3. The tax treatment of philanthropic entities
This chapter provides an overview of the tax treatment of philanthropic entities, starting with the qualification process for entities to become recognised Public Benefit Organisations (PBOs) or funds. This includes a description of countries’, worthy purpose, public benefit, and not-for-profit requirements, followed by an overview the administrative application and oversight process. The chapter then analyses the different forms of tax relief that philanthropic entities benefit from, starting with the tax treatment of income of philanthropic entities, followed by Value-Added Tax (VAT) benefits, and an overview of other forms of tax relief that PBOs or funds may be eligible for. Finally, the chapter highlights the potential risk of tax avoidance and evasion schemes involving philanthropic entities and the anti-abuse policies countries have put in place as a result.
Philanthropic entities can be categorised as either funds or Public Benefit Organisations (PBOs). For the purposes of this report, funds are entities such as foundations, associations and trusts that hold assets with which they support PBOs to advance a social objective. The term PBO refers to entities that provide goods and services in pursuit of the public benefit. From a tax perspective, philanthropic entities can benefit from tax incentives in a number of ways. Generally, entities with a philanthropic status may be able to receive tax incentivised gifts from individuals and corporations, or receive tax relief directly in relation to their activities (e.g., exemption from income tax, property tax, VAT1, etc.). For an entity to receive such a status (fund or PBO status), it must meet a number of requirements that can be separated into three broad categories:
Not-for-profit requirements.
Worthy purpose requirements.
Public benefit requirements.
Additionally a number of administrative requirements must be met to determine that the requirements listed above are met. Countries’ approaches to ensuring that the requirements are fulfilled, as well as the stringency of the requirements themselves, vary. Only once the requirements are fulfilled are philanthropic entities eligible to benefit from the tax incentives for philanthropy (such as receiving tax incentivised donations, income tax exemption, capital gains tax exemption, and VAT tax exemption or relief).
By subjecting philanthropic entities to the before mentioned requirements, governments may be able to better keep track of, and have some oversight over, their tax expenditures used to incentivise philanthropy. The not-for-profit requirement ensures that the recipients of tax incentives for philanthropy are entities whose primary objective is the public benefit (and not making profit). The not-for profit requirement does not prohibit a philanthropic entity from making a surplus, instead, it generally includes non-distribution requirements so that the surplus is not distributed as dividends or other benefits beyond the scope of the entity’s worthy purpose. The worthy purpose requirement allows the government to direct philanthropic funds, as well as its tax expenditures, towards particular social objectives (and possibly away from others). The public benefit requirement ensures that tax expenditures are used to incentivise activities that benefit a large and inclusive enough section of the public. How large and open the circle of beneficiaries needs to be, depends on the country and is discussed in more detail below. Finally, the administrative requirements may help ensure that the state has (and will continue to have) all the information necessary to evaluate whether an entity meets all the other requirements, particularly if there is an administrative body to monitor approvals and compliance.
3.1.1. Key Findings
The main findings of this chapter are that:
Countries tend to impose not-for-profit, worthy purpose and public benefit requirements to determine eligibility for tax concessions. Welfare, education, scientific research, and healthcare are deemed worthy purposes most frequently across countries. For the public benefit requirement, countries generally stipulate that the benefit must be open to all, that the benefit can be restricted to groups with specific characteristics, or that the characteristics used to specify who can benefit must relate to the fulfilment of the entities’ worthy purpose.
Almost all countries surveyed in this report require philanthropic entities to undergo a specific application process to become eligible for preferential tax treatment. Countries typically follow three broad approaches: the tax administration is responsible for the accreditation process; the responsibility is shared between the tax administration and a competent authority such as an independent commission; or the responsibility lies with another department and not the tax administration.
Countries’ tax relief for the income of philanthropic entities can be separated into two approaches: (1) to exempt all or specific income, or (2) to consider all forms of income taxable, but allow the entity to reduce its taxable income through current or future reinvestments towards the fulfilment of their worthy purpose. Countries following the first approach generally exclude non-commercial income (received gifts or grants) from the tax base. Approaches to dealing with commercial activities and the income generated from those activities, diverge. A common approach is to exempt commercial income that is related to the worthy purpose and tax unrelated commercial income.
Finally, countries that offer preferential VAT treatment to philanthropic entities tend to exempt them from having to collect VAT on certain (or all) supplies. Because such an exemption can create an input tax burden, some countries have implemented rules that help philanthropic entities reclaim some of their input tax.
This chapter proceeds as follows. Section 3.2 below summarises the not-for-profit, worthy purpose, public benefit and requirements across countries. Section 3.3 gives an overview of the administrative requirements and application processes that countries have put in place to ensure that the other conditions are being met. Section 3.4 discusses the tax treatment of philanthropic entities’ income. Section 3.5 gives an overview of countries’ VAT treatment of PBOs. Section 3.6 discusses other taxes and tax benefits that apply to philanthropic entities in some countries. Lastly, section 3.7 analyses the potential risk of tax avoidance and evasion schemes that involve philanthropic entities.
3.2.1. Not-for-profit entities and commercial activity
The first requirement is that entities must be ‘not-for-profit’. The term originally used was non-profit but in the last 10 years it has been more commonly referred to as ‘not-for-profit’ to reflect that the entity may make a surplus, but that its purpose is not to make profits. Thus, the requirement does not in itself limit not-for-profit entities from engaging in commercial activity or even acquiring a surplus (as long as that surplus is not distributed as dividends or as unreasonably high salaries or payments). Nevertheless, countries may choose to limit the degree to which philanthropic entities benefitting from tax incentives are able to engage in commercial activity. Furthermore, in a number of countries philanthropic entities must reinvest their surplus towards activities aimed at fulfilling their worthy purpose. If philanthropic entities engage in too much commercial activity or do not reinvest the surplus into a worthy purpose, countries may choose to tax the commercial activity, as well as the remaining surplus, or strip the entities of their preferential tax status altogether.
When philanthropic entities with a preferential tax treatment engage in commercial activity, it may raise unfair competition concerns if the goods or services supplied by the entity are also supplied by non-philanthropic businesses. To overcome this challenge countries may limit the degree to which a philanthropic entity can engage in commercial activity, tax the commercial activity, limit the commercial activity they can engage in, or only limit the preferential tax treatment of commercial activities that lead to unfair competition with for-profit businesses. More detail on this requirement is provided in the section on the tax treatment of income of philanthropic entities below (Section 3.4).
3.2.2. Worthy purpose requirements
In general, a worthy purpose signifies a cause that is deemed by government to be deserving of the philanthropic gifts of a donor and the resources of a fund or PBO. This characteristic is subjective and can be determined by the donors or philanthropic entities that are choosing what cause to focus their philanthropy on. In this report, however, worthy purposes denote a set of causes that philanthropic entities, which are eligible for tax relief, are able to engage in. That is to say that for a philanthropic entity to receive preferential tax treatment, it must have a purpose that the state (e.g. the legislature or tax administration) accepts as worthy. In a number of countries (e.g. Germany and the United States), PBOs need to focus their resources on the worthy purposes they specified in their application for a PBO status. That is to say that they cannot simply change their objective to any of the accepted purposes without going through an administrative process. In Germany, for example, if a PBO wants to change its worthy purpose, or add a new one, it must report this to the fiscal authorities.
Table 3.1 presents a non-exhaustive list of worthy purpose categories that countries may choose to support by giving tax relief to philanthropic entities with such a purpose. In order to compare worthy purpose requirements across countries, the categories listed are umbrella terms that include any related philanthropic causes. Welfare, for example, includes organisations offering shelter to fight homelessness or foodbanks that distribute food to those in need. Other worthy purposes, such as culture, may include museums or particular movie theatres, but may also apply more generally to heritage organisations or entities supporting the arts through grants. The categories that are deemed worthy most frequently across countries are welfare (37), education (35), scientific research (34), and health care (34).
Welfare qualifies as a worthy purpose in all countries listed except for Bulgaria, which is an anomaly as it only extends preferential tax treatment to the Bulgarian Red Cross. However, Bulgaria does offer tax relief to corporate and individual donors that give to entities other than the Bulgarian Red Cross (for more information see Chapter 4). Of the countries listed, Argentina, Bulgaria and Malta are the only countries that do not include education in their list of eligible causes. All countries listed in Table 3.1, except for Chile, Indonesia, Malta, and Bulgaria, include healthcare in their worthy purposes. South Africa, Malta, and Bulgaria are the only countries listed for which scientific research does not qualify as a worthy purpose. On the other hand, consumer protection (22), civil protection (28), animal protection (28), amateur sports (29), and religion (29) are the least frequently recognised worthy purpose categories across the countries listed.
Table 3.1 also shows that some countries have broad definitions for what constitutes a worthy purpose, while other countries have a more narrow definition. For instance, all of the listed categories could be considered worthy purposes in the Czech Republic, Estonia, Germany, Greece, Ireland, Israel, Lithuania, New Zealand, Norway, Portugal, Romania, the Slovak Republic, Slovenia, and the United States. Argentina, Bulgaria, Chile, Indonesia, Malta, and South Africa, on the other hand, all have a more narrow definition of what constitutes a worthy purpose.
In the majority of countries, funds and PBOs that meet the worthy purpose and public benefit requirements to receive tax incentivised donations also meet the conditions to receive preferential tax treatment and vice versa. However, this is not the case in Australia, Bulgaria, Canada, Germany, New Zealand, Norway, Sweden, South Africa, and the United States.
In countries like Bulgaria, the worthy purpose conditions for incentivising giving are less narrow than those determining whether a fund or PBO can receive direct tax support. In Bulgaria, funds and PBOs with a qualifying worthy purpose can receive tax incentivised donations but only the Bulgarian Red Cross is eligible to receive preferential tax treatment directly.
In Canada, worthy purpose conditions for incentivising giving are not identical to those determining whether a fund or PBO can receive direct tax support. In Canada tax-favoured donations can be made to funds and PBOs that engage in the worthy purpose activities listed in Table 3.1 as well as to: journalism organisations; municipal or public bodies performing a function of government in Canada; universities outside of Canada with Canadians in the student body; registered funds and PBOs outside Canada to which Her Majesty has made a gift; and the United Nations and its agencies. In general, however, it is more onerous for an organisation in Canada to become a registered charity organisation benefiting from tax-favoured donations than it is to be considered a non-profit.
Conversely, in Norway, Sweden and South Africa, the conditions for receiving tax incentivised donations are more restrictive than those for receiving tax support directly. In Norway, for example, only a specific subset of the philanthropic entities eligible for tax exemption qualify to receive donations from which the donating party can claim a tax deduction. In order to qualify, the receiving entity’s worthy purpose must fall within the following categories: healthcare; activities directed at children and young people engaged in culture or amateur sports; religion; human rights; development aid; disaster relief; and environmental and cultural preservation. In South Africa, funds and PBOs are only eligible to receive tax incentivised donations if their worthy purpose falls within healthcare, welfare and education.
