(Katz Commission)
FISCAL ISSUES AFFECTING NON-PROFIT ORGANISATIONS (NPO'S)VARIATIONS IN INTERNATIONAL TAX TREATMENT OF NPOS22
1. Australia
1.1 The key subsection is section 23(e) of the Income Tax Assessment Act of 1936, which exempts the income of a religious, scientific, charitable or public-educational institution. However, the term charity is not defined in legislation and relies on case law for its meaning. The Australian courts recognise as charitable any NPO whose purpose falls within one of the four heads of charity set out in nineteenth-century English case law: relief of poverty, advancement of education, advancement of religion, and other purposes beneficial to a community. The fourth head of charity, namely other purposes beneficial to a community, has generally been given a wide interpretation by the Australian Tax Office and the courts. Other purposes that qualify a NPO for a tax exemption, such as promoting the development of aviation or encouraging music, art, science, or literature, have subsequently been added.
2. Canada
2.1 Under the incorporating statute, the purposes that a society or non-share capital corporation may pursue must in the broadest possible terms be for some charitable, educational, patriotic, community, or public-benefit purposes. The only restriction is that the primary purpose must not be to operate some business, professional, or other for-profit activity.
2.2 All charities that have applied to Revenue Canada and been registered as charitable organisations, public foundations, or private foundations are completely exempt from all tax on income whether the income is from donations; earned by way of interest, dividends, or capital gains from passive investments; or earned from active businesses carried on by the charity. There is no excise tax payable by private foundations on earned income. There is also a wide range of exemptions on consumption, land, and import taxes, but these vary according to Provinces and even Municipalities.
3. Egypt
3.1 There are five main types of NPOs in Egypt:
3.2 Associations and foundations are both governed by Law No. 32 of 1964. In fact, this law treats foundations as a sub-group of associations. An association is any organised group composed of individual or legal persons operating for a certain period of time with an aim other than achieving profit. A private foundation, on the other hand, is a type of association that is established by the dedication of an amount of money (either by individual or legal persons) for an unspecified period of time to pursue religious, scientific, social-welfare, or public- benefit goals. The principal difference between foundations and associations is that foundations operate on the basis of an endowment, like the historic Islamic waqf, whereas associations depend on current income from membership fees, donations, and grants.
4. France
4.1 Although a wide array of objectives is open to NPOs in France, only organisations that serve public-interest purposes are eligible for special treatment. This special treatment takes the form of tax advantages for both the organisations and their donors and eligibility for government funding. Eligible for such treatment are organisations that serve the broader public rather than their members alone or that take on tasks that would otherwise fall within the responsibility of the state. This generally includes organisations working in the fields of education and research, health and social services, environment, development and housing, advocacy, philanthropy, international activities, or professional and business associations. Such organisations are often designated by state authorities as "organismes exercent des activités d'intérêt général" or "dont la gestion est désintéressée" to indicate the public-benefit aim and non-profit character of the organisation, respectively.
5. Germany
5.1 Tax exemption is generally granted to those NPOs that pursue public-benefit activities "Gemeinnützigkeit", regardless of the type of organisation or its legal status. The rules relating to public-benefit status are spelled out in sections 51 through 68 of the "Abgabenordnung" (AO), or General Tax Code of March 16, 1976. The Act distinguishes three categories of tax-privileged purposes:
5.2 According to section 52 AO, public-benefit purposes are those purposes that materially, spiritually, or morally promote the well-being of the public at large, as opposed to small and exclusive groups such as a family, company employees, or the members of a social club. The section includes the following purposes in this category:
5.3 In terms of section 53 of the AO, an organisation pursues charitable work, if its activities are singularly focused on supporting persons in an altruistic fashion. These are only charitable activities if:
the beneficiaries of these actions or deeds primarily depend on these contributions because of their bodily, mental or emotional and/or psychic disabilities or conditions; and
the payments received by way of the charitable relief measures do not exceed four times the amount of the prescribed income or contribution received by way of social insurance benefits in terms of the German Social Insurance Legislation. This proviso does not apply in cases where these people with disabilities have at their disposal sufficient financial resources and could thereby contribute to their own well-being. There are certain other stipulations that mandate bigger charitable contributions but which relate closely to German social security legislation and, hence, are not relevant for the South African situation.
5.4 In terms of section 54(1) of the AO, an organisation pursues religious or ecclesiastical work if its activities support in an altruistic manner a religious community but which is at the same time an entity that is governed in terms of public laws. Included under this category are all financial support measures aimed at the erection/construction, the decoration and maintenance of places of worship, churches or buildings or facilities for a parish, the financial support of religious activities or services; the training of clergymen, priests or parsons; the financing of religious instructions in schools, funerals and remembering the deceased; the administration of churches' or parishes' assets; the salaries of clergymen and religious support staff; and the old-age care of clergymen, their support staff, inclusive of the caring for their widows and orphans.
