Public Benefit Status of NGOs: A comparative perspective

Nilda BullainEuropean Center for Not-for-Profit Law

(ECNL)

Goals of PBO legislation

• Original rationale:– Prevent abuse of public funding (Charities Act, UK)– Ensure protection of private funds dedicated to the

public (concept from German foundation law)

• Modern day rationale:– Provide tax benefits to public benefit purposes as part

of the welfare economics – social policy goals with economic incentives

• Basic goal: ensure consistency of tax benefits and accountability - PBO is an issue of fiscal regulation.

Goals of PBO legislation

Further possible goals:• Increase transparency and accountability in

the sector (Netherlands + everywhere)• Encourage flow of resources to NGOs – e.g.

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

contracting (Hungary, Poland, Italy)• Facilitate relationship between NGOs and public

– image building for sector (Poland)• Prestige (Phillipines, Turkey)

Regulatory context

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

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

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

Definition of “Public Benefit”

• Usually no single succinct definition– The concept itself consists of several

interrelated elements: activity types, beneficiaries, financial conditions etc.

– Political concept - would leave too much discretionary room for implementers.

– Social-cultural concept – evolves over time, public sentiments and expectations change.

Definition of “Public Benefit”

• Enumeration of types of activities that benefit the public– A “catch-all” category (open ended list)– “Principal” or exclusive engagement in PB activities

• Criteria related to beneficiaries – Public at large– The needy– Non-exclusive services (e.g. in case of associations)

• Non-profit distribution constraint and possibly further financial restrictions (e.g. all income used for PBO purposes, unrelated economic activities not allowed)

Two approaches

• Common Law: “charity concept”– Charitable organizations = “sector”– Legal form doesn’t matter– Unified treatment of exemptions

• Continental Law: “public benefit status”– PBOs = “elite” of the sector– Applicable (usually) to nonprofit legal forms– Builds on other exemptions

What is Public Benefit? Charities Act 2006 (England)

• the prevention or relief of poverty; • the advancement of education; • the advancement of religion; • the advancement of health or the saving of lives; • the advancement of citizenship or community

development; • the advancement of the arts, culture, heritage or

science; • the advancement of amateur sport; • the advancement of human rights, conflict resolution

or reconciliation, or the promotion of religious or racial harmony or equality and diversity;

What is Public Benefit? Charities Act 2006 (England)

• the advancement of environmental protection or improvement;

• the relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantage;

• the advancement of animal welfare; • the promotion of the efficiency of the armed forces of

the Crown, or of the efficiency of the police, fire and rescue services or ambulance services; and

• other purposes that are currently recognised as charitable or are in the spirit of any purposes currently recognised as charitable.

Public Benefit Tests

Government

Sports

Political

Exclusive Activities

Arts

Religious

Profit Making

PublicBenefit

Organisations

Fixed or

flexible definitions

Who applies the

test? (not always government)

When does an organisation merit PBO status?

Informal Formal

PBO Life Cycle

Written Constitution

Legally Incorporated

Opens Bank Account

Starts Public Fund-raising Income

exceeds US$10,000

Gets Overseas funding

Trigger P

oint

Achieves Best

Practice Standards

When does an organisation merit PBO status?

Informal Formal

PBO Life Cycle

Written Constitution

Legally Incorporated

Opens Bank Account

Starts Public Fund-raising Income

exceeds US$10,000

Gets Overseas funding

Accredited

Achieves Best

Practice Standards

Com

puls

ory

Voluntary

PBOs in Hungary

• PBOs can be all nonprofit organizational forms existing in Hungary– Associations (not parties, trade unions and

employers’ associations)– Foundations– Public benefit companies– Public associations (e.g. chambers) if the establishing

law allows– National sports federations

PBO criteria (Hungary)

• Should conduct public benefit activities (PBA).• Should provide services beyond membership.• If it engages in economic activities, those should

be related to PBA and should not jeopardize PBA.• Its profits should support the PBA and should not

be distributed.• Does not conduct direct political activities, is

independent from political parties and does not support such.

All of this should be included in the founding statutes.

PBO criteria (Hungary)

• Outstanding PBOs should in addition include that:– It conducts a public task, the provision of

which is according to law or regulation the duty of the central or local government.