3.2.3. Public benefit requirements
For an entity to be philanthropic, its worthy purpose must be for the public benefit. Generally speaking this means that the worthy purpose of a fund or PBO has to benefit the public as a whole or a sufficient section of the public (sometimes referred to as a charitable or public class). If the circle of beneficiaries does not constitute a sufficient section of the public, the entity’s purpose would only be for the private benefit of a few individuals and therefore not meet the necessary requirements to qualify as a philanthropic entity worthy of receiving preferential tax treatment.
Typically, some worthy purposes are considered to benefit the public as a whole, meaning that the benefit is not limited to people who satisfy a particular criteria. Such worthy purposes may include, for example, protecting the environment, scientific discovery, or animal protection. Other worthy purposes, however, tend to benefit a circle of beneficiaries and countries typically regulate the size and/or the criteria used to specify who can benefit. An example of a worthy purpose that specifies who can benefit, is a disability support group. Generally, countries consider a circle of beneficiaries that is defined by need to be a sufficient section of the public.
Some entities, however, define their circle of beneficiaries using characteristics such as age, disability, gender, sexual orientation, race, nationality, pregnancy, or religion. Public benefit rules addressing this issue can be categorised into three approaches: countries may restrict philanthropic entities from using individual characteristics to define who can benefit altogether; countries may approve a list of characteristics (sometimes referred to as protected characteristics) that philanthropic entities are permitted to use in order to specify who can benefit; or countries may only allow limiting benefits to people with these characteristics if the criteria can be justified in relation to the worthy purpose (e.g., under this approach, a PBO committed to the health and well-being of pregnant women can use pregnancy as a characteristic to limit the circle of beneficiaries but cannot specify that only individuals of a particular religion may benefit from its services).
The benefit must be open to all and cannot be restricted
Some countries (e.g. Austria, France, and Slovenia) stipulate that the circle of beneficiaries needs to be open to the public and cannot be restricted by specific characteristics of individuals such as gender, sex, religion, or origin. In Austria, the circle of beneficiaries has to be the general public in the sense that the activity is in line with public interest in regard to intellectual, cultural or material subjects. Furthermore, the circle of beneficiaries of public benefit activities cannot be restricted by specific characteristics, including sex and gender. In Slovenia, there is no minimum number of people that need to be in the circle of beneficiaries and the benefit cannot be limited by individual characteristics including skill, gender, religion, nationality, or origin.
In France, PBOs are referred to as general interest organisations (association d’intérêt general) and can issue tax receipts to their donors so that they can benefit from the tax incentive for giving. To be eligible for such a status, an entity must meet the public benefit requirement of not working for the benefit of a small circle of people. Furthermore, the interests and activities of a general interest organisation must be able to benefit everyone, without being limited to any criteria (e.g., race, sex, profession, or religion). Additionally, a general interest organisation can become an association of public utility (association d’utilité publique). An association of public utility can receive, in addition to gifts which any PBO can benefit from, donations and bequests. To become an association of public utility, a PBO must fulfil additional public benefit requirements, such as having an influence and outreach beyond the local context and a minimum of 200 members.
The benefit can be restricted by specified characteristics
A number of countries allow philanthropic entities to restrict who can benefit using certain characteristics (e.g., Chile, Colombia, Greece, Israel, Lithuania, Malta, Mexico, Norway, Romania, Singapore, the Slovak Republic, South Africa, and Switzerland). In Colombia and Switzerland, for example, entities are allowed to benefit only one gender but may not use any other characteristics to further restrict who can benefit. In Mexico, no restrictions are allowed regarding origin, religion, or nationality. However, restrictions based on gender and potentially other characteristics are possible. For instance, philanthropic entities can concentrate their support on single mothers. The rule is that they must fulfil their specific purpose.
In Israel philanthropic entities can target only one gender and can specify origin, or nationality. In Latvia a worthy purpose can benefit target groups such as children, young people, people in poverty, and disabled people but the philanthropic activity must reach people regardless of their skill, origin, religion or nationality.
In Lithuania there are no rules that prohibit entities selecting their beneficiaries based on gender or skill as long as the activity is in line with the Law on Equal Opportunities for Women and Men. The philanthropic activities of the entities must also reach people regardless of their origin, religion, or nationality. In Romania, on the other hand, entities cannot benefit only one gender but may specify their circle of beneficiaries using other individual characteristics such as skill, religion, or nationality. Singapore permits entities to target only one gender if their activities also benefit the public as a whole. For example, PBOs such as the Boys Brigade and Girls Brigade engage in activities that benefit the wider community. Chile, Greece, Malta and the Slovak Republic have no rules regarding whether or not entities can limit their philanthropic activity to individuals with particular characteristics.
The characteristics used to specify who can benefit must relate to the worthy purpose
Lastly, a number of countries (Australia, Belgium, Canada, Estonia, Germany, India, Japan, the Netherlands, New Zealand, Portugal, South Africa, Sweden, and the United States) only permit philanthropic entities to limit the circle of beneficiaries to people with particular characteristics if it can be justified with their worthy purpose.
In Australia, philanthropic entities must have a purpose that provides a benefit to the general public or a sufficient section of the general public. Whether a purpose benefits a sufficient section of the general public is to be assessed on registration. Certain PBOs are presumed to be for the public benefit, such as those involved in the relief of poverty. PBOs can limit their beneficiaries to a gender if such a restriction relates to the worthy purpose. For example, a charity providing support to victims of domestic violence may be permitted to provide services only to women, and a charity with a purpose of advancing health may provide services only to men with mental health concerns. Similarly, a tax-exempt PBO may promote a specific religion or provide services to people who have migrated to Australia from a specific country.
Belgian law prohibits discrimination on grounds of age, sexual orientation, marital status, birth, property, religious or philosophical belief, political conviction, language, present or future state of health, disability, physical or genetic characteristic or social origin. However, if the PBO receives its accreditation for the purpose of benefiting a defined category of people (e.g. disabled persons), it may limit its action to this specific section of the public. Such PBOs include associations that specifically defend women's rights with a view to achieving greater gender equality. Regarding the geographic reach of an entity’s activities, specific criteria are defined by both the Ministry of Finance and the competent authority:
Scientific research: Entities must be active throughout the national or regional territory and not only at the local level.
Culture: Entities must be active throughout the national territory and not only at the local level, and may not be related to teaching activities which fall within the responsibility of the Ministry of Education.
Protection of nature and the environment: Entities must demonstrate that their activities are of a continuous and sustainable nature, have an area of influence that extends to more than one municipality.
Assistance to war victims, to the disabled, the elderly, minors of protected age and people living in poverty: Entities must be active throughout the national territory and not only at the local level.
Aid to victims of natural disasters recognised in Belgium, aid to developing countries, assistance to victims of major industrial accidents and sustainable development: Entities must be active throughout the national or regional territory and not only at the local level.
Donations to associations that assist the disabled may only benefit the disabled and not their families.
For cultural associations, activities must be organised in three different provinces. Local associations are excluded. A calendar of activities and an activity report for the past year must be provided.
In Canada an entity that benefits only one gender may be eligible to be a registered PBO and receive preferential tax treatment if it can show that there is a need to do so. All types of limitations to access have the potential to prevent an entity from being registered as a PBO, although to differing degrees. Entities that want an outright restriction of benefit or exclusion of services have a far greater burden of establishing public benefit than those entities that want only to focus attention on a specific group, but extend service delivery to the general public. Most importantly, when a PBO proposes to restrict the beneficiaries of an activity in any way, the nature of the restriction must be clearly linked to the proposed benefit. For example, a religious charity may well be limited to those who are adherents of that particular religious faith, whereas that same limitation would not suffice for an organisation established to assist persons with a disability. Overall, an entity with an unreasonably limiting service or programme, will not meet the public benefit requirements, unless the restrictions are shown to be relevant to achieving the charitable purpose.
Within the public benefit requirements, there are several sub-requirements. For instance, the benefit should generally be tangible; the beneficiaries must be the public-at-large or come from a sufficient segment of the public as determined by the charitable purpose being considered; the entity may not otherwise benefit private individuals except under certain limited conditions; subject to some exceptions, the entity cannot exist for the benefit of its members; the entity cannot charge fees for its services where the effect of the charge would unduly exclude members of the public.
In Estonia, the benefits of the philanthropic activity must be identifiable and justifiable, but not quantifiable. Philanthropic activities cannot only be aimed at individuals with specific characteristics and need to benefit a sufficient section of the public. If targeting only one gender can be justified with the entity’s worthy purpose, that would be considered a sufficient section of the public. The worthy purpose must not benefit a fixed number of people. If the not-for-profit entity has members, it must have two or more.
In Germany, the worthy purpose must be dedicated to the altruistic advancement of the general public. In 2017 the federal fiscal court in Germany decided that a PBO cannot be for the common-benefit if it excludes women from its membership without a relevant justification. The ruling has led to public debate. Member based entities are eligible for preferential tax treatment. There is a minimum number of seven members in order to establish a registered association. Non-registered associations may also be eligible for the preferential tax treatment.
In India a philanthropic entity cannot be for a private religious purpose or be a trust “for the benefit of any particular religious community or caste”. Activities may cater to women, children and vulnerable sections of society. Similarly in Japan, the beneficiaries can be specified by characteristics such as gender, religion, or ability as long as the there is a relevant connection with the worthy purpose. For example, a women’s rights organisation can target people based on gender, a religious organisation can target people based on religion, or an educational facility can target people based on skill or ability.
In Italy, most philanthropic entities are open to all, without restrictions to beneficiaries. However, some kinds of entities can restrict the benefits from their activities to some groups with characteristics related to the PBO’s worthy purpose (for example, philanthropic organisations that help disadvantaged people to find employment).
In the Netherlands, there is no specific definition of ‘public benefit’. In the legislation as well as in case law, this term is neutrally described, so that there may be different opinions as to whether the organisation benefits the public. The circle of beneficiaries can be restricted by the entity if, for example, its worthy purpose is promoting equal treatment of men and women and therefore focusses only on women. Importantly, however, the purpose and activities of a philanthropic entity may not violate the constitution or international treaties, which forbid discrimination based on (amongst other characteristics) gender, race and religion.
In New Zealand, philanthropic activity needs to benefit a sufficient section of the public. Imposing fees for access to a benefit can be acceptable if done reasonably. For example, by providing a benefit that can only be accessed by members of a certain group (e.g. a scholarship for Māori students). Limits on public access must be reasonable and appropriate. When members of an organisation can also benefit, any limitations on membership must also be reasonable in the context of the benefit to the public. For example, a society of doctors set up to improve medical practice may reasonably limit its membership to qualified doctors, because the real benefit is to the wider public from the improvement of public health.
In Sweden, member based entities are eligible if they are open to the public. Nevertheless, they are allowed to make certain restrictions (e.g., age limit for a shooting club, the ability to play an instrument for an orchestra etc.). Similarly, their activities can target only one gender only if this target is naturally associated with the objective of the member based entity.
