Public Benefit Status of NGOs: A comparative perspective

International Center for Not-for-Profit Law(ICNL)

Q: Getting Started

• Does the law in your country define a public benefit or charitable status for NGOs?

• Is there a reform initiative relating to PB or charitable status?

• What question do you have relating to the topic?

Public Benefit Status Issues

• Rationale for PB Status

• Context of Regulatory Approaches

• Definition and Qualifying Criteria

• Decision-making Body

• Benefits and Obligations

Q: Why?

• Is it necessary for legal system to recognize public benefit status?

• How might public benefit status strengthen civil society? Benefit the state?

• The notion of public benefit has been criticized for providing the state with opportunity to control those activities it deems to be public benefit. How would you respond?

Rationale for Public Benefit Status

• Ancient Roots– Code of Charitable Giving to protect “widows, orphans

and the poor” (1760 BC)

• Links to Fiscal Privileges– Tax-exemptions available for priests, religious

organizations (Genesis, Rosetta stone, Greeks)

• Statute of Charitable Uses (1601 A.D.)– To specify charitable purposes– To ensure funds applied to uses specified by donors

Rationale for Public Benefit Status

• TO PROMOTE PUBLIC BENEFIT ACTIVITY• To ensure consistency of tax benefits with

public benefit purposes and activities • To encourage flow of resources to NGOs – e.g.

private giving (Hungary)• To facilitate state-NGO relationship – e.g.

contracting (Hungary, Poland, Italy)• To strengthen relationship between NGOs and

public – image building for sector (Poland)

Regulatory Context: Principles• Public benefit status should be voluntary.• Public benefit status should not be mandatory

to conduct public benefit activities.• Certain benefits, i.e., tax and fiscal benefits,

are usually granted to public benefit organizations.

• Public benefit organizations have a corresponding obligation to comply with accountability rules.

• Benefits and obligations are related to purposes and criteria and not to legal form.

Regulatory Context: Alternative Approaches

• Tax legislation (e.g. Germany, Netherlands, Estonia)

• Law/s on foundations & associations (e.g. Bulgaria, Bosnia, Romania)

• Specific laws (e.g. UK, Italy, Hungary, Poland, Latvia)

Q: Definition of Public Benefit

1) What qualifying activities? 2) Open or closed list of activities?3) To what extent must PBOs engage in PB

activities?- Partially? Primarily? Exclusively?- How to measure?

4) Can membership organizations whose activities only benefit their members be able to qualify as PBO?

Definition of “Public Benefit”

• No single succinct definition

• Must be rooted to social-cultural context

• Concept embraces several elements– Public benefit activity types– Principal Purpose Test (beneficiaries)– Financial restrictions / conditions– Governing requirements

1: Public Benefit Activity Types

• Enumeration of types of activities that benefit the public– Examples from European legislation– Exclusions from PB activities– Open or Closed List of Activities?

2: Principal Purpose Test

• Organized and operated “principally” for public benefit

• “Organized”: governing docs.• “Operated”: annual reports, tax filings• “Principally”: How to measure?

– More than 50% / Exclusively– Circle of beneficiaries, portion of

expenditures and/or staff time

2A: Circle of Beneficiaries

• Public at large– Large, undefined group of individuals– Large enough group to be considered the public or sufficient

section of community

• Targeted class of beneficiaries– Group in particularly difficult living situation in relation to rest

of society

• Related Issues: – Can NGOs that benefit only members be PBOs?– Example of Kosovar NGO providing housing

Q: Restrictions and requirements?

• Required duration of existence?

• Asset requirement?

• Independent audit?

• Supervisory body?

• Economic activity?

• Political activity?

3: Financial Conditions

• Non-profit distribution constraint

• Restrictions regarding engagement in unrelated commercial activities

• “Entire income” is dedicated to its public benefit activities

• Appropriate salary levels, at-cost services

4: Internal Governance

• Collective governing body– General assembly– Board of directors

• Supervisory body / auditing committee– To ensure legal compliance

• Accurate books and records• Safeguards against CoI, self-dealing• Subject to audit requirement

– For PBOs of certain size– For PBOs receiving state budgetary support

Application for PB Certification

• Proof of registration as NGO

• Proof of compliance with PB definition (activities, principal purpose test)

• Compliance with financial conditions

• Compliance with internal governance requirements

Q: Decision-maker

• Who should decide in your country?

• Advantages / Disadvantages of each model?

Decision Making

• Tax authorities (Finland, Germany, Holland)

• One ministry (Bulgaria)

• Several ministries (Romania)

• Courts (Hungary)

• Public Benefit Commission (England & Wales,

Moldova)

Tax authorities

ADVANTAGES

• administrative convenience

• special expertise if there is separate department

• consistency

DISADVANTAGES

• conflict between duty to maximize budget revenue and to grant exemptions

• lack of expertise if overburdened

One ministry

ADVANTAGES

• consistency • specialized

expertise if separate department

DISADVANTAGES

• centralized access• potential for

discretionary / political decisions

Line ministries

ADVANTAGES

• specialized expertise

• good for practical arrangements (e.g. contracts)

DISADVANTAGES

• inconsistent case handling

• potential for discretionary / political decisions

• gaps in the jurisdiction

Courts

ADVANTAGES

• politically independent

• accessible for NGOs across the country

DISADVANTAGES

• overburdened - slow processing

• takes time to develop special expertise

Public Benefit Commission

ADVANTAGES• NGO representation • specialized

expertise• consistency• easier

communication with NGOs

DISADVANTAGES• challenge of proper

mechanism to delegate or elect NGO representatives

• can be politically sensitive (legitimacy)

• expensive• centralized access

Commission of E&W

• Non-ministerial government department – Part of Civil Service– Independent of ministerial influence

• Consists of Chair and 4-8 members– Member qualifications– Must include 2 qualified lawyers and 1 from Wales

• Members appointed by Minister for the Third Sector

Moldovan Commission

• 9 members, of whom …– 3 are appointed by President– 3 are appointed by Parliament– 3 are appointed by Government

• One of each group of 3 should represent an association and not also be a civil servant

• No additional criteria specified

Latvia Commission

• Advisory body to Ministry of Finance regarding conformity of NGOs to PB status

• Consists of gov’t officials and NGO representatives in equal numbers

• Procedures for selecting members are not defined by law, but reserved for Cabinet to decide

Polish Council for PB Activities

• An opinion, advising and supporting body for Ministry of Social Security

Potential Benefits • Tax Benefits

– Exemptions from income, profits, property, gift, inheritance taxes (and VAT)

– Tax allowances on income from economic activities, investments

– Customs duties exemptions– Tax-benefited donations (tax deductions

for donors who give to PBOs)– Tax-exempt payments to beneficiaries– Entitlement for receiving income tax

designations

Potential Benefits

Non-tax benefits

• Preferred status for Government funding and contracting

• Use of public property

• Free media air time

• Public employment opportunities

• Recognition and support of volunteers

Q: Accountability

• Who ensures PBOs are accountable?

• What tools are available?

• What information should be disclosed?

• Dissolution – transfer of assets?

Obligations

• Reporting – financial, programmatic

• Transparency, openness – make reports publicly available

• Record keeping – e.g. register of decisions

• Subject to audits and inspections – due process important

Public Benefit Status of NGOs: A comparative perspective

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