The three types of NPOs are not government agencies, though they are all closely linked to the government through various establishment and oversight mechanisms.
A fourth type of organization, the Public Institution (shiye danwei), is a quasi-government agency, formed by the government and generally staffed with government employees. They are discussed in this Note because they frequently receive grants from foreign donors and are subject to some of the same taxes as NPOs. [2]
Legislation enacted in 2001 established a fifth type of NPO, the public benefit or charitable trust, which resembles the charitable trust in common law. The government has yet to implement the legislation, so this form of NPO does not yet exist in practice. It may prove important in the future.
Trade unions, religious organizations, and political parties have limited interactions with foreign grantmakers and are beyond the scope of this note.
Similarly, specific rules may apply in certain cities and provinces. These rules are available in Chinese on the websites of the local Civil Affairs authorities. This note focuses solely on national legislation.
Finally, State Council Regulations on NPOs are in the process of review and possible revision, so local experts should be consulted if more information is sought on these regulations.
B. Tax laws
Income Tax In practice donations, state subsidies, and some other forms of income are tax exempt. Contributions to NPOs are deductible from income tax, with limits depending on the type of taxpayer, the type of beneficiary, and the use of the contribution.[3]
Indirect Taxes NPOs that engage in nursing, medical, educational, cultural, or religious activities or activities in which services are performed by the disabled are exempt from the Business Tax on the sale of services.
The PRC also subjects most goods and services to VAT and imposes customs duties on imports. Certain goods are exempt from VAT and customs duties, including goods donated by international organizations as well as goods donated by persons outside China to specified national-level Social Organizations.
Non-state Education Promotion Law of the People’s Republic of China, adopted by the Standing Committee of the Ninth National People's Congress on December 28, 2002
Circular Concerning Related Issues of Collection of Enterprise Income Tax to Institutions and Social Organizations
Notice of the Ministry of Finance and the State Administration of Taxation on the Policies and Relevant Management Issues cCconcerning the Pre-tax Deduction of Public Welfare Relief Donations
Enterprises Income Taw Law of PRC, article 9, 26.
III. Relevant Legal Forms
A. General Legal Forms
Four primary legal forms of NPOs are relevant to foreign grantmakers: the Nongovernmental Social Organization (shehui tuanti); Foundation (jijinhui); the Civil Non-enterprise Institution (minban fei qiye danwei); and the quasi-governmental Public Institution (shiye danwei).
Social Organizations (SOs). The Social Organization, which is essentially an association, is the primary NPO form in the PRC. Social Organizations are formed to advance “the common desires of their members.” [Regulations on the Registration and Administration of Social Organizations (RRASO)]. They may be formed for mutual benefit or public benefit.
Social Organizations are subject to joint oversight by (1) a Registration and Administration Organ, which may be the Ministry of Civil Affairs or the local Civil Affairs authority; and (2) a Competent Business Unit, which is a line ministry or other state organ at the national or local level with jurisdiction over the SO's sphere of activity. In general, only SOs with nationwide activities or impact are regulated at the national level; other SOs are regulated at the provincial, city, or county level.
Foundations. A Foundation is a not-for-profit organization that promotes public benefit undertakings. Its assets are donated by individuals, legal persons, or other organizations [Regulations on the Administration of Foundations (RAF), Article 2]. An organization cannot be a foundation if established with appropriated state funds. Foundations, like Social Organizations, are regulated by both a Registration and Administration Organ and by a Competent Business Unit. In many laws and regulations issued prior to the 2004 Foundation Regulations (such as the Public Welfare Donations Law or PWDL), the term "Social Organization" included Foundation.[4] The new Foundation Regulations distinguish between public foundations and private foundations, with the former now subject to strict regulation of their public fundraising.
