The legal requirements in the various countries for establishing a NREC are of critical importance and must be considered carefully. Nevertheless, the legal framework must respond to what the most effective institutional structure would be for delivering services. From a purely legal perspective, a particular legal framework may appear elegant and simple, but such a framework must be tested against the reality of a situation to determine if it will really work. In this regard, it will be essential to retain local counsel to assist with the establishment of a NREC.
The discussion herein examines the key legal issues likely to prove problematic when establishing a NREC. For example, this chapter does not discuss all the provisions that need to be in a charter or what documents must be submitted with a registration application. In order to properly register an NFPO this is important information, but such information does not warrant discussion at this time. One caveat regarding the legal discussion is that the laws in the CIS are in a state of flux. This information could prove dated in a few months.
Before discussing the NFPO law in Russia, Ukraine and Moldova some terms require clarification. In the CIS, NFPOs are often referred to as "Public Associations" or "Public Unions of Citizens." The use of the word "public" is widely used when discussing NFPOs. In western parlance the opposite word "private" is used, since "public" would refer to a government organization. Many western NFPOs would take umbrage at being referred to as a "public organization" since they view themselves as private organizations and independent of the government - even though they serve the public good and often work closely with government. While this report uses the term not-for-profit, this term and non-profit have only recently gained common usage in the CIS and many laws lack a clear definition for this concept.
A NFPO located in Moscow is also governed by the temporary provision, "On Non-State Non-Commercial Organizations in Moscow City," endorsed by the Mayor of Moscow on April 30, 1993. In light of subsequent legislation, the status of this provision is unclear, but it has served an important function by enabling foreign and international organizations to accredit their representative offices. In the past opening branches of international and foreign NFPOs proved difficult and justice authorities would often refuse registration. It required influence within the right government circles to expedite the process. The aforementioned provision provided another registration option so as to avoid this bottleneck.
Article 120 of the RF CC states that a foundation is:
The State Duma adopted a new Federal Law, "On Public Association," which was officially published on 25 May 1995. A public association may be established in one of the following organizational forms: public organization, public movement, public foundation, public institution and community action board. The various laws appear to provide for different kinds of institutions and foundations and clarity is needed as to which is best for a NREC.
The founders and\or participants select the administrative body for a public foundation. Either the founders will make recommendations for personal appointments or the participants will elect administrators at a congress (conference) or general meeting. The formation, maintenance, reorganization and dissolution of other types of foundations (private, corporate, state, public-state and others) may be regulated by corresponding laws on foundations.
At first blush, an Institution as Founder appears to offer an attractive option for a NREC. With such an entity, the founder transfers his property to the institution which manages the property, but the founder retains an interest in the property. An Institute as Founder and a foundation do not have a membership base. It is preferable to use a special law rather than a general one. Consequently, the RF CC gives general norms and the Law "On Public Associations" gives special norms which correspond with the RF CC.
Pursuant to article 6 of the May 25 public association law, government or representatives of Russian or foreign governments, (both internal or external) can not be the founder of a public association. Nevertheless, a representative of a Russian or foreign government can serve in their individual capacity on the board of a public association. The public association could pose a problem since CIS and western governments may want to serve as founders of a NREC. In the case of REC-Budapest several western governments and the government of Hungary founded the organization. The public association format may also not prove attractive for a NREC since this entity has a membership base.
Establishing a NREC by a presidential decree is not an option, since the new public association law prohibits such a formation process. In the past several NGOs were sponsored by a president's decree, but those organizations will have to re-register before 1999.
In accordance with article 47 of the May 25th law, a public association formed in the RF shall be recognized as international if, in accordance with its charter, one of its structural subdivisions (a subsidiary organization, branch, affiliate or representative office) is established and operated in a foreign country.
If a NREC registers as a Russian organization and concludes a contract with a foreign NFPO it can benefit from several tax exemptions afforded by Presidential Decree No. 2270 of 22 December 1993. Such exemptions are not available, however, if a NREC has the status of an international organization.
If a foreign NFPO in Russia awards grants to other NFPOs or individuals which it has received in the form of a grant or voluntary donation for the purpose of distributing it to other organizations or individuals for charity purposes, there is no tax liability. If a NFPO awards grants using funds earned from its own commercial activity, it can only contribute five percent of its profit and will be taxed on the remainder. This requirement is in a gray area and could be argued, but to do so grant giving will have to be explicitly stated as an objective in the charter.
