector of Registration and Succession shall be sought in case of an alteration of the statutes or a change in composition of the board of directors;
- an annual report and account shall be submitted to the Inspector of Registration and Succession.
However, these criteria have no basis in the law, and therefore are not applied by the courts when judging whether or not a specific organization is actually a public benefit organization. Therefore, the actual criteria that apply for public benefit status are developed in case law. The main criteria is that the organization serves the public interest (rather than being of public utility). An organization serves the public interest ‘if in reasonableness it can be assumed that the that the purpose that is being pursued, serves the well-being of the population in the (relevant) country.’
In practice, the test is performed by setting the public interest against the private interest. Both the statutes and the activities have to be aimed at serving a purpose of public interest. In order to determine if an organization is pursuing a purpose of public benefit, the circle of potential beneficiaries is decisive. If the purpose and activities are explicitly or implicitly aimed at serving too restricted a group of persons, the organization is not eligible for public benefit status. This can be because one or more particular persons- for example persons belonging to a family- are the beneficiaries, or because the organization is basically member serving, or supporting of the members of another organization. When an organization is both member serving, but also has public activities, for example musical associations that have public performances and educational activities for non-members, the balance between private and public benefit should be approximately 50/50 in order to qualify for public benefit status.
Organizations that aim to promote violence or the support of violence, either in the Netherlands or a foreign country, cannot be public benefit organizations, and in fact are forbidden under Dutch law (§2:20 CC). Otherwise, there are no restrictions. Political parties and their scientific institutions, as well as trade unions are also considered public benefit organizations.
The choice of which authority is competent to decide about granting public benefit status is relevant in certain respects, as well as the nature of the test. The public benefit test in the Netherlands is performed by the courts, which are independent from government. Therefore, the test is a normative one. The courts have no discretionary power, nor is the outcome of the test related to the public policy. The choice of which authority that is competent in this matter, in the majority of countries has a long history. Inevitably, however, the choice has a political and ideological background, and reveals part of the dominant view in a particular society regarding the independence of nonprofit organizations from the government and bodies of the public administration. On this point, Europe is still widely divided.
Notes Registration in the Register of Commerce, held by the Chambers of Commerce and Industry is compulsory for formal associations (e.g. that have laid down their statutes in a notarized deed) and foundations. However, registration under Dutch law is not required to obtain legal personality. A failure to register will result, though, in personal liability of the managing directors that have acted on behalf of the association and foundation. Thus registration is required to obtain the privilege of limited liability.  Respecting of course the non-distribution constraint applying to founders and members of the managing board of a foundation, and members of an association.  Thus, a limited liability company can also qualify for public benefit status, although this form is not commonly used for nonprofit public benefit purposes.  This article is the most important article with respect to public benefit status granting privileged treatment regarding gift and death duties (e.g. higher exemptions, and a favorable rate of 11% of the worth of the donation).  Also, when established that an organisation is a public benefit organisation in the sense of §24(4) Law on Succession Taxes, it is considered as such with regard to corporate and personal income taxation for purposes of deductibility of gifts.  Supreme Court, BNB 1983/176. Organizations that have their activities outside of the Netherlands, can be public benefit organizations. Also, foreign organizations can attract deductible donations from Dutch citizens, however, these organizations have to be officially recognized and listed as such in order to be able to do so.  Supreme Court, BNB 1979/314.  Supreme Court, V-N 1997, p. 3594.  Supreme Court, BNB 1994/280.  Resolution State Secretary of Finance of July, 8 1954.  Trade Unions in the Netherlands typically are not specific member serving but play an important role in the serving of interests of non-members as well.  As is the case in France, where the public authorities, Prefet, can decide whether or not a specific foundation is needed or not.  As is the case in England and Wales.