– It publishes the most important data of its operations and finances in the local or national media.

PBO obligations (Hungary)

• Openness in decision-making (board meetings, registry of decisions etc.)

• Conflict of interest rules in governance and management

• Supervisory board above a certain budget (5 million HUF)

• Publication of any governmental support through media

• Should prepare investment policy and other financial control provisions

PBO obligations (Hungary)

• Needs to prepare annual public benefit report– Including activity and financial report;– Report on any budgetary support;– Report on any grants given;– Value or amount of compensation provided to

leading officials (privacy issues!);– Report on assets management.

PBO benefits (Hungary)

• Most significant benefit: ability to receive tax deductible donations

• Additional benefits for long-term donations• Ability to provide income-tax free support

to individuals• Increased benefits for economic activities

compared to non-PBO NGOs• Outstanding category of PBOs even

higher benefits• Profit tax, customs and charges

exemptions are available for all NGOs

Decision-making (Hungary)

• Application to the courts at the time of registration or any time later.

• Court has to check whether statutes contain required provisions.

• In case of outstanding PBOs it usually asks for an actual contract to provide the public task.

• There is no monitoring of fulfillment of the requirements other than the “usual” check-up of the public prosecutor.

Decision-making (Hungary)

• Practical experience shows that PBO registration is cumbersome

• Courts require copy-pasting of legal provisions in the statutes

• Courts often require contracts or other supporting documents not stipulated in any law

• Court practice differs widely in the country

Impact and learning points (Hungary)

• About 52% of NGOs are now registered PBOs (36% by 2000)

• Private and corporate donations have not increased significantly

• On the other hand, state funding became increasingly directed towards PBOs only

• NGOs regard PBO status good for two reasons: – Gives a certain prestige in the eyes of the public if

they read “public benefit” in the name of the NGO.– Provides them with increased opportunities to apply

for government funding.

ANBI Status (Netherlands)

ANBI status criteria include: • (1) the NPO should not have any intention to make a

profit; • (2) the NPO has to demonstrate its charitable character; • (3) it should be clear that a natural person/legal entity

cannot have control over the assets of the institution as if it were his/its own capital;

• (4) the institution is not allowed to have more assets than reasonably necessary for the continuity of the institution;

• 5) the members of the ultimate policymaking body are only entitled to receive an allowance for expenses and a reasonable fee for attendance. However a reasonable compensation paid to such a member who carries out daily activities, is allowed;

ANBI Status (Netherlands)

• (6) NPO has to give an insight into the foundation’s activities, fundraising, and administration of funds and expenditures, it is necessary to have a current policy plan.

• (7) costs of fundraising and administration should be in reasonable proportion to the charitable expenditures;

• (8) all proceeds from liquidation of the charitable institution should accrue to a similar institution;

• (9) the books and records of the charitable institution must be transparent with regard to the points mentioned above.

PBO obligations (Netherlands)

• NPOs with ANBI status must submit a financial statement to the tax authorities each year.

• Larger associations and foundations with an enterprise have to publish their financial statements at the Commercial Register if they have obtained ANBI status.

• For other associations and foundations there are no obligations to publish their financial statements externally.

• The Netherlands Tax Service conducts individual inspections of organisations with ANBI status, as well as inspection campaigns on a national scale.

• The Names of qualifying organisations are available on the Ministry of Finance website.

Dilemmas, options

• How much it will be tax oriented or include other goals?

• How low or high the threshold will be? (I.e. how easy or difficult it will be to become a PBO?) – “Elite” or “minimum standard” approach?

• How formal or substantial it will be? (I.e. check papers only or look at what you do?)

Dilemmas, options

• “Easy access” or “club of excellence”?– Conditions for PBO status is easier or more

difficult to achieve? – Granting and maintaining of PBO status is

more formal or more substantial?– Tax benefits (actual benefits) are serious or

less significant?

Dilemmas, options

• Principles in answering dilemmas:– Keep the main goals in mind– Keep proportionality (balance) between

benefits and criteria + obligations– Keep existing entitlements unless

contradicts the goal– Keep balance of public vs. private interests– May introduce levels of public benefit

(Hungary) as long as proportionality is kept