The International Journal
of Not-for-Profit Law
Volume 2, Issue 1, May 1999
(Guideline for Discussion)
Names of the “Rose”
- Civic Organization (CO) – socio-ideological
- Civil Society Organization (CSO) – socio-political or legal-political (Hungary)
- Non-Governmental Organization (NGO) – socio-political
- Not-for-Profit Organization (NPO) – socio-economic
- Voluntary Organization (VO) – socio-economic
- trust (common law) – legal-traditional
The State-Civil Society Dichotomy
- State excludes Civil Society (Absolutism)
- State includes Civil Society (Totalitarianism)
- Civil Society includes the State (Pluralism)
- State and Civil Society are bound together (Rule of Law tradition)
The Public-Private Dichotomy
- Public interest – Private interest
- Public policy – Corporate policy
- Public law – Private law (Civil Law)
- Statutory law – Common law
- Limited and unlimited legal personality
- Public law and private law personality
- Double regulation by public and private law
- Double regulation of Civil Society Organizations
Categories of Civil Society Organizations
- Mutual Benefit Organization (MBO), self-help
- Public Benefit Organization (PBO), charity
- Quasi-Non-Governmental Organization (QUANGO) and Government-Organized Non-Governmental Organization (GONGO) are – per definition – not Civil Society Organizations
Categories of Special Public Law Organizations
- religious-ethical (Churches)
- political-administrative (Minority Self-Governments)
- professional-administrative (Chambers of Lawyers)
- legal-functional (Public Benefit Organizations) are – per definition – not State Sector Organizations
By Daniel Csanady
The Concept of “Public Benefit” in Civil Law Environment
There is a need for informal ways of communication and formal ways of cooperation between the State and Civil Society. Cooperation in the field of public services includes not only human services of the state – e.g. health-care, public education, support of minorities, handicapped and unemployed – but also those kinds of economic policies of the government which have an impact on social needs – e.g. increasing population, creating new markets, reducing unemployment, heightening technological skills, improving under-developed regions.
Communication and cooperation at this level do not differentiate between private interest organizations – i.e. not-for-profit and for-profit organizations – but provide an overall socio-political framework, where State and Civil Society are not antagonistic to each other.
This means that not only pluralist democracies but sometime populist democracies or even authoritarian regimes are able to mobilize Civil Society. But mobilization is a temporary way of cooperation and it is rarely the best way for the long-run development of Civil Society.
There is a need for some sort of direct and indirect government supports for the development of civil society organizations. Direct support could be infrastructural, operational, normative subsidies, or program financing on the central and/or the local level. Indirect forms of support are numerous as well – e.g. personal and/or corporate income tax and/or value added tax advantages, reduction of custom duties and/or administrative duties.
Economic policy at this level divides private interest organizations. It does differentiate between not-for-profit and for-profit organizations, because it means positive discrimination of not-for-profit organizations against for-profit ones.
Pluralist democracies are not always supporting civil society development. It is not just a matter of human and financial resources but also of social values and economic philosophy. ”Laissez fair” capitalism, e.g., is not the best socio-economic environment for the prosperity of not-for-profit organizations.
There is a need for an institutional and processual setup which arrange cooperation and mediates financial support vis-a-vis a service provision between government agencies and civil society organizations. This institutional structure needs double or two-folded regulation – i.e., both private law and public law regulations.
Legislative pattern at this level further differentiates private interest organizations. It differentiates between various types of not-for-profit organizations – i.e., mutual benefit and public benefit private organizations, and in some cases special public law organizations – in order to regulate and/or to control government spending and service qualities.
The reconstruction of this institutional and processual setup in the long-run has an impact on the socio-political environment. The legislative pattern could help to create either a more administrative – in European terms more ”corporative” – or a more functional, more democratic society. The legal regulation is not a goal in itself but a tool to satisfy certain social needs.
The Transitionary Context
- In the case of strong and/or integrated civil society, not-for-profit organizations are privately initiated but their operation and management are supervised by some sort of independent public sector organization – e.g., parliamentary committee or commissioner, judge, public prosecutor, tax authority, special government agency. Such a legal environment is more and more dominated by the idea of public benefit or charitable functions, which could be carried out by private law organizations regulated by general laws.