In the United States, entities need to support a charitable “class”, and not provide a more than insubstantial private benefit. There is not a specific number that constitutes a charitable class, however it must either be large enough that potential beneficiaries cannot be individually identified, or sufficiently indefinite that the community as a whole, rather than a pre-selected group of people receive benefits. Clubs and associations that are not charities are eligible for limited preferential tax treatment and there is not a specific minimum number of members needed.
3.3.1. Application process
To ensure that the entities receiving preferential tax treatment meet the public benefit, worthy purpose, and not-for-profit conditions, almost all countries surveyed in this report require philanthropic entities to undergo a specific application process to become eligible for preferential tax treatment. The assessing body must therefore approve entities before they are able to receive the preferential tax treatment. In a number of countries (e.g., Canada, France, Ireland, New Zealand, Colombia, and Germany), entities are able to apply before starting to operate. An advantage of this approach may be that entities can address issues from the start and thereby reduce the chance that they do not receive preferential tax status after they have already started operating. On the other hand, the shortcoming of such an approach may be that countries grant entities preferential tax status without being able to evaluate their performance or operations. Following up with the entity after it receives its initial tax privileges is a potential way in which countries could address this issue. For example, within three years after the approval of the status, the German tax administration monitors whether the requirements of the preferential tax treatment are still met. In France, the tax administration has six months to respond from the date of receipt of the application. After six months without notification of an administration agreement, a general interest association can receive preferential tax treatment. When it is negative, the tax administration must justify its decision. If the general interest organisation does not agree with the tax administration, it can send a second application within two months.
On the other hand, some countries (e.g., Belgium, Romania, and Argentina), require entities to have already been operating for a minimum period of time before they can apply. In Belgium, for example, PBOs must provide an activity report for the past year as well as a detailed statement of the current year's projects. In Argentina, entities that apply to receive PBO status with preferential tax treatment must demonstrate an initial (and largely symbolic, given recent inflation rates) social capital of ARS 1 000 in the general case, and ARS 200 for entities with a worthy purpose to promote economic, social and cultural rights of vulnerable groups and/or ethnic communities with a poverty or vulnerability status. In the case of foundations, the minimum initial social capital required is ARS 80 000. In Romania, entities must have been operating for at least three years and have achieved part of their philanthropic objectives before they can apply for tax relief.
In some countries (e.g., Norway and Lithuania), there is no application process for philanthropic entities to receive some of the preferential tax treatments. The benefits of not having an application process for preferential tax treatment may be to reduce the administrative burden on the entities as well as on the assessing body but this may raise issues of accountability. In Norway, for instance, there is no application process for qualifying philanthropic entities to benefit from direct preferential tax treatment. For funds and PBOs to be able to receive tax-incentivised donations, however, the entity must apply to the tax administration and fulfil the accounting and auditing requirements. Similarly, in Lithuania, there is also no registration process for philanthropic entities to receive most forms of preferential tax treatment, but if a PBO would like to receive sponsorship, it must apply to become an eligible sponsorship recipient.
3.3.2. Assessing body
To ensure that philanthropic entities meet the necessary conditions to benefit from preferential tax treatment, countries task their tax administration, other ministries or independent commissions with accreditation and oversight responsibilities. Table 3.2 shows that the majority of countries (16) have specific departments or units within their tax administration and/or Ministry of Finance that are dedicated to the philanthropic sector. Such countries may or may not have another department or independent body that oversees the funds and PBOs. To ensure that tax relief is targeted efficiently, the oversight body has to be able to determine whether the entity is productively fulfilling its worthy purpose. For PBOs with a cultural purpose, for example, such a determination may require a very different set of expertise as for PBOs with a welfare or environmental objective.
Table 3.3 indicates where within the government the administrative process of accrediting and overseeing philanthropic entities takes place. Countries typically follow one of three broad approaches: the tax administration is responsible for the accreditation process; the responsibility is shared between the tax administration and a competent authority; or the responsibility lies with another department and not the tax administration.
Tax administration
In the majority of countries, the responsibility over the accreditation process lies within the tax administration (see Table 3.3). This is the case in, for example, Argentina, Austria, Colombia, Estonia, Finland, India, Israel, Mexico, the Netherlands, Norway, the Slovak Republic, South Africa, Sweden, and Switzerland. In all of these countries, entities applying for preferential tax treatment need to apply directly to the tax administration, which is then tasked with reviewing the provided materials and determine eligibility. The majority of the countries following this approach (Argentina, Australia, Estonia, India, Israel, Mexico, the Netherlands, the Slovak Republic, South Africa, and Sweden) have a department or unit in their tax administration that is dedicated to philanthropy (see Table 3.2). For those countries in particular, a benefit of this approach may be to centralise the oversight process. On the other hand, this approach may require the tax administration to devote a significant amount of resources to entities that pay little to no taxes. Depending on the political environment, there could be competing pressures to prioritise revenue-raising activities over administering tax incentives for funds and PBOs. In such cases, there may be advantages in involving other parts of the government.
The Colombian approach is unique because it allows the public to be involved in the accreditation process. As Figure 3.1 below shows, once the submission of the request and the fulfilment of the online registry are correctly completed, the information of the entity will be published online, allowing the public to comment on it for five business days. After this, the Colombian tax administration will have four months to decide if it approves or denies the request of the entity to be classified as a philanthropic entity benefiting from the special tax regime (see the Figure 3.1 for more details on the timeline).
Note: The days in the infographic correspond to business days
Source: OECD Taxation and Philanthropy Questionnaire
Tax administration as well as other competent authority
In a number of countries (e.g., Australia, Belgium, Canada, Chile, France, Germany, Greece, Indonesia, Ireland, Japan, Latvia, Malta, Portugal, Slovenia, the Unites States) the administrative responsibilities are shared between the tax administration and other competent authorities. The range of activities that philanthropic entities may engage in is typically very broad and thus it could be challenging to properly assess and oversee entities that engage in fields that are not within the expertise of the tax administration or ministry of finance. Especially for countries that do not have a specific department or unit devoted to administering philanthropic entities (see Table 3.2), the additional resources and expertise of another competent authority may be an advantage. Some countries (e.g., Belgium, France, Slovenia, Portugal, and Chile) have addressed this challenge by assigning a competent authority in addition to the tax administration to oversee philanthropic entities. For example, the tax administration as well as the ministry of culture may process a cultural heritage organisation’s application for PBO status. In France, general interest organisations must register with the tax administration, while those seeking to be additionally recognised as being of public utility, must send their application to the Ministry of the Interior.
Another approach is to make an independent commission of experts responsible for the accreditation and oversight process (e.g., Australia, Ireland, Latvia and New Zealand). Having a dedicated commission of experts as an oversight body may have the advantage of overcoming institutional constraints of tax administrations. The primary purpose of a tax administration is the collection of tax revenue on behalf of citizens to fund the work of the government (OECD, 2019[1]). Managing a largely untaxed philanthropic sector, may therefore compete with limited resources needed for revenue raising activities. Dedicated commissions are typically able to collect and analyse data, develop expertise in the field of philanthropic entities, publish reports, and offer a clear point of contact for funds and PBOs.
Nevertheless, tax administrations have a crucial proficiency of the applicable tax rules and the way in which they interact with the country’s overall tax system. As a result, countries with commissions typically follow two approaches to incorporate the tax administration in the oversight process. The first approach, followed by Latvia, is to include tax administration officials in their commissions. The second approach, followed by Australia, Ireland and New Zealand, is to make use of a two-step process where entities must apply for approval to both a commission dedicated to philanthropic entities and the tax administration.
For example, in Latvia, entities are evaluated by a commission that is a collegial consultative body which includes (in equal number) authorized officials from the Ministry of Finance, the Ministry of Education and Science, the Ministry of Culture, the Ministry of Welfare, the Ministry of Justice and the Ministry of the Environment and Regional Development, as well as representatives of funds and PBOs who are competent and have experience in one of the worthy purpose fields.
In Ireland, philanthropic entities must firstly apply to an independent charity commission in order to be granted philanthropic status. Following that, philanthropic entities can apply to the tax administration for tax exemption. To be eligible for tax concessions in New Zealand, charities must first register with the Charities Services (a group within the Department of Internal Affairs with an independent charities registration board of three people). As part of the registration process, entities must disclose to Charities Services if they operate, or intend to operate, overseas. This information is passed on to the tax administration to further consider the charity’s eligibility for income tax concessions and for receiving tax-incentivised donations. Other PBO’s that may be fully income tax exempt, but are not considered charities in New Zealand (e.g., amateur sports bodies, or ‘friendly societies’) must apply to the tax administration directly and provide a copy of their company rules to ensure their funds can only be applied to their worthy purposes before the tax exemption is approved. Other clubs and associations, which are not eligible for full income tax exemptions, are also required to supply the tax administration with copies of their rules as they may be entitled to a limited NZD 1 000 tax deduction but unlike registered charities, are expected to file a tax return.
In Australia, the assessing body responsible for all decisions, regarding the registration and removal of organisations from the charities register is the Australian Charities and Not-for-profits Commission (ACNC). A charity must be registered with the ACNC to be exempt from income tax and obtain other tax concessions. Furthermore, a charity must be endorsed by the tax administration to be exempt from income tax. An entity wishing to be a deductible gift recipient must be endorsed by the tax administration or specifically named in tax legislation. The tax administration’s endorsement process typically takes less than 28 days.
Other department
Not all countries follow the above approaches of involving the tax administration in oversight responsibilities. In Lithuania, for example, the assessing body in charge of the application process to becoming a sponsorship recipient is the Centre of Registers under the supervision of the Ministry of the Economy and Innovation of the Republic of Lithuania. In Luxembourg, a PBO (like any other corporation) has to file annual accounts with the Company and Trade Register, which have to be supervised and approved by an independent auditor. PBOs may only own property or buildings necessary to carry out its mission. In Romania, the assessing body is the General Secretariat of the Government. In Bulgaria, the Registry Agency to the Minister of Justice is the body responsible for accrediting philanthropic entities, which enables them to receive tax-incentivised donations.
3.3.3. Additional reporting requirements
Regardless of what authority is tasked with approving philanthropic entities for tax privileges, the assessing body typically requires funds and PBOs to provide them with the information they need to evaluate whether or not the entities are, and continue to be, eligible to receive the philanthropic status as well as the associated preferential tax treatment. The requirements differ across countries and there is a trade-off between requiring entities to provide a lot of detailed information at the cost of a high administrative burden and minimal information at the cost of less oversight and perhaps more misconduct. The information requirements that countries implement can be categorised into record keeping requirements (so that entities can be audited effectively); annual reporting requirements (to help the administrative body oversee whether the entities continue to meet the worthy purpose, public benefit and not-for-profit conditions); constitutional requirements (to align the company rules with the tax rules); and an activities plan requirement (to help the assessing body evaluate the entity’s future plans).
