The Legal and RegulatoryFramework for CSO Self-Financing in Czech Republic

NESsT Legal Series

English

Czech Republic

March 2011

The Legal and Regulatory Framework for CSO Self-Financing in Czech Republic Written and edited by Nicole Etchart and Marta Ricci

This guide examines the legal and regulatory framework governing the selffinancing activities of civil society organizations (CSOs) in the Czech Republic and provides an assessment of the relevant laws and their practical effects in order to identify areas where the law might be created, overruled or reformed. Chapter 1 explains the concepts used and defines CSO self-financing, explains the regulatory environment as it relates to self-financing, and details the methodology NESsT used in researching and assessing the current legal framework in Czech Republic. Chapter 2 describes the typology first developed by the International Center for Not-for-Profit Law (ICNL) to examine the legal treatment of CSO economic and commercial activities in different countries around the world. Chapter 3 describes the current regulatory framework in detail and its application in the Czech Republic. It also shows that CSOs can take various different legal forms characterized by distinguished processes and requirements. Each is regulated by a different institution which makes the sector rather fragmented and hard to survey.

CSOs use self-financing strategies although these are not specifically reflected in the legislation. The tax structure can vary according to legal forms; this is to say that within a certain amount CSOs enjoy a tax exemption from income tax but pay taxes on their profit making activities. This chapter also explains the procedures for CSOs to follow. Finally, Chapter 4 discusses the Czech legal framework for CSOs carrying out commercial activities and makes recommendations for its updating and/or improvement.

This publication was developed as part of a legal series published by NESsT. Its structure and content are based on an original publication written by Nicole Etchart, Cofounder and CEO of NESsT. The Czech Republic guide was researched and written in English by Marta Ricci, with content and editorial input from Nicole Etchart and research support by Katerina Svickova. Production was overseen by Katie Storey. Easytalk translated the publication into Czech and Jorge Moraga was responsible for the layout.

NESsT promotes the social, political, economic and religious rights of all people and does not discriminate on the basis of gender, race, age, national origin, mental or physical disability, sexual orientation and political or religious opinion or affiliation.

Copyright Š 2011 NESsT. All rights reserved. Do not cite, copy, distribute or duplicate without prior written permission from NESsT. NESsT develops sustainable social enterprises that solve critical social problems in emerging marketing countries.

This publication contains information prepared by sources outside of NESsT, and opinions based on that information. NESsT strives to provide accurate information and well-founded opinions, but does not represent that the information and opinions in this publication are error-free.

The laws and regulations cited herein may change.

This publication is for informational purposes, and NESsT is not engaged in providing legal advice.

As legal advice must be tailored to the specific circumstances of each situation, the information and opinions provided herein should not be used as a substitute for the advice of competent counsel.

NESsT promotes the social, political, economic and religious rights of all people and does not discrimiante on the basis of age, gender, race, national origin, mental or physical disability, sexual orientation, and political or religious opinion or affiliation.

Copyright Š 2011 NESsT. All rights reserved. Do not cite, copy, distribute or duplicate without prior written permission from NESsT.

For more information on NESsT, its publications and services please contact: NESsT Europe Bajcsy-Zsilinszky u. 58 1. em. 6.

1054 Budapest - Hungary Tel: +(36) 1 267 0231 nesst@nesst.org www.nesst.org

Setting Stage: Framework for CSO Legal andthe Regulatory Purpose and Methodology Self-Financing in Czech Republic

March 2011 Chapter 1

NESsT wishes to acknowledge the following people for their invaluable contribution to the development and publication of this guide:

Katerina Ronovska studied at the Faculty of Law at the Masaryk University in Brno, Czech Republic, where she also completed her Ph.D. studies (2003). Her studies and research led her also to Vrije Universiteit, Amsterdam, the Netherlands (2001) and to the Institute Suisse Droit Comparé, Lausanne, Switzerland (2002), Max Planck Institute for Comparative and International Private Law, Hamburg, Germany (2010). She teaches civil law and non-government organizational (NGO) law at the Faculty of Law of the Masaryk University in Brno, the Czech Republic. Her main fields of research are corporate theory, corporate law, and she specializes in NGO law, working on different national and international projects in this field.

The International Center for Not-for-Profit Law provided the typology for classifying the use of economic or commercial activities among civil society organizations and the framework for assessing the Czech legislation.

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This publication was developed as part of a legal series published by NESsT. Its structure and content are based on an original publication written by Nicole Etchart, Co-founder and CEO of NESsT. The Czech Republic guide was researched and written in English by Marta Ricci with research support by Katerina Svickova and editorial support provided by Kerry Dudman.

Legal and Regulatory Framework for CSO Self-Financing in Czech Republic

Chapter 1

Setting the Stage: Purpose and Methodology

The term “civil society organization” (CSO1) encompasses non-profit, non-state organizations as well as community-based associations and groups that fall outside the realm of the government and business sectors. Given the limited philanthropic and government assistance, many CSOs undertake self-financing activities2 to generate revenues in support of their mission and programs.

NESsT has documented over a hundred cases of CSOs in Latin America and Central Europe which engage in these types of activities, and has analyzed the impact of these strategies on the organizations’ performance and sustainability. An important factor that emerged from this research is the need for a clear and supportive legal and regulatory framework to encourage the adoption of self-financing strategies among CSOs. This framework defines whether or not CSOs may engage in self-financing activities and influences the way in which they do so. The tax structures, the level of bureaucracy, and the clarity of existing laws are also

1 NESsT uses the term civil society organization (CSO) to refer to a wide range of formally registered non-profit, non-state organizations or community-based associations and groups that fall outside the realm of the government and business sectors.

In Czech Republic, this definition includes various legal entities, among which the most important for this study are: associations, endowments, foundations and public benefit organizations.

2 NESsT uses the term “self-financing” to refer to diverse strategies used by civil society organizations to generate their own revenues, including service fees, sale of products, use of hard or soft assets, membership dues, and investment dividends. NESsT uses the term “social enterprise” to refer to self-financing activities that are designed by a CSO to significantly strengthen the financial sustainability and the mission impact of the CSO.

Setting the Stage: Purpose and Methodology

March 2011 Chapter 1

factors that have a direct bearing on the development of self-financing activities. In some cases, CSOs are not certain to what degree they can engage in self-financing activities, and whether this might impact them negatively in terms of their non-profit status. Even when CSOs are aware of the respective legislation, they are often confronted with contrasting instructions on what administrative procedures to follow, from the various public institutions involved (ie. Labor Office, Municipality).

The purpose of this guide is to clarify the legal framework for CSOs in Czech Republic and to assess the degree to which this framework provides an enabling environment for them to pursue self-financing strategies.

only financially strengthened, but also institutionally empowered by their own ability to generate new revenues and to determine the course of their work with fewer constraints from donors.

Furthermore, when pursued in a socially and environmentally responsible manner, the enterprise activities of CSOs can help create an “alternative economy” more responsive to the needs of local communities, small producers, and low-income people. By purchasing products and services sold by CSOs, consumers are contributing to a more equitable and sustainable world.

Types of self-financing activities include the following: •

Membership dues: raising income through dues from members in exchange for some kind of product, service, or other benefit (e.g. a newsletter or magazine to its members, or discounts on products or services). If the fee is not paid in exchange for a product or service, it is considered a donation.

•

Fees for services: capitalizing on some existing skill or expertise of the organization by contracting work to paying clients in the public or private sector (for example, a CSO provides consultation services to businesses or local government agencies).

•

Product sales: Selling, rather than giving away, the products of projects (for example, books or other publications); reselling products (for example, in-kind donations) with a mark-up; or producing and selling new products (such as T-shirts or mugs).

•

Use of hard assets: renting out real estate, space/facilities, equipment and other assets, when not in use for mission-related activities.

•

Use of soft assets: generating income from patent licenses or other intellectual property or by endorsing products with the CSO’s name or reputation.

•

Investment dividends: passive investments such as savings accounts and mutual funds, or other more active and sophisticated financial transactions (active trading on the stock market or engaging in debt swaps) etc.

1.1 What Is Self-Financing and Why Is It Important?

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Self-financing strategies are used by CSOs to generate revenues in support of their missions. The use of these strategies is a response to the current funding paradigm in which CSOs compete for a limited pie of existing government and philanthropic funding from both national and international sources. This reality makes many CSOs heavily dependent on short-term, project-based funding and prevents them from focusing their attention on long-term, strategic development.

Through self-financing, CSOs may be able to increase their long-term viability and independence by generating some of their own resources to supplement support from public and private donors.

Self-financing does not necessarily lead to the commercialization of CSOs. Rather, it can provide these organizations with a greater level of independence and sustainability without compromising their mission, purpose or values. Income from self-financing can enable CSOs to support work that is often more difficult to finance through traditional sources of funding, such as core operating expenses, new programs, promotional work and others.

NESsT does not believe that self-financing should entirely replace traditional sources of financing, but instead proposes that self-financing can provide a powerful complement to government and philanthropic support. Through self-financing, many CSOs are not

March 2011

Setting the Stage: Purpose and Methodology

Chapter 1

As previously mentioned, CSOs engage in self-financing activities primarily to strengthen their financial resources or to advance their social purpose. Some of these may be solely interested in generating profits that they can use to fund core mission programs. In these instances, the organization is not concerned with advancing its social mission directly through self-financing, but rather indirectly by applying the profits earned through this activity to further its social mission. An example of this is a health education organization that starts a printing business and uses the revenues to fund research projects. In this case, the activity would be considered non-mission-related.

many do not have the internal capacity (skills, human resources, adequate financial systems, stakeholder support, business plans) or the external support (financing, consulting support, favourable legal and regulatory environment) to engage in self-financing activities. When such organizations nevertheless attempt to pursue self-financing strategies, a great deal of stress is put on their staff and indirectly on their other programs and the underlying mission. When a CSO decides to pursue self-financing activities, it is important that it does so with the appropriate levels of technical and financial support and with external conditions that makes such activities possible.

Other CSOs may be primarily interested in using a self-financing strategy to advance their social mission.

For example, a CSO whose social mission is to offer carpentry training and job placement to recovering substance abusers sells the furniture that the trainees produce in order to pay for the costs of the materials and the salaries of the trainees. This activity would be considered mission-related.

The pressures and demands faced by CSOs engaging in self-financing activities in Czech Republic highlight the need to understand the legal framework affecting them. In this context, the purpose of this guide is to address the following areas:

These two examples are not mutually exclusive, and neither are the financial and social goals that motivate CSOs engaging in self-financing activities. Many times, CSOs aim to achieve financial and social goals simultaneously through self-financing. A health organization may be better positioned to disseminate the findings from its research by publishing its own materials and the job training organization may be able to apply surpluses from its furniture sales to fund other programs of the organization or its core operating expenses. In each of these scenarios, the objectives of CSO selffinancing activities and the relationship between these activities and the organization’s primary mission are fundamental in determining the legal treatment of these activities, as this guide will illustrate.

1.2 Purpose and Contents of This Guide In an attempt to diversify their funding base, many Czech CSOs have already initiated self-financing strategies. For the most part, however, most of these have done so with little expertise, capital, or other forms of support. NESsT research on the use of selffinancing among CSOs in Central Europe in general and in Czech Republic in particular, demonstrates that

1. Summarize the key laws, regulations, and procedures governing the use of self-financing

by CSOs in Czech Republic. Chapter 3 explains what Czech law, specifically the Civil Code and tax law, says about the use of self-financing or commercial activities (the most frequently used term in Czech Republic).

It provides an analysis of the administrative registries and procedures and tax regulations that apply to CSOs engaging in such commercial activities. Chapter 3 also offers a general overview of these laws and regulations, so that Czech CSOs have a clear idea of where they fit within the legal system and the tax implications of the commercial or social enterprise activities they operate for self-financing.

2. Assess the relevant laws governing CSO self-financing activities in Czech Republic, evaluate their practical effects, and identify areas where the law might be improved. The guide identifies the strengths and weaknesses of Czech laws — whether they are a help or a hindrance to self-financing, whether they allow for transparent use of self-financing, and whether they foster or hinder the development of the sector as a whole. The legislation is analyzed within a tax treatment typology that makes it easy to understand and assess.

This typology was first developed by the International Center for Not-for-Profit Law (ICNL) to examine the

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Setting the Stage: Purpose and Methodology

March 2011 Chapter 1

legal treatment of CSO economic and commercial activities in Central and Eastern European countries3.

It has now become a widely accepted typology for understanding and assessing the tax treatments of such activities.

The research methodology for this guide was developed by NESsT to assess the legal framework for CSO self-financing activities in a given country. This methodology strives to help answer the following core concerns and questions:

The ICNL typology is presented in Chapter 2; the Czech legislation is analyzed in the context of this typology in Chapter 3; and the criteria presented are used as a basis for the assessments and recommendations offered in Chapter 4.

1. What the law states. What is the current legal treatment of CSO self-financing activities, including current legislation, legal provisions, history of the law, revisions of the law, regulatory approach, tax rates, reporting requirements, other laws or regulations, legal cases, and organizations or lawyers providing advice or assistance?

1.3 Background and Methodology Since 1997, NESsT has conducted applied research on CSO self-financing in order to identify common challenges and needs. The objectives of the applied research were as follows: • 6

Assess the current use of self-financing activities among CSOs. NESsT has developed national assessments of CSO self-financing in ten countries to determine CSO needs and to prepare the capacity-building tools and support for non-profit organizations seeking to implement or expand their self-financing activities.

•

Document success stories and obstacles in selffinancing activities among CSOs. NESsT has completed over 100 case studies of CSO selffinancing activities to gain insights into their development.

•

Examine the legal environment for CSO selffinancing in 12 countries, including the regulatory and tax framework in place at local and national levels that affects these activities.

•

Disseminate lessons from the research – by organizing conferences, seminars, and workshops – for stakeholders from all sectors in an effort to develop strategies for assisting CSOs in the use of selffinancing.

3 ICNL is an international organization whose mission is to facilitate and support the development of civil society and the freedom of association on a global basis. ICNL, in cooperation with other international, national, and local organizations, provides technical assistance for the creation and improvement of laws and regulatory systems that permit, encourage, and regulate the not-

2. How is the law understood? Are the regulations of CSO self-financing activities understood by CSOs? 3. Effects of the law. What is the effect of current regulations on CSO self-financing activities?

4. Recommendations for the law. What are the most important recommendations for addressing current regulatory problems?

NESsT conducted in-depth research through the use of a detailed questionnaire that examined both the current regulatory and legal framework in the Czech Republic. NESsT was assisted by Katerina Ronovska, an extremely experienced lawyer specializing in nonprofit law; with the collaboration of Monika Granja, director of Committee of Good Will – Olga Havlova Foundation in the Czech Republic, who was consulted for her knowledge of the legal tax framework for CSOs, including that concerning commercial activities.

