Analyses of czech legislative environment for Social entrepreneurship


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Analyses of czech legislative environment for Social entrepreneurship

  1. 1. Analyses of Czech legislative environment related to social entrepresesIntroduction: The legal order in the Czech Republic does not contain the legal definition of the“nonprofit organization” or „civil society organisation“ and this term has not, legally, anyspecific meaning. In the common use, non-profit organisations are subjects of private lawexisting for some other purpose than profit-making. These entities have several characteristics. They are either person-based or property-based, are typically founded by means of a multilateral civil law act, exert activities for thepublic or mutual benefit, are separate from the state, have a voluntary nature and a certainorganisational structure. Moreover, they are mostly equipped with certain mechanismsenabling the control of their own activities, make use of a particular type of financing(including certain tax benefits) and often utilise the work of volunteers. Only the Act on Volunteerism affects all legal forms of nonprofits. Czech legislationhas not yet clearly defined the term “nonprofit organization,” which creates problems wheninterpreting the legislation. Their most important characteristic is the fact that they mostly do not distribute theirprofit but use it for public benefit or mutual benefit purposes. Czech law is, technically, a part of the German legal family. It has developed fromAustrian1 law, having been strongly influenced by Roman law and displaying manysimilarities to the traditional German legal conception. This traditional conception was, however, significantly disrupted during the process ofthe so-called “socialist re-codification of private law”, carried out primarily in the 1960s.Under this process, civil law came closer to the Soviet doctrine and was fragmented intovarious branches of law regulated by an immense number of laws. The political and social changes since the early 1990s have manifested the attempt torectify this undesirable situation and return to European standards. Private law is, likewise, facing a significant reform: at present, there is a vibrantdiscussion going on about the draft of the new Civil Code, which is meant to become thefundamental norm in the area of private law.1 The Czech state was a part of the Austrian (and Austro-Hungarian) Empire for almost four centuries (1526 –1918). 1
  2. 2. Currently, only the general (and vey simple) regulation of legal persons is contained inthe Czech Civil Code, but each legal form is regulated by a separate law. In contrast to the broader definitions of civil society2, the civil society sector in theCzech Republic (partly under the influence of the Government Council for non-governmentalnon-profit Organisations) employs a narrower definition of “non-governmental non-profitorganizations”, which covers only those organisations which have the legal form of a civicassociation, foundation or foundation fund, public benefit institution (PBI), or registeredreligious legal person. These organisations have to be active in one of these areas: science, education,research and development, learning, culture, support and protect youth, animal protection,social, health care, environmental, humanitarian aid, sport and physical training. Next to those above mentioned, under the currently valid Czech law, the followinglegal persons may be also founded for some other purpose than for the purpose of business(and be relevant for this text): trade unions3, political parties and movements, churches andreligious societies and their other types of “registered religious legal persons”4, housingsocieties5, further co-operative, a limited liability company and a joint stock company may bealso founded for some other purpose than business (regulated in Commerical Code); as wellas interest groups of legal persons, regulated in Section 22(f) and subsequent sections of theCivil Code, and some other legal forms6. In Czech law, the legal base for non-profit organisations is provided mainly by civillaw. A similar approach is shared by many other European legal regulations, unlike thesignificantly different situation in e.g. the USA, where fiscal law plays the primary role.3.1. General Legal Framework Regulating CSOs2 e.g. within the framework of the John Hopkins Comparative Non-Profit Sector Project, see Salamon, Anheieret al 1999, or the CIVICUS CSI definition3 subject also to the provisions of the Act No. 83/1990 Coll. on Association of Citizens, in some aspects aspecially regulated, see § 9a4 See § 15a subs. 1 of the act No. 3/2002 Coll., on churches and religious societies, there are two kinds ofregistered religious legal persons, the first kind – metioned above (§15 sub. 1 b) ) and others § 15 sub 1 a)5 See § 9 of the Act No. 72/1994 Coll., on ownership of dwellings (flats and non-rezidental premises)6 Not really relevant for this study, but necessary to mention, is a special hybrid category - contributoryorganisations (prispevkove organizace), whose legal basis is provided by budgetary rules of the state, regionsand municipalities. Because of the area of their activity, they are often subsumed under the non-profit sector, butthey differ from other subjects in the non-profit sector by both their connection to public budgets and theiroverall conception. In the current law, they exist as relics of the past. 2
  3. 3. The general regulation of legal persons is contained in the Czech Civil Code, but the specialtypes of legal forms of non-profit organisations are regulated by a separate law. There are three main particular laws in the field of CSOs: – Zákon č. 227/1997 Sb., o nadacích a nadačních fondech - the Act on Foundations and Endowment Funds (No. 227/1997 Coll.), as subsequently amended – Zákon č. 83/1990 Sb., o sduržování občanů, the Act on Association of Citizens (No. 83/1990 Coll.), as subsequently amended, and – Zákon č. 248/1995 Sb., o obecně prospěšných společnostech - the Act on Public Benefit Institutions (No. 248/1995 Coll.) as subsequently amended. An Association is a legal person in which primarily natural persons associate, with a limited secondary participation of legal persons (as long as it is not an association of legal persons or unions of associations). An association may be generally characterised with the following elements: corporate personality, principles of voluntariness and openness of membership, principle of separation from the state which is a reflection of the constitutional right of freedom of association, membership with voting rights, self-administration, purpose other than business (i.e. profit-making). Associations are legal persons regulated by and explicitly enumerated in Section 2 of the Act on Association of Citizens. This concerns: associations, societies (scientific, professional but not general purpose institutions or business corporations), unions, movements, clubs and other civic associations (other than the above-mentioned, which are not specified by the law in any more detail). This, however, includes trade unions, whose creation is subject to a simplified regulation, and employers’ organisations. The Act on Association of Citizens further regulates the legal relations between some other subjects which were created during the socialist period, namely so-called ‘voluntary organisations’. The list would not be complete without mentioning unions of associations. An association is an independent legal person whose activities and position may be interfered in by the state authorities only within the limits of the law. The activity may not contravene the constitution and valid legislation and may not deny or limit any personal, political or other citizen rights. No armed associations or associations with armed units may be founded. It is not permissible for associations to have a goal aiming at enticing hatred, intolerance and support of violence. Associations may not perform any functions of state authorities, they may not manage such bodies or impose obligations on any individuals who are not their members. 3
  4. 4. Associations may establish organisational units as long as this is explicitly provided for in the articles of association7. A foundation and an endowment fund are purposeful associations of assets establishedand originating in compliance with the Act on Foundations and Endowment funds for theachievement of publicly beneficial purposes (goals). Foundations operate with incomegenerated from a registered endowment, as well as from donations and other resources. Theyare expected to provide financial or other grants to third persons exclusively for public benefitpurposes. An Endowment funds are a “more simple” form; they do not need to have a registeredendowment, but may raise funds for public benefit purposes and use them only for such apurpose. Foundations have existed within the territory of what is now the Czech Republic sincethe Middle Ages. After taking power in 1948, the Communist Party abolished foundations andthe State confiscated the property of foundations. This situation lasted until 1990 when the legaltype of foundation returned to the legal system of the then Czechoslovak Federal Republic,later, after 1993, the Czech legal system. The problem was that the legal regulation onfoundation was rather brief – only five sections in the Civil Code – and it were very easy toestablish a foundation without any funds at all. Consequently, it was often the case that thislegal form was misused. Currently, within the European context, the Czech regulation of foundations isunderstood as one of the most stringent ones. Nonetheless, the Czech regulation does not differfrom the European standard. The strictness of the rules stated by the Act 227/1997 Coll., onFoundations and Endowment Funds is grounded especially by a broader historical context andespecially owning to the necessity to “repair” the reputation of foundations which have losttheir credibility due to liberal regulations which had been in force at the end of the year 1997. Inmy opinion, the strictness has played a positive role and because of it, the foundation sector isslowly gaining its lost position. A Public benefit institution8 is a legal entity rendering generally beneficial services, for which the organisation was established, to the general public and to all clients under identical terms and conditions. 7 Section 6, subsection 2(e) of the Act on Association of Citizens 8 The Czech expression for a public interest institution – obecně prospěšná „společnost“ – uses the word “corporation”, which is misleading: this is not a corporation but really an ‘institution’ of private law, theoretically classified among legal persons with a property base. The name was modified by an unfortunate amendment during the reading of this Act in the Czech Parliament. The strict translation of the Czech term “obecně prospěšná společnost” in English language is “public benefit corporation” but I prefer to translate this 4