Russian NFPOs must submit to the tax authorities, along with their annual report, a legalized Russian translation of the statutory documents of a foreign sponsor organization in order to certify that it is a NFPO and authorized to make grants. The foreign organization must have the status of a NFPO under the laws of its country of origin.
A NFPO can maintain an in-country hard currency bank account, but must obtain permission from the Central Bank of Russia to have an off-shore account. Russian law prohibits an organization from withdrawing more than 2,000,000 rubles at a time. Upon petition by the NFPO director to the bank authorities, larger sums can be withdrawn.
The Supreme Rada of Ukraine (Parliament) recognizes that the law has many gaps. At the end of September 1995, the Rada will hold hearings "On Charity Activity and Charity Organizations." At least two draft laws have been prepared. The drafts will likely undergo significant revisions.
The law "On Public Association" does not provide for establishing a NFPO by executive decree or other special governmental act. Nevertheless, approximately five or six NFPOs have been established pursuant to such a special creation process. These organizations enjoy tax exemptions and special privileges. The decision to establish such an organization is made at the highest level of government. The Parliament does not favor such a creation process and may consider legislation requiring special decree NFPOs to register pursuant to the regular process.
Establishing a non-resident, representative office presents another option. A representative office of a foreign organization is not a Ukrainian legal entity, since it is not incorporated under Ukrainian law and simply represents the interests of a foreign legal entity. Both commercial organizations and NFPOs can have representative offices. The decision as to whether or not to establish a NREC as a Ukrainian organization could be postponed until the Parliament adopts new legislation governing NFPOs. Most foreign NFPOs have representative offices.
A representative office has some advantages over a Ukrainian legal entity. Specifically, a representative office can conduct its operations in hard currency and pay its employees in hard currency. Furthermore, the employees are not required to convert any such income into karbovansti and are taxed at a reduced rate of fifty percent pursuant to a "foreign currency income tax" exception in the income tax laws. Whereas Ukrainian currency regulations require Ukrainian legal entities to pay their employees in karbovansti. Many local employees, however, will not work for local currency. Some organizations ignore this unenforced provision of the law and either pay their employees in hard currency or go to great pains to transfer currency "bonuses" from abroad to their employees on a regular basis.
There are disadvantages to a representative office. An Instruction mandates that representative offices of foreign legal entities cannot employ directly permanent Ukrainian employees. Instead, representative offices located in Kyiv must maintain their employees' labor books through the Central Administration for Servicing of Foreign Representations of the Kyiv State Administration. Representative offices in other regions must submit the labor books to the foreign relations departments of their respective oblast state administrations.
The costs of using the Central Administration's services are as follows: "registration" of full-time employees costs $225 for non-professionals and $330 for professionals. Furthermore, the Central Administration takes a service fee equivalent to one percent of the employee's salary for its continuing services regarding employee salary deductions. This fee is paid monthly for the duration of the contract, along with the social security deductions.
In light of the cumbersome procedure of registering employees with the Central Administration, some organizations use subcontractors rather than employees. Ukrainian authorities view a representative office with excess employees as suspicious, since in the eyes of authorities it could be concealing "commercial activity." This would more likely pose a problem for a commercial organization than a public association.
Foreign employees working for an international organization do not have to obtain work permits, but they do have to register with the Ministry of Foreign Affairs to receive an accreditation. If the international organization or any of its local branches start a commercial activity which is not related to the purposes specified in the charter the foreign employees must obtain work permits from the Ministry of Labor. This requirement is neither onerous nor complicated. The costs for compliance are minimal, whereas the penalty for evasion is significant. As a practical matter, this law is not enforced and employers frequently fail to register their employees - both foreign and local.
On August 12, 1995 the President of the Ukraine issued a decree, N750, which provides for tax exemptions for contributions to charitable organizations, including contributions from foreign organizations. As a practical matter, a NREC will probably not award grants to individuals, but rather legally established NGOs. Grants to individuals only receive a tax exemption for the individual if the grant is used for scientific\technical research. In regards to grants to NGOs, it does not matter that the grantor is a public association. Ukrainian law wants to know how the money will be used. Apparently there have been situations where grant money has been used for commercial purposes which the authorities deemed inappropriate. The possibility arises that state organizations may be trying to control the direction of grant money.