To illustrate the legal framework developed in chapter 3, two case studies were put together to enable an indepth understanding to be gained of the experience of CSOs in this area.

for-profit, non-governmental sector in several countries around the world. ICNL maintains a documentation center for laws, regulations, self-regulatory materials, and other relevant documents; provides training and education; and conducts research relevant to strengthening and improving laws affecting the NGO sector.

For more information on ICNL, see www.icnl.org.

Legal and Regulatory Framework for CSO Self-Financing in Czech Republic

Chapter 2

A Typology for Assessing the Legal and Regulatory Framework This chapter presents a typology for analyzing the regulations that govern CSO self-financing activities.

The typology was developed by ICNL4 and subsequently expanded and modified by NESsT for use in its legal research on self-financing. The following section presents four key areas that are vital for understanding the legal structure for CSO self-financing before assessing the specifics of Czech Republic: 1) the legal characteristics of CSOs; 2) the legal definition of selffinancing; 3) the criteria for permitting self-financing; and 4) the taxation of self-financing activities.

In its texts, ICNL uses the term non-profit organizations (NPOs) or NGOs which refers to a subgroup of the broader classification of CSOs, the term used by NESsT. This guide uses the term CSO, except in parts that specifically draw upon the ICNL typology, where it maintains the original ICNL terminology. The broad scope of organizations encompassed by the term “CSO” is consistent with existing Czech law in the Civil Code with regard to non-profit generating legal entities.

4 The overall typology presented in this chapter was adapted, with permission, from the paper “Regulating Economic Activities of Not-for-Profit Organizations” that was first prepared by ICNL for the Regulating Civil Society” Conference in Budapest, Hungary,

in May 1996 (copyright ICNL, 1997) and from the “Handbook on Good Practices Relating to Non-Governmental Organizations”, Appendix I: Economic Activities and Taxation (copyright ICNL, 2000).

A Typology for Assessing the Legal and Regulatory Framework

2.1 Legal Characteristics of Non-Profit Organizations The characteristics listed below highlight the key differences between non-profit and for-profit organizations and therefore provide a context for understanding how non-profit organizations (NPOs) engage in selffinancing activities. The discussion that evolves in this chapter and the rest of the guide addresses a subgroup of all NPOs: those whose philanthropic purposes are intended to promote the public benefit. There is no agreed-upon definition of what constitutes the public benefit, which is why a large part of Chapters 3 and 4 address this issue in terms of Czech law.

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It is important to recognize that some other types of legal entities fall under the definition of NPOs such as cooperatives, political parties and movements, trade unions, churches and religious societies, and housing associations but do not fall under the public benefit criteria. Whereas there are some for-profit limited liability companies and joint stock companies which do serve a public benefit purpose and follow the same regulatory norms as associations, foundations, endowments and public benefit organizations but are governed by specific laws and regulatory bodies related to the for profit field. For this reason, they are not part of this study.

ICNL, however, does make this distinction between NPOs, and its typology accordingly identifies two basic legal assumptions that distinguish public benefit NPOs from for-profit entities: 1. Non-distribution constraint. Although NPOs are not prohibited from generating profits, these profits may not be distributed for personal gain to private parties, such as founders, members, officers, directors, agents, employees, or any related party.

2. Public benefit as objective. By definition, this class of NPO is organized and operated primarily to provide a public benefit. These characteristics are not dependent on the particular legal form of the NPO. Accordingly, this discussion addresses NPOs of various legal forms as long as they provide a public benefit and uphold the principle of non-distribution (non-profit purpose).

March 2011 Chapter 2

2.2 Legal Definition of Self-Financing There are many terms and definitions, both legal and non-legal, currently in use to describe activities that generate revenues for CSOs (e.g., commercial activity, economic activity, philanthropic enterprise, social enterprise, social-purpose business, earned income, income-generating activity). ICNL uses the term “economic activity” to refer to self-financing activities.

ICNL defines economic activities as “regularly pursued trade or business activities,” with the exception of those that have traditionally been excluded (such as ticket sales for cultural events, tuition fees at educational institutions, and patient fees at non-profit hospitals).

NESsT, on the other hand, uses the term “self-financing” to refer to activities that generate revenues for CSOs, including the six types of activities described in the previous chapter.

Czech civil legislation does not differentiate between “commercial activities” and other types of incomegenerating activities for CSOs, as long as these are considered within the objectives defined in their bylaws.

Likewise, this guide uses the terms self-financing and economic activities interchangeably when presenting the ICNL typology.

2.3 Criteria for Permitting Self-Financing According to ICNL, a threshold issue is the extent to which NPOs should be permitted to engage in economic or commercial activities without losing their philanthropic status. When viewed from this standpoint, the question is not whether such activities should be tax-exempt, but under what circumstances they should be permitted at all.

There is a global debate about whether or not an NPO that engages in commercial activities retains its essential characteristics. The answer is simple: provided the activity is not interpreted as or related to the generation of profit, and this difference remains clearly established, we can assert that NPOs that carry out commercial activities do not lose their quality as NPOs.

March 2011 Chapter 2

A Typology for Assessing the Legal and Regulatory Framework

At this stage of the analysis, the question is not whether such activities should be tax-exempt, but under what circumstances they should be permitted at all.

There are two typical tests used by governments around the world for determining whether economic activities are for-profit or non-profit: 1. Principal-purpose test. The principal-purpose test provides one legal model for regulating NPO selffinancing. It does not prohibit the use of self-financing activities, but rather emphasizes that the NPO is established and operated primarily for non-profit purposes and not for private gain. This test implies that selffinancing would be for mission-related purposes and would not be the principal activity of the organization.

Examples of this treatment can be found in the regulatory framework of many countries, which determine that economic activities are not the principal purpose (i.e., the principal activity) of the NPO; that economic activities are complementary (or additional) to the NPOs programs; or that economic activities are related to institutional objectives.

2. Destination-of-income test. This treatment ignores the economic or commercial nature of the activity in question and focuses exclusively on the purposes for which profits from the activity are used.

Under this test, an organization must devote all of its income to its not-for-profit purposes in order to qualify as an NPO. Accordingly, an organization that spends 99% of its time pursuing commercial endeavours, 1% of its time undertaking public-benefit activities, and devotes all of its profits to these public-benefit activities could still qualify as an NPO. An example of a destination-of-income test is when the profits from economic activities are used to support the organization’s mission purpose and not distributed as earnings.

Under either test, an NPO is permitted to engage in economic activities that further the mission (non-profit purposes) for which it is organized. More frequently, some countries combine the NPO characteristics under the principal-purpose test and destination-of-income test to determine whether the economic activities of an NPO are permitted. For example, a country’s legisla-

tion may authorize only those commercial activities which are related to the mission of an NPO (principalpurpose test) and require that the revenues from these be used exclusively for mission-related activities (destination-of-income test).

But what justification is there for a country’s laws to permit NPOs to conduct self-financing activities?

There are two rationales which explain why a country´s laws would permit NPOs to develop these activities: 1. Self-financing applies non-public resources to the public benefit. Income from economic activities is a primary source of funds for NPOs (particularly in countries in transition, where there is a lack of private capital and philanthropic tradition) and enables them to do their public-benefit work with less dependence on governmental support and charitable donations.

2. Self-financing meets public-good objectives.

Certain economic and commercial activities directly accomplish public-benefit purposes. For example, even though the sale of a book on teaching techniques by an educational organization is an economic activity, the distribution of the book directly serves the public-benefit purpose of promoting education. Preventing NPOs from using such commercial and economic means to attain their goals could directly impair their ability to serve public-benefit purposes.

2.4 Taxation on Self-Financing Activities Although the legal treatment of CSO self-financing varies on a practical level from country to country, most have avoided going to extremes (i.e., a complete prohibition on economic activities or, conversely, allowing economic activities to be the principal activity of the organization). The important issue is the tax treatment of such activities. Governments have typically employed four approaches, singly or in combination, to determine the tax treatment for CSO self-financing activities.

1. Blanket tax. A blanket tax policy is applied to income from all economic activities, regardless of the

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A Typology for Assessing the Legal and Regulatory Framework

source or destination of the income. Under this approach, the organization is not limited by level or type of activity, but is taxed on all revenues generated by these activities regardless of how the revenues are used.

2. Destination-of-income tax. A destination-of-income tax policy exempts income derived from economic activities that is used for public-benefit purposes. Under this approach, the organization is not limited by the level or type of economic activity, but is taxed on all income that is not used to further its public-benefit purposes.5 3. Source-of-income tax. A source-of-income tax policy focuses on the source of the income, granting a tax exemption only when the income is generated by activities that are related to the public-benefit purposes of the organization. Under this approach, the organization is taxed for all income generated from non-mission-related activity even if the income is used to support mission-related programs.

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4. Mechanical tax. A mechanical tax applies criteria automatically to determine the difference between economic activities that are taxed and those that are not; or it may establish an exemption ceiling (a maximum profit level). Income levels below the ceiling are taxexempt and above it are taxable.

Governments have typically employed four approaches, alone or in combination, to determine the tax treatment for CSO selffinancing activities.

Some governments have created hybrid tax policies that are based on one, or more of these approaches.

For example, allowing the net income from economic activity to be tax-exempt below a specified, pre-established threshold; and applying a mission-relatedness mechanical test to determine whether net income above that threshold should be taxed.

5 The destination-of-income tax should not be confused with the destination-of-income test. The test is used to establish that CSOs may conduct economic activities without compromising their

March 2011 Chapter 2

In the Czech Republic, criteria used to determine whether or not a CSO can practice self-financing and the amount it needs to pay in taxes are based on the destination of income test and a mechanical tax treatment. These criteria indicate that CSOs in Czech Republic must dedicate all of their profits to non-profit purposes. In effect, until now, the Tax Law has not focused on the origin or source of income (specifically for income originating from commercial activities), but rather generally establishes tax exemption for CSOs and those working for the public benefit whose profits have been destined towards specific and exclusive purposes in the country, provided that this income or revenue is not distributed among partners (non-profit purpose).

There is no consensus on which of these tax approaches is best, since each entails certain benefits and costs and defines a different public policy objective.

NESsT applies four of ICNL’s criteria to shed light on the practical implications of each approach.

1. Simplicity or complexity of administration.

Blanket taxation of all economic activity is the simplest approach to administer. Once economic activities are defined, NPOs are treated the same way as for-profit organizations. The destination-of-income rule is slightly more complex to administer. The main difficulty is establishing and enforcing criteria for what constitutes expenditure to support public-benefit purposes. This requires monitoring of the CSOs and how they use their income. This political function can be difficult to administer. Moreover, this approach creates a greater potential for abuse by unscrupulous individuals seeking to use NPOs as vehicles for tax evasion.

A mission-relatedness test is the most complicated to apply because it is difficult to specify the necessary connection between the economic activity and the public-benefit purpose. However, this test works best when developed over time through administrative practice. This mission-relatedness approach is also the most likely to keep NPOs focused on economic activities that also provide public benefit. non-profit legal status as long as any revenues are destined to the organization’s mission. The destination-of-income tax, on the other hand, focused purely on the tax treatment of CSOs.

March 2011 Chapter 2

A Typology for Assessing the Legal and Regulatory Framework

2. Effects on revenue collection. When the tax rates under the various treatments are equal, the greatest tax revenue is generated under the blanket taxation approach, since it subjects the largest number of NPO self-financing activities to taxation. However, it is difficult to estimate the level of tax which would be collected, since by applying the same tax rate to all commercial activities, it is likely that the level of commercial activity carried out by NPOs would decrease.

In other words, blanket taxation is not an incentive for NPOs to decide whether to undertake commercial activities.

In its purest form, the destination-of-income rule has the lowest potential to produce tax revenue because all income, regardless of the source, is free from taxation if it is applied toward public-benefit purposes. In practice, many countries impose limits on the amount of income that is exempt under the destination-of-income rule, thereby limiting potential losses to the state’s revenue base.

The mission-relatedness test also potentially reduces the size of the tax base, but probably less so than the destination-of-income test, because it only provides tax benefits for mission-related activities.

However the mission-relatedness test has an additional benefit: it channels NPO economic activity into specific areas that produce public benefit.

3. Effects on the commercial sector. The blanket taxation approach to NPO income from economic activities is most favourable for the commercial sector, since there is no possibility of unfair competition, as NPOs do not receive preferential tax treatment when compared to for-profit entities. The destination of income rule does not create any mechanism to prevent complaints about unfair competition. The use that NPOs make of their income could give them an advantage over their for-profit competitors. However, a limit on this benefit reduces the comparative advantage for NPOs. The mission-relatedness test minimizes unfair competition by encouraging NPOs to focus on activities that generate a public benefit and by applying the standard tax treatment used for for-profit enterprises when NPO

activities are conducted purely for profit. The difficulty in implementing this mission-relatedness rule lies in establishing which economic activities advance the public benefit and which do not (or which do not advance it enough).

4. Effects on the development of the NPO sector. The blanket taxation approach reduces resources for the non-profit sector, essentially transferring money from NPOs to the public sector. It is generally accepted that NPOs devoted to public-benefit purposes should at the very least not be required to transfer resources to the state (i.e., pay taxes) if they are not eligible for state subsidies. Blanket taxation of all NPO income from economic activities eliminates the incentive to engage in income-generating publicbenefit activities and is the most unfavourable to the non-profit sector. NPO proponents claim that such taxes should be at a lower, more preferential rate than taxes for for-profit enterprises.

The “destination-of-income rule provides the greatest potential revenue to NPOs, since virtually any income can be made tax-exempt if channelled into public-benefit activities. The mission-relatedness test is less favourable to NPOs because activities that are undertaken purely to obtain revenue enjoy no tax exemption. However, the mission-relatedness test still provides significant tax benefits for NPOs, particularly when they focus on activities associated with public-benefit purposes. Moreover, this approach channels NPO economic activities into more socially beneficial directions than the destination-of-income test, which encourages NPOs to engage in economic activities that can earn the greatest potential financial return but not necessarily the greatest social return.

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A Typology for Assessing the Legal and Regulatory Framework

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March 2011 Chapter 2

Legal and Regulatory Framework for CSO Self-Financing in Czech Republic

Chapter 3

The Legal and Regulatory Framework of Czech Republic

This chapter analyzes the legal framework that governs CSO and their commercial activities in Czech Republic. No specific legislation exists for CSOs; they are primarily governed by the Civil Code. The legislation does not hinder the implementation of social enterprises (SEs) (except in the case of foundations and endowment funds); however it does not foster it either.

The Civil Code is rather confusing as far as regulation of CSOs is concerned especially in defining clearly what falls under the public benefit definition. The system of tax regulations governing the non-profit sphere is relatively complex and, in some respects, not entirely satisfactory, although CSOs and their commercial activities do enjoy tax benefits. In the past year, there has been a vibrant discussion about the draft of the new Civil Code, which is meant to become the fundamental norm in the area of private law which regulates the non-profit sector.

For CSOs to fulfil their role as a voice for marginalized communities and to contribute to resolving the country’s most pressing problems, it is important that they be strengthened and self-sustaining over time. A sustainability strategy consists of finding mechanisms for an organization to generate its own resources through self-financing activities, lessening their dependence on donations while at the same time strengthening their mission.