Civil Non-enterprise Institutions (CNIs). CNIs are "social institutions established by Enterprises, Institutions, Social Organizations or other social forces as well as individual citizens using non-state assets and conducting non-profit-making social service activities” [IRRACNI]. Private schools, private not-for-profit research institutes, and private not-for-profit hospitals are commonly CNIs. A CNI, like a Social Organization and a Foundation, is subject to the joint oversight of a Registration and Administration Organ and a Competent Business Unit.
Public Institutions. Public Institutions are “social service organizations sponsored by state organs or other organizations using state-owned assets that engage in educational, science and technological, cultural, medical, and other activities for the purpose of social benefit” [Interim Regulations on the Registration and Administration of Public Institutions (IRRAPI), Article 2]. They are thus more closely linked to the state than are the other types of NPOs. Public schools and universities, scientific research institutes, and public social care institutions are generally Institutions. [5]
B. Public Benefit Status
Chinese law distinguishes between NPOs that have a public benefit purpose and those that serve other purposes. The Public Welfare Donations Law confers public benefit status on two categories of organizations: “Public Benefit Social Organizations” and “Public Benefit Nonprofit Institutions.” NPOs with public benefit status are eligible for tax exemption, but they are also subject to stricter government supervision [Public Benefit Donations Law, chapters 3-5].
According to Article 10 of the PWDL, “Public Benefit Social Organizations” are legally established Foundations, charitable organizations, and other Social Organizations founded to promote public benefit undertakings. Article 3 lists which activities qualify as “public benefit undertakings" [6]:
Disaster relief, poverty alleviation, assistance to the handicapped, and assistance to Social Organizations in needy circumstances;
Education, scientific, cultural, public health, and athletic undertakings;
Environmental protection and construction of public facilities; and
Other public benefit undertakings promoting social development and progress.
“Public Benefit Nonprofit Institutions” are legally established educational Institutions, scientific research Institutions, health Institutions, cultural Institutions, public sports Institutions, social welfare Institutions, etc., that carry out public benefit undertakings and are not-for-profit.
It appears that all Foundations, some SOs, and at least most Public Institutions have public benefit status. CNIs can also obtain public benefit status and accept donations under the PWDL.
Under Article 60 of the Trusts Law of China, a trust established for any of the following public interest purposes is a public trust:
Helping poor people;
Helping disaster victims;
Assisting the disabled;
Developing education, technology, culture, art and physical education undertakings;
Developing medical and sanitation activities;
Developing environmental protection activities and maintaining the environment; and
Developing other public activities for society.
IV. Specific Questions Regarding Local Law
A. Inurement
Chinese law generally prohibits inurement for all NPOs except private schools, which are regulated by the Law to Promote Private Education (see below).
The RRASO prohibits any action to “usurp, divide in secret or misappropriate the assets” of a Social Organization [RRASO, Article 29]. All of an SO's income must be devoted to the activities addressed in the organization's governing statute or constitution, and may not be divided among members. All donations and subsidies must be used in conformity with the organization's purposes and the agreements made with donors. In addition, employees' compensation must be set with reference to the salaries set for employees of the governing Competent Business Unit, which means they generally mirror the salaries of civil servants.
Article 27 of the RAF, which governs Foundations, and Article 21 of the IRRACNI, governing CNIs, are almost identical to Article 29 of RRASO [RAF, Article 27; IRRACNI, Article 21; and RRASO, Article 29]. A 2005 Ministry of Civil Affairs Minfei note on CNI accountability and self-governance further requires that all CNIs comply with the Accounting System of NPOs, thereby securing additional protection against inurement in the case of CNIs.
All of the income of a Public Institution must be devoted to activities that advance its purposes [IRRAPI, Article 15]. The Institution must use all donations and subsidies in conformity with the purposes of the organization and the agreements with donors.
The Public Welfare Donations Law sets forth similar provisions regarding inurement [Public Welfare Donations Law, Articles 17, 18 and 23].
There is one exception to the general rule against inurement: the founders of a private school are permitted to receive a "reasonable return" on their investment [Law to Promote Private Education, Article 51].