5.5 The support or promotion of charitable or non-profit activities only takes place if one's economic self-interest is not primarily advanced through this activity. Hence, any commercial or business-related activities must per definition rule out altruism. In short, this pursuit of publicly-minded activities in terms of German tax-preferential treatment is only present if no group benefits exclusively therefrom. Furthermore, the following conditions or prerequisites must be met:
funds of the NPOs may only be utilised for purposes as stipulated in its founding documents;
members, partners or associates of the NPOs and those who are members on the basis of the non-profit's constitution are not allowed to receive any share, percentage of the profits of such NPOs and may not be the recipients of any other allocations, allowances, gratuities or gratification, advances of funds or gifts from such organisation due to their membership;
the non-profits are explicitly prohibited from using their funds or resources for the direct and/or indirect support of advancement of political parties;
members or associates of the NPO may, on leaving or at the dissolution of the organisation, receive not more than their originally paid-in share of capital or ownership interest and the agreed value of their assets in-kind brought into the NPOs;
the NPO may not incur expenses which are not in line with the objects as embodied in the founding documents or that seek to benefit a person through a disproportionately high remuneration or emoluments or allowances; and
at the dissolution or abolition of the non-profit character or the annulment or scrapping of its original objects the NPOs accumulated resources or funds as far as they exceed the originally paid-in shares of capital or interest shares or the agreed value of their assets in-kind brought into the NPO, may only be utilised or distributed in favour of another tax-exempt non-profit or charitable organisation as this was the very basis for the creation and accumulation of such capital assets.
6. Hungary
6.1 Only selected types of voluntary associations are exempt from corporate income tax under Hungarian law; namely those engaged in scientific and technical research, culture, environmental protection, sports, health care, social help, and child and youth care:
7. India
7.1 Sections 10 through 13 of the Income Tax Act of 1961 define organisations eligible for tax-exempt status generally as religious and charitable organisations. These religious and charitable organisations fall into two groups:
7.2 The first group includes:
7.3 These organisations are fully exempt from income tax as long as they continuously pursue their objectives and apply all of their income to these objects.
7.4 Organisations that are charitable in nature but not included in this list can still acquire tax exemptions. According to section 2(15) of the Income Tax Act of 1961, the term charitable purpose includes relief for the poor, education, medical relief and advancement of any other object of public utility not involving the carrying on of any activity for profit.
8. Republic of Ireland
8.1 Some types of NPOs are specifically exempt from various taxes. These include credit unions, bodies promoting human rights which have consultative status with the United Nations or Council of Europe, athletic and amateur sporting bodies, and certain Friendly Societies. In addition, organisations that pursue charitable purposes are eligible to receive charitable exemptions from the Revenue Commissioners, the body responsible for the implementation of tax legislation in Ireland.
8.2 The Treatment of Organisations. With respect to direct taxation, only charitable organisations in the legal sense of the term and those organisations listed in the previous paragraph are eligible for exemption.
8.3 Charitable Status. In order to be recognised as having charitable status, the objects of the organisation must be entirely "charitable" as defined through years of case law. Since there is no official register of charities in Ireland, organisations must apply to the Revenue Commissioners for exemption from certain taxes. In order to be recognised by the Revenue Commissioners, an organisation must already have some form of constitution and must be the subject of a binding trust for charitable purposes only.
9. Israel
9.1 The Income Tax Ordinance exempts the income of any public institution from tax on its income (defined as corporation tax) insofar as such income is not derived from any trade or business carried on by the organisation or by another association that it fully controls. For tax purposes, a public institution is defined as either an association of at least seven persons, the majority of whom are not related to each other, and that exists and operates exclusively for a public purpose.
10. Italy
10.1 Under Italian tax law, the absence of a profit motive has never been a rationale for granting tax exemption to organisations. NPOs, therefore, do not automatically enjoy a privileged position as far as liability for Italian taxation is concerned. Rather, the key to whether an organisation is liable for tax is whether it carries out commercial activities, as defined in article 2195 of the Civil Code.
11. Japan
11.1 NPOs that engage in activities for the benefit of society as a whole, rather than the pursuit of profits, are given favoured treatment in tax law in Japan. Most significantly, such corporations are exempt from corporate income tax, except for income derived from profit-making activities.