Below is a guide to the formal process these organizations must follow to carry out self-financing activities.

The Legal and Regulatory Framework of Czech Republic

3.1 General Regulatory Framework Governing CSOs In the Czech legal order there is no legal definition for non-profit organization or civil society organization. Commonly, non-profit organizations are entities existing for some other purpose than profit-making and are subject to private law not to public law. These entities have several characteristics: they are either person-based or property-based; they are typically founded by means of multilateral civil law act; they exert activities for public or mutual benefit; they are separate from the state and have a voluntary nature and a specific organizational structure. Moreover, they are mostly equipped with certain internal mechanisms enabling the control of their own activities. They have a particular type of financing (including certain tax benefits) and often utilize the work of volunteers. Their most important characteristic is that they do not distribute their profit to founders or employees but instead use it for public benefit or mutual benefit purposes.

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Currently, the Czech Civil Code contains only a very simple and generic definition of the different legal entities representing the non-profit sector and each specific legal form is regulated by a separate law.

In contrast to the broader definitions of civil society6, the civil society sector in the Czech Republic (partly under the influence of the Government Council for non-governmental non-profit organizations) employs a narrower definition of “non-governmental non-profit organizations”, which covers only those organizations which have the following legal forms: civic association, foundation, endowment fund, public benefit institutions (PBI), or registered religious legal person. These organizations have to operate in one of these areas: science, education, research 6 E.g. within the framework of the John Hopkins Comparative Non-profit Sector Project, see Salamon, Anheier et al 1999, or the CIVICUS CSI definition 7 Subject also to the provisions of the Act No. 83/1990 Coll. on Association of Citizens, in some aspects a specially regulated, see § 9a 8 See § 15a subs. 1 of the act No. 3/2002 Coll., on churches and religious societies, there are two kinds of registered religious legal persons, the first kind – mentioned above (§15 sub. 1 b) ) and others § 15 sub 1 a) 9 See § 9 of the Act No. 72/1994 Coll., on ownership of dwellings (flats and non-rezidental premises) 10 Not really relevant for this study, but necessary to mention, is a special hybrid category - semi-budgetary or budgetary and

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and development, learning, culture, support and protect youth, animal protection, social, health care, environmental, humanitarian aid, sport and physical training.

In addition to those above mentioned, under the currently valid Czech law, the following legal entities may be also founded for some other purpose than profit making: trade unions7, political parties and movements, churches and religious societies and their other types of registered religious legal persons8, housing societies9. Further, a cooperative, a limited liability company and a joint stock company may be also founded for some other purpose than business (regulated by the Commercial Code); as well as interest groups of legal entities, regulated in Section 22(f) and subsequent sections of the Civil Code, and some other legal forms10

3.2 Historical Evolution of the Czech Legal System Historically the Czech law was part of the German legal family. It developed from the Austrian11 law, which was strongly influenced by Roman law and displays many similarities to the traditional German legal conception.

This connection, however, was significantly disrupted during the process of the so-called socialist re-codification of private law, carried out primarily in the 1960s under the communist regime. Under this process, civil law came closer to the Soviet doctrine and was fragmented into various legal branches regulated by an immense number of laws. The political and social changes since the early 1990s have attempted to rectify this situation and to return to European standards.

Under current Czech law, the legal base for non-profit organizations is provided mainly by civil law12. A contributory organizations (prispevkove organizace), whose legal basis is provided by budgetary rules of the state, regions and municipalities. Because of the area of their activity, they are often put under the non-profit sector, but they differ from other subjects in the non-profit sector by both their connection to public budgets and their overall conception. In the current law, they exist as relics of the past.

11 The Czech state was a part of the Austrian (and AustroHungarian) Empire for almost four centuries (1526 – 1918).

12 More about this issues see Ronovská, K.: Non profit organizations in the Czech Republic, in: Hopt, J.K., von Hippel, T.: Comparative Corporate Governance of Non-profit Organizations, Cambridge University Presse, UK, 2010, str. 379 – 427.

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similar approach is shared by many other European legal regulations, unlike the significantly different situation in the United States, where fiscal law plays the primary role.

In Czech Republic, the terms third sector or social sector organizations, Non-Profit Organizations (NPOs) and Non-Governmental Organizations (NGOs) are used indiscriminately. In the case of NPOs, the term is generally used for differentiating them from for-profit entities, and in the case of NGOs, the term is used to differentiate them from the State.

In 2001, the United Nations (UN) proposed the use of a new concept: civil society organizations (CSOs).

This concept turned out to be more inclusive, allowing for a “symbiotic” relationship with the other two sectors while also introducing into the social sector the concept of carrying out for-profit activities, without assuming that it has profit-making goals. Beginning with this definition, in this chapter we will analyze the legal framework that governs CSO commercial activities in Czech Republic.

3.3 Civil Legislations The general regulatory definition of legal entities is contained in the Czech Civil Code, but the specific types of legal forms that non-profit organizations can assume are regulated by separate laws.

There are three main specific laws in the field of CSOs: •

Zákon č. 83/1990 Sb., o sduržování občanů, Act on Association of Citizens (No. 83/1990 Coll.), as subsequently amended.

Civil Associations An Association is a legal entity in which primarily natural persons associate (as long as it is not an association of legal entities or unions of associations). An association may be generally characterized by 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 profit-making.

Associations are governed by Section 2 of the Act on Association of Citizens. This section 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). It also includes trade unions, whose creation is subject to a simplified regulation, and employers’ organizations as well as unions of associations. Moreover, The Act on Association of Citizens regulates the legal relations between other entities which were created during the socialist period, namely the so-called voluntary organizations.

•

An association is an independent legal entity whose activities and position may only be inferred upon by the state authorities within the limits of the law.

•

Its activity may not contravene the constitution and valid legislation and may not deny or limit any personal, political or other citizen rights.

•

No association with armed units may be founded.

•

Zákon č. 227/1997 Sb., o nadacích a nadačních fondech - Act on Foundations and Endowment Funds (No. 227/1997 Coll.), as subsequently amended, and

•

It is not permissible for associations to have a goal aiming at enticing hatred, intolerance, racism and support violence.

•

Zákon č. 248/1995 Sb., o obecně prospěšných společnostech - Act on Public Benefit Institutions (No. 248/1995 Coll.) as subsequently amended.

•

Associations may not perform any functions of state authorities; they may not manage such bodies or impose obligations on any individual who is not their members.

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•

Associations may establish organizational units as long as this is explicitly provided for in the articles of association (bylaws)13.

Foundations and Endowment Funds Foundations and Endowment Funds are purposeful associations of assets established and originating in compliance with the Act on Foundations and Endowment funds for the achievement of publicly beneficial purposes (goals). Foundations operate with income generated from a registered endowment, as well as from donations and other resources. They are expected to provide financial support to third persons exclusively for public benefit purposes.

Endowment funds are a simpler legal form; they do not need to have a registered endowment, but may raise funds for public benefit purposes and use them only for such a purpose.

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Foundations have existed within the territory of what is now the Czech Republic since the Middle Ages. After taking power in 1948, the Communist Party abolished foundations and the State confiscated their property This situation lasted until 1990 when the legal form of foundation returned to the then Czechoslovak Federal Republic legal system, and later, (after 1993) the Czech legal system. The problem was that the legal regulation on foundations was rather brief – only five sections in the Civil Code – and it was very easy to establish a foundation without any funds at all. Consequently, this legal form was often misused.

Currently, within the European context, the Czech regulation of foundations is understood as one of the most stringent ones, although they fall within European accepted standards14. The strictness of the 13 Section 6, subsection 2(e) of the Act on Association of Citizens.

14 See Ronovská, K.: Non profit organizations in the Czech Republic, in: Hopt, J.K., von Hippel, T.: Comparative Corporate Governance of Non-profit Organizations, Cambridge University Presse, UK, 2010, str. 379 – 427.

15 Costs pertaining to administration of the foundation/endowment fund include particularly the costs to achieve and valorize assets of the foundation/endowment fund; costs to promote the purpose of the foundation/endowment fund; and operating costs of the foundation/endowment fund, including emoluments for the board of directors, the supervisory board, or the controller.

16 see more about NIF in Chapter 4 17 The Czech expression for a public interest institution – obecnӗ

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rules stated by the Act 227/1997 Coll., on Foundations and Endowment Funds is grounded on this historical context and responds to the necessity to “repair” the reputation of foundations which have lost their credibility due to excessively liberal regulations which had been in force until the end of 1997. This strictness has played a positive role and because of it, foundations are slowly gaining their lost trust.

In general, foundations and endowment funds can use their resources exclusively for their statutory purposes, mostly in the form of grants given to third persons.

Assets of the foundation/endowment fund may be used only in line with the purpose and condition set forth in its foundation charter or the statute. The costs pertaining15 to administration of the organization must be kept separately from the foundation contributions.

Only a restricted portion of available assets may be used to cover the operational costs of the entity. There must be set rules, fixed for five years, limiting the use of their assets for administrative purposes as well as for all salaries, remunerations and other management-related expenditures. Even more strict regulations apply for the 71 foundations – recipients of the financial support from public fund called NIF (Foundation Investment Fund16).

Public Benefit Institutions The Act No. 248/1995 Coll. on Public Benefit Institutions constituted a new type of legal entity in the Czech legal system, whose statutory purpose is strictly limited to the provision of services beneficial to the public. A Public benefit institution17 is a legal entity established to provide public beneficial services to the general public and to all clients under identical terms and conditions. Its profit may not be used for the benprospӗšná „společnost“ – uses the word “public benefit corporation”, which is misleading: this is not a corporation but really an ‘institution’ of private law, theoretically classified among legal entities 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 “obecnӗ prospӗšná společnost” in English language is “public benefit corporation” but we prefer to translate this term as “public benefit institution”, because the term “corporation” seems to imply that this legal form is based on association of persons (members). But this legal entity is based on association of property and belongs to the category of foundations (alongside foundations and endowment funds).

13 Section 6, subsection 2(e) of the Act on Association of Citizens.

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efit of its founders, members of its bodies or employees but must serve for the provision of public beneficial services for which the organisation was established.

Public Benefit Institutions are private institutions regulated by the private law. They were originally meant to replace semi-budgetary or budgetary and contributory organizations (Příspěvkové organizace), legal entities under the public law, that might be referred to as ‘public institutions’ establ ished by regions or municipalities to provide the above-mentioned public beneficial services. However, the replacement did not happen and semi-budgetary organizations currently co-exist with public benefit institutions.

Other Legal Forms There are also separate laws on churches and political parties, as well as some other specific forms of not-forbusiness legal entities (as subsequently amended): •

•

Zákon č. 424/1991 Sb., o sdružování v politických stranách a v politických hnutích) – Act on political parties and movements; Zákon č. 3/2002 Sb., o právním postavení církví a náboženských společností – Act on position of churches and religious societies, especially § 15a – registered religion legal persons;

•

Zákon č. 72/1994 Sb., zákona o vlastnictví bytů – Act on ownership of dwellings (flats and non-residential premises) § 9 ff. – housing societies (with limited purpose);

•

Zákon č. 513/1991 Sb., obchodní zákoník – Commercial Code, it regulates the position of co-operative, limited liability companies and joint stock companies also these legal forms can be founded for some other purpose than business;

•

Zákon č. 40/1964 Sb., občanský zákoník – Civil Code, general regulation of legal entities § 18 ff. and § 20f ff. - interest groups of legal entities (can include both: not-for profit but also for profit purpose);

In this guide, we will focus only on the legal forms of associations, foundations, endowment funds, public benefit institutions and registered religious legal persons (under § 15a sub. 1 b) of Act No.3/2002 Coll. or what is often referred to as the so-called facilities purposely built for charitable services, because all these types of legal persons can be considered18 typical CSOs. Statistical Data on CSOs Currently, there are more than 60,000 organizations registered in the legal form of an association in Czech Republic. Many of them formally declare to have a nonprofit making aim, although they typically do engage in some kind of business activity.

Statistics from June 2008 indicate the following composition of registered CSOs: •

63,773 Civic Associations and 29,530 Chapters of Associations (i.e. branches of Associations).

•

404 Foundations.

•

1,073 Endowment Funds.

•

1,587 Public Benefit Institutions.

•

30 registered churches and religious societies, which have more than 4,000 registered organs and institutions (under § 15a sub. 1a) of act no.

3/2002Coll.). Of which only 231 fall under the category of “registered religious legal entities” under regulation of § 15a sub. 1 b) of Act no.

3/2002 Coll.), which are relevant to this study since they are affiliated to the church but are legally separate entities.

•

73 active political parties and registered political movements.

3.3.1 Requirements for Obtaining Legal Status as a NPO The establishment of all types of CSOs is regulated at a general level by the Civil Code. It preserves the traditional two-stage character of establishment consti-

18 The Government Council for NGOs also considers these forms to be typical CSOs.

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tuted by formation and registration. The specific laws regulating each specific legal form specify in detail the rather general regulation provided in the Civil Code and set further conditions.

associations under act no. 83/1990 Coll, and any association formed prior to 2007 under conditions of act no. 116/1985 Coll is considered to be an association created under act no 83/1990 Coll.

The formation of an association is a private act of at least three natural persons. The motion for the registration is filed by a preparatory committee. The law specifies the obligatory elements that such a motion and the articles have to contain19. An association has the right to be registered if it cumulatively meets substantive and procedural statutory requirements.

Recently, there have been several problems concerning the registration of associations20.

In the case of trade union organizations and employer organizations22, the registration principle is different, due to the fact that Czech Republic is bound to the evidence principle23 by international agreements with the International Labour Organization.

An association becomes an independent legal entity by registration at the Ministry of the Interior. Or reversely, it fails to become a legal entity on the day the court makes effective the decision of the Ministry to deny the registration. An association becomes a legal entity by law on the 41st day that is to say on the day following the inactive expiration of the statutory period of time of 40 days.21 Theoretically, there are no particular restrictions in setting up of associations; however, until September 2007, Act no 116/1985 Coll. imposed a different procedure for associations of foreigners. As part of the concession principle, these associations required receiving permission from the Ministry of Interior approved by the Ministry of Foreign Affairs. Although this principle was entirely in conflict with constitutional and international regulations guaranteeing the right to freedom of association, it was applied by the Ministry of Interior from 1990 to 2007. The situation changed in 2007 (when act no 116/1985 Coll. was amended) and since then it has become accepted that foreigners can also create 19 See section 6 of the Act no 83/1990 Coll., on Association of Citizen 20 Although the law provides for the principle of registration and the relatively clear procedure to be followed, the actual practice by the registrar, 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.

21 See Section 8 subsection 5 of the Act on Association of Citizens.

22 In Section 9a, subsection 1 of the Act on Association of Citizens.

23 They become legal persons on the day following the delivery of the motion for their registration to the Ministry of the Interior.