  5. 5. The Act No. 248/1995 Coll. on Public Benefit Institutions constituted a new type of alegal person in the Czech legal system, whose statutory purpose was strictly limited only tothe provision of services beneficial to the public. The law contains the legal definition of the public benefit institution. It is a legal entityestablished under the Act No. 248/1995 Coll. and rendering generally beneficial services tothe general public and to all clients under identical terms and conditions, whose profit maynot be used for the benefit of its founders, members of its bodies or employees and mustserve for the rendering of the generally beneficial services for which the organisation wasestablished. The legal form of the public benefit institution was originally meant to replacebudgetary and contributory organisations (see bellow) established by regions ormunicipalities and still rendering the above-mentioned generally beneficial services. This,however, did not happen. As a result, contributory organisations (legal persons under publiclaw) having a legal form that might be referred to as ‘a public institution’ currently co-existwith private law public benefit institutions (having the legal form of ‘private institutions’). There are also separate laws on churches and political parties, as well as some otherspecific forms of not-for-business legal persons (as subsequently amended):- Zákon č. 424/1991 Sb., o sdružování v politických stranách a v politických hnutích) – Acton politcal parties and movements;- Zákon č. 3/2002 Sb., o právním postavení církví a náboženských společností – Act onposition of churches and religious societies, especially § 15a – registered religion legalpersons;- Zákon č. 72/1994 Sb., zákona o vlastnictví bytů – Act on ownership of dwellings (flats andnon-rezidental premises) § 9 ff. – housing societies (with limited purpose);- Zákon č. 513/1991 Sb., obchodní zákoník – Commercial Code, regulates position of co-operative, a limited liability company and a joint stock company, those legal forms can befounded for some other purpose than business;term as “public benefit institution”, because the term “corporation” seems to imply that this legal form is basedon association of persons (members). But this legal person is based on association of property and belongs to thecategory of foundations (alongside foundations and endowment funds). 5
  6. 6. - Zákon č. 40/1964 Sb., občanský zákoník – Civil Code, general regulation of legal persons § 18 ff. and § 20f ff. - interest groups of legal persons (can have booth: not- for profit but also for profit purpose); In this text will be paid attention only to the legal forms of assocations, foundations, endowment funds, public benefit institutions and registered religious legal persons (under § 15a sub. 1 b) of Act No.3/2002 Coll.) so-called "purpose-built facilities for the charitable services“, because they can be consider9 as “typical” CSOs. Empirical data: There are four main different kinds of CSOs forming a basis for the non-profit sector. At the moment, there are more than 50 000 organisations registered in the legal form of an association. Many of them “formally” declare to have a non-profit making aim, although they typically do engage in some kind of business activities. Up to June 2008 there are registered 63 773 Civic Associations and 29 530 Chapters of Associations (i.e. branches of Associations). Up to June 2008 there are registered 404 Foundations and 1073 Endowment Funds All foundations, endowment funds and public benefit institutions must have a strictly public benefit purpose. Up to June 2008 there are registered 1587 Public Benefit Institutions. There are 30 registered churches and religious societies, they have more than 4000 registered organs and istitutions (under § 15a sub. 1a) of act no. 3/2002Coll.). Up to June 2008 there are registered 4394 registered legal persons. For this text are relevant only „registered religious legal persons“ under regulation of § 15a sub. 1 b) of Act no. 3/2002 Coll.), it exist about 231 such a subjects. There are currently 73 active political parties and registered political movements. Establishment and incorporation: The establishment of all types of CSOs is regulated on the general level in the Civil Code. Itpreserves the traditional two-stage character of establishment (formation – registration).Individual special laws specify this general regulation and set further conditions. The formation of an association is a private act of at least three natural persons. The motionfor the registration is filed by a preparatory committee. The law specifies the obligatory 9 Also by Government Council for NGOs 6
  7. 7. elements that such a motion and the articles have to contain10. An association has the right to beregistered if it cumulatively meets substantive and procedural statutory requirements. Recently,there have been many problems concerning the registration of associations11. An association is consider to become into beeing an independent legal person byregistration at the Ministry of the Interior, or by the effective day of the decision by the court onthe cancellation of the Ministry’s decision on the refusal to register, or by law on the 41st day,i.e. on the day following the inactive expiration of the statutory period of time of 40 days.12 Theoretically, there are no restrictions but in the case of associations, however, thetheoretical interpretation clashed till 2007 with the long practice of the Ministry of the Interior,which strictly requires that the preparatory committee includes at least three citizens of theCzech Republic. This, however, was in conflict with the constitutionally guaranteed freedom ofassociation. The law provides that a founder of an association may be any “citizen” who meetsthe statutory requirements. The term “citizen” needs to be interpreted in the sense of Article 42,section 3 of the Czech Bill of Fundamental Rights and Freedoms as an “everyone”. Situationchanged in 2007 (when act no 116/1985 Coll. was amended, see bellow) and since that there isaccepted that also foreigns can create tha associations under act no. 83/1990 Coll. In the case of trade union organizations and employer organizations13, the registrationprinciple is modified, due to the fact that the Czech Republic is bound by internationalagreements of the International Labour Organization, by the “evidence principle”14. The Czech legal system containes a relic from the past in the form of the Act No. 116/1985Coll. on the Conditions for Operation of Organizations with an International Element in theCzechoslovak Socialist Republic15. 10 See section 6 of the Act no 83/1990 Coll., on Association of Citizen 11 Although the law provides for the principle of registration and the relatively clear procedure to be followed, the actual practice by the registrator, i.e. the Ministry of the Interior, has seen numerous instances when the registration was not so easy as might have been expected with respect to the constitutionally guaranteed right of association and the clear diction of the law. 12 See Section 8 subsection 5 of the Act on Association of Citizens. 13 In Section 9a, subsection 1 of the Act on Association of Citizens. 14 They become legal persons on the day following the delivery of the motion for their registration to theMinistry of the Interior. 15 Till september 2007 this Act provided a different procedure for associations of foreigners, namely the consession principle (i.e. the necessity of a permission by the Ministry of the Interior approved by the Ministry of Foreign Affairs) as a precondition for the creation of entities regulated by this Act. This was entirely in conflict with constitutional regulations and international documents guaranteeing the right to freedom of association. This act was, despite its counter-constitutionality and ineffectiveness was applied by the Ministry of the Interior in years 1990 – 2007. Currently, the associations formed till 2007 under conditions of this act are considered to be association (created under act no 83/1990 Coll.). The act no. 116/1985 Coll. is further aplicable for International non-profit organisations, but it is not really clear, what is meant by this term. 7
  8. 8. In connection with the preparation of the proposal of the new Civil Code, there was adiscussion, if the current legal regulation of establishment of associations, based on the“registration principle”,16 should not be replaced with the “principle of freedom ofestablishment17”. This concept was finally not accepted (the Ministry of Interior was stronglyagainst this idea) and pro futuro stays registration principle. In the future, a court or some other body could be entrusted with the keeping of the registryof associations because leaving this issue up to the Ministry of the Interior is generallyconsidered to be unsuitable.18 Registered religious legal person is established by a deed of establishment, signed by thestatutory body of a church or religious society; the authenticity of the signatures in theagreement has to be officially verified. The law specifies the obligatory elements that such adeed has to contain (§16 sub. 3 of act no. 3/2002 Coll.). The deed of establishment must be submitted to the Ministry of Culture, which doesregistration (incorporating the legal entity) and entering information about it into the Registry ofregistered (religious) legal persons. The establishment of foundations, endowment funds and public benefit institutions can bedone by an agreement in writing concluded between the founders; in this case the authenticityof the founders’ signatures in the agreement has to be officially verified. There is also possibleto form the organisation by a founding charter, if there is only one founder. Foundations orendowment funds can by established also by testament19. The charter (testament) has to beexecuted in the form of a notarial deed. The founding document must be submitted to a regional court (the registry court) whichdecides on registration (incorporating the legal entity) and entering information about it into theRegistry of Foundations or Registry of Public benefit institutions. A foundation, endowment fund or public benefit institution is considered become intobeeing on the date of its entry in the registry. The motion to have the organisation registered hasto be accompanied by the documents required by the law. 16 In the case of trade union organizations and employer organizations, this principle is modified, due to the fact that the Czech Republic is bound by international agreements of the International Labour Organization, by the evidence principle. 17 The draft proposal has found inspiration for this conception in the Dutch regulation. 18 This is a relic of the conception of the supervision of associations from the times of the Austro-Hungarian monarchy, more specifically the period of the so-called ‘Bach absolutism’ in the 2nd half of the 19th century. 19 However, this kind has not been used in practice yet. It is related to some unclear points which the law does not deal with in connection with the establishment of foundations mortis causa. 8