An organization, even if a representative office, has to have a license to conduct operations in hard currency. Moreover, the organization has to sell fifty percent of its foreign currency to a licensed bank at a frighteningly low official exchange rate. The decree mandating such conversion is a temporary measure which will be rescinded when the karbovantsi has stabilized. The new currency law regulations will likely abolish currency license requirements and allow organizations to keep in their accounts all hard currency profits. Thereafter, one-hundred percent of foreign currency income will be sold on the Interbank Currency Exchange. However, the August 12, 1995 decree provides that charitable donations are not subject to the requirement to sell fifty percent of foreign currency.
The resolution "On Procedure for Implementing the Law of Ukraine On Implementing Changes to Decrees of the Cabinet of Ministers Concerning Currency Regulations" canceled all individual licenses granted by the National Bank to Ukrainian citizens to open and maintain hard currency accounts in foreign banks. This resolution has had minimal effect since most Ukrainians with off-shore bank accounts usually do not request such licenses.
Public Unions are created by the initiative of at least ten citizens. These citizens call a constituent congress or general meeting where they adopt the charter and form governing bodies (board of directors, committees etc.) and select officers. Article 10 of the Resolution specifies that only Moldovan citizens can be members or participants of public unions. A public union's charter, however, can provide that foreigners can have membership. Foreigners can also serve as officers of a public union. While no requirement prevents a government employee, national or foreign, from serving as a director in a representative capacity, this could change in the future. The requirement that at least ten citizens must found a public union would pose problems for a NREC. The possibility of establishing a representative office, rather than registering a legal entity, should be considered.
No special procedure exists, such as executive decree or legislative act, by which a public union can be created. All public unions register pursuant to the Resolution. Once established, however, a public union can seek tax exemptions and other special privileges pursuant to the Decree of the Republic of Moldova's President "On Sponsorship" passed on October 28, 1993, N180. This decree provides for preferential taxation for "sponsors", including international sponsors, which provide financial support for social and cultural measures. The law does not provide a clear definition of sponsor. Incidentally, only NGOs with a legal identity can receive grants.
To receive preferential treatment, the Parliament must include a "preferential order of taxation..." provision in the country's budget which is introduced on January 1st. The sponsors and the recipients of the sponsor's assistance need to conclude an agreement regarding the sponsor's assistance, which warrants the tax privileges. Such a procedure may not be necessary in the future. On July 7, 1995, the Parliament of Moldova adopted the Law "On charity and sponsorship." While an improvement over current legislation, the law remains vague on some points, but it does recognize ecology as a "sponsor purpose". The law provides that organizations created solely for charitable purposes are exempt from all taxes and duties. This law will come into force on January 1, 1996. Within the scope of their jurisdictional authority, local governments can also provide tax privileges.
Article 6 of the Resolution provides that public unions can be established at the local, national or international level. The charter must state where within the country the public union will operate and if there will be any territorial branches. Article 24 of the Resolution provides for establishing an international public union and states that an international public union must operate in one or more foreign countries.
Articles 257-258 of the Civil Code of Moldova govern contributions from bilateral and multilateral donors. The agreement concerning the contributions must be written and certified by a notary. The law, "On state fee," N1216-XII, adopted on December 3, 1992, specifies the rate of taxation based on the value of the agreement. This is the only tax on bilateral and multilateral contributions.
Public unions, pursuant to article 4.4 of the currency regulations approved by the National Bank of Moldova on 13 January 1994, cannot have off-shore bank accounts. However, natural and juridical persons can receive special permission from the Administrative Council of the National Bank to maintain an offshore account.
The Moldovan law "On work payment," adopted February 25, 1993, mandates that Moldovan citizens must be paid in Moldovan Lei. This law does not apply to foreigners who are governed by the law "On foreign investments." After paying Moldovan income tax, foreigners can transfer their foreign currency salary abroad.
Establishing a branch of an international organization represents a viable option for two reasons. First, funds could be transferred easily from the country since permission would not have to be obtained for such transfer. Second, importing equipment and other items into the country to achieve the charter purposes would not pose a problem.
Tax exemption issues require clarification. After the new sponsorship law is published, some tax issues may be resolved. Of particular concern is whether a NREC could engage in activities in addition to grant giving and retain tax-exempt status under the new law. The question also arises as to which of the categories would be most appropriate for a NREC.