- In the case of weak and/or divided civil society, not-for-profit organizations are primarily initiated and/or controlled by government agencies but their operation and management are guided by private law principles. Such a legal environment tends to be dominated by the idea of government programs and state responsibilities, which should be administered only by specialized organizations – e.g., chambers, unions, extra-budgetary funds – empowered by special acts or government decrees.
- In the case of the transitionary societies of Eastern Europe both the generalized and the specialized regulations are present in the legal environment, but democratic development and economic improvement leads to such legislative patterns which prefer public benefit or charitable activities to public law monopolies.
The economic indicator of this process is the growing number of service providing not-for-profit organizations, which creates primary public interest – on both central and government levels – to develop communicative strategies and cooperative policies towards them.
The legal indicator of this process is the growing number of contracts between government agencies and civil society organizations, which at least in civil law countries, leads to the formulation of general rules on functional relationship between public sector and private sector organizations.
The political impact of the process is the opportunity to identify and satisfy those social needs, which are neither state responsibilities nor marketable business ambitions. Since this gap between state and business interests of Central Europe seems to be fairly large and it could be covered at the moment only by public benefit not-for-profit organizations, the democratic future and the well-being of the region still largely rests upon legal regulations of the not-for-profit sector.
By Arthur Williamson
Working group 1 was composed of individuals with a wide variety of interests and backgrounds, which was evident in the numerous perspectives on how to approach the question of what is public benefit status. Public benefit status was examined through the lenses of political philosophy, sociology and the law. It was not easy to find a common approach.
We started off with a round among the members of the group in order to phrase some key issues related to the question of defining public benefit. Petr Pajas made a list of the questions, which are available at the end of this document.
During the discussion following this round, we touched upon various aspects of terminology related to distinguishing between public and private law in relation to public and private benefit. It is fair to say that we discussed the issues at a fairly abstract level.
I will attempt to flesh out the results of our discussions. This summary should not necessarily be viewed as an accurate historical description of the way the discussion evolved.
- One fundamental issue raised is why is there a need to define public benefit. A case is to be made that voluntary action by itself, where citizens take the initiative to handle things that they feel are important, is vital to civil society. There were basically two approaches to this.
- Public benefit status might give credibility to certain organizations, regardless of whether it comes with certain other benefits.
- Public benefit status gives access to certain privileges in terms of government support.
To put it differently: if a state will not give specific benefits, it is of no use to define what is public benefit. A point was made that specific benefits are granted to nonprofit organizations that are not public benefit organizations, such as sports organizations. Additionally, some benefits are given related to certain activities or services, regardless of who or what type of organizations provide these services, such as education and medical care.
It is fair to say that mainly we discussed the question of what public benefit is about in light of the second vision: special, favorable fiscal treatment by the govenrment.
- This leads to the issue of how broad the definition of public benefit should be. In some instances a government may not have the financial leeway to grant too generous a system of financial benefits, or it simply may not think such a system is useful. It seems there are several ways to address this issue:
- Define only those kinds of activities or services that you want to support. This is not necessarily related to public benefit status.
- Make up a list of the type of activities or purposes that you think are worthy of government support, and qualify those for public benefit status.
- Restrict public benefit status only to those activities or purposes that are outside of the political arena, e.g. what would be, in substance, the scope of charity under the UK and related systems.
- Do not impose any restrictions.
No consensus was reached on this point. Apart from budgetary reasons, the individual vision of the relationship between the state and civil society plays a role. We did agree, however, that organizations with an objective of disturbing public order or violating or restricting the rights and fundamental freedoms of other citizens should not be able to obtain public benefit status under any conditions.
Basically, the idea is that governments are in a position to choose what serves their interests best, and it not necessarily so that all public benefit organizations, however they are defined, should enjoy the same benefits. It may depend on the type of objectives they pursue.