24 In the case of trade union organizations and employer organizations, this principle is modified, due to the fact that the Czech

In preparing the proposal of the new Civil Code, there have been discussions whether the current legal regulation of establishment of associations, based on the principle of registration,24 should be replaced with the principle of freedom of establishment25. This concept was not accepted (the Ministry of Interior was strongly against this idea) so the principle of registration still holds.

Currently the registry of associations is kept by the Ministry of Interior, but in the future, it would be recommendable that a court or some other body be entrusted with this task.26 Registered religious legal entities are established by a deed of establishment, signed by the statutory body of a church or religious society; the authenticity of the signatures in the agreement has to be officially verified. The law specifies the obligatory elements that such a deed 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 incorporates the legal entity and enters the information into the Registry of registered (religious) legal entities.

The establishment of foundations, endowment funds and public benefit institutions can be done by an agreement in writing between the founders; in this case the authenRepublic is bound by the evidence principle by international agreements of the International Labour Organization.

25 The draft proposal has found inspiration from the Dutch law.

Currently the creation of an association is completed when the association is registered by the Ministry of Interior. There is a proposal to change the way in which an association is established and allow it to became an independent body already upon its establishment whereas its registration would only have a declaratory effect.

26 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.

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ticity of the founders’ signatures in the agreement has to be officially verified. It is also possible to form the organization by a founding charter, if there is only one founder. Foundations or endowment funds can by established also by testament27. The charter (testament) has to be presented in the form of a notary deed.

The founding document must be submitted to a regional court (the registry court) which decides on registration (incorporating the legal entity) and entering information about it into the Registry of Foundations or Registry of Public benefit institutions.

A foundation, endowment fund or public benefit institution is considered to come into being on the date of its entry in the registry. The request for incorporation has to be accompanied by a number of documents required by the law.

Public Institutions Involved in the Incorporation of CSOs: The Ministry of the Interior is responsible for setting up associations; the Ministry is involved in the establishment (registration) and also in its dissolution (under conditions set by law). The registration of civic associations is fairly quick, easy and free of charge.

Sometimes however, the Ministry may interpret the Act on Association of Citizens in such a way that results in either suspending or denying registration to those civic associations that provide beneficial services outside of their membership base and for a fee. This practice however goes against the freedom of association.

The Ministry of Culture is responsible for the registration of religious legal entities (§ 15a of Act no 3/2002 Coll.). Whereas foundations, endowment funds and public benefit institutions are established or dissolved by the Court. The registration procedure is more complicated than in the case of associations. There are no other agencies involved in the establishment or monitoring of CSOs and there is no central register of CSOs in the Czech Republic.

27 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.

28 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

3.4. CSOs Commercial Activities and NonProfit Status The purpose of associations is primarily associative interest activities. The formulation of the purpose must be included in the bylaws28. The purpose should not support the interests of political parties and movements, professional chambers, churches and religious institutions and should not be directed at attaining profits.29 The purpose of registered religious legal entities is ex lege (by law) to provide charitable services (see § 15a sub.

1b) of Act no. 3/2002 Coll.)

Foundations, endowment funds and public benefit institutions are types of legal entities whose purpose is strictly limited to public benefit. A publicly beneficial purpose is defined as: development of spiritual values; protection of human rights or other humanitarian values; protection of the environment, cultural monuments and traditions; development of science, education, physical education and sports30. The interpretation of what is public benefit by law is however rather vague. Their profit may not be used for the benefit of its founders, members of its bodies or employees and must serve for the rendering of the generally beneficial services for which the organization was established.

CSOs can operate relatively freely. Government entities cannot create legal impediments to the operation of these entities. In most cases CSOs are not prohibited from generating profits, but in most cases, these profits may not be distributed to private persons who might be in a position to control them for personal gain, such as founders, members, officers, directors etc. In the case of associations, this rule is not very clear because the Act on Associations of Citizen does not mention this obligation. It is left to the articles of association to address the issue of distribution of profit.

Foundations, endowment funds, public benefit institutions and registered religious legal entities are by definition legal entities organized and operated prima-

Ministry of the Interior, which is again in conflict with the constitutionally guaranteed freedom of association.

29 Section 1 Act on Association on Citizens; the regime of such associations is regulated by special laws, see above.

30 Section 1, subsection 1 of the Act on Foundations and Endowment funds.

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rily to provide public benefit purposes. In the case of associations, the purpose can be public benefit and also mutual benefit but it should always be a purpose other than for-profit (§ 1/3 Act on Association of Citizen).

The legal regulation of foundations and endowment funds is unfavourable towards commercial activities. The essential difference between the Czech conception of foundation law and most regulations in Western Europe, consists in the acceptability (or unacceptability) of possible business activities and other limitations concerning economic activities and the use of the assets of foundation subjects. The aim of this strict legal regulation is to eliminate the possibility of any misuse of the institute of foundation and, above all, to protect its property. It reflects the legislators’ effort to protect the foundation property for the performance of the foundation purpose and to minimize the risks related to its activities. This conception, however, causes many problems in real life and there are indications that it is likely to be dropped in the future.

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In the case of associations, public benefit institutions and registered religious legal persons – economic activities are possible, generally, as a financial base for statutory purposes and activities. Economic activities should be only auxiliary and should not be pursued for the purpose of generating profits. These activities are often carried out only in order to cover costs.

3.5 Economic Activities of CSOs CSOs that carry out commercial activities, in addition to activities related directly to their social mission, are required to track the income and expenses from their commercial activities separately from the missionrelated ones.

For some types of commercial activities it is necessary to obtain živnostenský list (a trading license) acc. Act no 455/1991 Coll., Licensing act (živnostenský zákon).

Certain specific laws (e.g. Act on Social Services) may impose more requirements.

Most associations in the Czech Republic depend on business activities due to the lack of other financial sources. Under the current economic situation, government funding has been reduced and Associations

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have less access to subsidies; moreover, tax laws do not provide incentives for corporate or individual giving.

As a result, business activities are currently one of the key sources of income for associations not only in the Czech Republic but also in other European countries.

However, the fact that an association engages in business or some similar activity does not necessarily mean that it pursues an economic (gainful) purpose.

The current Czech legal regulation expressly states that economic activities (business activities) may exist as a supplementary activity whose profits support the goal of the association.

However, the Articles of Incorporation of the association, and not the law itself, must specify whether it may do business or not, delineating the scope of such activities. The regulation of such activities is left up to the members to deal with in the articles of associations.

The current Czech law does not hold founding members of associations personally liable for the debts of the legal entity but rather creditors should recover their debts from the association´s own assets. This provides incentives to founders to include business activities within the articles of incorporation and to promote the use of such activities.

The profit, if there is any, must be distributed primarily in harmony with the articles of association; the Act on Association of Citizens lacks a provision which specifies how to deal with such profit. Unfortunately, the lack of regulation on this concept has often led to inappropriate use of profits generated by associations. This legal form is in fact often used for business activities since it does not impose profit distribution constraints.

In the case of registered religious legal persons (§ 15a sub.

4 act no. 3/2002Coll.) it is specifically mentioned in the law that these entities may also pursue auxiliary business activity, next to their statutory public benefit activity (charitable, social or health). The law does not mention their duty to reinvest the profit in their publicly beneficial causes, but it is probably implicit in the regulation. This legal form is not very suitable to carry out economic activities, because its purpose of establishment is to provide charitable services and not commercial initiatives. To offset this, many registered religious organization (such as NESsT portfolio member Diakonie and Moznosti Tu Jsou o.p.s) set up

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a parallel legal entity, mainly a public benefit organization, in order to carry out their economic activities and ensure that there is an explicit separation between these activities and their charitable ones.

The Czech Act on Foundations and Endowment Funds31 includes a provision that forbids them to engage in business activities. However, there are several statutory exceptions to this prohibition. Foundations and endowment funds are prohibited from doing business under their own names, except for: obtaining real estate leases, organizing lotteries, raffles, public collections, cultural, social, sports and educational events.

The assets of foundations and endowment funds may not be used as collateral nor to secure liabilities.

Foundations’ assets are inalienable if this is determined by the founder or the donor; in other cases, assets may be disposed of, but only in harmony with the purpose of the foundation and with all due care. The law provides a detailed regulation of ways in which a foundation may invest its means; everything is aimed at maximum protection of the foundation property for its publicly beneficial purpose.

Foundations and endowment funds may not own any other entity, unless the law provides an exception to this rule. Foundations may be shareholders of joint stock companies, which are not allowed for endowment funds. A foundation may also be the founder of a public benefit institution.

A foundation may participate in the business of jointstock companies. The investment may not exceed 20 per cent of the foundation’s assets after deducting the value of the foundation´s equity. Publicly negotiable securities issued by joint-stock companies may be purchased and sold by the foundation only in regulated markets. The foundation’s stake in a joint-stock company’s assets may not exceed 20 per cent.

By contrast, the law strictly provides that foundations and endowment funds may not become members of an unlimited liability company, general partners in a limited partnership company, silent partners or members

31 Section 23 (1) of the Act on Foundations and Endowment Funds.

of a cooperative whose members are obliged to cover the losses of the cooperative exceeding the value of membership contributions, or members of other legal entities if such members are liable for the obligations of such entity.

Public benefit institutions must provide the services for which they have been established for and may also provide other, so-called auxiliary services which must not reduce the capacity of the public benefit institution to provide the statutory services. The auxiliary services may be constituted by economic activities pursued for the purpose of generating income to cover the losses incurred by the statutory activities. However, as stated before, the law explicitly prohibits public benefit institutions from distributing profits, if any, to its trustees, officers and employees. Public benefit institutions may neither create branches abroad nor participate in the commercial activities of other entities.

3.5.1 Destination of Surplus When dissolving an association, the liquidation surplus after covering all debts, must be distributed to entities whose mission coincides with that of the association that is being dissolved as stipulated in the articles of association or by the association´s decision-making organ (often the general assembly). By law, this does not have to be stated in the Articles of Incorporation, but in practice the Ministry of Interior would prefer that it be included. When an association applies for public funding, it has to have a provision in the articles, which states that the surplus will remain in the public benefit sphere. The Act on Association on Citizens lacks a provision specifying how surplus should be handled and therefore needs to be defined in the articles of incorporation.

In the case of registered religious legal person (§ 15a odst.

1b) act no. 3/2002Coll.), the surplus funds that need to be liquidated (including obligations) pass back to the church or religion society (the founder).

In the case of foundations and endowment funds, if the foundation charter does not state that the surplus funds that

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need be liquidated are to be transferred to a specific foundation/endowment fund that shares a common or similar purpose, the liquidator will offer this surplus to identical, or similar purpose foundations or endowment funds; if no such foundation/endowment fund is identified by the liquidator, or this liquidation surplus is refused by the liquidator-indentified foundation/ endowment fund, the liquidation surplus will be offered to the municipality where the foundation/endowment fund is located. If the municipality does not accept the offer within 60 days from the offer date, this liquidation balance will go to the state treasury upon the expiration of the 60-day deadline. The beneficiary of the liquidation is to use this liquidation surplus for publicly beneficial goals. (In case of foundations/endowment funds financed by EU funds, there is a special regulation on how their liquidation surplus should be used.)32.

These foundations need to sign a contract with the state institution which gave them the grants which indicates that the surplus has to be transferred to other foundations with the same purpose or minimally in the public benefit sphere.

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In the case of public benefit institutions, the deed of establishment (charter) may specify other public benefit institutions to take over the liquidation surplus. Alternatively, the charter can indicate that the managing board, in its resolution to close down the public benefit institution, may specify a receiving public benefit institution. Otherwise, the liquidation surplus shall be offered for transfer to the municipality in which the PBI is registered. The surplus may be transferred to the municipality free of charge only if the municipality enters into a contract obliging it to use such surplus for rendering the publicly beneficial services for which the public benefit institution had been established. If not, the liquidation surplus shall be transferred to the state (Czech Republic) to provide public benefit services.

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List of Related Laws: The conditions for conducting business activities are set out in the following legislations: 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 službách33) Act no. 198/2002 Coll., on volunteerism (volunteer´s services) (o dobrovolnické službě) And many others according to the type of activity.

Tax laws: Act no. 337/1992 Coll. on the Administration of Taxes and Fees, sec. 6 (zákon o správě daní a 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) 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 – employment of disabled people, § 112 – 119 tools for active policy of employment Accounting: Act no. 563/1991 Coll., on accounting (zákon o účetnictví)

32 See § 9 sub. 5 of Act on Foundation and Endowment funds 33 A bit controversial is Act on Social Service which came into force in 2008. This law sets quality standards for social service providers. The positive ramification of this law is that it forces NGOs to

improve their quality of services. Some NGOs have a hard time meeting the quality standards. The law introduces some questionable aspects concerning NGO operations. For example, it restricts the extent of social service fees.

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The Legal and Regulatory Framework of Czech Republic

3.6 Tax Framework of CSOs and Donations Foundations, endowment funds, public benefit institutions, associations and registered religious legal entities in the Czech Republic fall under similar taxation provisions.

Tax regulations affect these entities throughout their existence – from their creation until their termination – and also affect their founders, members, donors and employees. In some cases, it is precisely due to tax benefits, that these particular legal forms of foundation and association are chosen and used by their founders.

The system of tax regulations governing non-profits is relatively complex and, in some respects, not entirely satisfactory. The key problem is the variety and sometimes even inconsistency in the wording of particular tax laws.

In addition, many laws provide tax benefits depending on the legal form of the entity or person regardless of whether it really engages in activities that are worthy of public support in the form of tax advantages.34 When it comes to taxation, the Czech legal system does not distinguish between public, mutual or private benefit.

There is also a broad application of the term public benefit. Some activities, such as sports (including professional sports) are identified as being of public benefit and, as a result, such activities enjoy tax advantages.

At present in the Czech Republic, there are ongoing debates on the issue of defining the notion of public benefit. Various approaches are being considered that would enable more effective support of public benefit activities, mainly in connection with the possible introduction of public benefit status.

The new law aims to set criteria that will define what public benefit entails and all legal entities that will fulfill those criteria will acquire the public benefit status which will entrust them with certain subsidies and benefits. With the new law, public benefit organizations will be required to implement higher levels of transparency; they will have to publish their funding structure

34 Since foundations, endowment funds and public benefit institutions must be established strictly for ‘the purpose of public benefit’, this conception is acceptable; a problem, however, may arise only in the case of associations. As a result, the law permits

and sources; they will have to publish the salary scale of the top management and provide annual reports. The goal of introducing the public benefit law is to foster transparency within the non-profit sector by preventing organizations which are not providing real public benefit from receiving certain subsidies or tax advantages.

In the Czech Republic, non-profit organizations are based on civil law, not primarily on tax law. On the other hand, there is a specific regulation affecting non-profit entities which states that they are only taxable as far as they run an enterprise with a profit purpose. Non-profit organizations are exempt from income taxes related to non-profit programs as long as the revenue is not higher than the expenses incurred. In case non-profits run commercial activities with profit purpose they become taxable but enjoy certain privileges.

