In June 1999, the United Nations Security Council authorized establishment of an international civil administration in Kosovo, known as the United Nations Interim Administration Mission in Kosovo (“UNMIK”). All legislative and executive authority was vested in UNMIK, to be exercised by the Special Representative of the United Nations Secretary-General (SRSG) (Section 1, Regulation 1999/1). In 2001, a Constitutional Framework establishing “Provisional Institutions of Self-Government” was put in place; these institutions include a legislature and executive branch institutions that exercise governmental authority, except in areas reserved to the SRSG.
UNMIK established the legal framework for not-for-profit, nongovernmental organizations (“NGOs”) operating on the territory of Kosovo. In terms of domestic NGOs, the two recognized forms are foundations and associations. In addition, foreign NGOs may conduct activities on the territory of Kosovo, provided that they register with UNMIK and substantially meet specified requirements imposed on domestic NGOs (Section 3, NGO Regulation). Both foreign and domestic NGOs may apply for “public benefit status” (Section 10, NGO Regulation).
Other not-for-profit legal forms, which are outside the focus of this Note, include political parties, trade unions, and other organizations registered under separate UNMIK regulations. There is also a Law on Institutions of Culture (Regulation 2006/44 On the Promulgation of the Law on Institutions of Culture adopted by the Assembly of Kosovo (2006), which is beyond the purview of this note.
B. Tax Laws
NGOs with public benefit status are exempt from the corporate tax to the extent their income is used exclusively to further their public benefit purposes (Section 6(a), Corporate Income Tax Regulation). This includes income derived from donations and grants. An NGO is taxed at the rate of 20% on income from commercial or other activity not related to its public purpose, reduced by deductions directly related to the expense of carrying out such activity (Section 29, Corporate Income Tax Regulation). NGOs without public benefit status are taxed on their profits in the same manner as other legal entities.
Both legal persons and individuals are allowed to deduct up to 5% of their taxable income for donations for specified public benefit purposes (Section 9, Corporate Income Tax Regulation; Section 16, Personal Income Tax Regulation). The donation must be made to an NGO that has received and maintained public benefit status or to “any other non-commercial organizations that directly perform activities in the public interest and not-for-profit,” including medical, educational, and other specified types of institutions (Section 9.2, Corporate Income Tax Regulation; Section 16.2, Personal Income Tax Regulation). Deductions are not allowed if the contribution will directly benefit a person related to the donor.
A value added tax (VAT) is in effect in Kosovo. Exemptions are provided for the sale or import of medicines, medical services, pharmaceutical products, and medical and surgical instruments and apparatus, as well as the provision of public education services (Section 12, VAT Regulation). Effective January 1, 2006, the VAT was amended to remove the VAT rebate on goods imported and used for public benefit purposes formerly granted to NGOs with public benefit status (Section 1, Regulation No. 2005/40 Amending the VAT Regulation).
UNMIK recognizes two NGO legal forms for domestic organizations: associations and foundations. Both forms may be established for any lawful public or mutual benefit purpose (Section 2.1, NGO Regulation).
An association is a membership organization established by at least three domestic or foreign legal or natural persons, at least one of whom is a resident of or situated in Kosovo (Section 2.2, NGO Regulation).
A foundation is an organization without members that is established to manage properties and assets. A foundation may be created by one or more legal or natural persons, at least one of whom is a resident of or situated in Kosovo (Section 2.3, NGO Regulation). A foundation may also be established by a will, bequest, or legacy (Section 2.5, NGO Regulation).
Foreign NGOs may conduct activities on the territory of Kosovo, provided that they register with UNMIK and substantially meet specified requirements (Section 3, NGO Regulation).
B. Public Benefit Status
An NGO may apply to UNMIK for public benefit status, which if granted entitles the organization to certain tax benefits and subjects it to certain reporting requirements. An NGO organized and operated to undertake one or more of the following as its principal activity may apply for public benefit status: humanitarian assistance and relief, charity, education, health, culture, environmental conservation or protection, economic reconstruction and development, the promotion of human rights, the promotion of democratic practices and civil society, the promotion of gender equality, or any other activity that serves the public benefit (Section 10.1, NGO Regulation).