The legal framework does not contain rules that govern financial transactions or “self-dealing” between NPOs and their founders, donors, directors, officers, employees, or family members.
B. Proprietary Interest
The Accounting System for NPOs (effective January 2005) specifically states that “Resource providers do not have ownership of [NPOs]” [Accounting System Article 2 (3)]. Though nothing in the law explicitly prohibits a donor from making a conditional donation, various regulations limit how an NPO can use its property and income, which may imply that donors cannot revoke their contributions.
The Public Welfare Donations Law provides that if the recipient changes the nature and use of the donated property without the consent of the donor, and refuses to abide by competent authority’s order to cure the violation of the donor’s instructions, the authorities can transfer the property to another NPO with the same or similar purposes, after consulting the donor [PWDL, Article 28].
The regulations do not address whether members of a mutual benefit SO can receive their contributions back when they cease being members.
The founders of a private school may retain a proprietary interest in the property they contribute to a school. During the existence of the school, however, they are entitled to claim only a “reasonable return,” and they cannot revoke their contribution or receive their property back [Law to Promote Private Education, Article 36]. As will be discussed below, it is not yet clear whether they can recover their property upon dissolution of the private school.
C. Dissolution
Chinese law is largely silent on what happens to the assets of an NPO upon its dissolution. One reason for this is the close link between the state and NPOs; the state formed all Public Institutions and most SOs and Foundations that exist today. In practice, the assets of a dissolved NPO generally are transferred to another NPO or to the state.
For SOs, the RRASO provides that “The remnant assets of a canceled Social Organization shall be disposed of in accordance with the relevant provisions of the State” [RRASO, Article 25]. The competent governmental officials opined that the assets should not be returned to members or donors. [7] Further, the Standard Form of Statutes of Social Organizations, which was drafted by the Ministry of Civil Affairs, provides that remaining assets should be used to support undertakings similar to those of the dissolved organization, under the supervision of the relevant government authorities [Standard Form of Statutes of Social Organizations, Article 25].
The IRRACNI concerning CNIs is silent in this regard, but officials treat CNIs in the same manner as SOs.[8]
As for Foundations, the RAF provides: “The remnant assets of a canceled Foundation shall be used for public benefit purpose designated in its constitution, or, when it is not feasible to do so, be donated to public benefit organizations whose nature and purpose are similar to the one in question by the Registration and Administration Organ" [RAF, Article 33].
Because Public Institutions are established with state-owned assets, the state typically acquires remaining assets upon dissolution, even in the absence of explicit provisions for their return.
Private schools may be an exception. The Law to Promote Private Education provides that the remaining assets will be disposed of according to related laws or regulations, which have not been issued yet [Law to Promote Private Education, Article 59]. It is possible that the rules will allow founders to recover the property they contributed, but only to the extent of its original value.
D. Activities
1. General
An NPO must limit its activities to those set forth in its constitution or statutes [RRASO, Articles 29, 33; IRRACNI, Articles 21, 25; RAF, Article 27, 42]. Different types of NPOs are able to qualify as legal persons, provided that they follow the appropriate registration procedures. As such, all NPOs have the power to engage in activities of legal persons, except to the extent the law provides otherwise.
2. Economic Activities
An NPO conducting commercial activities cannot be the principal purpose of an NPO. The law does not distinguish between “related” and “unrelated” commercial activities.
According to the interpretation of the State Administration of Industry and Commerce, the authority responsible for commercial activities, SOs, CNIs, and Public Institutions cannot themselves engage in for-profit businesses, but they can invest in commercial corporations unless the State Council provides otherwise. [9] This rule applies to Foundations as well.