Application and record keeping requirements
Record keeping requirements are necessary for effective auditing. For example, the Canadian tax administration conducts selective audits of registered philanthropic entities each year to evaluate whether they continue to qualify for registration and ensure they follow the rules (the tax administration maintains an audit coverage of approximately 1%). Funds and PBOs are required to provide books and records to demonstrate that their resources were used for worthy purposes and to ensure that official donation receipts were issued. So that entities have all the necessary information available during an audit, registered funds and PBOs in Canada are obliged to:
maintain direction and control of the use of all their resources;
meet their annual spending requirement (disbursement quota);
keep reliable and complete books and records;
issue complete and accurate official donation receipts (see Chapter 4 for more details on requirements relating to donation receipts).
In Belgium, PBOs must provide a budget for the current fiscal year; and the accounts of the last two accounting years. Furthermore, they must formally commit to limit management fees to less than 20%, limit advertising costs to less than 30%, and make no profits. The minimum duration of the process of accreditation is three months. Similarly, in Ireland the application for tax-exempt status must include a full set of recent financial accounts; a constitution; a plan for activities for the year ahead; and proof of registration of PBO or fund status with an independent charity commission.
Philanthropic entities in the Netherlands must keep accounting records from which the following can be inferred:
the nature and scope of the expense allowances and/or attendance fees granted to the separate members of the board;
the nature and scope of the management activities, and the other costs incurred by the entity; and
the nature and scope of the income and the assets held by the entity.
In Lithuania, philanthropic entities entitled to receive sponsorship must keep separate accounts for sponsorship received as well as for donations and/or services provided. Additionally, they must submit their monthly or annual reports to the tax administration. If the amount of the sponsorship received since the beginning of a calendar year from a single provider of sponsorship exceeds EUR 15 000, the entity must submit a monthly report.
In Colombia, the application process requires the following information:
a description of the entity’s worthy purpose;
the amount and destination of the reinvestment of the net benefits or surpluses, when applicable;
the amount and destination of permanent assignments that have been made in the taxable year;;
names of the persons that manage, direct or control the entity;
the salary of the members of the governing body of the entity;
names of the founders;
the amount of equity as of December 31st of the previous year;
the identification of the donors and the amount of the donations, as well as the destination of such donation and the projected term for expenditure or investment (if applicable);
an annual report of the results that establishes the information about ongoing projects and concluded ones, income, agreements entered into, subsidies and contributions received, as well as goals achieved for the public benefit;
financial statements of the entity;
a certificate of the legal representative or controller, as well as the income tax return that establishes that the entity has complied with all requirements for the taxable year;
In France, PBOs benefiting from a preferential tax treatment are subject to audit by the Court of Auditors. Organizations receiving more than EUR 153 000 in grants or more than EUR 153 000 in philanthropic gifts, must have their account records certified by an external auditor each year.
In Luxembourg, PBOs must determine who their beneficial owners are and have to declare them in the register of beneficial owners. A form must be completed with the information required by law in order to complete this declaration (in most cases, it will be the members of the board of directors).
Annual reporting requirements
A number of countries have annual reporting requirements (e.g., Australia, Colombia, Estonia, Lithuania, and Singapore). Typically, annual reporting helps the assessing body monitor an entity’s activities and assess whether they are still meeting all the necessary requirements. In Australia, for example, a registered entity must provide annual reports – an Annual Information Statement and for medium and large entities, a financial statement - to the ACNC. If a philanthropic entity is income tax exempt, it does not need to submit an income tax return, although there is a requirement to do so if requested by the tax administration. However, if applicable, such an entity may need to submit statements in relation to the VAT. Similarly, in order for philanthropic entities to maintain their status in Colombia, funds and PBOs of the special tax regime must annually submit their financial and legal information to the Colombian tax administration. Furthermore, all entities belonging to the special tax regime must file an annual income tax return.
Some countries require funds and PBOs to make their information publicly available. This is the case in the Netherlands, where philanthropic entities must publish information about the organisation on their own website or on a communal website of a trade organisation for example. An advantage of this approach may be in fostering the public’s trust in the philanthropic sector.
A number of countries require philanthropic entities to submit tax returns regardless of whether or not they are liable to pay taxes. In Germany, for example, funds and PBOs that receive preferential tax treatment can self-assess but are required to submit tax returns even if no tax is payable. Similarly, funds and PBOs in Slovenia can self-assess but are required to submit tax returns. On the other hand, for an entity to receive preferential tax treatment in the Slovak Republic, the only condition is to establish a business with a worthy purpose. The philanthropic entity is then required to submit tax returns but only if their income includes non-exempt income.
In the United States, philanthropic entities (other than churches) must apply for tax exemption from the tax administration and receive a tax-exempt status. After the tax-exempt status is granted, the entities (other than churches) must file annual information tax returns, which are available to the public. Additionally, if they engage in any unrelated trade or business activity, the philanthropic entities (including churches) must file a separate tax return, which is also available to the public.
Company rules and related requirements
Some countries (e.g., Ireland, New Zealand, Estonia, Mexico, and the Netherlands) require entities to report their company rules, constitution or bylaws with the administration, so that they can ensure that they are in line with the requirements necessary to receive preferential tax treatment. For example, to be qualified as a fund or PBO in the Netherlands, the articles of association of the philanthropic entity must stipulate that, in the event of liquidation, the assets remaining are to be passed on to a philanthropic entity with a similar purpose or on a foreign philanthropic entity that is (entirely or almost) exclusively committed to the public good and has a similar worthy purpose. In New Zealand, clubs and associations which are not eligible for full income tax exemptions are required to supply the tax administration with copies of their rules as they may be entitled to a limited NZD 1 000 tax deduction, but are also expected to file a tax return. Funds and PBOs in Mexico must include the current company bylaws in their application along with a proof of the nature of their activities.
Activities plan requirement
In a few countries (e.g., Belgium, Ireland, Colombia, Estonia, and Romania), entities have to provide the administration body with an activities plan. A benefit of this approach may be that countries can evaluate whether the entities have successfully made progress on their objectives but also allows them to flag any issues of eligibility ahead of time. For example, Belgium requires entities to provide a calendar of activities and an activity report for the past year as well as a detailed statement of the current year's projects.
In order to receive preferential tax treatment in Estonia, a philanthropic entity must submit an application complying with the requirements of the tax administration. The application should describe the activities of the association in the current year (including planned activities), explain the philanthropic activities carried out for the public benefit, describe the future visions of the entity and provide the necessary information on its founders. In addition to the application, the objectives set out in the articles of the entity and in the annual report are reviewed by the tax administration.
Philanthropic entities in Romania must present an activity report accompanied by annual financial statements as well as revenue statements and expenditure budgets for the three years prior to the application. The entity must also show proof of collaboration and partnership contracts with public institutions, associations or foundations in the country or abroad. Lastly, the entity should be able to show significant results in the fulfilment of its worthy purpose or present recommendation letters from competent authorities.
In Singapore, entities that wish to be a registered charity have to apply to the Commissioner of Charities, who assesses the application. Once registered, the philanthropic entity is required to make an annual submission to the Commissioner of Charities, which includes an annual report (including financial statements and a governance evaluation checklist).
3.4.1. Sources of income
Philanthropic entities may have commercial and/or non-commercial income, but the distinction is not always clear or the same across countries. Generally, non-commercial income refers to income from philanthropic gifts (discussed in Chapter 4) and government grants, or (in the case of PBOs) grants from supporting funds. Income from philanthropic gifts includes donations from individuals and corporations and testamentary transfers from individuals. In relation to these transfers, in countries that levy an inheritance tax instead of an estate tax, the tax liability is with the beneficiary and therefore an inheritance tax incentive for giving would benefit the philanthropic entity receiving the inheritance.
Broadly, commercial income is income derived from the supply of goods or services in return for some form of payment. When a corporation makes a payment as sponsorship (i.e. in return for publicity) to a philanthropic entity, it may, in some countries, be considered commercial income. That is to say that to the extent that the publicity resulting from sponsoring a philanthropic entity is a service, such income could be considered commercial.
Countries’ tax relief for the income of philanthropic entities can be separated into two approaches: (1) to exempt all or specific income (e.g. income from philanthropic gifts), or (2) to consider all forms of income taxable, but allow the entity to reduce its taxable income through current or future reinvestments towards the fulfilment of their worthy purpose. Table 3.4 shows that most countries tend to follow the first approach. Colombia, Indonesia, Lithuania, and Ireland follow the second approach, where all income (including philanthropic gifts) is considered taxable unless it is reinvested towards the fulfilment or the worthy purpose (see Table 3.5 for a detailed explanation of how the income tax liability of philanthropic entities is determined in Colombia).
3.4.2. Exempting all or specific sources of income approach
Countries generally exclude non-commercial income (such as income from philanthropic gifts or government grants) from the tax base and do not consider it as taxable income. Countries with inheritance taxes tend to exempt philanthropic entities from paying such taxes on the testamentary transfers they receive (Belgium and France apply a reduced inheritance tax rate on income from bequests).
Approaches to the tax treatment of income from commercial activities diverge. The first subsection below, discusses a small number of countries that exempt all commercial income of philanthropic entities. The second subsection provides an overview of countries whose philanthropic entities are fully income tax exempt and restrict these entities from engaging in certain kinds of activities. The third subsection discusses the countries that want philanthropic entities to pay taxes on some of their income, and thus generally differentiate between income that is related to their worthy purpose and income that is unrelated (also referred to as related and unrelated business income). The fourth subsection covers countries that tax commercial income above a threshold. Finally, there are also countries that simply tax commercial income and are thus not included in the following subsections (this is the case in Greece, Luxembourg, and Slovenia, where income derived from commercial activities is taxed).
Exempting all income from commercial activity
In Australia, philanthropic entities are fully exempt from paying income tax on both commercial and non-commercial income. Notably, a 2008-2010 review of the Australian tax system considered the issue of taxing the unrelated business income of philanthropic entities. The review found that the tax exempt entities are not incentivised to undercut the prices of their for-profit counterparts and thus the income tax concessions do not violate the principle of competitive neutrality and should be retained (Henry et al., 2009[2]). Entities may also receive a refund for franking credits (see Box 3.1 for more information).
New Zealand follows a similar approach: philanthropic entities are exempt from paying corporate income tax on non-commercial income and are also exempt from income tax on commercial income if the philanthropic entity meets the not-for-profit requirement and has no activities overseas. The issue of competitive neutrality concerns arising from exempting the commercial income of philanthropic entities was considered in the recent New Zealand Tax Working Group report. The report concluded that the underlying issue was the extent to which the philanthropic entity directs its surplus to their worthy purpose activities for the public benefit. As a result, the Working Group recommended that the Government regularly review the philanthropic sector’s use of tax expenditures to ensure that the intended social outcomes are being achieved (Tax Working Group, 2019[3]). In Malta too, philanthropic entities benefit from a tax exemption on all their income.