Taxes concerning CSO - 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 estate property tax

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 not operate with this notion.

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3.6.1 Survey of Tax Privileges Persons and entities subject to taxation are defined in Section 6 of the Act on the Administration of Taxes and Fees35. This act also includes the requirement of those subject to taxation to be registered, regulate the issuance of tax identification numbers and establish the requirement to file tax returns (or reports).

There are two basic kinds of special norms regulating the tax regime of entities which exist for public benefit.

These include: tax advantages or exemptions from taxes (tax-benefits) for CSOs whose activities generate income; and tax incentives and deductions (tax-incentives) to encourage donors to make donations to these types of entities.36 3.6.2 Tax Benefits

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There is a slight tension in Czech Republic between exemptions from taxes or granting other tax benefits and the principle of generality and equality of taxation; any such benefit thus has to be conceived in a very restrictive manner and needs to be properly justified, which is sometimes problematic. This is due to the fact that there is no real efficient definition of public benefit in the law to which tax benefits can be attached, which leads to confusion and lack of understanding in the public.

Income tax is not applicable to income mentioned in § 18 sub. 4 of the Act on Income taxes - income 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 of foreign countries, income from interests in current accounts and income arising from the statutory 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 is not subject to income tax as long as the expenses (costs) incurred on such 35 The Act of the Czech National Council No. 337/1992 Sb. on the Administration of Taxes and Fees.

36 For a similar categorization, see also Hondius, W. F., Ploeg, T. J. van der: International Encyclopaedia of Comparative Law, Volume XIII., Business and Private Organizations, Chapter 9, Foundations, 2000, p. 74 and subsequent pages.

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activities exceed the income. By contrast, income from advertising and property rental income are always subject to taxation.

3.6.3 Taxes on Economic Activities of CSOs Foundations, endowment funds, public benefit institutions, registered religious legal persons and associations are legal entities considered by law as not established for commercial purposes. As such, these entities pay a reduced corporate income tax (§ 20 sub (7) Income tax act) .The reduction in corporate income tax is by 30% of the tax base, but this reduction may be no less than CZK 300,000 (1 Euro = 26 CZK) and no more than CZK 1,000,000. The money thus saved, must be used to support related activities. In the case of university-type institutions, the money must be used for educational, scientific, technological development or artistic activities.

Foundations are fully exempt from corporate income tax on income generated by a registered endowment, be it interest from financial accounts, dividends from securities and bonds, rent from real property or royalties from patent rights or copyrights. No such exemption is applicable for endowment funds. Under certain conditions, CSOs are exempt from several other taxes: tax on real estate property transfer, tax on gifts and donations, inheritance tax.

Some believe that if a public benefit organization or an association becomes involved in economic activities that compete with the private sector, this could lead to unfair competition. They believe that to avoid this, no tax exemption should be offered for these activities, or only under highly restrictive conditions.37 Others argue however, that CSO exemption from taxes does not pose unfair competition since the profits or revenues generated from these economic activities go toward public benefit purposes and are not for personal gain. In addition, CSOs incur other “social costs” associated with economic activities carried out by, or for 37 For more on these opinions, see e.g. Koller, T.: Stiftungen und Steuer, Die Stiftung in der juristischen und wirtschaftlichen Praxis, published by H. M. Riemer, Europa Institut Zuerich, Schulthess, Zuerich 2001, p. 52.

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The Legal and Regulatory Framework of Czech Republic

the benefit of, marginalized or excluded communities, and these costs outweigh the gains made through tax exemptions.

The debate promises to be complex as the Council of NGOs met with the Office for the Protection of Competition (http://www.compet.cz/en/) in connection with the public benefit status law and the question of “unfair competition” was a major impediment raised by the representatives of the Competition Office.

The provision of Section 20 (4) of the Act on Inheritance, Gift and Real Estate Transfer Taxes38 clearly states the exemption of foundations, endowment funds and public benefit institutions from inheritance and gift taxes.

There are further exemptions from inheritance and gift taxes applying to free acquisition of property intended to finance equipment and humanitarian activities in the fields 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 as the property is acquired by legal entities (i.e. including associations) established for performing these activities and having their registered office in the Czech Republic.

The real estate property transfer tax (transferred for a consideration) does not distinguish between the type of entity or individual paying the tax; in the case of foundations, endowment funds and associations, there is no special regime. The rate is three percent.

The real estate tax39 distinguishes between two kinds of taxes – a tax on plots of land and a tax on buildings.

Under Section 4 subsection 1, the tax exemption applies to those plots of land that form a single functional unit together with a building serving, among other, foundations. Endowment funds, however, have not been included in the law. Associations and public benefit institutions are exempt from the tax in a similar way – Section 4 (1)f mentions “plots of land forming a single functional unit with a building in the ownership of an association of citizens and public benefit institutions”.

Section 4 (2)e mentions “plots of land forming a single

38 The Act No. 357/1992 Coll. on Inheritance, Gift and Property Transfer Taxes 39 The Act of the Czech National Council No. 338/1992 Coll. on Real Estate Tax

functional unit with a building or its part serving for the performance of religious rites of churches and religious organisations recognised by the state, and a building or its part serving for the performance of spiritual administration of such churches and religious organisations”.

The tax 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 of land and buildings are not used for economic activities or subleased.

The obligation to pay the road tax under the Road Tax Act40 applies to those foundations and endowment funds which use vehicles for their economic activities or some other independent gainful activity, or in a direct connection with economic activities, or for activities generating income subject to income tax under special regulations or similar taxes abroad.

The Act on Value Added Tax41 provides, among other, that any good purchased from other European Union member states, is subject to taxation also if obtained by a legal entity founded or established for some other reason than business.

3.6.4 Tax Incentives Donors, sponsors and other subjects making contributions towards the activities of foundations, endowment funds, public benefit institutions and associations enjoy a certain level of tax incentives.

Under Section 20 (8) of the Income Tax Act, any legal person may deduct from its tax base the amount of donations provided to foundations and associations with their registered office in the Czech Republic, if used for the financing of: science and education, research and 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 activi-

40 The Act No. 16/1993 Coll. on Road Tax 41 The Act of the Czech National Council No. 235/2004 Coll. on Value Added Tax

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ties of political parties and movements, as long as the amount of the donation is at least CZK 2,000.

Donations to CSOs (registered in Czech Republic), 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.

3.7 Tax Filing and Legal Reporting

26

A CSO, like any other legal entity, has to submit a tax declaration with the local Tax Administration Authority for income tax, VAT tax, inheritance 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 limits for their submission. CSOs are usually considered income tax payers as soon as they undertake commercial activities or have employees. As soon as a CSO receives a donation or an inheritance, the entity has to submit a donation or an inheritance tax declaration (to apply for tax exemption). Other types of tax declarations 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 of CSOs have to be reviewed by auditors.

3.7.1 Income Tax Filing for Legal Entities As soon as a CSO starts economic activities, it has up to 30 days to register with the Tax Administration Authority (§33 Act on income taxes). The registration process includes completion of a form which requests basic organizational information, such as the name of the organisation, location, identification number, names of statutory bodies, and names of persons eligible to negotiate in the name of the organization.

The information filed has to be documented (e.g. by record from the CSO register, by contract with a bank institution proving the bank account balance). In case of a change in the registered information, it is compulsory to provide the new information to the Tax Administration Authority within 15 days.

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3.7.2 Income Tax Filing for 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).

A CSO has to submit an income tax declaration by the 6th month after the end of the tax declaration period.

If the declaration period is a full calendar year, the organization has to submit the income tax declaration no later than the end of June.

3.7.3 VAT Reporting Non-profit organizations must pay value added tax (VAT) only if they are related to economic activities. Economic activities for the purposes of this Act shall mean such actions as production, trade, services, agricultural production, and independent scientific, literary or artistic fields. Non-profit organizations are exempt from paying VAT: 1. If they are only carrying out activities that the law does not include in the concept of economic activity.

2. If they only engage in activities that are exempt from tax without the deduction (the so-called exempt activities include postal services, radio and television broadcasting, education, health services and health goods, social assistance, operation of lotteries and other similar games).

3. Even when non-profit organizations do not fit in the above mentioned categories, they are exempt from VAT if the turnover does not exceed the amount of 1 million CZK in the last 12 consecutive calendar months.

However, a non-profit organization becomes a VAT payer even without carrying out any business activity or being a tax exempt legal entity, if it purchases goods from another EU Member States and the value of the goods without VAT during the current calendar year exceeds 10,000 EURO. In this case, the non-profit organization shall apply for the allocation of a tax identification number.

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All taxpayers (including CSOs) whose turnover exceeds CZK 1,000,000 (approx. 39,000 €)42 in any consecutive twelve-month period must register as a VAT payer with the Tax Administration Authority. The organisation has to register with the Tax Administration Authority within 15 days after the month when the turnover level was exceeded. The organization must begin to pay the VAT tax the first day after 3 months from the date when the turnover was exceeded.

3.7.4 Inheritance and Donation Tax Reporting In order to apply for a tax exemption from the Inheritance and Donation Tax, the organization must submit the Tax Declaration to the Tax Administration Authority within 30 days after the donation was donated or after the end of the inheritance procedure (§ 21 odst. 1 of act no. 357/1992 Coll., on inheritance tax, donation tax and property transfer tax).

3.7.5 Other Tax Reporting Property Transfer Tax Reporting The CSO has to submit a property transfer tax declaration within 3 months (i) after the property or real estate was entered into the property register (ii) from the date when the property transfer contract (if property is not recorded into real property register) came into force 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 transfer tax).

Real Estate Property Tax Reporting The CSO – as owner of the real estate – has to submit a real property tax declaration by 30th January (§ 13a of act no. 338/1992 Coll., on real estate property tax).

Road Tax CSOs have to register to pay the road tax if they own an engine-powered vehicle (car) or pay travel costs by car for it employees. The CSO has to register with the Tax Administration 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). The road tax is 42 Used the average exchange rate for 2010: 1 EUR = 26 CZK 43 § 26 odst. 1 Act on Foundations and Endowment funds 44 § 25 sub. 1 Act on Foundations and Endowment funds

paid in advance (tax advance deposit) – on 15th April, 15th July, 15th October and 15th December.

3.7.6 Annual Reporting Foundations, Endowment Funds and PBIs have to prepare and publish annual reports. Annual reports have to be filed with the Court Register within 30 days after the document was approved by the board of directors, the latest by the end of the following year43. Everyone is entitled to make use of the annual report and make copies including excerpts.

Foundations and endowment funds have to prepare and publish an annual report in line with the Act on Foundations and Endowment funds44. They must compile the report by the deadline determined by the board of directors, or by the statute of the foundation/endowment fund, but at the latest within 6 months of the period under review. The period under review is the past calendar year, or the time elapsed since the establishment of the foundation/endowment fund through the end of the calendar year in which the foundation was established, if it is its first annual report.( § 25 article 1 Act on Foundation).

The annual report outlines the activities of the foundation/endowment fund in its entirety during the period under review and provides also an assessment of these activities. In particular, it has to 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 on whether the foundation/EF adheres to the administrative cost-curbing rule in its economic performance.

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5) An assessment of basic disclosures contained in the annual financial statements and the auditor’s opinion supplemented by significant findings from the audit report. The annual financial statements constitute an appendix to the annual report. (§ 25 article 2 Act on Foundation).

3.7.7 Auditing The foundation’s annual financial statements have to be verified by an auditor. The endowment fund’s annual financial statements have to be verified by an auditor for any calendar year in which the sum of total costs or revenues disclosed by the endowment fund exceeds 3 million CZK (approximately 115 400 Euros45), or if the endowment 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 public subsidies, (i) if it has not been established by the supervisory board or (iii) if the turnover of the PBI exceeds 10 million CZK (approximately 385,000 Euros).

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In the case of associations, there is no legal duty to publish annual reports or to let verify the annual accounts by an auditor.

3.7.8 Public Collection Report If a CSO undertakes public collections, it has to report an accounting statement to the local municipality once a year. The report has to be submitted by the 3rd month after the end of a one year period from when the public collection took place and within three months after the end of all public collections (a public collection can be carried out in a maximum period of three years). See Act no 117/2001 Coll., on Public Collections.

Act no. 117/2001 Coll, on public collections regulates revenue from collections for public benefit purposes.

According to the Act, only legal entities can undertake public collections for public benefit purposes (humanitarian, charitable, development of education, physical training and sport, protection of cultural heritage or environment). The legal entity can use a limited amount of funds from the collection’s revenues to cover for administrative costs (up to 5 per cent from gross revenues).

45 Used the average exchange rate for 2010: 1 EUR = 26 CZK

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3.8 Required knowledge for launching commercial activities and existing sources of advice The significant legal, accounting and tax obstacles to CSOs setting up social enterprises, together with their limited experience in managing them means that there is a growing demand for technical support in finance, law (especially tax law) and accounting.

Often CSOs lack the economic means to pay for specialized assistance to help them meet the requirements.

In addition there are currently not enough accounting and legal specialists in these areas. Consequently, it is extremely important to make this knowledge accessible to CSOs so they can set up, strengthen and increase their mechanisms for self-financing, without losing tax exemption and so that excessive workload does not lead to deterioration in the administrative structure of the organization.

The Czech Republic has only a small group of nonprofit legal experts. Legal consultancy services are available in Prague, Brno and some regional cities.

Access to these services is limited in rural and more isolated regions.

Below is a list of governmental agencies, organizations and websites that currently offer assistance to CSOs in Czech Republic. With even fewer specialists in support services directly related to the commercial activities of CSOs. Non-profit organizations: •

Online information and education centre for NGOs. www.neziskovky.cz

•

Centre for research on the NGO sector. www.ecvns.cz

•

Econnect, the information center for non-profit organizations. http://nno.ecn.cz/

•

The Donors Forum, a foundation that promotes philanthropic giving and offers training and consultation on fundraising. www.donorsforum.cz

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•

•

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Nova Ekonomika, a non-profit organization focusing on promoting, researching and supporting social enterprise. http://www.socialni-ekonomika.cz/ NESsT, a non-profit organization that supports the development and strengthening of social enterprises in emeriging markets by providing capacity building and financial support to CSOs. www.nesst.org

Governmental organizations: •

Portal of the Public Administration - http://portal. gov.cz

•

Government Council for non-profit and NGOs www.vlada.cz

3.9 Conclusions •

Fokus Praha, an organization that runs a few social enterprises and provides information, assistance and a networking platform on social enterprise. http://www.socialnifirmy.cz/ and http://www. fokus-praha.cz/

•

NadaceVia, a foundation that promotes philanthropic giving and the development of social enterprise through the Academia for social enterprise program. www.nadacevia.cz

•

Greater London Enterprise (GLE) Prague, a non profit organization that provides training and support to social entrepreneurs. http://www.gle. co.uk/services/prague/czech/

•

The Union of Czech and Moravian production cooperatives that represents many sheltered workshops,http://www.scmvd.cz/

Academias: •

Masaryk University, Law Faculty http://www.law. muni.cz/

•

Masaryk University, Faculty of Public administration. www.econ.muni.cz

•

Charles University, Faculty of Social Sciences http://fsveng.fsv.cuni.cz/

•

Charles University, Faculty of Humanitarian Studies http://www.fhs.cuni.cz/

•

The Center for Social and Economic Strategies (Charles University, Faculty of Social Sciences) http://www.ceses.cuni.cz/CESESENG-1.html

The Czech non-profit and non-governmental sector is made of several different legal forms, all operating in specific areas (see page 17) and all established for a purpose other than that of making profit. Each of them is established by different institutions, including the Ministry of Interior, the Ministry of Justice and the Ministry of Culture. There is no central register to track records of the sector; each institution maintains its own.