An NPO's commercial activities are taxed on the same basis as a commercial corporation unless the law stipulates otherwise. Exceptions to this rule are quite rare. Enterprises owned solely by public schools, for example, are exempted from a substantial part of the business tax and VAT. The income of scientific research institutes and higher educational institutions, if derived from the transfer of technology, is exempted from business tax. [10]
3. Political Activities
No formal legal rules restrict NPOs' involvement in the legislative process. Organizations commonly debate legislative proposals through the mass media and communicate their opinions to the legislature.
Though no explicit rules exist, NPOs are generally forbidden to engage in political activity surrounding an election, except for trade unions and certain affiliated organizations of the Chinese Communist Party.
E. Discrimination
The Constitution guarantees that all “Citizens of the People’s Republic of China have the duty as well as the right to receive education” [The Constitution of the People's Republic of China, Article 46]. Article 4 of the Constitution also guarantees the equality of all national and ethnic groups in China, and prohibits any form of discrimination against minorities [The Constitution, Article 4]. It seems unlikely that a citizen of China could be deprived of equal educational opportunity on the basis of race or ethnic group.
F. Control of Organization
It is possible for a Chinese NPO to be controlled by a for-profit entity, which would lead to IRS scrutiny. For-profit organizations commonly form or join SOs, such as guilds and chambers of commerce. Members control an SO through the members’ assembly.
Many CNIs were established by for-profit organizations. Founders of a CNI or Foundation are permitted to control it throughout its existence; although this is not explicitly provided in the regulations, control may be established by the statute of a CNI or a Foundation. In practice, a Public Institution is wholly controlled by its founder, ordinarily a government agency.
In theory, a Chinese NPO could be controlled by an American charitable organization, which would have to be disclosed in the affidavit accompanying its establishment. According to the RAF, foreign individuals and organizations may establish Foundations, and foreigners are eligible for the positions of president and officers of Foundations as long as they reside in China no less than three months a year. The only form of SO that foreigners can legally join is a foreign chamber of commerce, such as the American Chamber of Commerce-PRC and the British Chamber of Commerce in China. The discussions about the new regulations for SOs indicate that foreigners will be permitted to join and perhaps to found friendship organizations.
G. Annual Inspection and Information Disclosure
The Measures for the Annual Inspection of Foundations (issued April 2005) require that foundations and representative offices of overseas foundations provide their annual work report for the previous year to the relevant registration and administration organ for review. An annual work report shall include: financial statements, auditing reports, and information on donations, acceptance of donations, and offers of funding, as well as any change in staffing or institution. Measures for Annual Inspection of Private Non-enterprise Entities spell out similar requirements for CNIs.
The Measures for the Information Disclosure of Foundations (issued January 2006) require foundations or representative offices of overseas foundations to disclose internal information and business undertakings to the general public. The following information shall be made generally available: (1) the annual work report of a foundation or representative office of an overseas foundation; (2) information on donation activities by the foundation; and (3) information on the welfare funding projects undertaken by the foundation.
V. Tax Laws
A. Income Tax Exemption
China has three categories of income tax: Enterprise Income Tax, Foreign Invested Enterprise and Foreign Enterprise Income Tax, and Individual Income Tax.
Under Paragraph 1, Article 8 of the Public Welfare Donations Law, the “state encourages the development of public benefit undertakings, and grants support and preferential treatment to public benefit Social Organizations and public benefit nonprofit Institutions.” This law establishes benefits relating to Enterprise Income Tax [Article 24], Individual Income Tax [Article 25], and Import Duties and VAT [Article 26], but the specifics of the exemptions are set forth in other laws and regulations.
On January 1, 2008 the Enterprise Income Tax of PRC, article 9, 26 came into effect, amending the original law. Under the new amendments, not-for-profit organizations are exempt from income tax provided they meet relevant provisions. However, the relevant provisions have not yet been defined.