Restricting the commercial activities an entity can engage in
In Canada, qualifying philanthropic entities are exempt from paying income tax. PBOs are not permitted to undertake commercial activities unless they are related to the charitable purpose the entity is undertaking or the entity is run almost entirely with volunteer labour. Philanthropic entities are prohibited from carrying out unrelated commercial activities themselves and may have their registration revoked or be subject to financial penalties if they do so. A philanthropic entity may, however, carry out commercial activities through separate business corporations or trusts, provided the proper separations between the philanthropic entity and the business are in place. There are also expenditure requirements: if the average value of an entity’s property not used directly in philanthropic activities (during the 24 months before the beginning of the fiscal year) exceeds CAD 100 000, the philanthropic entity’s disbursement quota is 3.5% of the average value of that property.
In Belgium, philanthropic entities are subject to the legal entities income tax (LEIT). The LEIT is not specific to philanthropic entities and is applied to all legal entities that are not subject to the corporate income tax. A philanthropic entity can engage in economic activity if it does not constitute a principal activity, and is a secondary activity whose profits are reinvested in the entity’s worthy purpose. Philanthropic entities liable to the LEIT are not taxed on their total annual net income, but only on:
their real estate income,
their income from capital and movable property, inclusive the first EUR 1 880 euro bracket of income from savings deposits and the first EUR 190 bracket of dividends from recognised cooperative companies and to companies with a social purpose.
certain miscellaneous forms of income.
Thus, income from donations is exempt from the LEIT, but regional inheritance taxes may still apply to bequests.2
The LEIT is collected as a withholding tax. Where philanthropic entities receive income from movable property or miscellaneous income of movable origin without the withholding tax being deducted at source, the withholding tax is due by the recipient of the income. In the following cases specific assets are put on the Belgian tax roll:
Certain types of real estate income, notably net income from land and buildings situated in Belgium and leased, are subject to a 20% tax.
Capital gains made through the transfer of developed or undeveloped real estate are taxable at 16.5% or 33%.
The transfer of important participations is taxable, at the 16.5% rate, according to the same arrangements as for personal income tax.
Unjustified expenses, in-kind benefits or financial advantages, are taxable according to the same arrangements as for the corporate income tax (contribution of 100% on secret commissions and 50% if it can be established that the beneficiary for those expenses, in-kind benefits, and financial advantages is a legal person).
Pension contributions and pensions considered as disallowed expenses under the corporate income tax, financial advantages or in-kind benefits, as well as the amount equal to 17% of the benefit in kind resulting from the private use of a company car, are liable to a 33% tax.
Inter-municipal associations operating a hospital or an institution assisting war victims, disabled persons, etc., are taxable on dividends attributed to other legal entities except public administrations. The rate of this tax is 25% and the increase for lack or insufficiency of advance payments is applicable according to the same arrangements as for corporate income tax.
In Latvia, philanthropic entities are not subject to corporate income tax if the purpose of the establishment is not to make profit or achieve an increase in capital for their members, religious organisations, trade unions, and political parties. Furthermore, monetary assistance received from a public benefit organisation for covering expenditure for medical treatment (including in order to ensure transport of a patient and accompanying person to a medical treatment institution) is not included in the annual taxable income and is thus exempt from personal income tax.
Overview
The rationale behind imputation credits (also termed refundable franking credits’) is to reduce the double taxation of dividends by imputing the corporate tax to the shareholder. Dividends paid from taxed profits are ‘franked’ (i.e. receive an imputation credit) if the company that distributes its dividends has paid tax on its profits. Therefore, individuals or corporations receiving the franked dividends may receive an imputation credit under certain conditions.
Imputation Credits in Australia and New Zealand
In Australia, some tax-exempt entities (i.e. charities and deductible gift recipients) that receive franked dividends are eligible to benefit from a refund of franking credit. Since these tax-exempt entities do not pay tax on the income received from dividends, the refundable credit is essentially additional income for the entity to use for its worthy purpose. In New Zealand, on the other hand, tax-exempt entities that receive franked dividends will not be taxed on those dividends but will not be able to use the imputation credits attached to the dividends. The effect is that they are effectively subject to tax at the company rate, 28%, on the income that is taxed within any companies they invest in.
Source: Australian Taxation Office website.
In Japan, the income of PBOs (that fulfil the not-for-profit requirement) is tax exempt. The commercial activities that exempt PBOs are permitted to engage in without losing their tax exempt status, are stipulated by the most applicable ministry (i.e. the ministry that has the most expertise regarding the particular worthy purpose). Furthermore, if half or more of the employees of a commercial activity are persons with disabilities and the PBO contributes to the protection of the lives of these persons, than the activity is not considered a profitable business, which would otherwise be taxable.
In Singapore, the income of all philanthropic entities registered under the Charities Act, is exempt from income tax. PBOs may engage in commercial activities to generate additional income, or to provide goods or services for their members or clients to further their worthy purposes. However, these commercial activities, may not undermine the philanthropic entity’s focus and distract the charity from its exclusively worthy purpose. Charity boards should also be prudent and must not expose their charitable assets to significant risk. Where business activities may expose charitable assets to significant risk, they must be carried out by a business subsidiary. Business subsidiaries that are set up by charities are treated in the same manner as any other company. The income of these business subsidiaries is subject to income tax.
In Argentina, philanthropic entities are exempt from corporate income taxes. In Switzerland, PBO's are exempt from income and wealth taxes. In Israel, donations, inheritances, government grants and passive income are tax exempt. In Chile, some PBOs may be exempt from the corporate income tax when the exemption is granted by the President of the Republic. This benefit can only be requested by PBOs where their main and effective purpose is to provide aid directly to people with limited economic resources who are unable to meet their basic needs.
Exempting commercial income if related to worthy purpose activities
Austria distinguishes between three types of commercial activities: necessary, related, and unrelated. A commercial activity is considered necessary if the worthy purpose of the philanthropic entity cannot be achieved without it and the exempt entity does not significantly compete with other taxed entities that engage in a similar commercial activity. The income generated through necessary commercial activities (e.g., selling entry tickets as a museum) is fully tax exempt. A commercial activity is considered related if it is a means to achieving the worthy purpose, although not a necessary one. Income generated from related commercial activities is liable for the corporate income tax but a EUR 10 000 exemption remains. Philanthropic entities that engage in unrelated commercial activities risk losing their tax-exempt status all together. If, however, the commercial activities that a philanthropic entity engages in, generates under a threshold of EUR 40 000 in the tax year, the entity may keep its tax-exempt status. Furthermore, some capital gains of PBOs are tax-exempt. For example, the capital gain from shares (and interest from capital assets) that is verifiably used for worthy purposes is tax-free if the business is related to the PBO.
In Finland, philanthropic entities are liable to a tax on income derived from business activity, as well as a 6.26% tax on income derived from real property that is used for a purpose other than the eligible worthy purposes. For philanthropic entities in Finland, the income from the following activities is not considered to be income derived from business activity and is therefore tax exempt:
income derived from organising lotteries, fairs, athletic competitions, dances, bingo and other entertainment events, as well as the income derived from buffets, sales and other similar activities;
income derived from member magazines and other publications directly serving the purpose of the entity;
income derived from collecting funds through selling remembrance cards, badges, cards, vanes or other such products;
income derived from selling goods or services, which are manufactured or produced for the purposes of therapy, or teaching in hospitals, mental hospitals, penal institutions, workhouses, old people’s or disabled people’s homes or other similar care-taking institutions.
Income subject to tax can be deemed to be wholly or partly income tax exempt by the tax administration. A tax exemption can be granted only when the exemption can be regarded as justified with respect to the benefit that the entity produces for society. When an exemption is considered, attention is paid to what degree the entity's assets and income are used worthy purpose activity that is important for society. Attention must also be paid to whether the exemption for an entity's business leads to unfair competition.
In Germany, the income generated from activities related to the worthy purpose is exempt from corporate income and trade tax. Income attributable to economic activities which are not related to the designated worthy purpose are not subject to corporate income tax or trade tax if the total annual income including VAT from these commercial activities does not exceed EUR 35 000. Furthermore, the income of capital assets of philanthropic entities is exempt from the withholding tax on capital investments.
Philanthropic entities in Bulgaria are not taxed on their non-commercial income (such as income from grants or donations), i.e. the income that supports their main purpose, but income from commercial activities is subject to the corporate income tax for all philanthropic entities except for the Bulgarian Red Cross.
Similarly in Greece, any income acquired by philanthropic entities through the pursuit of the fulfilment of their worthy purpose (such as membership fees, public or private grants, donations, etc.) is not subject to income tax. On the other hand, any income generated from commercial/business activities is taxable, regardless of whether it is used to fulfil the worthy purpose of the not-for-profit entity (e.g., interest on deposits, public events etc.).
In Portugal, the income of philanthropic entities that is derived from donations is untaxed. Income derived from worthy purpose activities is generally also untaxed. Other sources of income, such as unrelated commercial activity or financial assets and investments are considered taxable income.
In Sweden, as in most other countries, PBOs are exempt from paying income taxes on income received or derived from donations, grants, investments, and worthy purpose activities. Furthermore, income earned by carrying out philanthropic activities, including under contracts with government, is also tax-exempt. This suggests that income from unrelated activities will be taxable income.
In the United States, PBO’s are generally exempt from corporate income taxes. However, income from unrelated business activities (i.e. activities that are not substantially related to the exempt purpose), is taxable at the corporate tax rate. More specifically, such income is taxed at the top corporate tax rate with an exclusion of USD 1 000. Income related to the exempt purpose of the non-profit organisation is generally income tax exempt. The rules on income from outsourcing work depend on the way in which it is outsourced. If, for example, an entity pays a management company to run a business and transfer all of the income over to the entity itself, then the income would be taxable as unrelated business income. Similarly, if the philanthropic entity is a partner in a partnership and the partnership is running the business, then the income would be taxable also. If, on the other hand, the income is from a business that just pays the PBO rent, then the income would usually not be taxable. If the income is passive income, for example royalty or dividend income, it would also not be taxable.
Using a threshold to exempt commercial income
As noted in the section above, Austria, Germany and the United States apply thresholds as well as distinguish between related and unrelated commercial income. In Austria, philanthropic entities that generate related or unrelated commercial income above the respective thresholds, risk losing their tax-exempt status. In Germany and the United States, on the other hand, unrelated commercial income above the threshold is taxed. In addition, several other countries (France, Hungary, Mexico, the Netherlands, Norway, the Slovak Republic, and South Africa) use thresholds to determine how to tax the income of philanthropic entities.
In France, PBOs which carry out commercial activity on a regular or occasional basis, may be exempt from corporate taxes (value added tax, corporate income tax, corporate property tax) if the activity does not compete with the business sector and if the revenues collected during the calendar year for this activity do not exceed EUR 72 000. PBOs that benefit from the corporate tax exemption remain liable for corporate income tax at reduced rates for income from asset management such as:
income from the rental of built and undeveloped buildings owned by the association (CIT rate at 24%);
profits from the exploitation of agricultural or forestry properties (CIT rate at 24%);
dividends (CIT rate at 15%);
other securities (CIT rate at 10 % or 24%).