  9. 9. Public agancies: The government, i.e. the Ministry of the Interior, is involved in the setting up of anassociation; this body is involved in the establishment (registration) and possible (underconditions set by law) also dissolution. Registration of civic associations is fairly quick and easy, free of charge. Problem is,that the Ministry of the Interior interprets strange way the Act on Association of Citizens andeither suspends or denies registration to those civic associations that provide beneficial servicesoutside of their membership base for a fee. This approach goes agains the freedom ofassociation. The same applies to Ministry of Culture in the case of Registered religious legalpersons (§ 15a of Act no 3/2002 Coll.) Courts are involved in the setting up of foundations, endowment funds and publicbenefit institutions. Court is involved in the establishment (registration) and, under conditionsset by law, also possible dissolution. The registration procedure is more complicated than in thecase of associations. There are no other agencies involved in the setting up of CSOs. There is no central register of CSOs in the Czech Republic.3.2. CSOs Commercial Activities and Non - profit Status The purpose of CSOs: The purpose of associations is thus primarily “associative interest activities”. Theformulation of the purpose must be included in the articles20. The purpose cannot consist inassociation for purposes common to political parties and movements, professional chambers,churches and religious institutions and for the purpose of attaining profits.21 The activity maynot contravene the constitution and valid legislation and may not deny or limit any personal,political or other citizen rights. Associations may not perform any functions of state authorities;they may not manage such bodies or impose obligations on any individuals who are not their 20 Section 6, subsection 2(c) of the Act on Association of Citizens. In practice, there are numerous problems connected with the definition of the purpose and the subsequent registration by the Ministry of the Interior, which is again in conflict with the constitutionally guaranteed freedom of association. 21 Section 1 Act on Association on Citizens; the regime of such associations is regulated by special laws, see above 9
  10. 10. members. However, the practice of the registrating authority (i.e. the Ministry of the Interior)often goes beyond the limits of statutory requirements.22 The purpose of registered religious legal persons is ex lege to provide charitableservices (see § 15a sub. 1b) of Act no. 3/2002 Coll.) Foundations, endowment funds and public benefit institutions are types of legalpersons, whose purpose is strictly limited only to public benefit. A publicly beneficial purposeis, in particular, development of spiritual values; protection of human rights or otherhumanitarian values; protection of the environment, cultural monuments and traditions;developments in science, education, physical education and sports23. No private benefitsmay be provided to founders or members of the management board. Public benefit institutions should generally provide beneficial services to the generalpublic and to all clients under identical terms and conditions. Their profit may not be used forthe benefit of its founders, members of its bodies or employees and must serve for the renderingof the generally beneficial services for which the organisation was established. CSOs can operate freely. Government entities do not create legal impediments to theoperation of NGOs. However, in 2008, the Ministry of Labor and Social Affairs halted theirfinancial support of some association programs on the grounds that, in general, associationshave low levels of operational transparency. Economic activities of CSOs: Economic activities are generally permited for all CSOs except foundations and endowment funds; in their case, the law provides strict limitations. None of the CSOs can be established to pursue economic activities and such activities may not be prevailing activities. Economic activities should exist only as some kind of a financial basis of the organisations and are irrelevant for considering the economic or non-economic purposes of those organisations. The problem is, that this is not clearly stated in the Czech law on associationa and very simple regulation is often dissused. Business activities are currently, apart from members’ contributions, one of the key sources of income for associations not only in the Czech Republic but also in other European countries. 22 E.g. it quite absurdly refuses to register such associations which provide services to non-members. 23 Section 1, subsection 1 of the Act on Foundations and Endowment funds 10
  11. 11. It is necessary to distinguish business activities from an economic purpose, whichboth regularly appear in the case of business corporations. However, the fact that anassociation engages in an business or some similar activity does not necessarily mean that itpursues an economic (gainful) purpose. The current Czech legal regulation expressly states that economic activities (businessactivities) may exist as a supplementary activity whose profits support the goal of theassocation. However, they may not, in principle, become the main purpose of an association. Most associations in the Czech Republic depend for their existence, due to the lack ofother financial sources, on business activities. Under the current economic situation, theseassociations can hardly expect to obtain the financial means in the form of subsidies frompublic budgets; moreover, tax laws do not act as a motivating factor for potential donations byentrepreneurs either. Articles (not the law) specify whether an association may do business or not,delimiting the scope of such activities. The law does not, in any way, limit the participation of associations in the businessactivities of other legal persons (undirect traiding). The regulation of such activities is left upto the members to deal with in the articles of associations. The members of associations are not, in general, liable for the debts of the legalperson. Creditors should recover from the assets of the legal person. When the assets are notsufficient, this is normally the creditor’s risk. The profit, if there is any, must be distributed primarily in harmony with the articlesof association, the Act on Association on Citizens lack a provisions specifying the manner ofdealing with such profit. Unfortunately is this conception often dissused. In the case of registered religious legal persons (§ 15a sub. 4 act no. 3/2002Coll.)specifically express that those entities may also provide other “auxiliary” business activity,next to statutory public benefit activity (charitable, social or health). The duty to reinvest theprofit is not stated in the law, but it would be problably against the meaning of the regulation.This legal form is not very suitable for the economic activities. The Czech Act on Foundations and Endowment Funds24 includes a provision on theban of business activities engaged in by foundations. However, there are several statutoryexceptions to this prohibition.24 Section 23 (1) of the Act on Foundations and Endowment Funds. 11
  12. 12. The foundation/endowment fund is prohibited from doing business under its ownname, save for real estate leases, organizing lotteries, raffles, public collections, cultural,social, sports and educational events. Assets of the foundation/endowment fund may not be used as collateral nor subject toany other way of securing liabilities. The foundation assets are inalienable if this is determined by the founder or the donor;in other cases, it may be disposed of, including the change of the composition of the assets,but only in harmony with the purpose of the foundation and with all due care. The lawprovides a detailed regulation of the manner in which a foundation may invest its means;everything is aimed at maximum protection of foundation property for the publicly beneficialpurpose. Assets of the foundation/endowment fund may not be used for the participation in theproperty of any other persons, unless the law provides for an exception to this rule. Such anexception is the property participation of foundations (i.e. not endowment funds), limited bylaw, in joint stock companies. A foundation may also be the founder of a public benefitinstitution. The foundation may participate in the business of joint-stock companies only. Theentire involvement of assets by the foundation may not exceed 20% of the foundation’sproperty after deducting the value of the foundation equity. Publicly negotiable securitiesissued by joint-stock companies may be purchased and sold by the foundation only inregulated markets. The foundation’s stake in a joint-stock company’s assets may not exceed20%. By contrast, the law strictly provides that foundations and endowment funds may notbecome members of an unlimited liability company, general partners in a limited partnershipcompany, silent partners or members of a cooperative whose members are obliged to coverthe losses of the cooperative over their membership contributions, or members of other legalpersons if such members are liable for the obligations of such persons. Public benefit institutions must provide the services for which they have beenestablished for a reasonable fee that must be the same for all who need those services. Theseentities may also provide other, so-called “auxiliary services” which must not reduce thecapacity of the public benefit institution to provide the statutory services. The auxiliaryservices may be constituted by economic activities engaged in for the purpose of generatingincome to cover the losses from statutory activities. 12