- Another issue raised regarding the relationship between public law and civil law concerns what should happen with the remaining property of a public benefit organization after dissolution and winding up of the organization. Because a public benefit organization receives direct or indirect support at the expense of the taxpayers, there should be a prohibition on dividing the remaining property after dissolution among members or office holders. The same issue also arises when a nonprofit organization is converted into a for profit organization, or when altering the objectives of the organization.
The members of the group agreed that a condition placed upon access to public benefit status and the privileges that come with it should be that after dissolution the remaining property shall not be divided among the founders or members as could be the case in ordinary nonprofit organizations. Instead, the property shall be passed on to another public benefit organization with a similar purpose.
Questions Raised During the First Session of Group 1 on Defining the Public Benefit
- To what extent may an NGO engage in private interest activities without harming the public benefit status of the NGO?
- What are the distinct characteristics of NPOs (not-for-profit), PBOs (public benefit) and NGOs (non-governmental)?
- Is the recent development of the power structure (legislative, executive, and judicial power) in modern societies important for the issues of public benefit and how?
- How should one treat self-help oriented organizations. How much are these of public benefit?
- How should the government handle voluntary organizations that intend to carry out public activities contrary to the public policy of the government?
- Are there any “per se” categories of public benefit organizations?
- Should and/or may there be any limits to the basic or general rights of legal bodies (such as the right to hold title to real estate, etc.) with respect to public benefit?
- May the existence of an ombudsman in a country be of any importance to the case of public benefit organizations or to the development of the civil society?
- Are private schools of the same importance and should they have the same rights as public schools?
- Is any voluntary action in and of itself a public benefit activity? In other words, is the element of voIunteerism enough for obtaining the status of public benefit?
- Should a registering authority have discretionary power in making decisions regarding the need for a public benefit activity or a PBO?
- Should the tax authorities co-operate with any other authority in deciding public benefit status?
- How should one deal with the discrepancy in the way countries treat political parties and/or trade unions?
- Should we establish subcategories of PBOs that enjoy further preferential status due to the presence of characteristics that we feel should be rewarded?
- Should we take into account the national, regional or temporal characteristics of the notion of public benefit?
- Should there be a list of public benefit activities or even PBOs?
- Is it important to distinguish the approach to the public benefit issue according to the common law or continental legal structure?
- What should be done when a decision is made to remove public benefit status from an activity?
Group facilitator: Radost Toftisova
Rapporteur: Paul Bater
Experts: Ulrich Drobnig, Borislav Belazelkov, Paul Bater.
Issues for Discussion:
1. Which is the Appropriate Authority to Decide on Granting Public Benefit Status?
- Which bodies should decide?
- What are the advantages and disadvantages of each model?
- Under what circumstances would the different models be appropriate?
2. How Should the Decision Whether to Grant Public Benefit Status be Made?
- Should there be a separate procedure for public benefit status, or should it be granted during the regular registration procedure?
3. Which Criteria Should the Decision-Making Authority Consider in Granting Public Benefit Status?
- Should there be discretionary power to decide?
- What documentation should be required?
- Is it appropriate to require a qualification period before granting public benefit status?
Discussions, Conclusions and Recommendations
The working group followed the suggested topics for discussion and we touched several other relevant issues as well.
1. Who Decides?
The discussion began with an examination of the existing solutions in the countries represented in the group. In the Netherlands, Romania, Poland, Hungary and Bulgaria, for example, it is the court that decides on the registration of NGOs. However, public benefit status is still an unknown concept under the current Polish and Bulgarian legislation. In Romania, de lege ferenda public benefit status will be granted by the government. Concerns were expressed about the executive branch having the decision-making authority (in Slovakia this is the Ministry of Interior).
The British example of a special decision-making body – the Charity Commission- was pointed out as a good solution, because it avoids the danger of strong governmental control and provides for a faster public benefit status-granting procedure.
The group discussed the several aspects of “public benefit” as a special status for which only some NGOs may be eligible, and the relation of those aspects to the choice of decision-making authority (e.g., since PBOs enjoy tax benefits, tax authorities should have a input in the decision to grant PBO status).