Originally, the Enterprise Income Tax applied to all enterprises, whether or not they have legal personality, as well as to “all other organizations” with income [Interim Regulations on Enterprise Income Tax, Article 2]. This was interpreted to include NPOs. The law was recently amended, with an effective date of January 1, 2008. Under Article 26 of the new Income Tax law of the PRC, NPOs that meet relevant provisions can enjoy income tax exemption. The meaning of “relevant provisions“ is not yet defined.
Although in theory all of an NPO's income is subject to Enterprise Income Tax, a 1997 Ministry of Finance and State Administration of Taxation circular provides a broad exemption to NPOs [Circular Concerning Related Issues of Collection of Enterprise Income Tax to Institutions and Social Organizations]. To implement this circular, the State Administration of Taxation adopted Methods of Administration on the Collection of Enterprise Income Tax to Institutions, Social Organizations and Civil Non-Enterprise Institutions. According to these two documents, an NPO's donations, financial support from the government, membership dues, and some other income are free from Enterprise Income Tax.
B. Deductibility of Charitable Contributions
Payers of Individual Income Tax can deduct up to 30 percent of their taxable income for public benefit contributions to NPOs [Regulations for the Implementation of the Individual Income Tax Law, Article 24]. Payers of Enterprise Income Tax can deduct up to12 percent of their taxable income [Enterprise Income Tax Law, Article 9].
The State Administration of Taxation determines the eligibility of organizations to receive tax deductible contributions on a case-by-case basis. [11]
It must provide services to the general public and not aim to make profits;
It must qualify as a public welfare legal person, and the management and use of its property must comply with all relevant laws and administrative regulations;
All of its assets must be owned by the public welfare organization;
The organization’s proceeds and operational surplus must be primarily used for the activities for which the organization was created;
The organization’s surplus cannot be distributed to any individual or for-profit organization when it is terminated or dissolved;
It cannot engage in any business activity irrelevant to its public welfare purpose;
It must have a sound financial and accounting system;
The highest governing body shall not have as its objective making private profit; and
No donor may participate by any means in the distribution of the assets of the organization, nor may the donor have ownership over such assets.
Payers of Foreign Invested Enterprise and Foreign Enterprise Income Tax can also deduct up to 12 percent of their taxable income [Enterprise Income Tax Law, Article 9]. The Enterprise Income Tax Law has replaced the Regulations for the Implementation of the Foreign Invested Enterprise and Foreign Enterprise Income Tax.
C. Indirect Taxes: Business Tax, Value Added Tax, and Import Duties
The PRC subjects certain sales of goods and services to Business Tax (which relates to provision of services) and VAT (which relates to sales of goods), and offers few exemptions.
The general Business Tax law exempts NPOs and other entities that engage in nursing, medical, educational, cultural, or religious activities, or activities in which services are performed by the disabled [Interim Regulations on the Business Tax, Article 6].
Goods sold within China or goods imported from abroad are subject to VAT. Article 16 of the Interim Regulations on the Value Added Tax exempts from VAT goods for scientific research, experimentation, and education; antique books; and goods imported by organizations of the disabled to be used specifically for the disabled. Imported goods donated by foreign governments and international organizations are also exempt from the VAT under Article 16.
Goods donated by foreign governments and international organizations are also exempt from customs duties [Customs Law, Article 56].
Certain donations are also exempt from customs duties and VAT [Public Welfare Donations Law, Article 26]. In 2001, the Ministry of Finance, the State Administration of Taxation, and the Customs General Administration jointly issued Interim Methods of Customs Duties Exemption of Donated Goods for the Purposes of Poverty Relief or Charity. This exemption applies to goods donated by people outside China that are accepted by the government or by “Social Organizations established with the permission of competent departments of the State Council, whose purposes are humanitarian, poverty relief or charity” [Public Welfare Donations Law, Article 5]. The Customs General Administration enacted implementing rules, [12] under which the exemption applies only to several national-level SOs, including the Red Cross Society of China, the All-China Women’s Federation, the China Disabled People’s Federation, the China Charity Federation, the China Primary Health Care Foundation, and the Soong Ching Ling Foundation. Most NPOs are excluded.