  13. 13. However, the law explicitly prohibits public benefit institutions from distributing itsprofits, if any, to its trustees, officers and employees. Public benefit institutions may neither create branches abroad and participate in thecommercial activities of other entities nor create their own.Destination of surplus: In the case of associations, in the case of dissolution, after satisfaction of all debts, theliquidation surplus must be distributed primarily in harmony with the articles of association,the Act on Association on Citizens lack a provisions specifying the manner of dealing withsuch a surplus. In the case of registered religious legal person (§ 15a odst. 1b) act no. 3/2002Coll.),liquidation surplus (and also obligations) passes back to the church or religion society (thefounder). In the case of foundations and endowment fuds, if the foundation charter does not statethat a liquidation surplus is to be transferred to another foundation/endowment fund due to itspurpose, the liquidator will offer this liquidation foundation/endowment fund of identical, orsimilar, purpose; if no such foundation/endowment fund is identified by the liquidator, or thisliquidation balance is refused by the liquidator-indentified foundation/endowment fund, theliquidator will offer this liquidation balance to the municipality where thefoundation/endowment fund is located. If the municipality does not accept the offer within 60days from the offer date, this liquidation balance will go to the state treasury upon theexpiration of the 60-day deadline. The acquire is to use this liquidation balance for publiclybeneficial goals. There is a special regulation for foundations/endowment funds, whichreceived financial support from EU funds. In the case of public benefit institutions, if the deed of establishment (charter) mayspecify the public benefit institution entitled to take over the liquidation surplus, it the chartercan be also stated that specifying of such a receiving public benefit institution can bedetermined by the management board in its resolution on winding up the public benefitinstitution. Otherwise, the liquidation surplus shall be offered for transfer onto themunicipality in which the PBI has its registered office. The property may be transferred to themunicipality free of charge only if the municipality enters into a contract obliging it to usesuch property in full extent for rendering the publicly beneficial services for provision ofwhich the pulbic benefit institution had been established. If not, the liquidation surplus shallbe transferred to the state (Czech Republic) to provide public benefit services. 13
  14. 14. Related laws:Act no 83/1990 Coll., on Association of Citizens (zákon o sdružování občanů)Act no 227/1997 Coll., on Foundations and Endowment fuds (zákon o nadacích a nadačníchfondech), Section 23 (1): „A foundation is prohibited from doing business uder its own name,safe for real estate leases and organising loterie, faffles, public collections, cultural, social,sport and educational events.“Act no. 248/1995 Coll., on Public Benefit Institutions (zákon o obecně prospěšnýchspolečnostech)Act no. 3/2002 Coll., on Churches and Religion SocietiesConditions for conducting business activities are set out in the following legislation:Act no. 455/1991 Coll., Licensing act (živnostenský zákon)Act no. 513/1991 Coll., Commercial Code (obchodní zákoník)Act no. 108/2006 Coll., on social services (zákon o sociálních službách25)Act no. 198/2002 Coll., on volunteerism (volunteer´s services) (o dobrovolnické službě)and many others by the type of activity….Tax law:Act no. 337/1992 Coll. on the Administration of Taxes and Fees., sec. 6 (zákon o správě danía poplatků)Act no. 586/1997 Coll., on Income tax (Income tax law) (zákon o dani z příjmů)Act no. 357/1992 Coll., on Gifts, Inheritance and Real property Tax (zákon o dani darovací,dědické a dani z převodu nemovitosti)Act no. 253/2004 Coll., on VAT (o dani z přidné hodnoty)Act. no. 16/1993 Coll., on Road Tax (o dani silniční)Fees:Act no. 549/1991 Coll., on court fees (o soudních poplatcích)Act no. 368/2002 Coll., on administrative fees (o správních poplatcích)25 A bit controversial is Act on Social Service, which came into force in 2008. This law sets quality standardsfor social service providers. The positive ramification of this law is that it forces NGOs to improve their qualityof services. Some NGOs have a hard time meeting the quality standards. The law introduces some questionableaspects concerning NGO operations. For example, it restricts the extent of social service fees. 14
  15. 15. Act no. 565/1990 Coll., on local fees (o místních poplatcích )Labour Law:Act no. 262/2006 Coll., Labour Code (zákoník práce)Act no. 435/2004 Coll., on employment (o zaměstnanosti) - §67 – 87 – emplyment of dissablepeople, § 112 – 119 tools for activ policy of employmentAccounting:Act no. 563/1991 Coll., on Accounting (zákon o účetnictví)Conclusion: International Centre for not-for-profit law uses the term „economic activities“ to referto self-financing activity. Economic activities are defined as „reguregularly pursued trade orbusiness activities“ with the exception of those that have traditionally been excluded (ticketsales, cultural and educational events etc.). NESsT use the term „self financing“ to refer to activities that generace revenues forthe CSO´s, including membership fees, fees for services, produkt sales (e.g. books or otherpublications, mugs, t-shirts etc., renting out real estates, ise pf „soft assets“ – intellectualproperty, reputation etc., investment of dividents. In the Czech Republic are „economic (business) activites“ defined in § 2 ofCommercial Code as „systematic activity conducted independently by entrepreneur in his ownname and on his own responsibility for profit“. There is not a legal definition of the term„self-financing“. In the Czech Republic, in most of cases are CSOs not prohibited from generatingprofits, mostly those profits may not be distiributed to privat persons who might be in aposition to control them for personal gain, such a founders, members, officers, directors etc. In the case of associations is this rule not very clear because the Act on Associations ofCitizen does not express this rule. I its up to articles of an association if this topic will beregulated or not. Economic activities or business activities of associations are not prohibited by thecurrently valid law, as long as they are not engaged in for the purpose of generating profits.These activitites are often carried out only in order to cover costs. Economic activities should mostly exist only as some kind of a financial basis of theorganisations and are irrelevant for considering the economic or non-economic purposes of 15
  16. 16. those organisations. There is difference (and often it is also very unclear), if some economicactivity is conducted as for- profit26 or as not- for- profit (statutory) activity. Foundations, endowment funds, public benefit institutions and registered religiouslegal persons are by definition a legal persons organized and operated primarily to providepublic benefit purposes. In the case of associations can be purpose public benefit and alsomutual benefit but always other than for-profit one (§ 1/3 Act on Association of Citizen). The legal regulation of foundations and endowment funds is strictly unfavorabletowards commercial activities. The essential difference between the Czech conception offoundation law and most regulations in Western Europe consists in the acceptability (orunacceptability) of possible business activities and other limitations concerning economicactivities and the use of the assets of foundation subjects. The aim of this strict legalregulation is to eliminate the possibility of any misuse of the institute of the foundation and,above all, the protection of property. This conception, however, causes many problems in reallife and there are indications that it is likely to be dropped in the future. This strict regulation reflects the legislators’ effort to protect the foundation propertyfor the performance of the foundation purpose and to minimise the risks related to itsactivities. Foundations and endowment funds may also engage in other gainful activitieswhich, however, may not meet the criteria constituting economic (business) activities.27 In general, foundations and endowment funds can use their resources exclusively fortheir statutory purposes, mostly in the form of grants given to third persons. Assets of thefoundation/endowment fund may be used only in line with the purpose and condition set forthin its foundation charter or the statute. The costs pertaining28 to administration of theorganisation must be kept separately from the foundation contributions. Only a restricted portion of available assets may be used to cover the operational costsof the entity. They must set rules, fixed for five years, limiting the use of their assets for26 Example: An association has as statutory purpose to support culture on the country site. They do organizeopen-air movie on the medoow next to villige and have a shows once a week in summer. Is it business activity ornot? Probably not, because this activity is to fill the statutory not for profit purpose and this is why i tis notnecessary to have a licence for this activity and will be the income taxed.27 In April 2002, an amendment to the Act of Foundations and Endowment Funds was adopted (No. 210/2002Sb.). This made the current regulation of possible economic activities of foundations and endowment funds moreprecise.28 Costs pertaining to administration of the foundation/endowment fund include particularly the costs to achieveand valorize assets of the foundation/endowment fund; costs to promote the purpose of thefoundation/endowment fund; and operating costs of the foundation/endowment fund, including emoluments forthe oard of directors, the supervisory board, or the controller. 16
  17. 17. administrative purposes as well as for all salaries, remunerations and other management-related expenditures. Even more strict regulation is there for the 71 foundation – recipients of the financialsupport from public fund called NIF (Foundation Investment Fund29). In the case of associations, public benefit institutions and registered religious legalpersons – the economic activities are possible, generally, as a financial base for statutorypurposes and activities. The economic activities should be only „auxiliary“. There are somelimits mentioned above.3.3. Taxes on CSO Commercial Activities From the perspective of tax law, foundations, endowment funds, public benefitinstitutions, associations and registered religious legal persnons in the Czech Republic haveprincipally similar position as regards taxation. Tax matters accompany these entities throughout their existence – from their creationuntil their termination. However, tax issues do not concern only the institutions themselvesbut also their founders, members, donors and other persons. In some cases these are the casesfor which the particular legal forms of the foundation and the association are actually used. The system of tax regulations governing the non-profit sphere is relatively complexand, in some respects, not entirely satisfactory. The key problem is a certain variance andsometimes even inconsistency in the wording of particular tax laws. In addition, many laws provide tax benefits depending on the legal form of subjectsregardless of the fact whether a given legal person really engages in activities that are worthyof public support in the form of tax advantages.30 On the other hand, some activities, such assports (including professional sports) are identified as being of public benefit and, as a result,such activities enjoy tax advantages. At present, there is a debate going on in the Czech Republic on the issue of definingthe notion of ‘public benefit’. Various approaches are currently being considered that wouldenable a more effective support of public benefit activities, mainly in connection with thepossible introduction of ´public benefit status´.29 see more about NIF in Chapter 430 Since foundations, endowment funds and public benefit institutions must be established strictly for ‘thepurpose of public benefit’, this conception is acceptable; a problem, however, may arise only in the case ofassociations. As a result, the law permits tax benefits to be accorded only to those associations that are active in.some of the fields listed by the law and considered as being of public benefit, even though the act itself does notoperate with this notion. 17