This structure is very disperse and partially explains why the sector has not been sufficiently researched, studied, analyzed and adequately acknowledged.

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Each type of CSO´s legal entity is regulated according to different criteria set in the specific legislations.

For instance, unlike civic associations-- foundations, endowment funds and public benefit organizations are required to produce annual reports and conduct financial audits every year. In the case of public benefit organizations, audits are required only when they are recipients of public subsidies (the majority is) or their turnover exceeds 10,000,000 CZK. CSOs are in general not difficult to set up but sometimes difficult to monitor and control. This is particularly the case of civic associations which make up the larger percentage of existing CSOs. Since 2008, and as a result of this lack of transparency related to their own legal structure associations have been excluded from several granting programs of the Ministry of Labour and Social Affairs.

Seemingly, civic associations are no longer recognized as legal entities that can provide public benefit since the Ministry of Interior has ceased to register any new association as provider of social services. As a result, Associations must establish public benefit organizations in order to be able to provide social services and access subsidies or grants.

The Legal and Regulatory Framework of Czech Republic

With the exception of foundations and endowment funds, which are regulated by rather restrictive rules, Czech CSOs can conduct commercial activities. They can do so, as long as the commercial activities have a different purpose than that of making profit and are auxiliary to the mission of the organization hence providing public benefit. The profit generated has to be reinvested in the programs of the non profit organizations. Unlike other non profit legal forms, in the case of associations, the law does not indicate how the surplus or income generated has to be distributed; this has to be indicated by the founders in the articles of association.

30

Non-profit organizations need to run separate accounting for their commercial activities. The laws regulating the business activities of non-profit organizations are unclear and complicated. This is mainly due to the fact that there is confusion on how to regulate the relation between commercial activities, non-profit legal entities and the meaning of public benefit. The definition of public benefit is not clearly established; nor is the criteria for determining whether an organization is fulfilling a public benefit purpose.

From the point of view of taxation, the Czech legal system does not distinguish between public benefit and mutual or private benefit. Tax advantages are conditioned by the legal form, not the purpose of establishment – or activity – actually performed by the legal entity.

This problem in the taxation law is one of the issues that the new law on public benefit status, currently being discussed in parliament, hopes to correct as explained in paragraph 3.4.

Non-profit organizations are always subject to the tax on revenue generated from ads, membership fees and rentals. On the other hand, they are not subject to taxation on interest income from deposits in their accounts nor on revenue generated from their program activities nor their commercial activities as long as the expenses of the main activity are greater than the revenues generated from it, in which case the tax base equals zero. However, if revenues from the core activities exceed the costs of reaching, securing and maintaining the revenues, then revenues from the main activities and the commercial activities of the organization are subject to income tax.

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Non-profit organizations can reduce their tax base by up to 30% but no more than by 1 million CZK, as long as the funds raised by these tax savings are used to cover costs associated with the activities not subject to tax. This must be implemented no later than during the subsequent three tax years.

As mentioned above, the tax treatment of commercial activities of CSOs is determined by the type of legal entity running the economic activity rather than by the nature of the business (mission or non-mission related). CSOs are legal entities established for not profit making purposes that provide public benefit and this is what determines how taxes are applied to them and their commercial activities. These commercial activities can only be implemented if the profit is reinvested in the public benefit programs of the organization. For the Czech regulatory system, the destination of income is a requirement for social enterprises and is also a determining feature in their tax treatment.

With reference to ICNL tax treatment typologies presented in Chapter 2, the Czech tax treatment for CSO economic activity is a combination of the following: 1. Income from activities that are related to public benefit purposes of the organization and that does not exceed costs is not taxed (§ 20 sub 7). CSOs will be taxed on surplus revenues.

2. Seemingly income generated from economic activities, and used for public benefit purposes, that does not exceed costs is not taxed (see § 20 sub 7 of Income tax Act).When income exceeds costs, CSOs enjoy a reduction of 30% of their taxable base and this amount is a minimum of 300,000 CZK up to a maximum of 1,000,000 CZK. This means that CSOs are taxed on income from their economic activities using a destination of income and mechanical tax approach.

In regards to tax incentives for donations to CSO, at the beginning of 2002, the Chamber of Deputies of the Czech Parliament debated a bill that would allocate 2% of income tax from natural persons to non-profit organizations (Act on Assignations).

This law was not approved as it was not in line with the Czech tax regulations. According to the drafters, the law was meant to improve the financing of

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the non-profit sector.46 Those who opposed the bill however argued that, this attempt constituted a nonsystematic intervention into the structure of taxes in the Czech Republic and better results for the nonprofit sector could be achieved with an amendment of the Income Tax Act, which could set higher limits for tax deductions for those natural and legal persons intending to donate a part of their profits for charitable purposes.

Currently, donations to 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.

At the moment, tax payers can deduct charitable donations from the total amount of taxes they need to pay, but they cannot deduct more than 15% of the total taxes they owe. If the state were to double this percentage, it could have incredible repercussions on the giving trends of the Czech tax payers.

3.10 Case studies which demonstrate important issues within the regulatory framework Two associations have been chosen to assess the current regulatory framework and the capabilities of CSOs to comply with legal and regulatory obligations in practice. What follows is a brief description of each institution and their financing activities followed by a summary of the legal aspects affecting the development of their social enterprises as a self-financing strategy.

3.10.1 Pohoda Association The Organization Established as a civil association in 1998, Pohoda wanted to be an alternative to national social care institutions providing social services to disabled people in the Czech

46 PSP ČR, III. volební období, sněmovní tisk 1194, poslanecký návrh, zákon o asignacích, accessible online at www.pspcr.cz, cited on 11.1.2010

Republic. Their mission is to integrate people with mental disabilities in society helping them to be part of the community and manage their adult life (learning how to lead a self-sufficient, independent and responsible life, maintaining and developing relations with partner, family and friends, work and leisure).

POHODA has a total of 35 employees (full and parttime). More people cooperate with Pohoda through external cooperation agreements (especially students and social workers). In total 55 people work in their programs.

They provide three main social service programs from which they earn income: •

Daily Care Service for disabled people to whom they offer a variety of activities including music classes and arts & crafts. The daily care service can host a maximum of 12 clients per day.

•

Sheltered Housing for 21 disabled people.

They have 4 flats in Prague plus 2 beds for crisis situations. The clients living in sheltered homes receive help and training on independent living (8 of their 21 sheltered housing clients also join the daily care clubs at Pohoda).

•

Assistance Service which consists of two main activities: a. Tailored-made, home-delivered assistance to clients (40%); b. Relief service for families of disabled people (60%). For this service they contract 15 external social workers. Their tailored made assistance service is based on goals agreed upon with the client at the beginning of the cooperation and can last between 2 to 4 years.

They produce performance evaluation reports every 6 months to monitor progress and/or lack of it.

31

The Legal and Regulatory Framework of Czech Republic

March 2011 Chapter 3

Structure of funding sources 2006–2009 in million CZK 2006

2007

Foundations

343 = 2,3%

187 = 1,1%

100 = 0,6%

0 = 0,0%

Public funds

8570 = 58,6 %

8853 = 50,9%

10028 = 64,4%

8856 = 68,4%

ESF EU

3491 = 23,9%

5766 = 33,2%

1827 = 11,7%

0 = 0,0%

Corporate donors

182 = 1,2%

51 = 0,3%

99 = 0,7%

118 = 0,9%

Individual donors

31 = 0,2%

21 = 0,1%

209 = 1,3%

80 = 0,6%

Self-financing activities

2017 = 13,8%

2501 = 14,4%

3307 = 21,3%

3887 = 30,0%

Total in CZK

14634 = 100%

17379 = 100%

15570 = 100%

12951 = 100%

Development of total income (taking into account the revenue from the European Union- Europe Social Fund- EU ESF)

32

Year

Income

With ESF

Without ESF

2003

9

0

9

2004

8,5

0

8,5

2005

8,8

0,1

8,7

2006

15

3,8

11,2

2007

18,2

5,8

12,4

2008

15,9

1,8

14,1

2009

13

0

13

Pohoda generates revenues from provision of social services, subletting accommodation, training courses and consultancy and selling teaching tools. All these activities enjoy a tax reduction according to § 20 paragraph 7 of Law 586/1992, the Income Tax Act which states that if revenues do not exceed costs, the organization is exempt from paying taxes. If revenues exceed costs they have to pay taxes but are entitled to the 30% reduction in taxes (with a minimum deduction of 300,000 CZK from their tax base to a maximum deduction of 1,000,000 CZK).

Pohoda is also subject to tax exemption on donations according to § 20 paragraph 4, point. a) Act No. 357/1992 Coll, which states that organizations are exempt from taxes for both financial and nonfinancial donations if the gift is intended for a purpose listed in the following

2008

2009

areas: culture, education, science, health, social welfare, ecology, sport, education and protection of children and youth and fire protection.

If a non-profit organization has no tax liability, it doesn’t need to register as a tax payer but it is still obliged to do its yearly tax declaration. Pohoda has never generated higher revenues then costs in performing its main activity, hence has never been registered as a tax payer.

Self-Financing Activities In 2009, Pohoda set up a new legal entity, a public benefit organization and launched its social enterprise.

The social enterprise idea matured during years of training and program improvement. Between 2007 and 2008 the organization received European funds for staff training which allowed it to widen and strengthen its internal range of expertise and know-how. Some staff members received special training in the UK where they learnt how to provide a new set of social services to their disabled clients and how to teach this know-how to others. The organization designed training courses for social workers that received official accreditation from the Ministry of Social Affairs and in early/mid 2009, the Pohoda Educational Agency was officially launched. The Educational Agency offers high-quality training to social workers, government officials, private companies and families of people with mental disabilities to improve interaction, communication, and ultimately integration of disabled people in society. To cover the start up costs of the agency, the board agreed to use some of the reserves of the organization which the agency will reimburse through its profits. The agency runs as a separate legal entity and offers its professional trainings also to the staff of the

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The Legal and Regulatory Framework of Czech Republic

parent organization in exchange for free premises and in-kind administrative support.

The goal of the agency is to cover 6% of the total budget of the organizations (the parent and the agency) and to generate funds to invest in each of the programs run by Pohoda for its clients on a rotational basis. The agency wishes to train a total of 1000 people in its first year of activity. So far results have been very good; the courses are well appreciated by their customers and they have managed to sign an agreement with the biggest national insurance company to train their employees’ throughout the country. The self-financing activity has also increased the visibility of the organization and has improved its reputation.

Challenges of Self-Financing The challenges Pohoda is facing in running the business are often consequences of a lack of business know-how.

Throughout the first year of operations, the organization has in fact implemented some changes in its operational and HR management systems in order to overcome problems related to lack of internal support and unskilled staff. Those improvements were the result of the training received through the NESsT business planning process which has also helped to establish adequate prices for their courses and improve their quality control system.

The agency still needs to design a marketing strategy to reach two main target groups which they have not yet managed to approach: public officials and private firms.

According to Pohoda’s experience, the laws regulating the commercial activities of non-profit organizations are often not clear. Although information on rules and regulations is accessible, the problem is how to interpret them and comply with them in the specific case of non-profit organizations. A good example of this is the road tax; this law states that if you own a vehicle for the purpose of generating revenue you should pay this tax.

But nowhere is it explained in detail what it means to use a vehicle to provide taxable income in the case of nonprofit organizations.

3.10.2 Mame Otevreno Association Mame Otevreno is a civic association founded in 1999 focused on providing assistance to help integrate people with special needs, in particular people suffering from mental disabilities and autism, into the community.

The organization provides support to its clients through six different programs tailored according to needs and age groups. Their programs include leisure activities, as well as training and support to their clients to access the labor market. While helping their target group prepare for and enter the labor market, they also work on educational, informational and advisory programs to raise awareness in the community.

Mame Otevreno has 25 employees and generates revenues from the following activities: •

Personal assistance

•

Transit employment program

•

Job placement

•

Advertising

•

Sale of sheltered workshop products

•

Sale of concert tickets

33

Revenue is also generated by the Vesmirna cafe where the transit employment program takes place.

Their budget and financial sources in the past three years have been as follows:

Year

Budget

Source Self-generated Revenue

2007

9035 million CZK

27,3%

62,7%

2008

11,559 million CZK

28,6%

71,4%

2009

7545 million CZK

32,3%

67,7%

Other

In 2008 they implemented an ESF project substantially increasing their annual budget.

Like Pohoda, Mame Otevreno enjoys a tax reduction according to § 20 paragraph 7 of Law 586/1992. The Income Tax Act (see definition above). Seemingly, as Pohoda, Mame Otevreno is also subject to tax exemption on donations according to § 20 paragraph 4, point. a) Act No. 357/1992 Coll. (see definition above).

The Legal and Regulatory Framework of Czech Republic

Mame Otevreno is a VAT payer (10% and 20%) for all its income generating activities excluding those social services that are exempt by law (such as: assistance service, employemnt transit program, concert ticket sales).

The organization has the same legal requirements as any other commercial legal entity. They need to be registered at the financial office, at the trading licence office, at the social security authorities, health insurance and so on. They need to run separate accounting for each income-generating activity. They need to produce several financial statements ( balance sheet, profit&loss statement) and have to submit the tax filing for each tax they are subject to pay.

34

Information on accounting and other regulations have been provided by other CSOs as well as gathered from the UNES magazine, specialized in non-profit topics.

Mame Otevreno has had often the experience of addressing employees of public institutions with questions to which they were not always able to give answers or their answers were at times contradictory. It appeared that public employees were often confused about what regulations applied or didn’t apply to a non-profit organization, or felt somehow insecure to give instructions on what the organization was exempt from or how it could reduce taxable and non-taxable costs.

In Mame Otevreno‘s experience, the regulations applying to the income-generating activities implemented by the organization are often inconsistent as well. Specific, concrete questions often find various different concepts, explanations and answers in the legislation and offer different solutions or links to other regulations, which is often confusing and time consuming to follow and abide by.

The lack of clarity in the laws and regulations has had a direct negative impact on Mame Otevreno as the organization pays 120,000 CZK annually in taxes although two-thirds of its budget is funded by subsidies for program-related activities which should be taxexempt.

Through the experience gained in the training workshops with clients at Café Vesmirna, the organization became motivated to launch a social enterprise.