According to other rules made by the Customs General Administration, goods are exempted from Customs Duties and VAT if (1) they are imported by scientific research institutes or schools, (2) they are directly for scientific research or education, and (3) they cannot be produced in China.
D. Other Taxes
NPOs also qualify for exemptions from other taxes, including Real Estate Tax, Urban Land Use Tax, and Tax on Acquisition of Real Estate.
E. Double Tax Treaties
China and the United States have entered into a double-taxation treaty, but it does not specifically address the deductibility of contributions by U.S. residents and businesses to NPOs.
F. Foreign Organizations and Grants
There are no clear rules about the status of foreign associations in China, and their status is subject to case-by-case scrutiny and discretion of the Ministry of Civil Affairs and other competent authorities.
Foreign exchange is under relatively tight government control in the PRC. The donated foreign exchange from abroad should be exchanged for Chinese renminbi (RMB) in one of the specified banks [Regulations on Foreign Exchange, Article 10; Rules of Administration of Purchase, Sale and Payment of Foreign Exchange, Article 9].
There are no special rules that regulate the receipt of foreign grants by domestic organizations.
[1] After more than 2,000 years with its own unique legal tradition, China began to embrace the civil law tradition of the western world early in the 20th century. During the Republic of China period (1912-1949), systematic legislation placed China firmly in the civil law family. Since the establishment of the People’s Republic of China in 1949, the legal tradition in China has remained mainly civil law, though with significant characteristics of socialism. Thus there is no Civil Code in China at present, only General Principles of Civil Law.
[2] Civil affairs authorities who oversee NPOs use the term “minjian zuzhi,” which literally means civilian organizations; it may also be translated as civil society organization, nongovernmental organization, or not-for-profit organization. This category covers Social Organizations, Foundations, and Civil Non-enterprise Institutions, but not Public Institutions.
[4] The RAF (2004) was adopted to replace the 1988 Regulations on Foundations (enacted by the State Council on September 27, 1988). Under the 1988 RAF, the Foundation was a special category of Social Organization. Consequently, the term “Social Organization” in other laws and regulations has usually been used to include the Foundation. But the 2004 RAF no longer describes the Foundation as a special category of Social Organization. Foundations are in somewhat of a legal limbo, in theory if not in practice, because they are not mentioned in the General Principles of Civil Law.
[5] One may question whether a Public Institution qualifies as an NPO at all, given that the government provides a Public Institution's original assets and exerts greater control over it than over an ordinary NPO. Even so, an Institution is subject to certain taxes on the same basis as SOs and CNIs, and the Public Benefit Donations Law treats donations to Institutions the same as donations to public benefit SOs. Whatever category Institutions may belong in, they are regularly the recipients of foreign grants, and so they are included in this Note.
[6] Article 50 of the Trust Law also lists the extent of “public benefit purposes” in terms of public benefit trust (or charitable trust). It is nearly the same as Article 3 of the Public Welfare Donations Law.
[7] The Department of Politics and Law of the Office of Law of the State Council & the Bureau of Administration of Non-governmental Organizations of the Ministry of Civil Affairs (ed.), Interpretation of the Regulations on the Registration and Administration of Social Organizations and the Interim Regulations on the Registration and Administration of Private Non-enterprise Units, Beijing: Press of Society of China, 1999, pp.58-9.
[8] Id., p.142.
[9] Article 6 and 7 of the Opinions on Several Issues Concerning Registration and Administration of Enterprises (June 29, 1999).
[10] See Tax Report, supra note 3.
[11] In 2003, the State tax authorities allowed a full range of tax benefits for donations to only 12 designated NPOs, while this number increased to 24 in 2006.
[12] Methods for the Implementation of the “Interim Methods of Customs Duties Exemption of Donated Goods for the Purposes of Poverty Relief or Charity.”