  18. 18. In the Czech Republic, non-profit organisations are based on civil law, not primarilyon tax law. On the other hand, there is a specific regulation affecting non-profit subjects. Theyare only taxable as far as they run an enterprise with a profit purpose.Related acts (as subsequently amended): - zákon č. 337/1992 Sb., o správě daní a poplatků - the Act No. 337/1992 Coll. on the Administration of Taxes and Fees., sec. 6 - zákon č. 357/1992 Sb., o dani dědické, darovací a dani z převodu nemovitostí, act on Inheritance, Gift and Property Transfer Taxes - zákon č. 586/2002 Sb., o daních z příjmů – the Act no 586/1992 Coll.. on Income Taxes - zákon č. 235/2004 Sb., o dani z přidané hodnoty – the Act no. 235/2004 Coll., on VAT - zákon č. 16/1993 Sb., o dani silniční – the Act no. 16/1993 Coll., Road tax Act - zákon č. 338/1993 Coll., o dani z nemovitostí, Act no.338/1992 Sb., on real estateproperty taxSurvey of tax privileges: Prior to dealing with the legal position with respect of taxes, the actual position of –CSOs as tax subjects needs to be delimited. The tax subject is defined in Section 6 of the Acton the Administration of Taxes and Fees31. This act also includes the duty of tax subjects tobe registered, regulates the issuance of tax identification numbers and establishes the duty tofile tax returns (or reports). In general, non-profit organisations do not enjoy any special regime and areregulated in a similar manner as all other legal persons. However, if they are founded for apublic beneficial purpose, which is the case of all foundations, endowment funds and publicbenefit institutions, registered religious legal presons and some associations, they may, aftermeeting certain statutory conditions, enjoy tax privileges. There are two basic kinds of special norms regulating the tax regime of subjectsexisting for some public benefit. These are tax advantages or exemptions from taxes (tax-31 The Act of the Czech National Council No. 337/1992 Sb. on the Administration of Taxes and Fees. 18
  19. 19. benefits) for CSOs whose activities generate incomes, and tax incentives and deductions (tax-incentives) to entice donors to make donations for the benefit of these subjects.32Tax benefits: There is a tension between exemption from taxes or some other tax benefits and theprinciple of generality and equality of taxation; any such benefits thus have to conceived in avery narrow manner and are properly justified, which is sometimes problematic. There are opinions that if a foundation or an association becomes involved in marketbusiness relations and finds itself in a competitive relation to some other subject, then eitherno exemption is possible at all or only under highly restrictive conditions.33 Exemption from taxes due to public benefit is not in conflict with the above-mentioned because it actually concerns an entirely different sphere. Business activities areperformed in order to generate profits for the entity involved in doing business. However,public benefit activities are directed for the benefit of other subjects than the one exertingsuch activities. Foundations, endowment funds, public benefit institutions, registered religious legalpersons and associations constitute, from the perspective of the Act on Income Taxes, legalpersons not established for the purpose of doing business, for which a special regime isprovided by the law (Section 18 (3), (6) and (7) a (8)). Income tax is not applicable to incomes mentioned in § 18 sub. 4 ot he Act on Incometaxes - incomes from subsidies, grants for operations and other aid from the state budget,county budget and municipal budget provided under special laws, EU funds, public funds offoreign countries, incomes from interests in current accounts and incomes arising from thestatutory purpose as delimited in their statutes, foundation deeds, and special regulations. In other words, income arising from the main activities of a non-profit organisation isnot subject to the tax as long as the expenses (costs) expended on such activities exceed theincomes. By contrast, incomes from advertising and rent payments are always subject totaxation.32 For a similar categorisation, see also Hondius, W. F., Ploeg, T. J. van der: International Encyclopaedia ofComparative Law, Volume XIII., Business and Private Organizations, Chapter 9, Foundations , 2000, p. 74 andsubsequent pages.33 For more on these opinions, see e.g. Koller, T.: Stiftungen und Steuer, Die Stiftung in der juristischen undwirtschaftlichen Praxis, published by H. M. Riemer, Europa Institut Zuerich, Schulthess, Zuerich 2001, p. 52. 19
  20. 20. Foundations, endowment funds, public benefit institutions, registered religious legalpersons and associations are legal entities considered by law as not established forcommercial purposes. As such, these entities pay a reduced corporate income tax (§ 20 sub (7) Income taxact) .The reduction in corporate income tax is by 30% of the tax base, but this reduction maybe no less than CZK 300,000 (1 Euro = 26 CZK) and no more than CZK 1,000,000. Themoney thus saved must be used to support related activities. In the case of university-typeinstitutions, the money must be used for educational, scientific, technological development orartistic activities. Foundations are fully exempt from corporate income tax on incomesgenerated by a registered endowment, be they interests from financial accounts, dividendsfrom securities and bonds, rents from real property or royalties from patent rights orcopyrights. No such exemption is applicable for endowment funds. Under certain conditions are exempt from several other taxes: tax on real estateproperty transfer, tax on gifts and donations, inheritance tax. The provision of Section 20 (4) of the Act on Inheritance, Gift and Real EstateTransfer Taxes34 expressly mentions the exemption of foundations, endowment funds andpublic benefit institutions from inheritance and gift taxes. There are further exemptions from inheritance and gift taxes applying to freeacquisitions of property intended to finance equipment and humanitarian activities in thefields of culture, education, science, health care, social care, ecology, physical education,sports, education and protection of children and young people and fire protection, as long asthe property is acquired by legal persons (i.e. including associations) established forperforming these activities and having their registered office in the Czech Republic. The real property transfer tax (transferred for a consideration) does not distinguishbetween the individual paying subjects; in the case of foundations, endowment funds andassociations, there is no special regime. The rate is 3%. The real estate tax35 distinguishes between two kinds of taxes – a tax on plots of landand a tax on buildings. Under Section 4 subsection 1, the tax exemption applies to those plotsof land that form a single functional unit together with a building serving, among other,34 The Act No. 357/1992 Coll. on Inheritance, Gift and Property Transfer Taxes35 The Act of the Czech National Council No. 338/1992 Coll. on Real Estate Tax 20
  21. 21. foundations. Endowment funds, however, have not been included in the law. Associations areexempt from the tax in a similar way – Section 4 (1)f mentions “plots of land forming asingle functional unit with a building in the ownership of an association of citizens andpublic benefit institutions”, Section 4 (2)e mentions “plots of land forming a single functionalunit with a building or its part serving for the performance of religious rites of churches andreligious organisations recognised by the state, and a building or its part serving for theperformance of spiritual administration of such churches and religious organisations”. Thetax on buildings under Section 9 (1)e, f, and k is regulated in a similar way. Both foundations and associations may assert the tax exemption only if the plots ofland and buildings are not used for entrepreneurial activities or subleased. The obligation to pay the road tax under the Road Tax Act36 applies to thosefoundations and endowment funds which use vehicles for their entrepreneurial activities orsome other independent gainful activity, or in a direct connection with entrepreneurialactivities, or for activities generating incomes subject to income tax under special regulationsor similar taxes abroad. The Act on Value Added Tax37 provides, among other, that goods from some other EUmember state, obtained for money in this country, is subject to taxation if obtained by a legalperson founded or established for some other reason that business. All taxpayers (including CSOs) whose turnover exceeds CZK 1,000,000 in anyconsecutive 12-month period must register as a VAT contributor with the tax authorities. Thetaxation period can be one or three month period. The turnover does not include membershipfees or subsidies from the state budget or the EU budget.Tax incentives: Partial benefits also apply to donors, sponsors and other subjects making contributionstowards the activities of foundations, endowment funds, public benefit institutions andassociations. Under Section 20 (8) of the Income Tax Act, any legal person may deduct from its taxbase the amount of donations provided to foundations and associations with their registeredoffice in the Czech Republic, if used for the financing of science and education, research and36 The Act No. 16/1993 Coll. on Road Tax37 The Act of the Czech National Council No. 235/2004 Coll. on Value Added Tax 21