We summarized the main advantages of the “court-decides” solution as: independence from political interference, easier appealability of the decision, good tradition in some countries, and a public registry that is available and easily accessible. The disadvantages include: slow procedure, danger of a “case by case” decision-making process, concerns about judicial interpretation of the law instead of merely applying it, and a lack of expertise by the judges in NGO issues.
The arguments made in favor of a separate decision-making institution include: low costs, centralized process, the possible participation of NGO representatives, faster procedure, the possibility to use an already existing body for new functions. The arguments against such an institution include: possible corruption, centralization of the process (in its negative aspect), and the lack of administrative competence in the NGO representatives.
Choosing a Ministry as a decision-making authority, offers the advantage of wide expertise, low costs and good coordination among ministries, and has as a major drawback the open door for political influence on the status-granting process.
In general, group discussions led to the conclusion that there is a wide variety of solutions to the problem of who should have decision-making authority for the granting of public benefit status. The appropriateness of any given solution depends on the civil, legal and political traditions in each country, on the established relationship between government and the NGO community and on the degree of maturity of the NGO sector itself. Major factors to be taken into consideration are the independence of the decision-making process, the avoidance of political influence and strong state control on it, and the keeping of a public registry of PBOs. In a number of countries the issue has no practical relevance yet because the concept of public benefit NGO has not been introduced. Similar considerations arise when a given type of NGO may only be created as a PBO, e.g. foundations in France.
2. Status-Granting Procedure
The importance of a fast, simple, transparent and easily accessible procedure, with a possibility for appeal, was emphasized. The group discussed the draft Romanian law under which a 3-years’ qualification period is required before an NGO is granted public benefit status and during which it has to meet certain criteria. We concluded that the disadvantages of such a solution probably outweigh the advantages, because it places a great burden on NGO candidates for public benefit status – they must meet the requirements imposed on PBOs without enjoying the accompanying benefits.
Some of the participants suggested that the procedure should be different depending on the type of NGO. Another opinion identified the need for a connection between the decision-making and the controlling body. However, those two bodies should not necessarily coincide. While, for example, it would be appropriate for the court to grant public benefit status, it would also be acceptable if the state exercises some control in exchange for the benefits it gives to PBO, and the tax authorities in particular would normally control the tax benefits PBOs enjoy.
We did not reach a definite conclusion as to whether a single or a two-step procedure for granting PB status should be recommended. The most appropriate solution would depend on the situation in the relevant country and its traditions with respect to NGO and PBO concepts.
3. Criteria to be Considered
The working group finally discussed what criteria should be taken into consideration by the decision-making authority in the process of granting or denying public benefit status. The group reached the conclusion that such criteria should include: the purpose of the NGO, the non-distribution of profits, and the degree to which the activities of the organization are in the public interest.
The group discussed the concerns that arise in connection with the possibility of NGOs performing economic activities, and the claims by business entities of unfair competition by NGOs. Private Benefit Organizations performing economic activities may need to register in the registry for business entities as well, depending on the established system in the different countries.
The working group also concluded that granting public benefit status is not an irreversible process, and that such status may be withdrawn when the NGO ceases to meet the qualification criteria. In certain cases even a retroactive effect of the withdrawal may be justified. In addition, sanctions may be imposed on an NGO that has abused its public benefit status. This would encourage PBOs to keep in strict and constant compliance with the requirements inherent to their status.
The working group briefly discussed the discretion that should be provided to the decision-making body. Arguments supporting both wide and narrow discretion were presented. The prevailing opinion suggested that the authority should be given wide discretion to grant public benefit status and narrow discretion to deny it. Such a solution would enable more types of NGOs to qualify for public benefit status, even if the legislation in force is outdated and does not include them among the potentially eligible groups. Of course, possible abuse and corruption come up as concerns here.
The summary of group three is not yet available on-line. Please check back later.
Government Grants and Tax Benefits
Working Group No. 4 worked to locate new devices for obtaining government grants, as well as finding new devices for people to fund NGO activities.
General objective: To find a common denominator of basic principles to apply to tax benefits in countries of the region.
- Common features (international or regional) of tax benefits.