In Hungary, PBOs are exempt from corporate tax if their income derived from commercial activities (including managing real estate) does not exceed 15% of the total income. In India, philanthropic entities that are not engaged in certain specified charitable activities and are classified as being engaged in the advancement of any other object of general public utility can derive up to 20% of their income from trade, commerce or business, provided it is earned in the course of advancing the charitable purpose of the entity.
In Mexico, philanthropic entities are exempt from income tax on income from donations; government grants; the sale of fixed or intangible asset; membership fees; recovery fees; interest; economic rights derived from intellectual property; temporary use or enjoyment of real estate, or from yields obtained from shares or other credit instruments, provided they are used for the purposes for which they were authorised. Additionally, they may obtain income from activities other than the purposes for which they were authorised, provided it does not exceed 10% of their total income.
In the Netherlands, philanthropic entities are only liable to the corporate income tax if (1) they participate in the market economy with labour and capital and thereby make a profit, or (2) if their activities compete with commercial businesses, or (3) if no exemption applies. The exemption applies if the entity’s surplus is below EUR 15 000 a year or less than EUR 75 000 combined for the prior four years.
In Norway, a philanthropic entity is exempt from paying income taxes on received donations, inheritances and grants. The entity is exempt from income taxes on income generated from any commercial activity it undertakes that does not contribute towards the realisation of the institution's worthy purpose, provided that the annual revenue from the commercial activity does not exceed a threshold of NOK 140 000. This includes any capital gain as a result of economic activity. On the other hand, capital gains resulting from the tax-exempt worthy purpose activities are tax-exempt.
In the Slovak Republic, the income received by philanthropic entities is generally tax-exempt, except for commercial income, including income derived from property (rent), the sale of assets, membership fees and advertising income above EUR 20 000 per year.
In South Africa, only welfare, education, healthcare and conservation activities qualify for an income tax deduction. The other worthy purposes (shown in Table 3.1 are only exempt from gift tax. Furthermore, 15% of all commercial income of philanthropic entities is tax exempt, amounts above that are taxable at the corporate income tax rate.
3.4.3. Exempting income if reinvested towards the worthy purpose
For countries following the second approach (exempting income if reinvested towards the worthy purpose), the source of the income is generally secondary to its destination. That is to say that as long as the surplus of a philanthropic entity is reinvested towards the worthy purpose within a given time period, the income of the entity is exempt. If, on the other hand, the entity decides to defer reinvestment, stockpile its surplus or invest it towards something other than its worthy purpose, the surplus may become taxable.
In Colombia the income tax treatment of philanthropic entities is determined based on whether, and how, the net benefit or surplus is reinvested. Other countries discussed in this report tend to exempt non-commercial income automatically (i.e. not consider it taxable income). In Colombia, however, all forms of income are considered taxable and the tax relief instead allows the entity to reinvest the net benefit or surplus (resulting from the income) towards the fulfilment of its social objective.
In Indonesia, donations and grants to philanthropic entities are tax exempt income. If an entity engaged in education or research and development has a surplus, it is only tax exempt if the surplus is reinvested in its worthy purpose (education or research and development) within a four year period after the income was received. Similarly, in the Czech Republic, the corporate income tax exemption only applies to the income of a PBO if such income is or will be used for specified worthy purposes.
In Ireland, philanthropic entities do not enjoy automatic income tax exemption simply by virtue of registering with charities commission. As discussed at the beginning of the chapter, entities must apply to the revenue for the tax exemption separately. Once the tax-exempt status is approved, entities are also exempt from capital gains tax and tax on commercial income, provided that the income is applied towards the fulfilment of the entities’ worthy purposes. Philanthropic entities also benefit from a matching scheme for donations which is described in more detail in Chapter 4.
In Lithuania, philanthropic entities are subject to the corporate income tax. The rules for calculating taxable profits of such organisations do not differ from the rules applicable for commercial entities. Nevertheless, the preferential tax treatment allows philanthropic entities to reduce the taxable surplus calculated in accordance with the general corporate income tax rules by deducting the funds directly allocated to a worthy purpose in the current or subsequent two tax periods. Where the amount of funds directly allocated to the financing of activities with a worthy purpose in the current tax period exceed the amount of taxable surplus calculated for that tax period, the funds exceeding this amount may be carried forward to reduce the amounts of taxable surplus calculated for the two subsequent tax periods. Donations in cash from a single donor which exceed EUR 9 750 during a tax period, and other donations not used for public benefit purposes are taxed at a general 15% corporate income tax rate.
Preferential VAT treatment may apply to a philanthropic entity’s inputs (purchases) as well as its outputs (supplies - sales or disposals). Regarding its inputs, philanthropic entities pay VAT on their purchases (as long as those purchases are not exempt goods or services). If they are not registered for VAT purposes, the entity is likely treated as a final consumer and cannot recover the VAT paid on its inputs without specific tax relief. Similarly, if the entity is registered for VAT purposes but does not make any taxable sales, it will also not be able to recover the VAT paid on its inputs. A philanthropic entity may not make any taxable sales because its supplies (outputs) are exempt, or because they are out of the scope of the VAT. On the other hand, philanthropic entities that do charge VAT on their sales (including zero rated goods and services) are able to recover the VAT paid on their inputs.
Consequentially, countries may choose to allow philanthropic entities to not charge VAT on their supplies (or the entities may be under the revenue threshold), which could in return create an input tax burden for those entities. As a result, some countries offer tax relief to philanthropic entities that are not able to recover VAT paid on their inputs (or are only able to recover a share of it).
VAT exemptions, reduced rates, and zero rates can create unfair competition, especially if the VAT exempt goods or services supplied by a philanthropic entity are also provided by businesses that charge VAT on their sales. Thus some countries do not exempt from VAT certain goods and services provided by philanthropic entities in order to avoid unfair competition (e.g. Canada and Ireland). Belgium, Chile, Colombia, Estonia, Indonesia, Italy, and the Slovak Republic, do not have preferential VAT treatment for philanthropic entities and apply the standard VAT rules. Although Italy does not allow a preferential VAT regime for philanthropic entities, PBOs are exempt from the requirement to provide evidence of their sales through invoices and sales receipts.
3.5.1. VAT exempt
Entities (or the activities of entities) can be exempt from VAT due to their philanthropic nature (e.g., France), because their activities do not fall within the coverage of the VAT, or because they operate below a VAT registration threshold.
In Argentina, the services of philanthropic entities that are directly related to the PBO's main purpose are exempt from VAT. That means that donations by third parties, membership dues, and fees charged to members for specific statutory activities, are all VAT exempt services for PBOs. Other transactions of PBOs are subject to the standard VAT rules.
In Australia, philanthropic entities have a higher revenue threshold for registering for VAT. Eligible entities do not need to register for VAT until their turnover is AUD 150 000 or more (normally registration is required at AUD 75 000). In some cases, PBO may choose how activities are treated. If, for instance, a PBO (e.g., a parents association) operates a school canteen on the grounds of a primary or secondary school, the PBO can choose to be VAT exempt, meaning it does not need to remit VAT on its sales of food. However, the school canteen cannot claim VAT credits for its purchases. Once the PBO chooses to be VAT exempt (i.e. pay input tax) it cannot revoke that choice for 12 months. Similarly, all philanthropic entities can choose to exempt their fundraising events from VAT, which in turn means they will have to pay input tax on their purchases since they will not be able to claim the VAT credits. This is aimed at reducing the administrative burden.
In Austria, not all philanthropic entities are exempt from the VAT. Instead, only PBOs with a “cultural” or “sports promoting” worthy purpose, as well as those running care facilities or health institutions, or providing accommodation and food to trainees below the age of 27, are VAT-exempt. Other philanthropic entities are subject to the standard VAT rules.
In Greece, philanthropic entities are exempt from charging VAT on several goods and services, subject to certain conditions. Examples of exempted activities are: The provision of services closely related to sport to persons engaged in sports or physical education by philanthropic entities. The provision of services to their members by philanthropic entities and organizations pursuing religious, philosophical, charitable purposes. The provision of cultural or educational services by philanthropic entities operating for cultural or educational purposes (in particular those services provided to visitors of museums, monuments, archaeological or other similar sites, as well as the organisation of art events, exhibitions and lectures). And finally, services provided by the above-mentioned entities in the context of events organised by them for their financial support.
In Israel, PBOs pay VAT on the goods and services they purchase and use as part of the philanthropic activity. The VAT paid by the PBOs cannot be deducted as an input tax, as there is no VAT on goods or services supplied by the PBO as part of its philanthropic activity. Commercial activity by the PBO is subject to VAT and therefore the VAT paid on inputs for the commercial activity can be deducted against VAT collected from the commercial activity.
In Latvia, the non-commercial activities of PBOs are generally considered to be outside the scope of the VAT. On the other hand, the commercial activities of PBOs are subject to the standard VAT rules. However, the VAT treatment is evaluated on a case-by-case basis. For example, VAT paid on inputs that are used as part of the philanthropic activity are not deductible. VAT paid on inputs for the commercial activity on the other hand, are deductible. However, if a PBO ‘sells’ the goods and services as part of its philanthropic activity, this activity would be regarded as a taxable transaction. The taxable amount of this transaction shall be the purchase price of the goods or full cost to the PBO of providing these services.
In Mexico, philanthropic entities are exempt from VAT for the sale of goods, the provision of services and the temporary use or enjoyment of goods as part of their activities. However, the entities have the obligation to pay and withhold the VAT when they receive independent personal services or goods provided or granted by individuals.
In Portugal, philanthropic entities are exempt from charging VAT on goods and services related to:
health, social security and social assistance (provided that they do not receive any compensation);
education – including day-care centres, kindergartens, leisure centres, establishments for children and young people with no normal family environment, establishments for disabled children and young people, rehabilitation centres for the disabled;
sport, art, and culture – including artistic, sporting, recreational, physical education and cultural activities (e.g., visiting museums, art galleries, and castles);
civic activities (e.g., political, union);
religious activities;
and humanitarian activities.
Fundraising activities (such as access tickets, registration fees, buffet, bar, stand rental, advertising revenue, etc.) are also exempt from VAT, as long as the fundraising is on an occasional basis and for the exclusive benefit of these entities (and provided they do not distort competition) and is limited to a maximum of eight fundraising events.
In Romania, some activities for the public benefit are exempt from VAT. These activities include the supplies of services closely related to sports or physical training, performed by PBOs for persons who practice sports, as well as the supplies of cultural services by cultural PBOs, recognised by the Ministry of Culture.
In South Africa, PBOs need to apply separately to be exempt from VAT. However, in general a PBO will not have to register for VAT as a vendor since it cannot be a predominantly commercial enterprise. In Switzerland, the VAT threshold for PBOs is supplies of CHF 150,000. In Finland, philanthropic entities are only liable for VAT on their commercial activities.
