Ireland has a rich diversity of types of nongovernmental organizations (NGOs). While the customary broad division between mutual benefit and public benefit organizations applies, these categories encompass a range of NGOs, including cooperatives, religious organizations, trade unions, residents’ associations, foundations, and self-help groups.
Most public benefit organizations are established as one of the following legal forms:
An unincorporated association;
A trust; or
A company limited by guarantee.
An organization in any of these forms, in turn, can qualify for charitable tax exemption if it meets particular requirements. This Note refers to organizations with charitable tax exemption as "charities," and organizations without such exemption as "non-charities." [1]
Two other NGO forms are beyond the scope of this Note because they rarely interact with U.S. grantmakers: Friendly Societies, and Industrial and Provident Societies. The majority of these societies pursue mutual benefit objectives, though a few do pursue public benefit objectives and qualify for charitable tax exemption.
B. Tax Laws
The Irish charitable tax exemption extends to income tax, corporation tax (in the case of companies), capital gains tax, Deposit Interest Retention Tax (DIRT), capital acquisitions tax, stamp duty and dividend withholding tax. Although charities themselves are not exempt from VAT, many items that may relate to charitable activities are exempt.
Corporate donations of cash to certain charities qualify for tax relief in Ireland, which may be relevant to an American corporation doing business in Ireland in deciding whether to engage in direct corporate grant-making there.
Note that both the Charities Acts and the Companies Acts may be replaced by new legislation in 2008.
III. Relevant Legal Forms
A. Unincorporated Association
Unincorporated associations are popular because of the ease of creating them. An unincorporated association is a membership-based organization. The association does not ordinarily have legal personality and so cannot enter into legal relations in its own right. Members are jointly and severally liable for the association’s debts. An association is created by the oral or written agreement of its members. Its governing instrument, usually termed its constitution or rules, is normally interpreted according to contract law.
B. Trusts
In this arrangement, one or more persons operating under the authority of a “deed of trust” hold funds or property on behalf of other persons; the governing instrument is a trust deed or will, and executive power rests with the trustees appointed under the terms of the trust.
A trust (like an unincorporated association) ordinarily has no legal personality; the trustees themselves must enter into legal relations and accept personal liability. Under section 2 of the Charities Act 1973, however, a qualifying trust may become a body corporate, with the property vested in that body. To seek such a conversion, the trustees apply to the Commissioners of Charitable Donations and Bequests. A body corporate established in this manner has a common seal and power to do any act or thing (including hold land) necessary to administer the trust as a charity. Moreover, the charity may sue or be sued in its corporate name.
C. Corporations Limited by Guarantee
A company limited by guarantee is an alternative type of corporation, used primarily for non-profit organizations that require legal personality. A guarantee company does not have share capital. Its members are guarantors instead of shareholders. The guarantors commit to contribute a nominal amount (typically €1) toward winding up the company in the event of a shortfall upon cessation of business. A company limited by guarantee cannot distribute profits to its members, so it is eligible to apply for charitable tax exemption. A company limited by guarantee’s governing instruments consists of its memorandum and its articles of association.
IV. Public Benefit Status
Non-governmental organizations as such in Ireland need not be established for the public benefit. Most NGOs, in fact, are established for the benefit of their members, including sporting and recreation clubs, professional bodies, political parties, trade unions, cooperatives and credit unions.
To be eligible for the charitable tax exemption, though, an NGO must be established for the public benefit. All NGO forms discussed here – unincorporated associations, trusts, and companies limited by guarantee – are eligible for charitable status. New charities legislation, likely to be enacted in 2008, is expected to give greater guidance as to what constitutes public benefit.
Although no legislation lists what objectives qualify as "charitable," the Revenue Commissioners (November 2005) have indicated that they generally consider whether an applicant's purpose falls within one of four broad categories:
Relief of poverty;
Advancement of education;
Advancement of religion; and
Certain other purposes beneficial to the community.
It is not unusual for a charitable body to fall within more than one of the headings. With regard to the final, catch-all category, not every purpose that benefits the community qualifies as a charitable purpose. In examining an application for tax exemption, the Revenue Commissioners consider the objects and the actual activities of the applicant body, and how they comport with charity case law.
An organization seeking charitable tax exemption must also have a constitution or other governing instrument that includes particular provisions (to be detailed below).
When granting an application for charitable status, the Revenue Commissioners assign the organization what is known as a CHY reference number, which indicates that it is eligible for charitable tax exemption.
V. Specific Questions Regarding Local Law
A. Inurement
Non-charities: Under Irish law, non-charitable NGOs are not subject to any restrictions on inurement. Situations may arise where inurement may present problems, most notably upon dissolution of certain kinds of organizations (see Section C, below).
Charities: To be eligible for charitable tax exemption, an organization must not distribute profits or dividends to private persons or for-profit organizations. All property and income must be applied to advancing the charitable purpose. The Revenue Commissioners require a clause to this effect in the governing instrument. Moreover, directors of charitable companies, trustees of charitable trusts and officers of charitable associations are prohibited from receiving any remuneration or other type of monetary benefit. Again, the Revenue Commissioners require a clause to this effect in the governing instrument.
B. Proprietary Interest
Non-charities: Founders may retain a proprietary interest in assets transferred to a non-charitable organization. Specifically, the founders are entitled to reacquire their contributed assets upon the NGO's dissolution.
Charities: For an NGO to receive tax exemption as a charity, the Revenue Commission requires a clause providing that all income and property of the organization are to be applied solely toward its charitable main objects. In addition, according to the Revenue Commissioners, the donation should generally be at arm's-length and with no strings attached. Although the donor may advise, the use of the donation is subject only to the charity's governing instrument. Finally, donors cannot receive benefits, other than such nominal or incidental ones as newsletters, in exchange for donations. Examples of prohibited benefits include free tickets and preferential rights of entry to prestigious events.
C. Dissolution
Non-charities: Upon its dissolution, a non-charitable NGO's remaining assets will be distributed according to the governing instrument.
Charities: Upon the winding up or dissolution of a charity, any remaining property must not be paid to or distributed among the members of the body. Instead, under the doctrine of cy près, as applied either by the Commissioners for Charitable Donations and Bequests or upon application to the High Court, such property must be transferred to some other charitable institution or institutions whose main objectives are similar to those of the dissolving body, or, failing that, to some other charitable body. The Revenue Commissioners require a clause to this effect in the charity's governing instrument.
D. Activities
1. General Activities
Non-charities: The purposes of non-charitable NGOs are not subject to restrictions, other than a presumption that such organizations are established to pursue legal purposes.
Charities: A charity is a public benefit organization operating exclusively to advance one or more of the following charitable purposes:
The relief of poverty;
The advancement of education;
The advancement of religion; and
Certain other purposes, beneficial to the community, which are not accommodated under the previous headings.
2. Economic Activities
Non-charities:
The economic activities of non-charitable NGOs are not restricted.
Charities:
Irish tax law allows a charity to conduct certain economic activities, or "trading," with profits exempt from tax under a “trading exemption.”
The Revenue Commissioners define trading as “generally involving the sale of goods or services to customers with a view to generating a profit.” To qualify for a trading exemption, a body established only for charitable purposes must apply the income derived from its trading solely to advancing its purposes. In addition, the organization ordinarily must satisfy one of the following conditions:
(a) The trade must occur in the course of carrying out a primary purpose of the charity. [Taxes Consolidation Act 1997, section 208(2)(b)(i)]
Examples include the following:
An art gallery or museum holding an exhibition and charging an admission fee;
A school providing an educational service for a fee;
A theatre selling tickets to its productions; and
A hospital providing health care services for a fee.
Economic activities that would not otherwise qualify may nonetheless fall under the trading exemption, if they are ancillary to pursuing the charity's primary purpose. Examples include a theatre selling food and drink to its patrons, or a hospital selling papers, flowers and toiletries to patients and visitors. The Revenue Commissioners operate on a case by case basis in these circumstances.
(b) The work in connection with the trade must be carried on mainly by beneficiaries of the charity. [Taxes Consolidation Act 1997, section 208(2)(b)(ii)]
Many charities engage in activities where the charity's beneficiaries carry out work. The work usually has an educational or remedial purpose and thus often falls in the preceding category. However, even if the work does not advance the charity's primary purpose, it can still qualify for exemption from tax. In order to obtain this form of exemption, the organization must prove that the greater part of its trade is undertaken by the beneficiaries, particularly where non-beneficiaries (such as employees or volunteers) also participate.
E. Political Activities
Non-charities: Non-charitable NGOs may freely engage in political and legislative activities.
Charities: Charities must not make political lobbying or advocating law reform their primary purpose. To further their primary charitable purposes, however, charities may undertake ancillary political activities, such as advocacy or consultation on law reform, without endangering their tax status.
F. Racial Discrimination
The Equal Status Act 2000 (s.7) prohibits universities and other educational establishments, whether or not supported by public funds, from discriminating on the basis of race. In addition, the Equality Act 2004 transposes into Irish law EC Race Directive (Directive 2000/43/EC), which outlaws racial discrimination in the provision of goods and services generally, though it does allow asylum seekers to be treated differently in the provision of public services, including education.
G. Control of Organization
Irish charities may be established by natural or legal persons, both domestic and foreign. Therefore, it is possible that an Irish NGO may be controlled by a for-profit entity or by an American grantor charity (which requires that the charity specifically so provide in the affidavit).
Ireland has traditionally welcomed UK NGOs that have opted to establish branches within the jurisdiction. There are very many such NGOs, particularly in the area of health and social care service provision. As a nation sharing a land boundary with an adjoining UK jurisdiction, Ireland has become accustomed to dealing with practical issues relating to cross-border NGO activity, such as fundraising. Further, as a full member of the European Union, Ireland is obliged to facilitate the freedom of movement of NGOs within member States.
VI. Tax Laws
A. Tax Exemption
Non-charities: NGOs without charitable status are ineligible for charitable tax exemption.
Charities: A body with charitable tax exemption will have a charity reference number issued by the Revenue Commissioners. Under sections 207 and 208 of the Taxes Consolidation Act 1997, the income of charitable bodies or trusts established for charitable purposes is exempt from income tax, subject to a number of conditions.
The Revenue Commissioners do not normally consider the following activities charitable:
Lobbying for the reform of law or political activities;
An organization whose main object is to benefit the members rather than a section of the community;
Provision of social and recreational activities;
An organization set up solely to fundraise; and
Illegal activities.
In addition, the applicant for tax exemption must satisfy the following conditions:
It is legally established in Ireland; its center of management and control is in Ireland; the majority of its directors are Irish residents; and it has a permanent establishment and some operations within Ireland;
Its objects and powers are so framed that every object to which its income or property can be applied is charitable; and
Its main objects and the application of its income or property are bound by a governing instrument, such as a memorandum and articles of association, a deed of trust, or a constitution.
The Revenue Commissioners further require that the charity's governing instrument include the following provisions:
A winding-up clause that requires any remaining assets to be distributed to a body having similar main objects, or, failing that, to some other charitable body;
A clause requiring that all of the organization's income and property be applied solely toward its charitable main objects;
A clause prohibiting directors, trustees or officers from receiving any remuneration or other monetary benefit; and
A requirement that any proposed alterations to the governing instrument must be approved by the Revenue Commissioners.
NGOs with charitable tax exemption are exempt from paying income tax on interest, annuities, dividends and shares, rents on property, and profits from trade (subject to the limitations noted above) or land owned and occupied. The tax exemption applies only to funds, or the proportion of funds, used exclusively for charitable purposes. [Taxes Consolidation Act 1997, sec. 207(b)(iii)] (Spending funds for non-charitable purposes may also endanger a charity's tax-exempt status altogether.) "Charitable purposes" encompasses the normal expenses running of a charity, including proper remuneration of employees. If funds are to be accumulated for more than two years, the charity must obtain prior permission from the Revenue Commissioners.