  22. 22. development purposes, culture, education, police, fire protection, support and protection of young people, animal protection, for social, health, ecological, humanitarian, charitable, and religious purposes of registered churches and religious organisations, for physical education and sports purposes, and for activities of political parties and movements, as long as the amount of the donation is at least CZK 2,000. Starting from 2001, the total of no more than 5 per cent of the tax base for income tax of legal persons may be deducted. Before that, this amounted to merely 2 per cent of the tax base. A donation provided in this way is not only bound to a particular purpose without the possibility of being used for any other purpose but it is also exempt from the gift tax. A donation may be obtained on the basis of a gift agreement (or a subsidy agreement), clearly delimiting the purpose of the donation. This deduction may not be carried out by entities not founded or established for the purpose of business. Donations to CSOs (registered in Czech Republic), and from 2009 EU, Norway and Island) may, in accordance of Section 15 (8) of the Income Tax Act, be provided also by natural persons. Such natural persons may deduct from their tax base amounts exceeding, in a given tax period, 2 per cent of the tax base or at least CZK 1,000. They may, however, deduct no more than 10 per cent of the tax base. Conclusions: According to tax law and donations for CSOs are tax-deductible for individuals and companies. The current maximum allowed deduction, however, is inadequate to motivate potential donors. The tax environment is further complicated by inconsistent interpretations of tax laws. For example, a lawyer, an economist, an accountant and a financial office may all interpret the law differently. The tax law does not give much advantages to CSOs who conduct self-financing activities. CSOs can generate income through the provision of goods or services, but such activities are not explicity supported and, in some cases, are indirectly limited. Many problems arise from different interpretations of commercial activities of CSOs, because are not well defined by the law. Act no. 117/2001 Coll, on public collections regulates revenue from collections forpublic benefit purposes. According to the Act only legal entites can undertake public collectionsfor public benefit purposes (humanitarian, charitable, development of education, physical 22
  23. 23. training and sport, protection of cultural heritage or environment). The legal entity can use alimited amount of funds from the collection’s revenues to cover for administrative costs (up to 5% from gross revenues). 3.5 Tax Filing and Legal Reporting: A CSO such as any other legal entity has to submit a tax declaration with the local Tax Administration Authority in the matter of income tax, VAT tax, inferitance and donation tax, real property transfer tax, real estate property tax and road tax. Every type of tax has different tax declarations and different time limit for their submission. CSOs are usually income tax payers as soon as they undertake commercial activitiess or have employees. As soon as the CSO’s source of funding is donations or an inheritance, the entity has to submit a donation or an inheritance tax declaration (to apply for tax excemption). Other types of tax daclarations for CSOs are not so common. The tax filing procedure is complicated, so CSOs often are assisted by an accountant and a tax consultant. In some special cases, the annual financial statements proceedings of CSOs have to be supported by auditors. Income tax – legal persons: As soon as a CSO starts economical activities it has up to 30 days to register with the Tax Administration Authority (§33 Act on income taxes). The registration proceeds by filling out the blank form, entering the data and information such as the name of the organisation, location, identification number, names of statutory bodies, names of persons eligible to negotiate in the name of the organization. The information filled has to be documented (e.g. by record from the CSO register, by contract with a bank institution proving the bank account balance roll). In a case of a change in the registered information it is compulsory to notify the new informationto to the Tax Administration Authority within 15 days. Income tax – natural persons: A CSO has up to 15 days to register with the Tax Administration Authority when the organization hires an employee (the registration procedure is the same as above). 23
  24. 24. A CSO has to submit an income tax declaration by the 6th month after the end of taxdeclaration period. If the declaration period is a full calendar year, the organisation has tosubmit the income tax declaration no later than end of June.VAT: All taxpayers (including CSOs) whose turnover exceeds CZK 1,000,000 (approx.39,000 €) in any consecutive 12-month period must register as a VAT payer with the TaxAdministration Authoritiy. The organisation has to register to the Tax AdministrationAuthority within 15 days after the month when the turnover level was exceeded. The liabilityto pay the VAT tax starts the first day after 3 months from the date when the turnover wasexceeded.Inheritance and donation tax: In order to apply for a tax exception from the Inheritance and Donation Tax theorganization must submit the Tax Declaration to the Tax Administration Authority within 30days after the donation was donated or after the end of the inheritance procedure (§ 21 odst. 1of act no. 357/1992 Coll., on inheritance tax, donation tax and property transfer tax).Property transfer tax: The CSO has to submit a property transfer tax daclaration within 3 months after (i) theproperty or real estate was entered into the property register (ii) from the date when theproperty transfer contract (if property is not recorded into real property register) came intoforce or (iii) from the date when the verdict confirming the property right came into force (§21 odst. 2 of act no. 357/1992 Coll., on inheritance tax, donation tax and property transfertax).The real estate property tax: The CSO – as owner of the real estate – has to submit a real property tax declarationby 30th January (§ 13a of act no. 338/1992 Coll., on real estate property tax).Road tax: CSOs have to register to the road tax if they own an engine-powered vehicle (car) orpay travel costs by car for it employees. The CSO has to register to the Tax Administration 24
  25. 25. Authority by 30th January after the end of the year of the taxation period. (§15 of act no.16/1993 Coll., on vehicle duty tax (Road tax)). The road tax is payed in advance (tax advancedeposit) – on 15th April, 15th July, 15th October and 15th December.Accounting: Accounting of the NGOs has to follow the specific regulations, especially act no.563/1992 Coll., on Accounting and public notice no. 504/2002 Coll., implementing act onAccounting no.563/1991 Coll., – vyhláška č. 504/2002 Sb., kterou se provádějí některáustanovení zákona č. 563/1991 Sb., o účetnictvíAnnual report: Annual report - Foundations, Endowment Funds and PBIs have to prepare and publishannual reports. Annual reports have to be filed with the Court Register within 30 days afterthe document was approved by the board of directors. Everyone is entitled to make use of theannual report and make copies including excerpts. The foundation and endowment fund have to prepare and publish an annual report inline with the Act on Foundations. The foundation and endowed funds (EF) compile its annualreport by the deadline determined by its Board of Directors, or by the Statute of thefoundation/endowment fund, but at the latest within 6 months of the completion of the periodunder review. The period under review is the past calendar year, or the time elapsed since theestablishment of the foundation/endowment fund through the end of the calendar year inwhich the foundation subject was established, if it is its first annual report.( § 25 article 1 Acton Foundation). The annual report outlines activities of the foundation/endowment fund in its entiretyduring the period under review as well as an assessment of these activities. Inparticular, it hasto include:1) An outline of assets and liabilities of the foundation/EF.2) An outline of the use of the property of the foundation/EF.3) An outline regarding persons who were beneficiaries of the foundation/EF.4) An assessment whether the foundation/EF adheres to the administrative cost-curbing rulein its economic performance.5) An assessment of basic disclosures contained in the annual financial statements and theauditor’s opinion supplemented by significant findings from the audit report; the annual 25
  26. 26. financial statements constitute an appendix to the annual report. (§ 25 article 2 Act onFoundation). Foundation Investmet Fund foundations (FIF) in a devoted section of their annualreport have to state information about the management of the FIF endowment. FIFfoundations have to submit an annual report to the Ministry of Finance and to theGovernment‘s Advisory Body for NGOs.Auditing: Auditing – The foundation’s annual financial statement have to be verified by anauditor. The endowment fund’s annual financial statements have to be verified by an auditorfor any calendar year in which the sum of total costs or revenues disclosed by the endowmentfund exceed 3 million CZK (approximately 115 400 Euros; 1 EUR = 26 CZK), or if theendowment fund’s assets are in excess of 3 million CZK. PBI’s annual report have to be verified by an auditor (i) if the PBI is recipient of thepublic subsidies, (i) if it has not been established the supervisory board or (iii) if the turnoverof the PBI exceeds 10 million CZK (385,000 EUR). In the case of associations, there is no legal duty to publish annual report or necessaryto let verify the annual accounts by an auditor.Public Collection Report: If a CSO undertakes a public collection, it has to once per year report an accountstatement to the local municipality. The report has to be submitted by the 3rd month after theend of a one year period of the collection’s realization and within 3 monts after the end of allpublic collections (a public collection can be carried out in a maximum period of 3 years), seeAct no 117/2001 Coll., on Public Collections.3.6. Experitse Needed to Manage Commercial Activites For some type sof commercial activities is necessary to obtain živnostenský list(licnse, certificate of concession) acc. Act no 455/1991 Coll., Licensing act (živnostenskýzákon). Some special law (e.g. Act on Social Services) can set more requirements. CSOs that carry out commercial activities in addition to activities related directly totheir social mission have to track the income and expences form commerical activitiesseparately from the mission related once. 26
  27. 27. There are not many specialist tax expert or accounters. Publications: The Czech Republic has only a small group of CSOs legislative specialists. Legal consultancy services are available in Prague, Brno and some regional cities. Access to these services is limited in rural or more isolated regions. At the same time, the country does not produce a sufficient number of lawyers specialized in the CSO sector. Usefull contact information: Infocentre for NGOs Centre for research of NGOs, Association of foundaitons Masaryk University, Law Faculty Masaryk University, Faculty of Public administration, Charles University, Faculty of Social Sciences Charles University, Faculty of Humanitarian Studies Portal of the Public Administration - Government Council for the NGOs Conclusions: As regards taxes, non-profit organisations are regulated by essentially the same rules as other legal persons. However, if they are established for a publicly beneficial purpose, which is the case of all foundations, endowment funds, and public benefit institutions (but also associations and registered religious legal persons), they may, after meeting certain statutory conditions, enjoy tax privileges and exemptions. Tax exemption in the Czech Republic is, in most cases, connected morely with the legal form of a given subject. One may be surprised to find out that from the point of view of taxes, the Czech legalsystem does not distinguish properly between “a public benefit” and a “mutual or privatebenfit”, thereby providing public advantages also to private activities or, to put it another way,legal persons which exert solely private activities. Tax advantages are conditioned by the legalform, not the purpose of establishment – or activity – really performed by a given legal person. At the same time, individual tax laws are not uniform and are sometimes even chaoticin setting up groups of subjects which enjoy tax advantages. Another paradox is that a certain 27