In the Netherlands, VAT is not applicable to non-commercial activities and therefore the VAT paid on inputs is not deductible. Within commercial activities there is a distinction between activities that are exempt and not exempt from VAT. Where activities are exempt from VAT, the VAT paid on the inputs is not deductible either. If a PBO is located in the Netherlands and has sales of no more than EUR 20 000 a year, the PBO can choose to be exempt from charging VAT, like any other small business, but will not be able to deduct or claim VAT on inputs.
In Singapore, PBOs are subject to standard VAT rules. PBOs may be regarded as carrying on both business and non-business activities for VAT purposes. Non-business activities include the provision of free services that are funded by grants, donations or sponsorships. PBOs are liable for VAT registration in Singapore if the annual value of taxable supplies arising from business activities exceeds the registration threshold of SGD 1 000 000. Once VAT-registered, PBOs are required to charge and account for VAT on their taxable supplies made. These include supplies made in the course of commercial activities (e.g. school or course fees, and day-care facility fees), as well as subsidised services as part of their philanthropic or religious purposes (e.g. dialysis fees, medical consultation fees). Like other businesses under standard VAT rules, PBOs are allowed input VAT claims on business purchases if these inputs are incurred for the making of taxable supplies in the course or furtherance of their business. Input VAT incurred for carrying out wholly non-business activities or exempt supplies is not claimable, while input VAT incurred for carrying out subsidised activities (partly business and partly non-business) is to be apportioned such that only the portion relating to the business of making taxable supplies is claimable.
3.5.2. VAT exempt with possibility of reclaiming input tax
Exempting entities or activities from VAT can lead to entities having to pay VAT on their inputs and some countries have put in place policies that enable philanthropic entities to reclaim some of the VAT they paid on inputs.
In Canada, most supplies of services and some supplies of goods made by registered charities and other PBOs are exempt from VAT (e.g. supplies of food and lodging made for the relief of poverty or distress; meals on wheels; recreational programs established for children, individuals with a disability and disadvantaged individuals; memberships in organizations providing no significant benefit to individual members; and trade union and mandatory professional dues). However, the VAT generally applies to certain supplies of goods and services made by charities that are similar to goods and services supplied by non-charitable businesses. For example, VAT typically applies to admissions to a place of amusement (e.g., a theatre), even when supplied by a philanthropic entity. If all or substantially all (90%) of a philanthropic entity’s supplies (outputs) are taxable, the entity would typically be entitled to full input tax credits for VAT paid on its purchases of inputs to those taxable supplies. For VAT paid on purchases that do not qualify for input tax credits, philanthropic entities are eligible for partial rebates. The typical rebate rate for PBOs is 50%, however, higher rebate rates are available if the PBO is also a public hospital or a non-profit school, college or university. Registered charities that produce or offer a mix of taxable and exempt supplies (outputs) use a special streamlined method for calculating their VAT obligations: registered charities generally retain 40% of the VAT they collect on their taxable supplies (outputs) and receive a rebate on the VAT paid on most of their inputs, but are not entitled to input tax credits on these inputs.
In Ireland, a PBO may have activities which are taxable from a VAT perspective, outside-the-scope of VAT or even exempt from VAT. If their activity is an outside-the-scope or exempt activity, they are neither obliged nor entitled to register and account for VAT on the income generated from those income activities. In certain circumstances, the activities of a PBO may be considered to be in competition with commercial traders and the charity may then be required to register and account for VAT on these activities. Additionally, where a PBO acquires, or is likely to acquire more than EUR 41 000 worth of goods from other EU Member States in any period of twelve months, there is an obligation to register and account for VAT in respect of those intra-Community acquisitions. Overall, the VAT status of the PBO’s activities is important in determining the VAT treatment of any income generated and the resultant entitlement to deduct VAT on costs associated with that income. In other words, the activities of a PBO must be considered on a case by case basis to decide their VAT status.
Under Irish legislation, a PBO can only recover VAT on its costs if it makes taxable sales, that is, if it is registered for VAT and charges VAT (including sales subject to the zero rate) on its sales. If the PBO has taxable supplies, it can reclaim its VAT on inputs. If the supplies are exempt or out-of-the-scope of VAT, no VAT recovery is possible. If the PBO has a mix of both exempt income and income which is subject to VAT, and income which is outside the scope of VAT, it can reclaim VAT incurred on the direct costs of making its taxable sales as well as a proportion of the VAT incurred on its general costs using an apportionment method. Furthermore, Ireland has a unique VAT compensation scheme for PBOs, which is described in more detail in Box 3.2. Other reliefs from VAT are available for the following PBOs, goods and services:
PBOs involved in the transport of severely and permanently physically disabled persons: a refund of the amount of VAT paid may be claimed in relation to the purchase and adaptation of vehicles for use by qualifying bodies for the transport of severely and permanently disabled persons.
Radios for the blind: a refund of the amount of VAT paid may be claimed in respect of radios where the PBO has a primary objective of improving the circumstances of blind persons and where the radios are intended for the use of blind persons.
Appliances for use by disabled persons: a refund of the amount of VAT paid may be claimed on certain aids and appliances purchased by or on behalf of a disabled person to assist that disabled person in the performance of essential daily functions or in the exercise of a vocation.
Rescue craft and equipment: a refund of the amount of VAT paid may be claimed on certain small rescue craft, ancillary equipment and special boat buildings and also on the hire, repair and maintenance of these craft to PBO’s who provide a sufficient standard of rescue and assistance services at sea and on inland waterways.
Humanitarian Goods for Export: a refund for VAT can be granted for goods purchased for exportation by philanthropic organisations for humanitarian, charitable or teaching activities abroad e.g. Apostolic Societies, Chernobyl Children Projects etc.
Donated medical equipment: a refund of the amount of VAT paid may be claimed by a hospital or a donor on the purchase of certain new medical instruments and appliances which are funded by voluntary donations. The VAT refund may be claimed by whoever suffers the tax i.e. the hospital or the donor, as appropriate, but not, of course, both.
Donated Research Equipment: a refund of the amount of VAT incurred in the purchase or importation of any new instrument or appliance (excluding means of transport) through voluntary donations, to a research institution or a university, school or similar educational body engaged in medical research in a laboratory.
In New Zealand, PBOs that make taxable supplies of more than NZD 60 000 per annum are required to register for the VAT. PBOs that do not reach this registration threshold may voluntarily register so long as they do make taxable supplies of goods or services. The rules do not distinguish between different types of activities. PBOs can, as long as they make some taxable supplies, claim back the VAT on any inputs they have other than inputs used for making exempt supplies (i.e. rental accommodation or financial services). As such, they can claim back the VAT on inputs that are not actually used for making a supply of goods or services. This is more generous than the input tax deduction rules for other registered-persons who can normally only claim an input tax deduction if the input is applied towards making a taxable supply of goods or services. All goods and services sold by PBOs, other than exempt supplies, are subject to VAT. Whether the goods and services are sold as part of a commercial activity or a philanthropic activity is irrelevant for VAT purposes.
The United States does not have a VAT although the States and local authorities imposes retail sales taxes. In the United States, the specific rules about exemption from State and local retail sales taxes are made by the States and can vary. Philanthropic entities are generally exempt from paying sales tax on their purchases and from collecting sales taxes from related business activities provided they meet state requirements, which may include a certificate or application for eligibility.
Germany is an outlier, because it offers a reduced VAT rate for some supplies by philanthropic entities, while others are VAT-free (e.g. some medical services). Entities can reclaim the VAT paid on their inputs for supplies subject to a reduced VAT rate. If the activities of PBOs are not part of a commercial activity and meet the worthy purpose and public benefit requirements, philanthropic entities in Germany are subject to the reduced VAT rate of 7%.
To mitigate the VAT cost for registered charities that cannot recover VAT on their costs, a VAT Compensation Scheme for PBOs was introduced in Ireland in 2019. This scheme aims to reduce the VAT burden on qualifying charities to partially compensate them for irrecoverable VAT which they have suffered in the previous calendar year. They are entitled to claim a refund of a proportion of their VAT costs based on the level of non-public funding they receive.
The scheme is capped at EUR 5 000 000 per year and, where the total amount of all eligible claims in each year exceeds the capped amount, claims are paid on a proportional basis. VAT may only be reclaimed on goods and services which were applied only to the PBOs charitable purpose. The charity must also provide proof that the charity was not entitled to a deduction or refund of the tax being claimed under any other legislation administered by the tax authority.
3.6.1. Recurrent taxes on immovable property
Philanthropic entities may own real-estate that they use to fulfil their social objectives, or they may own it as a source of income. If entities use their real-estate for their worthy purpose such as the location of offices or philanthropic activities such as treatment centres, athletic infrastructures, events, or distribution centres, some countries may exempt them from property taxes. Philanthropic entities that own immovable property as a source of income are generally liable for property taxes on those properties if such a tax is levied in their jurisdiction.
In certain cases philanthropic entities in Canada may be exempt from property taxes. However, property tax is predominantly levied at the municipal level and exemptions, rebates and credits vary provincially and by municipality. In Germany, real estate used by PBOs for charitable purposes is exempt from local property tax. In Ireland, residential properties that are owned by a PBO and used for the sole purpose of providing residential accommodation in connection with the facilitation of recreational activities are exempt from property taxes. This exemption is intended to benefit philanthropic entities who own residential properties that are used by its members when taking part in recreational activities. In Italy, local authorities (municipalities and regions) can exempt philanthropic entities from local taxes (such as real estate taxes). In Romania, there is an exemption from the tax on buildings for structures owned by the entities established either by will or set up according to the law, in order to maintain, develop and help national cultural institutions, as well as to support humanitarian, social and cultural actions. Local councils may decide to grant exemption or reduction of tax on buildings used for the supply of social services by philanthropic entities. In Singapore, PBOs benefit from a property tax exemption for real-estate that is used exclusively for public religious worship, as a public school, for charitable purposes, or for purposes conducive to social development in Singapore.
In the United States, property tax rules are determined by the States. Land and buildings of churches are generally exempt, although some States limit the amount of eligible land (such as one acre). Land and buildings of other non-profits are also generally exempt, although this exemption may not apply to all types of non-profits. In Sweden, a PBO is exempt from real estate tax if the real estate is mainly used in activities promoting the worthy purpose.
3.6.2. Miscellaneous tax benefits for philanthropic entities
Lastly, there are a number of unique tax benefits that some countries offer philanthropic entities in their tax jurisdiction. In Norway, philanthropic entities are exempt from employers' SSCs on wage costs related to their worthy purpose activity. This exemption is limited to total wage costs below a total of NOK 800 000, and NOK 80 000 per employee. Australia and New Zealand both impose a fringe benefits tax (FBT) but provide preferential tax treatment to philanthropic entities (see Box 3.3)
In Portugal, PBOs are exempt from taxes on vehicles if they are used to pursue their philanthropic activities. In the Netherlands, PBOs (including churches) are, under certain conditions, eligible to repayment of half of the energy tax they pay. In France a PBO which owns a television set on January 1 of the tax year is liable for the contribution to public broadcasting. However, organisations hosting people are generally exempt. It Italy, philanthropic entities are exempt from the stamp duty and license duty, normally charged for the certification of documents and for the authorisation of administrative procedures. The United States has recently introduced some additional taxes on income tax-exempt entities (see Box 3.4).