12. Mexico
12.1 By law, private-assistance institutions are automatically granted exemption from corporate income taxation. However, in the case of civil associations, the application for tax-exempt status is handled separately from the registration for legal personality. In particular, institutions wishing to obtain tax-exempt status must apply in writing to the Ministry of the Treasury, Under-secretary of Revenues, Area of Donations or, alternatively, to the Local Legal Administration of Revenues of the same Ministry. This application must include:
13. Poland
13.1 The general principle of Polish law is that all legal actors, including associations and foundations, are treated equally in matters of taxation. Accordingly, tax exemption is not granted to specific types of organisations per se, but is rather related to the pursuit of specific eligible activities. All legal entities are therefore formally obliged to pay income tax, commodities and services tax, tax on real property, and so on.
13.2 An exception to this general legal principle was introduced by the Law on Foundations of 1984, which originally exempted bequests or gifts of cash and other movable property or property rights made to foundations from inheritance and gift taxation. Although this exemption was annulled in 1989, the Law of January 31, 1989 granted exemptions from income taxation for all legal personalities, including associations and foundations, whose statutory aims are scientific and scientific-technical activities, education, culture, sports and recreation, the protection of the environment, charity, health protection, social assistance, occupational and social rehabilitation of the handicapped, and religious practice.
14. The Russian Federation
14.1 NPOs are generally exempt from the profit tax on all income except that received from entrepreneurial activity. This includes income received in the form of designated gifts, foreign grants, membership dues, and participants' deposits designated for the NPOs use. By contrast, revenue from an NPOs entrepreneurial activity is subject to taxation, as is revenue received through partnerships or joint ventures with commercial organisations. In addition, the government has the right to confiscate from the NPO the amount of income from foreign grants or designated gifts not used according to the designated purposes.
14.2 Religious organisations and public organisations for the disabled are generally exempt from the profit tax. Moreover, the taxable profit of enterprises owned by artistic unions is reduced by the amount applied to fulfilling the parent organisation's chartered activity.
14.3 Generally, inasmuch as the law does not sanction entrepreneurial activity that does not correspond to the NPOs chartered purpose, it does not provide for an unrelated business income tax (UBIT).
15. Spain
15.1 Although the system is generally favourable, eligibility for beneficial tax treatment is fairly narrowly defined. According to article 42 of the Law on Foundations, to be eligible, foundations and associations of public utility must:
16. Sweden
16.1 The tax treatment of organisations is as follows.
per cent. However, organisations of several kinds serving a public benefit are exempt from tax on their income under the condition that they use at least 80 per cent of their income for their public-benefit purposes. The VAT basically follows the income tax. Furthermore, exempt organisations do not have to pay the 0.15 per cent net wealth tax and are also exempt from inheritance and gift taxes. The exemption does not normally apply to their unrelated business income. However, capital gains are tax exempt, even if related to property used in the generation of unrelated business income. The definition of public benefit, as spelled out in section 7 of the Act of State Income Tax, or "Lagen om statlig inkomstkatt", is very wide. It encompasses any activity for the public good, provided it is of a general character and principally addressed to an unlimited number of persons, and not orientated to certain family members or to an otherwise limited circle. Any religious, charitable, social, political, artistic, and cultural purpose would be acceptable in so far as that particular purpose is the principal purpose of the association and the activities are geared to fulfilling that purpose. Under such circumstances, all income that arises from the activities of the association is exempt from taxes, provided that such activities have a natural connection to the public-benefit purpose. However, income earned from businesses unrelated to the principal public-benefit purpose of the association is still subject to taxation if it amounts to more than 15 to 20 per cent of the association's total business income. If such income exceeds this percentage, the whole of the business income will be taxed.
Foundations. A vast number of foundations are also exempt from taxes, especially those foundations that serve the public good, such as foundations pursuing charitable, scientific, educational, religious, welfare, and other public or commonwealth purposes. To enjoy such tax exemption, a foundation must pursue these purposes exclusively or principally in its daily activities, and at least 80 per cent of the proceeds or returns received by the foundation from its property or assets must be used for the same purposes. Family foundations, on the other hand, do not enjoy any particular tax exemptions.
17. United Kingdom
17.1 In 1891, the mass of case law was classified by Lord Macnaghten in Pemsel's Case into four categories: the relief of poverty; the advancement of education; the advancement of religion; and other purposes beneficial to the community not falling under any of the preceding categories. Although it is a classification of convenience only, it has constantly been referred to in later cases. Although courts have recognised that the law of charities may have evolved since Lord Macnaghten's classification, it remains the case that purposes which are neither enumerated in the preamble nor, by analogy, deemed to be within its spirit and intendment are not charitable, even though such purposes are beneficial to the public.
18. United States
18.1 Federal Law. The federal law in the United States provides income tax exemption for many types of organisations. These organisations are, in order of their listing in the Internal Revenue code: