The Czech Republic is a civil law country with four primary forms for nongovernmental, not-for-profit organizations (NGOs):
Associations;
Foundations;
Funds; and
Public Benefit Corporations (PBCs).
Other not-for-profit legal forms, which are outside the focus of this note due to their limited interactions with foreign grantmakers, include religious organizations, political parties, political movements, interest associations, trade unions, and professional chambers.
B. Tax Laws
Under the Income Tax Law, NGOs are exempt from tax on income from statutory activities (provided that certain conditions are met), state subsidies, other forms of state support, and “current account” bank interest (i.e., a single bank account used by an entity as its official income-expenditure account; other accounts may exist, but only one can be treated as a “current account”). (Article 18(4), Income Tax Law.) Foundations, funds, PBCs, and other public benefit NGOs are generally exempt from the Tax on Donations. (Article 20(4), Tax on Donations). Accordingly, public benefit NGOs generally do not have to pay either income tax or donations tax on foreign grants.
Economic activities are taxed at a reduced rate, and foundations are exempt from tax on income generated from their registered endowments. As of May 1, 2004, when the Czech Republic entered the European Union and the Act on Value Added Tax took effect, NGOs are no longer generally exempt from output VAT on supplies provided to others in pursuit of statutory activities. However, activities of NGOs related to accredited educational activities and the provision of medical and social services remain exempt from output VAT. NGOs are also eligible for certain Real Property Tax exemptions. Both legal entities and natural persons may deduct donations to NGOs pursuing certain enumerated public benefit purposes and to organizations that filed and organized “public collections” under the Public Collections Law
II. Applicable Laws
Act No. 2/1993, Constitution of the Czech Republic and the Constitutional List of Freedoms and Rights (“Constitutional Act”);
Act No. 117/2001 on Public Collections (“Public Collections Law”);
Act No. 586/1992 on Income Tax (“Income Tax Law”), as amended by Act No. 522/2005 as well as previous amending acts;
Act No. 357/1992 on Patrimonial Tax, Tax on Donations and Tax on Transfer of Property (“Law on Donations”), as amended by Act No. 179/2005 as well as previous amending acts;
Act No. 338/1992 on Real Estate Tax, as amended by Act No. 545/2005 as well as previous amending acts; and
Act No. 235/2004 on Value Added Tax, as amended by Act No. 545/2005.
III. Relevant Legal Forms
A. General Legal Forms
Many types of legal entities may be used to create what is known in international parlance as an NGO. As in most civil law countries in Europe, the principal legal forms in the Czech Republic are associations and foundations. The Czech Republic also has several additional forms, including funds and public benefit corporations.
Associations
Associations are membership organizations established by “citizens” [1] to pursue common interests. Associations are generally regulated by the Law on Associations, and within broad parameters, associations are permitted to engage in both mutual benefit and public benefit activities. (See, e.g., Article 4, Law on Associations). Associations are, however, prohibited from engaging in functions reserved for the government or public administration (Article 5, Law on Associations).
Political parties, political movements, churches, and religious organizations are regulated under separate legislation and because of their infrequent dealings with foreign grantmakers, are largely excluded from this Note.
Foundations and Funds
Foundations and funds are grant-making, asset-based organizations established by legal or natural persons for public benefit purposes (Article 1(1), Law on Foundations). Foundations must maintain an endowment of at least CZK 500,000 (approximately $21,500). Funds have no endowment requirements and may use all of their assets to pursue their statutory purposes (Article 2(3), Law on Foundations). Although neither form may engage in economic activities, both foundations and funds may organize cultural, social, sporting, and educational events, as well as lotteries, in order to raise funds (Article 23, Law on Foundations). Foundations may hold up to 20% of the shares of joint stock companies. Investments of assets that comprise the registered endowment are subject to specific rules limiting the risk of loss. (Article 23, Law on Foundations). Funds are prohibited from investing in capital markets. Foundations, but not funds, may establish Public Benefit Corporations.
Public Benefit Corporations
PBCs were originally created to enable privatization of state entities providing public benefit services. They subsequently were used as an alternate legal form for those foundations created before 1998 that could not meet the criteria for a foundation under the new Law on Foundations. Essentially, PBCs have no members and render “generally beneficial services” to the public on equal terms and conditions. (Article 2, Law on PBCs). This legal form is commonly used by government-dependent NGOs such as theatres, hospitals, homes for the elderly, drug rehabilitation clinics, and so forth. PBCs may engage in economic activities if the income is used to improve the utilization of the organization’s assets without negatively affecting the quality, scope, and availability of the public services it offers (Article 17, Law on PBCs). PBCs may not invest in the entrepreneurial activities of other persons. PBCs may establish branches abroad so long as the law of the country where the branch is established limits usage of branch resources similarly to law of the Czech Republic (Article 17 (2), Law on PBCs).
Public Benefit Corporations are exempt from property tax on buildings that serve their purposes and from real estate, if the building is used to advance their purposes.
B. Public Benefit Status
Foundations and funds must promote “publicly beneficial goals.” (Article (1), Law on Foundations). These goals are defined as the development of spiritual values; protection of human rights and other humanitarian values; protection of the environment, cultural monuments and traditions; and the development of science, education, physical education, and sports. (Article 1(1), Law on Foundations). Public benefit companies must render “publicly beneficial services” (Article 2, Law on PBCs), but this term is left purposefully undefined, which limits the utility of this provision when conducting an equivalency determination. The concept of public benefit does not appear in the Law on Associations.
The concept of public benefit is woven into the Income Tax Law and the Public Collections Law. Under the Income Tax Law (Articles 15 (8) and 20(8)), natural persons and legal entities may in general deduct from taxable income gifts to a legal entity based in the Czech Republic if the recipient allocates the gifts to certain public benefit activities: "science and learning, research and development, culture, schools, police, fire squads, support and protection of young people, protection of animals and their health, social and health care, ecology, humanitarian and charity purposes, religious purposes for registered churches and religious communities and sports." Assistance in humanitarian disasters is treated similarly. The tax base reduction applies also to those foreign legal entities that are organizing a "public collection". Under thePublic Collections Law, "public collection" is limited to collecting contributions for promoting "public benefit purposes," such as humanitarian and charitable goals, the development of education and learning, physical fitness and sports, the protection of cultural heritage or traditions, and the environment (Article 1, Public Collections Law). Thus, tax deductibility may depend on how an NGO uses the donation.
IV. Specific Questions Regarding Local Law
A. Inurement
There are few restrictions on the ability of associations to distribute assets or income to members, employees, or others associated with the organization. Moreover, there are no provisions limiting administrative costs, reimbursement or compensation rates, or the distribution of remaining assets upon dissolution of an association. Therefore, when making an equivalency determination for an association, it is essential that a U.S. grantmaker ensure that the association’s governing documents explicitly prohibit private inurement.
The assets of a foundation or fund must be used in a manner consistent with the purposes and conditions set forth in the organization’s governing instruments. (Article 21, Law on Foundations). In addition, the law precludes directors, comptrollers, and other members of a foundation or fund’s governing bodies, as well as persons closely related to them, from receiving grants from the organization. (Articles 11(4) and 21(5), Law on Foundations). Directors of a foundation or fund are permitted to receive reimbursement for their services to the foundation or fund, but not to be directly employed by it. There are no legal limitations on what compensation may be offered. [2]
In contrast, PBCs may not pay any reimbursement for services or salaries to members of the Board of Directors or the Supervisory Board, or to persons closely related to them. However, PBCs may reimburse members for expenses related to travel and accommodations when attending a meeting outside of their domicile, and for other expenses pursuant to limits established in separate legislation (Article 10, Law on PBCs). In addition, the law broadly prohibits the use of the organization’s profit for the benefit of its founders, members of its management bodies, or employees (Article 2(1)(c), Law on PBCs).
B. Proprietary Interest
The Law on Associations contains no provisions concerning residual or on-going proprietary interests of members in an association’s property or income. Since members and donors of associations can contractually agree to the terms of the use for any property they contribute to an association, it is possible for outside parties to possess proprietary interests in an association’s property. Although the Law on PBCs and the Law on Foundations do not explicitly prohibit the existence of proprietary interests, they are generally interpreted as barring such interests.
C. Dissolution
Few normative rules govern the distribution of an association’s property remaining after dissolution. An association, like a commercial entity, can generally distribute remaining assets to members upon dissolution, which is problematic for U.S. grantmakers undertaking equivalency determinations. In situations where an association accepted donations supporting public benefit purposes, the legal vacuum has been the source of public scandals.
In the event of the dissolution of a foundation or fund, all remaining assets must revert to another foundation or fund having similar public benefit objectives. In the absence of such a foundation or fund, the assets are transferred to the municipality where the organization is registered for publicly beneficial objectives. If the municipality declines to accept these assets, they revert to the state treasury, where they must be used for a public benefit purpose (Article 9(4), Law on Foundations) or its institutions.
In a similar fashion, the remaining assets of a PBC after dissolution may be transferred only to the PBC indentified in the organization’s charter or chosen by the board of directors after deciding to liquidate (Article 4(4), Law on PBCs). In the absence of any such PBC, the assets revert to the local government or the state via the regional government where it was registered (Article 9(6-7), Law on PBCs). In this case as well, the assets must be allocated to a public benefit activity.
D. Activities
1. General Activities
Associations may engage in both mutual benefit and public benefit activities. In contrast, foundations, funds, and PBCs are statutorily required to pursue public benefit objectives. NGOs may not be established for the purpose of undertaking economic activities. However, the law does not explicitly prohibit political activities, with the exception of rights that the law generally reserves to political parties and political movements, such as registering a candidate for election. PBCs may not support political parties.
2. Public Benefit Activities
As discussed above, all forms of NGOs may engage in public benefit activities. By their nature, foundations, funds, and PBCs must pursue only public benefit goals as their primary activity. Specifically, foundations and funds must promote “the development of spiritual values; protection of human rights or other humanitarian values; protection of the environment, cultural monuments and traditions; and developments in science, education, physical education and sports” (Article 1, Law on Foundations). The Law on PBCs requires PBCs to provide generally beneficial services, but this term is not defined. Slightly different definitions of public benefit purposes are used for the tax treatment of donors and donees (see Section III B above).
3. Economic Activities
An association may not be established for the primary purpose of carrying out economic activities. Foundations and funds are prohibited from engaging in economic activities directly or through other entities except for leasing real property in their endowment, and organizing lotteries, raffles, public collections, and cultural, social, sporting, and educational events (Article 23(1), Law on Foundations). Foundations (but not funds) are allowed to hold up to 20% of the shares of a joint stock company and invest up to 30% of their endowment value into open investment funds focused on portfolios of OECD (Organization for Economic Cooperation and Devleopment) countries and with otherwise limited investment risk. PBCs may engage in so-called “complementary operations” (for example, economic activities) provided that they do not jeopardize the quality, scope, and availability of the organization’s public benefit services (Article 17(1), Law on PBCs). PBCs are prohibited from engaging in the entrepreneurial activities of other entities, and any profit earned from economic activities must be allocated to the organization’s reserve fund, which must be used primarily to cover losses occurring in subsequent years.
E. Political Activities
Czech law treats NGOs in the same manner as other legal entities and therefore allows them to support or oppose political candidates and to participate in lobbying and public advocacy activities. Associations may not operate as political parties or political movements (Article 3(a), Law on Associations), but nothing prohibits them from engaging in legislative or politically motivated activities. Similarly, foundations and funds are prohibited from financing political parties and political movements (Article 21(6), Law on Foundations), but they are not proscribed from engaging in general legislative and political activities (assuming the activities would be compatible with their public benefit requirements). The Law on PBCs likewise contains no specific prohibition on politically related or lobbying activities. Therefore, when making an equivalency determination, it is essential that a U.S. grantmaker review a prospective grantee’s governing documents to ensure that problems do not arise under U.S. law.
F. Discrimination
The Czech Constitution explicitly prohibits discrimination based on, inter alia, sex, race, skin color, language, religion, political or other persuasion, national or social origin, or belonging to a national or ethnic minority (Article 3(1), Constitutional Act). Associations are explicitly prohibited from engaging in any activity that denies or restricts the civil rights of individuals because of their nationality, sex, race, origin, political opinions, or religious affiliation (Article 4(a), Law on Associations). According to leading Czech experts, due to the supremacy of constitutional laws over all other legislation, these provisions preclude a private school or other educational institution, as well as any other subject of the law, from discriminating based on race or ethnicity.
G. Control of Organization
Legal entities may not establish citizens’ associations in the Czech Republic, although they may join associations as members (Article 2(2), Law on Associations). The Czech Constitution guarantees that foreign persons (natural and legal) have the same rights under Czech law as Czech persons (Article 42(1), Constitutional Act). Therefore, foreign individuals may found associations under Czech law. Foreign natural and legal persons are explicitly allowed to establish foundations and funds (Article 3(2)(b), Law on Foundations) and PBCs (Article 4(2), Law on PBCs).
The Law on Foundations limits interlocking control with other organizations. No one who has been a beneficiary of a foundation or fund may serve on the organization’s board of directors. Nor may such a person serve as a member of a statutory or controlling body of a legal entity that has received funds from the foundation/fund as part of its statutory activities (Article 11(4), Law on Foundations). Similar restrictions apply to PBCs (Article 10(3), Law on PBCs). Until 2002, the law required two-thirds of the trustees of a PBC to be citizens of the Czech Republic, but Act No. 208/2002 removed this requirement.
V. Tax Laws
The following section discusses relevant tax legislation, recognizing that taxes may affect the amount of the grant actually flowing to the grantee.
A. Tax Exemptions
The Income Tax Law generally excludes from income taxation “interest associations explicitly not established for income generating activities, associations of citizens, …public benefit corporations, foundations and funds, public universities …” (Article 18(8), Income Tax Law). [3] The income tax law also specifically states that NGOs are generally not required to pay income tax on interest on current accounts, state subsidies, and other income from their statutory activities, provided that the expenditures exceed the income from the activity (Article 18(4), Income Tax Law). Foundations, [4] Funds, PBCs, and other public benefit NGOs are also generally exempt from the tax on donations. (Article 20(4), Tax on Donations.)
Income from economic activities related to the statutory purposes of an NGO is subject to a reduced tax. All related income is exempt from income tax up to CZK 300,000 (approximately $12,750). Revenues (i.e., incomes minus related expenditures) at the end of fiscal year over this amount are reduced before taxation by 30% or CZK1 million (approximately $42,500), whichever is less, if the proceeds are used for public benefit purposes. However, since NGOs are required to allocate earnings and expenses for each individual activity separately, they may face a greater income tax liability (despite the 30% tax base reduction) than for-profit entities, which are able to offset earnings from one event with losses from another.
B. Deductibility of Charitable Contributions
The deductibility of a donation under Czech law is a function of the activity rather than the form of the recipient organization. In order to be deductible, a donation must be made for “science and learning, research and development, culture, schools, police, fire squads, support and protection of young people, protection of animals and their health, social and health care, ecology, humanitarian and charity purposes, religious purposes for registered churches and religious communities and sports.” In addition, deductible donations also can be made to individuals residing in the Czech Republic to support schools, health care establishments, and care for abandoned animals or endangered species (Article 20(8), Income Tax Law) as well as to handicapped individuals and children who are residents of the Czech Republic. In addition, a donor may receive a deduction for a donation to any legal entity that properly applied for and carried out a public collection under the Public Collections Law as discussed in Section III(B).
Individuals may deduct donations to qualifying NGOs up to 10% of the person’s taxable income. However, to qualify for the deduction, the individual must donate at least 2% of his/her taxable income or CZK 1,000, up to a maximum of 10% of the tax base. For legal entities, the cap is 5% of taxable income is deductible, and every donation must be at least CZK 2,000.
C. Value Added Tax
Under the VAT law that took effect on May 1, 2004, the standard VAT rate is 19%, with a 5% rate applied to some goods and services. NGOs are no longer exempt from VAT on supplies relating to their statutory purposes, as was formerly the case. Instead, VAT exemptions are limited to the following:
income from rent,
educational services provided by accredited universities and accredited vocational training facilities,
health services provided by accredited hospitals, medical care professionals, and institutions, and goods related to these services, and
social services provided according to special regulation by state or charitable private organizations.
VAT must be paid by anyone whose turnover exceeds 1 million CZK (about EUR 35,000) within a fiscal year. Also, any legal entity, including an NGO, who accepts any service from any VAT payer within the EU must report it within 15 days and pay VAT. The penalty for disobeying this requirement is severe: up to 10% of the turnover since the beginning of fiscal period.
D. Property Tax
The real property tax is not imposed on property occupied in a building belonging to and serving a foundation, school, museum, art gallery, public library, health or social care institution, or an organization exclusively engaged in environmental protection. Undeveloped plots of land are also exempt from taxation if they belong to a foundation with an endowment or to a PBC and serving its purpose. Certain categories of buildings are also exempt from the property tax. These include buildings belonging to associations, PBCs, and foundations, if the buildings house schools, libraries, museums, galleries, archives, health or social services, or associations of handicapped people.
E. Import Duties
Exemption from customs duties is tied to the nature and purpose of the goods rather than the type of organization importing them. Goods are exempted from customs duties only if: (i) they are donated; and (ii) there is no equivalent produced in the Czech Republic, or its importation would not jeopardize the interests of Czech producers. Goods eligible for exemption are those used for educational purposes, scientific work (such as equipment and tools), goods to be used to improve the cultural and living standards of handicapped people, goods to be distributed free of charge for charitable purposes, and items to be used by the blind.
Since May 1, 2004, the Czech Republic has been a member of European Union. Therefore, goods imported by an NGO from any other member state of the European Union, up to a total value of EUR10,000 during a fiscal year, are exempt from import taxation and custom duties.
F. Double Tax Treaties
A double taxation treaty was signed in 1994 between the United States and the Czech Republic. Since May 1, 2004, all regulation of double taxation between the United States and the European Union applies also to the Czech Republic. After this date, any provision of Czech law conflicting with general EU regulations ceased to be applicable.
VI. Knowledgeable Contacts
Petr Pajas, PASOS – Policy Association for an Open Society
[1] Although the Law on Associations uses the term “citizens” and does not explicitly permit foreigners to establish associations, the Czech Constitution provides foreign persons (natural and legal) with the same rights as Czech persons under Czech law, unless otherwise stipulated in a particular law (Article 42(1), Constitutional Act).
[2] Foundations and funds are also required to implement certain measures to control administrative costs by limiting administrative costs to a fixed percentage (to be determined by the organization) of total annual revenues, annual disbursements, or the size of the organization’s equity or assets at the end of the year (Article 22, Law on Foundations). Whatever method is selected may not be amended for at least five years.
[3] Income from advertisements, renting of property, and several other sources of income are, however, subject to income tax (Article 18(3), Income Tax Law.)
[4] Earnings of foundations from the rental of property in the foundation’s endowment are also exempt from income tax (Article 19 (1)(r), Income Tax Law and Article 32, Foundation Act), so long as the property is formally registered as such.
