Economic Activities of CSOs

European Center for Not-for-Profit Law

(ECNL)

Budapest, July 14, 2007.

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Issues to Discuss:

What are economic activities?

Should CSOs be allowed to engage in economic activities?

If so under what conditions?

How are they taxed?

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Defining CSOs:

Established voluntarily by instrument of private law (agreement or other founding act).Established to pursue public or mutual benefit goals (rather than generating profit).Separated from the government structure.Have the status of legal entity.Organized as membership or non-membership organization (associations, foundations, not-for-profit corporations, public benefit corporations, private institutions, etc).

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Defining Economic Activities

Regularly pursued trade or business involving sale of goods or services

Does not include: Gifts, donations Passive investment income Occasional activities (charity dinner) Activities using volunteer labor and donated goods Fees intrinsically connected to public benefit

purpose (admission fees for museum, patient fees for not-for-profit hospital).

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Arguments Supporting Economic Activities of CSOs

Economic activities important source of income for CSOs: contribute to the sustainability of CSOs.

Certain economic activities directly linked to public benefit purposes (e.g., an organization that promotes certain art – and use proceed from selling its publications to promote that art).

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Arguments Against CSOs Economic Activities

Create an unfair competition to business because as: they need less capital to engage in commercial activities;they need not invest in public relations and advertisement (as they have built-in positive reputation with consumers due to their public benefit purposes).

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Economic Activities of CSOs

Most of the countries do allow CSOs to engage directly in economic activities:

EU: Generally yes

SEE region: Generally yes Exception: Macedonia, Slovakia and Czech

Republic (funds and foundations not allowed)

NIS region: Generally yes Exceptions: Armenia (safe for foundations),

Ukraine (safe for charities), Uzbekistan

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Economic Activities of CSOs Allowed:

Provided EA are not primary purpose.

Provided EA are not main activity.

Provided EA additional, accessory activities.

Provided EA related to statutory objectives.

Provided EA necessary to accomplish goals.

Provided EA identified in founding documents.

Provided EA declared as source of income.

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Economic Activities of CSOs

Country Fees/Dues Government PhilanthropyGermany 32 64 3Netherlands 39 59 2UK 45 47 9US 57 31 13Poland 60 24 15Hungary 55 27 18Czech Rep. 47 39 14Slovakia 55 22 23Romania 22 45 26Johns Hopkins Comparative Nonprofit Sector Project (2003)

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Taxation of CSOs Economic Activities

Not subject to tax.Fully taxed.Taxed based on whether related to mission.Taxed based on whether used for public benefit purposes.Hybrid systems, partially taxed (thresholds).

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Taxation of CSOs Economic Activities

Full taxation: Albania, Bulgaria, Armenia, Belarus, Kazakhstan, Russia. Problem: No real incentive to engage in

economic activities / undermines NGO financial sustainability.

Exemptions available: (international good practice) Danger: Businesses registered as NGOs to

gain tax preferences. Still: Problem can be dealt with by limiting

availability of tax exemption.

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Tax Exemptions: Relatedness Test

Defined: Income from EA related to statutory purpose is exempt, while income from unrelated EA is taxed on the same basis as income of businesses.Examples: Latvia, Estonia, Romania, Moldova.Advantage: Helps guard against unfair competition. (CSO engaged in selling walking canes to blind vs. CSO running café.) Disadvantage: Administration. Often difficult to draw the line between related and unrelated activities (e.g, CSO publishing books for sale).

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Tax Exemptions: Destination of Income Test

Defined: Income from EA is exempt to extent that it is dedicated to pursuit of public benefit (statutory) activities specified in law.

Examples: Poland, Germany, Kosovo, Croatia, Kyrgyzstan.

Advantage: Clarity of administration (Polish Science Foundation case)?

Disadvantage: Problem of unfair competition?

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Tax Exemptions: Threshold/Hybrid Test

Exemptions based on a threshold defined by $ value or % of organizational income / often linked with other tests as well.

Majority approach in CEE region (Check Republic, Slovakia, Hungary, Serbia).

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Tax Exemptions: Threshold/Hybrid Test

Czech Republic: NGOs entitled to exemption for income from EA below threshold (9,400 Euros). Above threshold, NGOs may deduct 30% of their tax bases up to 31,000 Euros, provided that tax savings are used to further NGO purposes (tax exempt activities).Foundations are exempt on the income of their endowments.

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Tax Exemptions: Threshold/Hybrid Test

Slovakia: Income from related EA up to 7,300 Euros is exempt.Income from related EA above threshold is exempt if: It is not conducted at a price advantage in competition

with for-profit entities, and The income is proportionate to costs (determined by

comparison to income/cost ratios of “other persons”).

Related EA is one that is not defined in the organization’s statutes as its primary purpose, but is necessary to carry out the organization’s statutory activities.

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Tax Exemptions: Threshold/Hybrid Test

HungaryIncome from statutory/public benefit activities is exempt.Income from entrepreneurial activities (unrelated economic activities) is taxed if the proportion of income from such activities in the

gross income of the NGO exceeds 10% or 10 million HUF,

PBOs and outstanding PBOs have higher thresholds.

Such income above thresholds is taxed proportionally.

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Economic Activities: Case of Montenegro

Liberal framework for CSOs’ economic activities combined with inadequate oversight by regulators.Hundreds of businesses and cafes registered and operating as CSOs.MoF proposal to prohibit CSOs from engaging in economic activities altogether.

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Economic Activities: Case of Montenegro

Limit to degree of economic activity in which CSO may engage.

Threshold set at 4000 Euro or 20% of total income of CSO.

Exclusion of micro-credit organizations.

Failure to comply may result in total prohibition to engage in economic activity.

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Contact Information:

Apaczai Csere Janos u.17, 1st floor, Budapest 1052,Hungaryphone: + 361 318 6923 fax: + 361 266 1479  www.ecnl.org.huwww.icnl.orgEmail: dragan@ecnl.org.hu