Monitoring the benefits their clients gained from job training and actually finding a job in the open market,

March 2011 Chapter 3

the organization realized the job training program was a crucial part of the rehabilitation treatment they had been offering to their clients. As a consequence of that the organization decided to open another social enterprise and employ more clients.

Based on the experience gained from running the café, the organization recently opened a pastry shop. The Vesmirna Patisserie was designed not to provide training but to employ clients and make enough profit to be self-sustainable. In 2010 Mame Otevreno received the EU grant Operational Programme Prague Adaptabilita (OPPA) to cover the start up costs of the Patisserie, although the enterprise does not intend to be financed from public money in the future, but rather from market based demand and profit like any other successful business.

Challenges of Self-Financing The biggest initial challenge was financing the startup budget. The OPPA grant was perfect as it covered all the start-up costs plus some of the initial operational costs. The other major challenge was finding an appropriate location, considering central locations are expensive. They approached the municipality of Prague 2; negotiations went on for months but with no success in the end. Luckily, they found a private landlord who offered to rent the current premise at a very convenient price.

Running the café showed that it is very challenging to keep a balance between the running of the business and the training of clients. Often times service was slow, or mistaken orders were served, so the goal for the new social enterprise is to be able to harmonize better the efficient functioning of the business with the employment of people with special needs. In order to achieve this, the organization has improved internal communication with employees and defined clear roles and responsibilities, while at the same time hiring a professional manager and a professional pastry-cook to secure efficiency and quality.

Mame Otevreno hopes to replicate the Vesmirna patisserie elsewhere in the country. The organization is an example of how doing business may strengthen managerial know-how, increase self-confidence and encourages entrepreneurial thinking.

Legal and Regulatory Framework for CSO Self-Financing in Czech Republic

Chapter 4

Interpretation of and Recommendations for the Czech Legal Framework The application of the ICNL framework described in Chapter 2 to the legal and tax regulations in the Czech Republic described in Chapter 3, can be quite useful to Czech CSOs in their development of selffinancing activities.

In terms of the criteria that make the self-financing possible, the Czech system applies the principalpurpose criteria. According to these criteria, an organization must devote all of its income to its non-for-profit purposes in order to qualify as a non profit organization (NPO). The Czech legislation states that CSOs can conduct commercial activities provided that the profits are all reinvested in the organizational mission.

This is further regulated by the fact that organizations in Czech Republic are required to include all their objectives in their bylaws, including those intended for self-financing. The bylaws must specifically state that the latter are intended to further the organization’s mission and are not the main activity of the organization. This provides a legal model for regulating NPO self-financing activities. It does not prohibit the use of self-financing but rather emphasizes that the NPO is established and operated primarily for non-profit purposes and not for private gain.

After an analysis of the taxation on self-financing activities in accordance with the ICNL

Interpretation of and Recommendations for the Czech Legal Framework

theoretical framework, it is possible to conclude that Czech Republic applies a combination of destination-of-income and mechanical tax approach. A destination-of-income tax policy grants a tax exemption only when the income generated from economic activities is used for public-benefit purposes. Under this approach, the organization is not limited by the level or type of economic activity, but is taxed on all income that is not used for its public benefit purposes. The mechanical tax policy applies exemption ceilings (a maximum profit level) whereby income levels below the ceiling are tax-exempt and above it are taxable.

4.1 The Legal Framework and CSOs

36

As already mentioned, there is almost no legislation specifically relating to CSOs in the Czech Republic: they are principally governed by the Civil Code and in some cases by specific laws, depending on the typology: civil associations, foundations, endowment funds public benefit organizations or registered religious legal entities.

The core of the civil society in the Czech Republic is undoubtedly formed by associations. They represent one of the most fundamental and essential component of the non-profit sector. They reflect the freedom of association for people who are sharing a common interest related to a social purpose.

Because of their simple legal framework and their rather liberal regulatory structure, civic associations outnumber other forms of CSOs. The problem is however that this very lose legal form has often been misused damaging the reputation of the entire sector.

Public benefit institutions are established for the purpose of providing services for the benefit of the public and currently this legal form is being used ever more often as it is considered more transparent compared to civic associations, due to its more defined regulations. In fact unlike public benefit organizations, civic associations can no longer obtain the certification of social services providers and consequently apply for specific grants or public subsidies.

March 2011 Chapter 4

Public benefit organizations are also the preferred legal entity for CSOs to run social enterprises. The public benefit purpose and the requirement for higher level of transparency are the main reasons for that. Public subsidies currently available to CSOs for the development of social enterprises reflect this trend and civic associations are not eligible for those subsidies.

4.2 Perception of CSOs Because of historical reasons, there is not really a tradition of strong and independent civil society in Czech Republic. Before the Czechoslovak Republic was founded, in 1918, all associations were focused mostly on the Czech Question, the fight for self-determination of the Czech nation.

After 1918, associations began to consider new aims and purposes; however, this process was short-lived and interrupted by historical events that considerably reshaped the entire Czech nation and its society.

The economic crisis, the Second World War, the Nazi regime and the turn to the Communist regime in 1948, left little space for civil society to flourish for a purpose other than national identity. The traditional 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 tried to rectify this situation and return to European standards promoting a broader view on the role of civil society. But, unfortunately, the laws have been often drafted in a hurry, without much thought, and have tended to be misused. The Act on Associations of Citizens, for example, still provides insufficient regulations to ensure transparency, and fails to guarantee the protection of rights of third parties establishing legal relations with associations.

This is also due to the absence of any public registry of associations.

At the beginning of 2000, a new draft Act on Associations was submitted to the Parliament. The draft was well-done, attempting to solve most of the

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Interpretation of and Recommendations for the Czech Legal Framework

problems of the current legislation. 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.47 On the contrary, the strict regulations of the Act 227/1997 Coll. on Foundations and Endowment Funds have repaired the reputation of foundations from 1997 onwards. As a result, foundations today are well-respected in the Czech society.

Like in other post-communist countries, in Czech Republic there is still little appreciation of concepts such as philanthropy, charity or solidarity. Therefore CSOs have been struggling to gain support and recognition in this country. In the last years however, CSOs have slowly won more trust, trying to learn and apply best practices from the more advanced third sector in Western Europe and especially the UK. Currently, the Czech society is beginning to understand the importance and legitimacy of CSOs and philanthropy is beginning to grow. CSOs are mostly perceived in a positive manner, especially those CSOs that are widely known by the public and receive coverage from television and other media.

The state and the public administration refer to CSOs as partners and co-workers, although in practice their relationship is not equal given CSOs high level of dependency on public funds. Corporations are starting to develop corporate social responsibility (CSR) programs thus establishing new and different types of support for non-profit organizations. Although CSR is mostly practiced by foreign companies working in the country, national corporations are gradually discovering the benefits of CSR even though the global financial crisis is slightly affecting this field at the moment.

47 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“

4.3 Perception of CSOs with Respect to Commercial Activities Economic (business) activities are a key source of income for non-profit organizations. The current Czech legal regulation expressly states that commercial activities have to be defined in the bylaws and may exist only as supplementary activities whose profits support the goal of the organization. However, they may not, in principle, become the main purpose of an association.

In the case of foundations, endowment funds and public benefit institutions, the purpose of their existence is limited to public benefit so it is more difficult for these entities to pursue private gain. Foundations are subject to strict limitations on any kind of commercial activities whereas public benefit organizations are allowed to run commercial activities as long as it is for a public beneficial purpose.

As a result of that, limited commercial activities of public benefit institutions are perceived as extra income to support the public benefit purpose. In general however, from a legislative point of view, economic activities run by CSOs in Czech Republic are not wellreflected in the legislations; they are neither properly defined nor regulated. In order to improve this situation, the sector needs to grow and become more visible.

4.4 Evaluation There are several issues that need to be addressed in order to create an enabling environment for Czech CSOs to engage in profit generating activities. The first has to do with definition. Unlike Slovakia, where there is a legal definition for social enterprises, in Czech Republic there is no definition. As a consequence, there are no clear and consistent regulations guiding social enterprises and there is no way to compile data on the economic activities run by CSOs.

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 www.icnl.org/ JOURNAL/vol2iss4/ar_pajasczech.htm

37

Interpretation of and Recommendations for the Czech Legal Framework

Without data, it is difficult to have an idea of the real size of the sector and it is impossible to evaluate its performance, both from a financial perspective (generated turnover) and a social point of view (social impact).

Politicians so far have had little interest in the topic, and the lobbying power of the third sector has been rather weak.

The study conducted in 2006 by The International Centre of Research and Information on the Public, Social and Cooperative Economy (CIREC), divided European Union member states in three groups according to their levels of social economy recognition, acceptance and adoption in 2005 (CIRIEC, 2006). Social economy is one of the three sectors of economies alongside the private business sector and the public sector. Social economy represents the community and its activities including CSOs, volunteering, charitable initiatives and social enterprises.

The three groups identified by CIREC were: 38

1. Countries in which the concept of the social economy is widely accepted: in France, Italy, Portugal, Spain, Belgium, Ireland and Sweden, the concept of Social Economy enjoys greater recognition by the public administrations and by the academic and scientific world.

2. Countries in which the concept of the social economy enjoys a medium level of acceptance these are Cyprus, Denmark, Finland, Greece, Luxembourg, Latvia, Malta, Poland and the UK. In these countries the concept of the social economy coexists alongside other concepts such as the non-profit sector, the voluntary sector and social enterprises or social firms. In the UK, the low level of awareness of the social economy contrasts with the government’s policy of support for social enterprises. In Poland it is quite a new concept but has become popular recently due to the new structures associated with entry into the European Union.

48 Paper offered for public discussion at the Founding Conference of the National Thematic Network for Social Economy in Prague, 24 Sept. 2009 - from Marie Dohnalova and Martin Potucek, Center

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3. Countries with scant or no recognition of the concept of the Social Economy: the concept of the Social Economy is little known, incipient or unknown in a group of countries composed of Austria, the Czech Republic, Estonia, Germany, Hungary, Lithuania, the Netherlands and Slovenia (citing The Europena Social Economy; Concept and Dimension of the third Sector,

by José Luis Monzon, Rafael Chaves, Article first published online: 11 SEP 2008).

As we can see, in 2005 Czech Republic still belonged to the group of EU states that did not acknowledge social economy. Still today, no governmental or other institutional body is responsible for social economy and there is little general awareness of the meaning of the term (citing)48, yet some considerable progress has been made in these past five years.

4.4.1 Effects on the Commercial Sector The regulatory environment of the non-profit sector in Czech Republic has had a moderate impact on the relations with the commercial sector – There is a certain level of disagreement between representatives of the private sector and those representing the non profit sector regarding the exemption from taxes, or other tax benefits, and the principle of generality and equality of taxation; any such benefits are thus conceived in a very narrow manner and need to be properly justified, which is sometimes problematic. Some believe that tax incentives create unfair competition between CSOs, or social enterprises, and for-profit entities. This perception however is strongly objected by the non-profit sector, given that CSOs are generally operating in areas or fields where there is limited interest from private profit-driven entities, plus, unlike private businesses, social enterprises bear extra social costs in trying to fulfil their public benefit purpose while being sustainable on the market. Rather, in a certain sense, there is unfair competition between CSOs and “budgetary and contributing organizations”. The latter are institutions funded by public funds which tend to be favoured in public procurement bids.

for Social and Economic Strategies, Faculty of Social Sciences and Humanities, Charles University in Prague

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Interpretation of and Recommendations for the Czech Legal Framework

4.4.2 Effects on the Development of the Third Sector

4.5 Limitations of the Regulatory Framework

Moderate – Good The legal framework has not significantly changed in the last couple of years but some conceptual (and also particular) changes have occurred which point toward the development of the sector. The amendment to the Act on social services, excluded civic associations from providing some social services leaving them the option of establishing public benefit institutions, considered to be more transparent and better regulated.

In summary, the main limitations governing CSOs in Czech Republic resulting from the legal and regulatory framework are:

In the past few years, the Governmental Council for Non-Governmental Non-Profit Organizations has actively pushed for new reforms in the Civil Code to strengthen CSOs and their sustainability in the long-run. The drafted law on the public benefit status is the most critical one as it may help CSOs to secure more appropriate and more stable public funding and enjoy better defined tax privileges for their commercial activities.

From 2004 EU funds have considerably strengthened the Czech third sector, which has become more dynamic and more professional. EU funds have also helped the development of social enterprise in Czech Republic. Programs like 2004-2006 CIP EQUAL set up initiatives to strengthen social economy; one of them was the creation of The National Expert Group for Social Economic Activities (NESEA) in 2007, with the intent to establish definitions of social economy, social entrepreneurship, and social enterprise, including their principles. One of the outcomes was the launch of the first Czech website on social economy www.socialni-ekonomika.cz. At the end of 2009, the same group launched a project called the Thematic Network for the Development of Social Enterprise aimed at creating a discussion and information platform involving all the stakeholders of social economy (CSOs, public administration, academics and private sector).

The platform is financed by the European Structural Funds and represents one of the few new initiatives currently developed in the country that focus on raising awareness and set some basic principles and structures to promote social enterprise.

•

Too many different legal forms for non-profit entities;

•

Unclear definition of concepts such as: public benefit, social economy, and social entrepreneurship;

•

Lack of a registry on CSOs or social enterprises;

•

Lack of consensus in the interpretation of the laws (i.e. inconsistent or contradicting instructions from different public institutions);

•

Some legal forms constituting CSO are easy to use whereas some are too restrictive;

•

Little trust in civic associations due to their insufficiently regulated legal form;

•

Inadequate monitoring and evaluating tools for CSOs and their activities, provided by the legal system;

•

Lack of support for social enterprises among the public administration;

•

Low trust in cooperatives due to their negative perceptions, deriving from the communist era when these entities were linked to the regime;

•

Inadequate legal framework to regulate self-financing economic/business activities of civic sector non-profit organizations;

•

Lack of ministry-level state institutions with responsibility for the social economy;

•

Inadequate business skills in the third sector to allow for strong social enterprises to develop;

•

Difficulties in mobilizing resources (human, financial) for CSOs.

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Interpretation of and Recommendations for the Czech Legal Framework

From a legal point of view, in order to strengthen civil society, it is essential to adapt the fiscal and legal systems using methods of efficient control – to avoid cases of abuse - while at the same time giving the necessary freedom to promote the development of the sector and allowing it to use its creative talent freely.

Public subsidies The granting of subsidies is partly regulated by law49 and partly a matter of the policy of the central or local government authorities. The funding conditions are mostly not set down by law. The grant rules are set by individual ministries and public funds, e.g. the State Fund for the Environment, the Grant Agency of the Czech Republic etc.

40

Public subsidies are an important source of income for NGOs. Financing from public sources has been characterised by a high degree of centralization.

Every year, the government decides the major areas for state subsidies to NGOs for the coming year. After the reform of the public administration (2001), this system was decentralized; as a result, regional units and municipalities now have their own policies on providing subsidies.