  28. 28. type of activities, more specifically “sports” (even professional sport, i.e. performed on acommercial basis) is declared by a special law38 to fall within the scope of “public benefit” evenwithout there being a systematic or any other reason with view to other types of activities whichare, in their character, in the scope of ‘public benefit’ without any dispute. At the beginning of 2002, the Chamber of Deputies of the Czech Parliament debated abill on the determination of parts of proceeds from income tax of natural persons for charity (acton assignations). The bill was turned down during the first reading. According to the drafters, itwas meant to contribute to an improvement in the field of financing the non-profit sector.39 Inmy opinion, this attempt constitutes a non-systematic intervention into the structure of taxes inthe Czech Republic; the situation might be better dealt with by an amendment of the IncomeTax Act, which could set higher limits for tax deductions for those natural and legal personsintending to donate a part of their profits for charitable purposes. With the respect to ICNL typology presented in Chapter 2, Czech tax treatment for CSO´s is combination of following: 1. Some incomes are not taxe at all (§ 20 sub 4), some incomes are taxed always (§ 20 sub 3 of Inocome tax Act), is used concept - source of income tax. 2. CSO´s are exempt form taxes on profit generated form their economic activites up o a certain income level (see § 20 sub 7 of Income tax Act). Above this level, CSO is taxed at the regular corporate profit tax rate. That mean, that CSOs are taxed on profit from their ecomonic activities using mechanical tax. Chapter 4 Introduction: The core of the civil society in the Czech Republic is, undoubtedly, formed by associations. As regards their character, they are representing one of the most fundamental and essential components of the non-profit sector. People who are sharing a common interest and find it suitable, useful and practical to associate and together perform activities aimed at 38 See The Act No. 115/2001 Coll. on the Support of Sport. 39 PSP ČR, III. volební období, sněmovní tisk 1194, poslanecký návrh, zákon o asignacích, accessible online at, cited on 11.1.2010 28
  29. 29. achieving such a common goal (purpose). Because of very simple legal framework, there is ahuge space for such acitve approch to own life and enjoing the freedom of association. Dark side of this very basic regulation is very problematic position of such aassociation very low level of trust of the public (see bellow). Further on, the present legal framework in the Czech Republic, as established during90´s, is favourable to the creation and operation of foundations, endowment funds and publicbenefit institutions, which are the counterpart to the English term “foundations”. Foundations and endowment funds, more than other subjects of law, are characterisedby the private law requirement of freedom of implementation of interests held by privateindividuals on the one hand and the public interest of retaining the use of the foundation’sproperty for the publicly beneficial purpose. This is related with the significant mandatorynature of the Act on Foundations and Endowment funds (see below). A special legal person is the public benefit institution is established for the purpose ofproviding services for the benefit of the public and currently is this legal formu sed more andmore for different kinds of purposes (but always public benefit). Although it is notimmediately clear from its name, this legal person also has the character of a foundation withan initial property contribution.404.1. Perception Because of historical reasons, there is not really a tradition of strong and independent„civil society“. Before the Czechoslowak Republic was founded, in 1918, all associationswere focused mostly on a „Czech Question“ fight for self-determination of the Czech nation. After 1918 there was just a little time to find a new aims and purposes. After thatcame economical crises, second world war and turn to communism in 1948. The traditional40 The Czech expression for a public benefit institution – “obecně prospěšná společnost” – uses the word“corporation”, which is misleading: this is not a corporation but really an ‘institution’ of private law,theoretically classified among legal persons with a property base. The name was modified by an unfortunateamendment during the reading of this Act in the Czech Parliament. The strict translation of the Czech term“obecně prospěšná společnost” into English is “a public benefit corporation” but I prefer to translate this term as“a public benefit institution”, because the term “corporation” seems to imply that this legal form is based onassociation of persons (members). But this legal person is based on association of property and belongs to thecategory of foundations (alongside foundations and endowment funds). 29
  30. 30. conception of civil society was disrupted during the process of the so-called “socialist re-codification of private law”, carried out primarily in the 1960s. The political and social changes since the early 1990s have manifested the attempt torectify this undesirable situation and return to European standards. But, unfortunately, later onhappend fatal mistake. The laws passed for the legal regulation of the position of CSOs – foundations andassociations – were drafted in a hurry, were brief and simple….end often missused. The lawsregulating this area have since then been amended and improved (at least in the case offoundations). The strictness of the rules stated by the Act 227/1997 Coll. on Foundations andEndowment Funds is grounded especially by a broader historical context and especiallyowning to the necessity to “repair” the reputation of foundations which have lost theircredibility due to liberal regulations which had been in force at the end of the year of 1997. Itis precepted that the strictness has played a positive role and because of it, the foundationsector is slowly gaining its lost position. In the last years CSOs are slowly but surely winning back the lost trust, trying as hardas they can. Currently, the public understands the importace and legitimacy of CSOs andphilanthropy is rooted in society and slowly growing. Mostly are CSOs perceived positively,especially those with which the public is already familiar (from TV etc). Big foundationswhich have a „good name“ in the eyes of public have donators, who support themperiodically. People prefer anonymous sponsorship (DMS – donations in the form of SMS)when is necessary „fast aid, like nature disasters. State and public administration describe CSOs as partners and co-workers, althoughtheir relationship is not equal in practice. A a big problem is found that CSOs are toodepended on funding from public funds or EU funding. When this support ends, CSOs are notable to continue and sustainability is very problematic. Another problem that there not so many „community“ CSOs, but this segment isgrowing because i tis very imoportant for building good realationship (partnership) with localauthorities. Corporations include NGOs in their corporate social responsibility (CSR) concepts,and they provide support for certain issues or regions. Cooperation with NGOs improves 30
  31. 31. corporations’images and is gradually becoming a part of their corporate culture but globalfinancial crises is affecting this field. CSR concept is supported more by foreign comapnies,czech commerical sector still understand philantropy more as PR or marketing strategy (theymix up a donations or sponsorship with the advertisment). Problematic is found very simple and easy exploitable regulation on the field onassociations. One of the most significant drawbacks of the current Act on Associations ofCitizens consists in the insufficient protection of rights of third parties establishing legalrelations with associations. This is the result of the absence of any public registry ofassociations, not very satisfactory conception of regulating the termination of associations aslegal persons and the unclear regulation of the position of organisational units ofassociations.41Preception of CSO´s with respect to commercial activities: It is quite common opinon that commercial (business) activities are currently, apartfrom members’ contributions, one of the key sources of income for associations, not only inthe Czech Republic but also in other European countries.The current Czech legal regulationexpressly states that commercial activities may exist as a supplementary activity whose profitssupport the goal of the association. However, they may not, in principle, become the mainpurpose of an association. In the Czech Republic are registered more then 65 000 associations. Mostly they aredepend, due to the lack of other financial sources, on business activities. Under the currenteconomic situation, these associations can hardly expect to obtain the financial means in theform of subsidies from public budgets; moreover, tax laws do not act as a motivating factorfor potential donations by entrepreneurs either. Most of associations work properly, some of them not. Some of those subjectsfunction as common for-profit-organisation, do commercial activities, under legal form of anassociation. And this is not very good precepted by the public. There were some expamles in the TV, news, that a legal form of association wasdissused in connection with commercial activities. Last expamle is the case of Championship41 It is up to the articles of association to determine whether an association will establish organisational units andwhether they will be invested with legal personality. 31