The Revenue Commissioners conduct reviews to ensure that a recognized charity continues to satisfy the conditions for exemption. Within 18 months of the date the exemption was granted, a copy of the charity's financial accounts for the first year and a report on its activities must be submitted to the Revenue Commissioners. Financial statements normally include a Statement of Income and Expenditure as well as a Statement of Assets and Liabilities. Accounts must be audited if the annual income exceeds €100,000 (see CHY 1, November 2005, at http://www.revenue.ie/leaflets/chy1.pdf). In addition to the initial 18-month review, the Revenue Commissioners may conduct periodic reviews thereafter. If they conclude that an organization has not complied with its own governing documents or with the Commissioners' requirements, the Commissioners can withdraw its tax exemption, retroactively if necessary.
B. Deductibility of Donations to Irish NGOs by Individuals and Corporations Based in Ireland
Tax relief is available for donations to “approved bodies,” including “eligible charities” and various educational and other named organizations. [Taxes Consolidation Act 1997, section 848A, Schedule 26A, Part 1 (added by Finance Act 2001, section 45)]
An “eligible charity” is not simply an organization with charitable tax exemption. Rather, an eligible charity must hold "authorization" from the Revenue Commissioners, which requires, among other things, at least three years of tax-exempt status. Authorizations are valid for up to five years, and, upon expiration, may be renewed by fresh application. [Taxes Consolidation Act 1997, section 848A, Schedule 26A, Part 3]
To be eligible for a deduction, the minimum donation to a designated charity or other approved body is €250 per year. Donations made in installments also qualify.
There is no maximum qualifying donation, unless the donor is associated with the charity or approved body to which the donation is made. In that instance – e.g., where the donor is an employee or member of the charity or approved body – then tax relief is limited to 10% of the individual's total income during the year of assessment.
A donation must also satisfy the following conditions in order to be deductible:
It must be in the form of money;
It must not be repayable;
It must not confer any direct or indirect benefit on the donor or any person connected with the donor; and
It must not be conditional on, or associated with, or part of an arrangement involving the acquisition of property by the approved body from the donor or any person connected with the donor.
In the case of corporate donations, the company claims a deduction for the donation as if it were a trading expense; there is no grossing-up arrangement. In the case of an individual taxpayer, the relief will be given on a “grossed-up” basis to the eligible charity or approved body, as the case may be, rather than by way of a separate claim to tax relief by the donor. In other words the donation will be treated as having been received by the eligible charity or approved body "net" of income tax. [2]
C. Value Added Tax
Organizations granted charitable tax exemption do not enjoy a comparable general exemption from Value Added Tax. Charities are not generally regarded as supplying goods or services in the course or furtherance of a business, so they are neither obliged nor entitled to register and account for VAT on their income. They are therefore not entitled to a repayment of VAT incurred on purchases, other than in certain circumstances. Charities carrying on a trade, such as selling publications or operating a restaurant, however, are obliged to register for VAT with respect to those trading activities if they exceed the threshold for registration, currently €51,000 for the sale of goods.
Specific items exempt from VAT may relate to charitable activities: a) the purchase and adaptation of vehicles for use by organizations to transport severely and permanently disabled persons; b) the purchase of radio broadcasting reception apparatus intended for use by blind persons; c) the purchase of appliances for use by disabled persons; d) the purchase of sea rescue craft and equipment; e) goods purchased for exportation by philanthropic organizations for humanitarian, charitable or teaching activities abroad; and f) donated research equipment and donated medical equipment. Further information can be found in the Revenue Commissioner’s information leaflet CHY 10, http://www.revenue.ie/leaflets/chy10.pdf.
D. Double Tax Treaty
A double taxation treaty exists between Ireland and the United States. When such a treaty is in existence, dividends, interest, and royalties arising in one country and paid in another are subject to tax only in the country where paid.
[1]Ireland does not register charities as such; rather, the Office of Revenue Commissioners grants charitable tax exemption to certain organizations. ["Frequently Asked Questions – Charities," http://www.revenue.ie/leaflets/faq_chy.pdf.]
[2]For further discussion of the rules applicable to companies making gifts to charities in Ireland, see ICNL’s International Reporter of Not-for-Profit Law: “Country Report for Ireland, NGO Laws and Regulations,” by Kerry O’Halloran and Emma Fitzgerald..