At governmental level, the principles for distributing the subsidies50 are submitted to the Council for Nongovernmental and Non-profit Organizations51, which is an advisory body to the government of Czech Republic and may influence its decisions. There is currently a proposal to unify granting rules at governmental level, but some state organs (i.e. Ministry of Culture) are not very happy about this idea.

There is a unique entity in Czech Republic represented by the Foundation Investment Fund (called NIF, in English FIF), established in 1991 for the purpose of supporting the non-profit sector (via foundations). This 49 Act No. 218/2000 Coll. - the Act on Budgetary Rules, and the Act No. 250/2000 Coll. on Budgetary Rules of Regional Budgets 50 Zásady vlády pro poskytování dotací ze státního rozpočtu České republiky nestátním neziskovým organizacím ústředními orgány státní správy, Principles for granting for year 2008 see: http:// www.cas.cz/rvs/dokumenty/zasady_vlady.pdf, citováno 12.1.

2010 51 The Council for Non-State Non-profit Organisations is an advisory body to the government of the Czech Republic in matters related to the non-profit sectors. The aim of the Council is to create the

March 2011 Chapter 4

Fund was created by the government setting aside the amount of 1 per cent of the shares from the second wave of privatizations (approximately 2,8 billion CZK).

Until 1996, there were disputes in the government about which foundations should have access to funding from FIF and in what manner. The most important part of the proposal was the decision to use the contributions from FIF to increase the registered endowment of the foundations and not their programmes. The finances were distributed only nine years after the establishment of the Foundation Investment Fund. This procedure adopted in the Czech Republic was unique among post-communist countries. The state not only became the donor to non-state foundations, but it also controlled the use of the donations that were provided as capital to particular foundations by subjecting them to public supervision. The donations were provided on a contractual basis that stipulated specific provisions and could include other rights and obligations. Any violation of such rules may be sanctioned including the requirement to return the contribution.

4.6 Proposed Changes in the Legislations The Legal framework for civil society organisations (CSOs), which was constituted in the nineties, has not changed substantially. Changes in CSO legislation involve mainly the liberalization of the law on foundations. In June 2010, the amendment on the Act on Foundations and Endowment Funds52 was passed53.

The main goal of the amendment was to allow foundations and endowment funds to allocate funding toward their own activities. They now can run their own programs but they need to separate costs of these activities from administrative costs associated with foundation giving. However, they still cannot run commercial activities. The amendment also takes into account the particularities of endowment funds and the need to foster transparency of the foundation sector. possibility for mutual contact between the non-profit sector the governmental administration.

52 Amendment no. 158/2010 Coll. of the law no. 227/1997 Coll., Act on foundatins and endowment funds, in force from 1.7.2010.

53 See for more infos: Ronovská, Kateřina. Novinky na poli nadačního práva: krok správným směrem(News on the field of foundation law:step in the right direcition) Právní fórum, Praha : Wolters Kluwer ČR, VII., 8/2010, od s. 407 – 412.

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In 2010 the Parliament also passed the amendment of the Act on Public Benefit Institutions54, with the aim of eliminating gaps and difficulties of this law, specifically by increasing accountability of the statutory authority, ensuring the protection of the property contributed by the founder upon the foundation’s establishment and also in case of liquidation. The Act on Public Benefit Organizations will be part of a conceptual reform, which would cover not only the field of private law (civil law) but also the area of tax law. The legal definition of public benefit should however be revised and made more understandable and specific.

In early 2010, an amendment to the Act on Public Collections was drafted with the intention to remove the drawbacks existing in the application process. It should mainly aim at simplifying the possibility to hold collections in exceptional circumstances, specifying and extending collections procedures, specifying the regulation of so-called ‘travelling collections’, and improving the quality of supervision over public collections.

Over the last 10 years there have been discussions about the re-codification of Czech private law55 which will also result in changes on the legal position of legal persons (and CSOs)56 specifying that foundations, associations and public benefit organizations should be included in the civil code, which is how it is done in the traditional continental legal approach.

Part of this complex reform of private law is also the proposal for a new act on commercial companies.

There is a general agreement that a new Civil Code should provide a unification of the entire area of private law. It should formulate the fundamental principles and be sufficiently general in order to resist pressures at being amended. Most important, there is strong consensus on the need to ensure the quality of the proposed code and its applicability by strengthening key concepts, structure and content.

54 Amendment no.231/2010 Coll., of the law no. 248/1995 Coll., on public benefit institutions.

55 A proposal of a new Civil code will be soon discussed by the Czech Parliament but it is not sure if it will be passed, mostly because of political reasons. For more iformantion (in English) see Ronovská, Kateřina. Civil Law in the Czech Republic: tendencies of development (some notes on the proposal of the new civil code). European Review of Private Law, The Netherlands : Kluver Law International, 16/2008, 1., od s. 111 - 120, 10 s.

56 The current Act No. 227/1997 Coll. on Foundations and Endowment Funds should be cancelled as well, and the legal regulation of foundations should serve as lex generalis for legal

Currently the Parliament is working on a new law on Public Benefit; this law would bring changes to the structure of CSOs. If the law passes any legal entity that decides to be registered as a public benefit organization will have to abide by certain specific criteria such as: provide public benefit through its services and activities; be transparent; reinvest profit in non for profit programs and register in the national public benefit registry. The law proposes to introduce certain requirements to ensure greater transparency, such as the obligation to produce annual reports and publish information related to contracts, programs, services, employees’ salaries and financial sources. The organizations acquiring the public benefit status will have to ensure to keep the status for a minimum of ten years, in case they fail to meet this requirement they will have to return the subsidies received up until then.

The public benefit status should guarantee a better and more consistent allocation of public subsidies to organizations as well as some additional tax alleviations.

The proposed law aims at building more trust in the non-profit sector by making it more transparent and more measurable through the collection of qualitative and quantitative data on the sector which is currently missing.

Nevertheless, some remain skeptical about the positive impact of this law. The law in fact is expected to affect only a minor percentage of the civil sector. Currently there are more than 70,000 non-profit organizations, of which only 3000 have used public funds in 2008.

The law will affect only those 3000 organizations, as they will be mainly motivated to acquire the status in order to keep using public funds. Risks may also include that organizations that will not apply for the public benefit status will be considered second class organization or that those that receive the status will have more duties and responsibilities that will reflect persons of the foundation type. There is also the intention that the Act No. 83/1990 Coll. on Associations of Citizens should be cancelled, the regulation of associations should be shifted into the Civil Code and the legal form of association should serve as a general regulation for legal persons of the corporation type.

The proposal also anticipates the cancellation of the Act No. 248/1996 Coll. on Public Benefit Institutions. However, public benefit institutions founded previously will be able to continue their existence and will be regulated by the existing legal regime, while newly founded beneficiary societies will have the legal form of “institutions”.

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in extra bureaucratic procedures. In some cases the requirements set by public benefit status may also become redundant (i.e. public benefit organizations and foundations for example are by default established for public beneficial purposes but in order to obtain the public benefit status, as meant in the new law, they will need to complete the necessary application procedures). At the same time the ten years guarantee of providing public benefit service seems like a very demanding condition.

The main problem, however, remains the definition of public benefit. Questions like: who should define it? What it should include? How to assess, monitor and evaluate public benefit? Remain still unanswered questions that legislators and the civil society sector are trying to define.

4.7 Conclusions and Recommendations

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Given its geographical position in the centre of the European continent, Czech society has, over the centuries, fought hard to establish its independence from the varied influences of surrounding nations and ethnic groups.

The development of Czech civil society went hand in hand with this national movement, strongly present from the middle of the 19th century and culminating in the creation of independent Czechoslovakia in 1918. As a result of the overall political situation in Europe and the internal problems with ethnic minorities, Czech civil society in the 1920s developed, as its characteristic feature, a close connection with the state.

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After some period of uncertainty in the early 90s, the situation in the non-profit sector in Czech Republic has stabilized. Currently, as mentioned in Chapter 3, there are three main particular laws in the field of NGOs – the Act on Foundations and Endowment Funds (No. 227/1997 Coll.), the Act on Association of Citizens (No. 83/1990 Coll.), and the Act on Public Benefit Institutions (No. 245/1995 Coll.). In this text we also considered another type of legal entity – registered religious legal person (§ 15a of the Act no 3/2202 Coll., on churches and religious societies).

These laws are not systematically included in the Czech Civil Code (CCC). The CCC contains only the general and very simple common rules for all legal entities (e.g. issues such as the characterization, establishment and dissolution of legal persons). This reflects the nature of the non-profit sector in Czech Republic, which is still rather fragmented and underrepresented in the legislation.

The main problems of the Czech NGO sector were identified in the survey “Evaluation of the proposal for the support of the development of the non-profit sector” (“Zhodnocení koncepce podpory rozvoje neziskového sektoru”)58 which was approved by the Czech government in 2009.

The survey identified several main problems already discussed in this guide, such as: lack of definition of public benefit; low level of community support to NGOs especially from public administration; insufficient data, research, monitoring and evaluations conducted on the non-profit sector.

However, after the communist coup, the close relationship between the state and civil society became a way by which the regime controlled and sometimes suppressed civil society organizations.57 The reconstruction of the civil sector – which had been practically destroyed during the era of the construction of socialism – started only in connection with significant political and economic changes that took place in the region at the beginning of the 1990s.

The survey also highlighted the need for NGOs to develop a more diversified financial structure in order to decrease heavy dependence on public funds. In order to meet this objective, the survey highlights the need to expand and strengthen the capacity of the NGO sector by providing professional training in specific areas where they lack know-how, mainly fundraising, marketing, financial management and business know-how to set up and efficiently run income-generating activities.

57 For more details, see Müller, K. jr.: Češi a občanská společnost [The Czechs and the Civil Society]. In: kol. autorů: Občanský sektor, studie a souvislosti. Sborník textů. [The Civil Sector: Studies and Connections. A Collection of Texts.] UK Praha 2002, p. 71 and following.

58 Zhodnocení koncepce podory rozvoje neziskového sektoru – Evaluation of the conception of support of NGOs secotr , see http://www.vlada.cz/assets/ppov/rnno/koncepce-neziskovehosektoru/zhodnoceni_koncepce_pro_web.pdf, cited 21.1.2010

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The study also suggested the need to resolve the existence of a certain inequality between individual entities active in the non-profit sphere; particular reference in this case was made to the failed transformation of the legal form of contributing and budgetary organizations which represent some kind of hybrid surviving from the pre-1990 times. Contributory and budgetary organizations are funded through public funds by the state, regions and the municipalities. NGOs, on the other hand, must undergo the complicated procedure of reapplying for their subsidies each calendar year, and are exposed to high levels of uncertainty. Similarly, unlike NGOs, contributory and budgetary organizations enjoy also privileges in public procurement processes.

The criticism toward the legal structure of civic associations for being too permissive and unregulated, has made public benefit organizations the current preferred legal form to provide social services or to run a social enterprise.

With specific reference to social enterprise in the Czech Republic, the concept is quite new and therefore it is not surprising that there is no specific legal framework defining or regulating this area. From the comparative analysis on social economy models in EU59 it was concluded that it is necessary to raise more awareness about the concept and gather more practical examples before it can be reflected in the law.

Challenges affecting the development of social enterprises in Czech Republic are numerous. Public sector officials on national, regional and local levels are not aware of the concept. Furthermore, there is a lack of professional knowledge in the sector to help the development of CSO self-financing and social enterprise activities and limited financial resources and instruments available to support their start-up or expansion.

Since 2005 some progress has been made to address those issues. The EU project 2005-2008 EQUAL Initiative to Support Social Enterprise in CR, financed research and studies on social enterprise aimed at raising awareness and bringing the sector closer to its European counterparts. At the same time, the program helped to finance several social enterprises operating in the country.

59 Viz http://www.equalcr.cz/clanek.php?lg=1&id=1367, citovรกno 11.1.2010

This research also highlights the need to unify the legal structure of the non-profit sector in Czech Republic and create a central registry or institution responsible for regularly collecting and analyzing data on the sector. It also recommends establishing sector-wide monitoring and evaluating systems which may contribute to increase awareness about the programs and results achieved, by NGOs and their social enterprises.

A more unified and centralized legal structure should contribute also to stronger cooperation among institutions, in particular between the Ministry of Labour and Social Affairs, the Ministry for Regional Development and municipalities which are heavily involved in contributing to the development and sustainability of non-profit organizations and social enterprises through subsidies, grants or public procurement. Seemingly it would be good to encourage international cooperation in the field of social enterprise whereby good practices and lessons learnt could be shared across borders on a more regular basis. The Czech EU presidency in 2009 certainly helped in establishing this link, which will be hopefully maintained.

There is a need to increase capacity within the third sector in order to develop successful social enterprises.

Major attention should be given to education and training in order to build the necessary know-how within CSOs to plan, implement and develop sustainable self-financing activities.

There appears to be also a lack of infrastructure supporting non-profit organizations and even more so social enterprises. Expert advice on legal or tax regulations it is hard to find and mainly accessible only in Prague and Brno.

Several initiatives have been successful in spreading awareness of the benefits social enterprise. NESsT has been in the region since 1997, promoting and supporting social enterprise development and the need to develop an enabling environment and support structures for social enterprise. Since 2000, NESsT has trained 2500 CSO professionals in self-financing and social enterprise, and has developed over 200 social enterprises. Other supportive structures have

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been recently promoted, like the EU-funded TESSEA project launched at the end of 2009 to create a new thematic network for the development of social enterprise. The project aims to raise awareness of social enterprise, disseminating information and creating strategies to further develop this area. This informal platform wishes to map and research social enterprise in the Czech Republic and hopefully develop into an official platform of advisors to the government, to regional and local authorities, organizations or social entrepreneurs.

At the same time academic studies on social economy should be expanded and systematized, as well as research and data on the sector and its development.

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Overall Czech society is developing greater interest and attention to the develop ment of its social economy, including non-profit organizations and their commercial activities. This reflects not only in recently launched initiatives, but also in recent legislative discussions. The reform on private law, the new civil code and the law on public benefit status are currently being discussed in parliament and most likely in the coming year a decision will be reached. If approved, this may mean that starting from 2013, CSOs and social enterprises in Czech Republic will be facing different legislative conditions than those described in this guide, hopefully much better ones.

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Ronovská, Kateřina. Civil Law in the Czech Republic: tendencies of development (some notes on the proposal of the new civil code). European Review of Private Law, The Netherlands : Kluver Law International, 16/2008, 1., od s. 111 - 120, 10 s.

Ronovská, K: The Contemporary Trends and Issues of Foundation Law in Europe and Their Characteristics in the Czech Republic, in: Czech Law in European Regulatory Context, Medien und Recht Verlag, Wien- Munchen, 2009,str. 259- 273 Ronovská, K.: Legal Framework for external supervision of NGOs in the Current Czech Law, International Journal for Not for Profit Law, Washington D.C., USA, 2009, vol.

12, no. 1/2009, str. 71-77.

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