  32. 32. in Classical Skiing in Liberec 2009, were 70 mil. CZK are missing. This championship was organized by an association. In the eyes of the public – an association is – no control, no protection of thier parties, no legal certainty….It is still not clear, how it end a who will pay for it, if somebody…. At the beginning of 2000, there was a momentary hope that Act on Association might be passed since the governmental draft of the new Act was submitted to the Parliament. This was quite well-done, attending to solve most of the above-mentioned problems of the current legal regulation. Unfortunately, the debates in the Parliament became dominated by individual interests of certain lobby groups (mainly sports clubs) who felt the draft was too regulative.42 On the other hand, it is precepted that under current economic situation, due to the lack of other financial sources, many associations are depended on commercial activities. It is because most of the associations can hardly expect to obtain the financial means in the form of subsidies from public budgets; moreover, tax laws is not really a motivating factor for potential donations by entrepreneurs either. Those commercial activites should be supplementary activity whose profits support the goal of the association. However, they may not, in principle, become the main purpose of an association. In the case of foundations, endowment funds, public benefit institutions is the purpose of an organisation limited only to public benefit, in the case of foundation subjects there are strict limits to any kind of commercial activities and the regulations are very detailed. This relatively extensive foundation law is a reaction to the former very liberal approach to the regulation of foundations in the Civil Code, which was one of the main causes of the discreditation of the institute of the foundation in the Czech Republic at the beginning of the 1990s. Currently are foundations and endowment funds precepted as “financial base” of non-profit sector, but more or less only as subjects, which collect and distribute financial means(granting fundations). 42 During the discussion stage, there were some opinions claiming that there was no need for a new Act on Association, because the old one was “well proved and practical” – let me add the comment ‘to misuse’ to this quote. For more information, see Ronovská (Adámková), K: Úvaha nad „potřebnosti“ nepotřebného zákona o spolcích [Some thoughts on the ‘necessity’ of an unnecessary Act on Associations], Právní rozhledy 2/2001, p. 65 and following, and Pajas, P: Do the Czechs need a new law on Association?, accessible online at 32
  33. 33. Limited commercial activities of public benefit institutions are precepted well, asextra income to support of the public benefit purpose. Majority of public benefit institutionsprovides some commercial activities as “auxiliary” and additional activity. There was adecision interesting decision last year of the High court in Prague (7 Cmo 537/2008-50)43about the distinction between public benefit purpose and economical activities of a publicbenefit institution.The same applies to registered religious legal persons under § 15a of act no.3/2202 Coll.Evaluation: To evaluate the spirit or motivation of politicians (especially on central level) toregulate economic activites for CSOs, on one hand, politicans have not much interest tolibaralization of the foundation law, on the other hand there is also no interest to more strictregulation for associations. Important seems to be discussion around and the destiny of theAct on organisations with public benefit status.4.2. Implications of the Regulatory Framework on Public Policy4.2.1. Simplicity or complexity of administration – Good, but in a case of associations notvery satisfactory.In the civil law and also in tax law there is a special treatment for CSO´s. The legalframework is quite complex and sometimes too complicated.4.2.2. Effects on revenue collection4.2.3. Effects on commercial sector Moderate - There is always a tension between exemption from taxes or some other taxbenefits and the principle of generality and equality of taxation; any such benefits thus have toconceived in a very narrow manner and be properly justified, which is sometimesproblematic. There is always a problem also with an unfair competition between CSO´s and for-profit entities. But the CSO´s are encouraged and sometimes forced by the law to be active inthose fields where is not much interest from commercial entities. Other problem is unfair competition between CSO´s and Contributory organisations(see bellow).43 This decision was not publihed. 33
  34. 34. 4.2.4. Effects on the development of the NPO sectorModerate – Good The legal framework did not changed much in last couple of years, so for someconceptual (and also particular) changes is still waited. It seems like that legal form of publicbenefit institution is used more that it used to be, and a legal form of assiciation is used less.The reason is (maybe) the Act on social services, which states that some „social services“cannot be provided by associations, so the legal type of public benefit institution is onlychoice.4.3. Limitations of the Regulatory Framework4.3.1 General Legal Framework Regulating CSOs- There are too many different legal forms (and thank the unlimited fantasy of the politiciansit growing);- Interpretation is always a problem, different governmental offices and even each officerdoes have sometime own interpretation;- I tis up to legal form, some are easy to use, some are too detail…- To promote concept of social enterprise the way like e.g. in Italy..…. it is a bit far from theCzech conception, but the legal form of public benefit institution is good to use for this.4.3.2 CSO commercial Activities and Non profit status- The legal regulation is quite clear, mostly possible as „additional activity“ on CSOs;- There is a discussion about the Act on organisations with public benefit status – drafted bygovernment (currently) which would change a lot.4.3.3 Taxes on CSO Commercial Activites – see Chapter Relevant laws on non-commercial sources of FundingAct no. 117/2001 Coll., o veřejných sbírkách, Act on public collectionsAct no. 202/1990 Coll., o loterijích a jiných obodbných hrách, Act on Gaming – ?zmínitproblem “s určením výtěžku ze zisku na obecně prospěšný účel” (zneužívání ustanovenízákona společnostmi, které provazují loterie) a neexistence možnosti provozovat charitativníloterie, se kterou napr, počítá zákon o nadacích?Public subidies: 34
  35. 35. The granting of subsidies is partly regulated by law44 and partly a matter of the policyof the central or local government authorities. The funding conditions are mostly not set downby law. The grant rules are set by individual ministries and public funds, e.g. the State Fundfor the Environment, the Grant Agency of the Czech Republic etc. Public subsidies are an important source of income for NGOs. Financing from publicsources has been characterised by a high degree of centralisation. Every year, the governmentsets the major areas for state subsidies for NGOs for the coming year. After the reform of thepublic administration (2001), this system was decentralised; as a result, regional units andmunicipalities now have their own policies on providing subsidies. On the central (governmental level), the Principles for distributing the subsidies45 aresubmitted to the Council for non-state and non-profit organisations46, which is an advisorybody to the government of the Czech Republic and may influence its decisions. There is a discussion going on to unified the graning rules at the governmental level,but some state organs (f.e. Ministry of Culture) are not very happy about this idea. An especially Czech reality is the existence of the Foundation Investment Fund(called NIF, in English FIF), established in 1991 for the purpose of supporting the non-profitsector (via foundations). For this purpose, the government set aside the amount of 1 per centof the shares from the second wave of voucher privatization (approximately 2,8 billion CZK).Until 1996, there were disputes in the government about which foundations should receive thefinancial means from FIF and in what manner. The most important part of the proposal wasthe decision to use the contributions from FIF for the increase of the registered endowment ofthe foundations and not for their programmes. The finances were distributed only nine yearsafter the establishment of the Foundation Investment Fund. In this way, the intentionanticipated by the law, i.e. the support of foundations by the state was met. This procedureadopted in the Czech Republic was unique among other post-communist countries. The statenot only became the donor to non-state foundations, but it also conditioned its contribution byhaving it transferred into the foundation capital of particular foundations (the contracts44 Act No. 218/2000 Coll. - the Act on Budgetary Rules, and the Act No. 250/2000 Coll. on Budgetary Rules ofRegional Budgets45 Zásady vlády pro poskytování dotací ze státního rozpočtu České republiky nestátním neziskovýmorganizacím ústředními orgány státní správy, Principles for granting for year 2008 see:, citováno 12.1. 201046 The Council for Non-State Non-Profit Organisations is an advisory body to the government of the CzechRepublic in matters related to the non-profit sectors. The aim of the Council is to create the possibility for mutualcontact between the non-profit sector the governmental administration. 35
  36. 36. between the government and the recipients – foundations stipulate special duties such as the strict “contractual” external supervision etc.) Special rules for the provision of subsidies have been set in the agreement on the provision of contributions from the FIF to foundations – FIF recipients. The subsidies are provided on the basis of agreements on the provision of contributions. It is also possible for contracting parties to agree on other rights and obligations. Any violation of such rules may be sanctioned by e.g. the duty to return the contribution made. Very problematic und unsufficient is Act no. 202/1990 Coll., o loterijích a jiných obodbných hrách, Act on Gaming, there is stated that part of the profit of gaming provides has to be income of a public benefit sector. This concept is often disused and has to be improved in the future. This act also doesn’t account with the possibility to organize charitable loteries. 4.3.5 Tax Filling and tax Reporting See chapter 3.5.1. 4.3.6. Expertise Needed to Manager Commercial Activites See chapter 3. 5.2. Proposed changes: Legal framework for the organisations of civil society (CSOs), which was constitutiedin the 90ies of the last century, became stabilized and current changes are only partial. The trends that may be seen on the field of the Czech foundation sector in the lastcouple of years clearly aim at the certain (however, often limited) liberalization of thefoundation law. This new trend was manifested also in the proposed amendment to the Act onFoundations and Endowment Funds,47 which, hopefully, should be soon given a vote in theChamber of Deputies of the Czech Republic. Probably the most important change is thatfoundations and endowment funds should be “freed” to carry out their own programs andseparate costs of these activities from administrative costs of the foundation subjects. Such achange would open more space for own activities of foundations and endowment funds. Moreover, the amendment takes into account the particularities of endowment fundsand targets also transparency of the foundation sector. 47 The proposal is available at: financovani/schuze-vyboru-pro-legislativu-a-financovani-rvnno-26136/, cited on January 2010. 36