- Criteria for government giving and the government as a client or purchaser of services.
- Examining other government support mechanisms (innovations in the government’s relationship with PBOs).
NGOs and the environment – they are working (subject of domestic legislation) – contrary to international organizations
How does the European status of NGO work here? There is no harmonisation of legislation in the EU either.
1. Tax on Surplus
Income tax is defined as tax on an organisation’s excess money at the end of the year or as the difference of revenues over expenditures.
Opinion 1: If income tax is spent for public benefit then there is no tax paid.
Opinion 2: The non-distributing factor or characteristic of any NGO – if money is kept by the organisation for later use, there must be a tax exemption. If there is a “healthy” surplus, a “financial plan for sustainability” is necessary. In this case, a tax should not be paid so there will be an opportunity for the NGO to survive.
In a non-profit organization we have to group the organizations and then we list our expenses. If there is a separate commercial activity, it must be accounted for separately.
Whatever profit occurs goes to the NGO. It is convenient for an NGO to own a separate company to market economic activities purposes. After taxation is applied, the revenues are put to the NGO.
Foundations are limited from engaging in economic activities for historic reasons.
Taxation makes a difference to the government:
Receipts 500 Expenses 500
Tax relief 100
If the state gives a grant it’s 500 revenue, but the total state expenditure will be 600.
2. Related/ Unrelated Economic Activities (Legal and Moral Point)
In some cases it’s the law that does or does not allow. If not, one has to have a system for allocating the money. There is no use for the Law to go in details, but there must be a reasonable allocation of related or non-related activities (for example, number of staff employed).
Paying even symbolically for NGO services means creating a healthy relationship from a service point of view and improves sustainability. Even if the tax rate is concessional, it still must be paid.
3. Government Use of “National Lottery” Revenue.
UK lottery: The amount of money going to NGOs was not conclusive. The lottery splits money to different sectors and every year is different (one year might be arts, then the environment, the disabled etc).
4. Tax on Staff Income
Concerning taxation on staff and employees (taxation on individuals) – they should be treated as any other employees, and personal income tax should be the same.
5. Indirect Taxes (VAT)
If receipts do not reach a certain amount the entity need not register for tax. This helps smaller NGOs or NGOs that are just starting out. VAT is the most important one- the actual paying and collecting VAT and the balance of the two, service tax etc. In Italy the VAT is zero rated for NGOs that work in development aid in third world countries. There may be different rates for NGOs in different countries (0 or smaller rate than the regular one) and it depends on different contexts and situations.
6. Relief on Donations (Tax Deduction)
Donations are not seen as an exemption, but as a deduction to corporations or individuals that give money to NGOs. It is important to anticipate tax reduction for companies or individuals. In various countries this is regulated in many different ways from taxable income – countries have different incentives.
Data presented on the source of money to NGOs: 48% is from the government, 4-5% is from donations, 47% are the NGO fees.
Unanswered dilemma: whether the government decides to whom money is allocated. It is appropriate for the state to focus on priority bases.
Government subventions (support)
Government subvention can be understood as: government support (transfer of resources, provision of goods and services for valuable consideration) as well as financial assistance, grants etc. Can be a care contribution, general contribution or a contract for the project.
Governments (and not only governments) are “projectizing” their programs. Costs are less if NGOs do the job. There should be a constructive dialogue with the government and grants should no longer be free.
“Free” contributions vs. contracts
Overhead + surplus element in contracts
Effectiveness + efficiency
Quality of services
Slovakia: 1. More government contributions than foreign sources; 2. Free grants more
Lithuania: 1. More government grants- few international 2. Free grants
Hungary. 1. Good government and international support 2. Good examples of contracts
Macedonia: 1. International
Bulgaria: 1. Very
Romania: 1. International support only for sectors no clear government strategy 2. Government funding through variety of arrangements
Conclusion: Government support should be targeted. General sectorial policy support should be present, but there should be clear policy and strategy. There should be a tendency to work more locally and less with international support. There must be a strategy of the state, but while created to be assisted with NGO input. lt would be better if there are more “contractual” relations of government vs. NGOs.