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International Conference on Public Financing of NGOs

Tax exemptions and other incentives to encourage CSO economic activities;

The situation of Romania in a regional context

Eva Varga & Ana Negrila, NESsT

Bucharest, September 14

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NESsT mission

NESsT works to solve critical social

problems in emerging market countries by

developing and supporting social

enterprises that strengthen civil society

organizations’ financial sustainability and

maximize their social impact.

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NESsT “University”

NESsT Consulting NESsT

Marketplace

1 2

3 4

NESsT Venture Fund Philanthropic

investment funds supporting social enterprise portfolios in emerging markets.

Promoting accountability, innovation, leadership and professionalism in the field

Providing professional services in social enterprise development

A global on-line shopping directory of social enterprise products & services

NESsT initiatives

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Setting the scene in Central Europe

• Comparison of tax regulations– in 6 countries: Romania, Hungary, Slovakia, Czech

Republic, Croatia and Poland– re VAT, profit tax and indirect incentives (tax

incentives provided to third parties on their donations or investment into CSOs)

• Main issues and challenges:– Unfair competition vis-à-vis for-profit sector?– Caps can be counter-productive– Administration, filing– Accounting

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VAT regulations for CSOs in Croatia:

OGI, Osijek

Mission:To initiate and provide

support to positive processes of social development in local communities through 3 programs: human rights, community development and NGO support.

Social enterprise:To provide specialized

accounting and financial management services to local small and medium size NGOs in the regions of Slavonija and Baranja.

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VAT regulations for CSOs in Croatia:

OGI, Osijek

• VAT exemption up to 85.000 kuna/year turnover (EUR 11.600) allowed to launch the social enterprise – within association

• Competitive pricing while offering unique experties

• Once revenues exceed cap– new legal entity (doo) owned by OGI– price increase to reflect increased costs– financial projections reflect changes as of year 4 (1st

year is VAT exempt for newly set-up for profits)

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Setting up a separate entity (ltd) in Hungary:

Kava, Budapest

Mission: Experts in theater in education Kava provides workshops to disadvantaged children about serious social problems, such as discrimination, drug use, and crime.

Social Enterprise: selling drama-based trainings in conflict resolution and communications to a new sector: private companies interested in worker satisfaction, retention, and performance.

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Setting up a separate entity (ltd) in Hungary:

Kava, Budapest

• Sales volume increase exceeded capacity• Separate entity improved transparency• Ltd pays profit tax like any for-profit

company (16%)• Ltd houses costs of social enterprise

activity• Ltd after tax profit turned back into Kava

Association’s nonprofit programs• Possibility of transforming Ltd into

nonprofit Ltd (new form)

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Using other forms of indirect support in Czech Republic:

Diakonie, Plzen

Mission: Create conditions for securingsocial services for mentally disabled people and people in a difficult life situation, including day care programs and housing.

Social enterprise: Café and Tearoom “Kacaba” in Plzen, which provides skill training to and employs mentally disabled persons.

Providing catering services to companies for the value of the fine those would pay for not employing people with disability

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Romanian legal environment for CSOs and social enterprises

• According to Romanian law there are– 3 types of CSOs: associations, foundations, and federations– All commonly referred to as "non-profit organizations" in Romanian

legislation

• CSOs in Romania are regulated by the– Government Ordinance on Associations and Foundations, GO

26/2000, adopted in January 2000, further modified and put into law in 2005 by the Law on Associations and Foundations (No. 246/2005).

• The Romanian legal framework explicitly permits CSO commercial activities as long as they are mission related.

• CSOs wishing to engage in non-mission related commercial activities have to set up a separate, for-profit entity.

• There is a limited profits tax benefit for CSOs• CSOs are due for VAT, which is not reimbursable, and

must pay customs duties• CSOs must file financial reports (balance sheet, etc)

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Social Enterprise Archetypes

SocialPrograms

+EnterpriseActivities

EnterpriseActivities 

SocialPrograms $

EnterpriseActivities

SocialPrograms

$

Embedded

Integrated Complementary

Source:Alter, Kim, Social Enterprise Typography. The Inter-American Development Bank, Washington, DC, 2003.

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Summary of Romanian Tax Treatment of CSO commercial

activities

Company profits tax

Depends on Structure of Economic Activity

Is activityMission-related?

Direct Economic Activity

Separate Commercial Company

Yes Taxed on all profits, if revenue above EUR15.000 – at 16%

At 16% on all profits

No Separate for-profit company must be set up.

At 16% on all profits

VAT On all purchases

VAT to be paid at standard national rate 19%, if turnover over EUR 35.000 + limited exemptions

Customs duties On all imports At standard customs tariff rates

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Setting up a separate entity (ltd, srl) in Romania: Bioterra

• Mission: the Association of Organic Farmers of Romania, Bioterra, is a non profit organization, whose mission is to promote organic farming and food products in Romania and to provide training and support for small farmers who want to cultivate and produce organic agricultural products.

• Social enterprise: fee based consulting services on organic farming, organization of demonstration plot visits, publishing books and pamphlets.

• Expansion of services (agro-tourism, e-commerce) and growth of sales volume (passing 15.000 EUR revenue threshold) necessitates setting up SRL– Will pay 16% profit tax– Will be able to hire more staff with business skills– Will lessen burden of enterprise on program staff – Will maintain strong links to organization’s mission and programs

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Using legislation to aid SE, sheltered workshop: Motivation

Foundation• Mission: to create sustainable programs to increase the

quality of life of people with disabilities of all ages in Romania • Social enterprise: production and sales of wheelchairs and

other mobility equipments; grant funded program till 2003, is now expected to provide 20% of total revenues although Motivation SRL incorporated in 2001

• Model: – Separate economic entity - SC Motivation SRL – Third party payment system - contracts with county offices of the

National Health Insurance CompanyThis allows MRF to fulfill its mission and to generate self

financing income for the nonprofit organization. • 2006 legal provision provides incentives to potential

employers to purchase products from sheltered workshops as an alternative to hiring people with disabilities

• Mission impact: in 2006 Motivation employed 45 full-time paid staff (a 60% increase over 2004) and served 927 beneficiaries (a 112% increase over 2004). The organization currently employs 74 full-time staff, of which 17 are wheelchair users.

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Legal framework for social enterprise in Romania - limitations

• Fiscal advantages for

CSO/non-profit/public benefit organizations are limited.

• In Romanian legislation the concepts of public benefit organization and mission-related activities are not well-defined and leaves room for interpretation.

• There is little involvement from CSOs in policy-making and legislative process.

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Other ways public funds can help CSO economic activities

– Guarantee schemes– Loan funds with soft conditions– Venture capital– Community Interest Tax Relief – Mandatory reduction in local authority tax – gov’t

subsidizes local authorities– Using publics funds to open up markets, equip CSOs

to enter them (e.g. pass on assets, tax breaks on investments into CSO social enterprises)

• Do these schemes exist in CEE? Would they make sense?

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Improving the legal framework in Romania;

Recommendations

• Allow CSOs to directly engage in non-mission related economic activities

• Reform tax regime: eliminate (or lower) revenue threshold for profit tax for CSOs

• Expand VAT exemptions on CSOs comemrcial activities

• Introduce a uniform and clear concept of public benefit organization, specifying criteria, rights and obligations; provide tax incentives

• Increase CSO involvement in the legal drafting process.

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Thank you for your attention!

Ana Negrila, Enterprise Development Manager for Romaniaanegrila@nesst.org

Eva Varga, Enterprise Development Director, Europeevarga@nesst.org

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