Australia
In Australia, some PBOs are exempt and other tax-exempt entities pay a reduced rate of fringe benefit tax (FBT). The Australian States also impose payroll tax based on the total size of the payroll. Exemptions are available to charities where the employees are engaged solely in the philanthropic activities of the charity.
New Zealand
In New Zealand, charities generally do not have to pay FBT on benefits provided to employees while they are carrying out the entity’s charitable activities. For example, if an employee uses the entity’s car while doing charitable work, there will not be any FBT due on any private benefit they receive. The one exception is where the employee is provided with a credit card or similar facility for private use and the value exceeds NZD 300. This will be liable for FBT. If the charity operates a business that is unrelated to the philanthropic purpose, FBT will be payable on any benefits provided to employees. New Zealand does not impose payroll tax.
Overview
Signed into law 22 December 2017, the TCJA is considered the biggest overhaul of the US tax system in more than thirty years. It includes corporate and individual tax changes, which have implications for giving and philanthropic entities.
Excise tax on net investment income of foundations
The law imposes a 1.39% excise tax on the net investment income of most domestic tax-exempt private funds, including private operating foundations. The tax itself has applied since 1969, but the rate was previously 2% (or 1% in some years if certain requirements were met) until the TCJA made it a flat 1.39%.
An exemption (unaltered by the TCJA) from the excise tax may apply to an operating foundation if:
it has been publicly supported for the last ten years;
Its governing body consists of individuals fewer than 25% of whom are “disqualified individuals”;
It has no officer who is a “disqualified individual”.
A disqualified individual refers to
a substantial contributor; or
an owner of more than 20% of the total combined voting power of a corporation, the profits of a partnership, or the beneficial interest of a trust which contributes to the PBO; or
a member of the family of any individual described in (1) or (2).
Excise tax on excessive executive remuneration of exempt organisations
The law imposes a 21% excise tax (based on the top corporate tax rate) on remuneration in excess of USD 1 000 000 per year paid by tax-exempt organisations. The tax applies to the highest paid employees of a tax-exempt organisation. The tax also applies to termination payments.
Source: Internal Revenue Service (IRS) website and OECD Taxation and Philanthropy Questionnaire.
3.7.1. Examples of tax abuse
Abuse of tax incentives for philanthropy occurs when the preferred tax status of a fund or PBO is abused either by the entity itself, or by taxpayers and donors, or third parties, such as fraudsters who pose as philanthropic entities or tax return preparers who falsify tax returns to defraud the government (OECD, 2009[4]). The abuse of tax incentives, and the diversion of monies intended for public purposes, discussed in this chapter focuses on the entities themselves. Common types of abuse include:
Excessive salaries and compensation for board members and employees of PBOs and funds;
Diverting funds intended for public purposes to private benefit, e.g. misusing the entity’s funds for personal expenses such as cars, office spaces, or the employment of unqualified family members;
A for-profit business poses as a PBO to benefit from the tax relief;
Investment by a philanthropic entity in corporations owned or controlled by employees of the entity
Liquidation of a PBO and distribution to individuals, eluding tax liability
Salaried employees concealed as volunteer workers (and non-declaration of salary or wages);
An entity not registered for VAT that is undertaking taxable activities.
In Canada, arrangements involving transactions between philanthropic entities and non-arm’s length individuals and entities are an ongoing concern. This can include transactions involving investments by a charity in corporations owned by individuals controlling the charity or low or zero interest loans to such individuals or corporations. Often such amounts are at significant risk of not being repaid. Another form of non-arm’s length transaction is the above-fair-market value contracts for services between charities and individuals or corporations that control the charity. This includes above fair-market value salaries paid to those involved, payment of personal expenses and other fringe benefits. In Colombia abusive schemes have included the setting-up of fictional philanthropic entities to take advantage of tax benefits, such as those provided for in the Special Tax Regime for Non-Profit Entities. For example, company-M may donate money to PBO-X, which is an entity that enjoys preferential tax treatment. Company-M therefore obtains a benefit consisting of a 25% tax credit of the value donated while PBO-X allocates the received donations towards programs in which company-M is a contractor, thereby receiving the initially donated value as income. To avoid such schemes some countries have, among other policies, strict donor-benefit rules discussed in Chapter 4.
In a 2009 OECD report on the abuse of charities for money-laundering and tax evasion, a number of countries identified tax evasion schemes related to philanthropic entities. Canada, the Czech Republic, and the United States reported that they have tracked schemes in which a philanthropic entity is set up so it receives approval for issuing donation receipts, but does not engage in the worthy purpose activities and instead the individuals who set up the entity use the fund for their personal benefit (OECD, 2009[4]). According to the report, the Canadian tax authority has noticed that charities and tax return preparers who previously have been identified as being involved in false receipting continue to issue the false receipts. At the time, the 2009 report found that suspected fraudulent alteration and creation of receipts has become more prevalent due to advancements in printing technology. Most suspicious activities seemed to involve tax return preparers and the use of electronic services.
3.7.2. Risk of terrorist financing
Another important finding of the 2009 OECD report is that although terrorist abuse of the philanthropic sector is rare, it does occur and there are vulnerabilities and risks that countries should keep track of. In the United States, the designation, prosecution and investigation of philanthropic entities has shown that terrorist abuse of philanthropic entities exists.
The Australian Charities and Not-for-profits commission (ACNC, 2020[5]) has published some of the ways in which terrorist organisations can misuse philanthropic entities to raise and distribute funds for their activities:
A resident PBO may have an overseas partner organisation that uses its funds to finance terrorism.
Terrorist organisations may use a philanthropic entity’s assets (e.g., vehicles, storage, etc.).
Terrorist organisations may attempt to use a philanthropic entity’s name and status to raise funds without the entity’s knowledge.
Terrorist organisations may attempt to infiltrate a philanthropic entity to redirect money to fund terrorist purposes.
A terrorist organisation may set up and register a philanthropic entity and hide its true purpose.
3.7.3. Detection of tax abuse related to philanthropic entities
To prevent abuse of tax concessions for philanthropic entities (including tax evasion and terrorist financing schemes), countries need to ensure that the administrative requirements (such as the application process, or annual reporting in some cases) enable the oversight body to identify and track suspicious entities and activities. However, the philanthropic entities have a role to play in limiting abuse too. As discussed in this section, some schemes occur without the entity’s knowledge. Therefore it is important that the entities themselves regularly conduct internal audits and investigations, and engage in due diligence before financing certain projects or partnering with another organisation.
For the government oversight body, in-depth audits during an application or renewal of status can help detect cases of abuse. In Belgium, the tax administration also verifies if the entity has followed the directives with respect to tax receipt preparation and issuance, even if an entity has already been certified in the past (OECD, 2009[4]).
In a number of countries, tax authorities investigate cases of tax abuse in the philanthropic sector in partnership with other law enforcement agencies. Exchanging good practices as well as information with tax administrations and law enforcement agencies helps countries better detect and track tax abuse schemes involving philanthropic entities.
Keeping the public and especially donors aware of schemes involving philanthropic entities is also important. According to the 2009 OECD report on the abuse of charities, countries such as Canada and the United States have introduced awareness campaigns to alert the public about the risks associated with the abuse of charities (OECD, 2009[4]). Canada and the United States have put out tax alerts on their websites about donation schemes (such as a tax shelters) and the abuse by intermediaries (such as tax return preparers) with respect to charitable donations. In Canada, taxpayers can search the online charities listing and have access to the list of the registered charities, newly registered charities, charities whose status have been revoked and suspended, and which charities have been permanently annulled or have been fined. The public can also review the annual information returns filed by registered charities.
3.7.4. Rules on remuneration and total spending on employment
Philanthropic entities, generally meet a non-distribution requirement while the entity is in existence. An issue that can arise is whether the payment of salaries to employees breaches this notion of ‘non-distribution’. Generally, the requirement does not prevent the payment of ‘reasonable’ remuneration for services (or the provision of goods). Some countries may impose restrictions in this regard, while others may be less prescriptive. Disclosure requirements may lessen the opportunities for excessive inurement.
To ensure that the untaxed income and received donations from philanthropic entities are not used for the personal gain of people associated with the entity, some countries have strict rules on remuneration and the total spending on employment. In Canada, for example, board members of PBOs are entitled to reasonable remuneration for the services they provide. This includes attendance fees and reimbursement of expenses, but does not generally include a salary simply for being a board member. The members of the board of trustees (or the board of directors) in Switzerland work on a voluntary basis and are generally only entitled to compensation of their effective expenses and cash expenses. For special services of individual members of the board of trustees (board members) it is allowed that an adequate compensation is paid.
In Colombia, the budget destined to compensate, remunerate or finance any disbursement, in money or in kind, for purposes of payroll, fees or commissions to the persons who hold managerial and directive positions of a philanthropic entity, may not exceed 30% of the total annual expenditure of the entity. If such payments exceed this limitation, the entity will be excluded from the Special Tax Regime.
Board members and trustees of PBOs in Ireland cannot accept a salary specifically for acting as a charity trustee, or receive other benefits for acting as such. However, they may be reimbursed for reasonable expenses, which they incur in carrying out their duties. Similarly, in Australia board members are generally unpaid but can be reimbursed for expenses.
In Sweden, board members of the PBO are entitled to remuneration. The only condition is that the PBO must use the main part of the income for a worthy purpose. In the Netherlands, PBOs can have volunteers, who may receive a limited compensation for their work. If the compensation is in line with the market, the volunteer will be seen as an employee and the normal rules for employees are applicable. In South Africa, employees and board members of philanthropic entities are entitled to remuneration, which is taxed as their personal income. Further, 75% of all donations received by a philanthropic entity in South Africa must be distributed for worthy purpose annually. Therefore, 25% is available to remunerate employees and others involved in the entity and for other expenses. The United States levies a 21% tax on excessive (over USD 1 000 000) remuneration for the five highest paid employees of exempt organisations (see Box 3.4 for more details).
References
[5] ACNC (2020), Governance Toolkit: Financial Abuse, https://www.acnc.gov.au/for-charities/manage-your-charity/governance-hub/governance-toolkit/governance-toolkit-financial.
[2] Henry, K. et al. (2009), Australia’s Future Tax System, https://treasury.gov.au/review/the-australias-future-tax-system-review.
[1] OECD (2019), Tax Administration 2019: Comparative Information on OECD and other Advanced and Emerging Economies, OECD Publishing, Paris, https://dx.doi.org/10.1787/74d162b6-en.
[4] OECD (2009), Report on abuse of charities for money-laundering and tax evasion, http://oecd.org/dataoecd/30/20/42232037.pdf.
[3] Tax Working Group (2019), Future of Tax: Final Report, Tax Working Group, https://taxworkinggroup.govt.nz/resources/future-tax-final-report-vol-i.