Educational and health-related activities constitute public benefit activities only if significant benefits are provided free of charge or at less than fair market value to disadvantaged individuals or groups. Economic development constitutes a public benefit activity only if it is undertaken primarily for the benefit of disadvantaged individuals or groups (Section 10.2, NGO Regulation). An NGO with public benefit status must file annual financial and programmatic reports in order to retain that status (Section 10.3, NGO Regulation; Section 5, Administrative Direction 2000/10). The financial reports of public benefit NGOs with annual income or expenditures in Kosovo over roughly €127,823 must be reviewed by an independent auditor (Section 5.9, Administrative Direction 2000/10).
IV. Specific Questions Regarding Local Law
A. Inurement
NGOs are prohibited from distributing any net earnings or profits to any person. An NGO’s assets, earnings, and profits may not be used to provide direct or indirect benefit to any founder, director, officer, member, employee, or donor of the NGO (Section 1.3, NGO Regulation). NGOs are allowed to pay “reasonable compensation” to such persons for work performed for the organization (Section 1.3, NGO Regulation).
B. Proprietary Interest
No specific legal provisions address this issue, which is still an evolving area under local law. Therefore, it would be prudent for a grantmaker undertaking an equivalency determination to review the governing documents of a prospective grantee to ensure compliance with U.S. law.
C. Dissolution
If an NGO received tax or fiscal benefits, donations from the public, or government grants, then upon the organization's dissolution, any assets remaining after the discharge of liabilities shall be distributed to another NGO with the same or similar purposes, as identified in the organization’s governing documents or through a decision of the organization’s highest governing body. If no NGO is designated by either of these means, then UNMIK shall determine the NGO entitled to receive these assets (Section 11.1, NGO Regulation).
D. Activities
1. General Activities
NGOs in Kosovo may engage in any lawful activities, including economic activities and certain political activities (Sections 2.1, 8, 9.2, NGO Regulation).
2. Economic Activities
An NGO may engage in economic activities, provided that the earnings are intended and used to promote the organization’s not-for-profit purposes (Section 9.2, NGO Regulation). Although there are no explicit legal provisions on this matter, in practice UNMIK generally allows NGOs to engage in economic activities only to the extent they do not constitute the principal activities of the organization.
E. Political Activities
NGOs may not engage in fundraising or campaigning to support political parties or candidates for political office (Section 8, NGO Regulation). However, this prohibition does not appear to extend to involvement in lobbying or other kinds of political activities. Therefore, a U.S. grantmaker undertaking an equivalency determination should review the governing documents and activities of a prospective grantee to ensure that requirements of U.S. law are satisfied.
F. Discrimination
The Constitutional Framework guarantees all persons in Kosovo the right to all fundamental freedoms without discrimination on any grounds, and the rights and protections set forth in numerous international conventions and declarations on human rights are incorporated into the Constitutional Framework (Chapter 3.1, Constitutional Framework). Moreover, communities and their members have the right to establish educational institutions provided that “curricula shall respect the applicable law and shall reflect a spirit of tolerance among communities and respect for human rights and the cultural traditions of all communities” (Chapter 4.4(j), Constitutional Framework). The laws in effect in Kosovo must not conflict with internationally recognized human rights standards and shall not discriminate against any person on racial or other specified grounds (Section 2, Administrative Regulation). Ethnic communities and their members are guaranteed the right to education and can provide for education in their own language (Chapter 4.4(b) and (j), Constitutional Framework). All persons undertaking public duties or holding public office in Kosovo are required to observe these norms (Section 3, Administrative Regulation).
The principles set forth in the Constitutional Framework are effectuated by the Anti-Discrimination Law. The Law applies to both individuals and legal persons in the public and private sectors, and covers any action or failure to act that affects the rights of a person to access to employment or education, among other things. Recipients of public contracts, loans, grants or other benefits are required to execute a statement that they will act in compliance with the Anti-Discrimination Law and will promote a non-discrimination policy in carrying out their obligations under the public award. The Law authorizes claims as well as sanctions for violation of its provisions.
G. Control of Organization
There are no restrictions on the participation of or management by foreign individuals or entities in Kosovar NGOs. Foreign persons may found, be members of, and manage an NGO in Kosovo. Therefore, it is possible that a Kosovar NGO may be controlled by a for-profit entity or an American grantor charity (either of which will lead to additional IRS scrutiny).
V. Tax Laws
A. Tax Exemptions
Registered NGOs with public benefit status are exempt from the profit tax to the extent that the income is used exclusively to further the organization’s public benefit purposes (Section 5(a), Profit Tax Regulation). This includes income derived from foreign grants and donations. Income generated from contracts with a non-local contractor for the supply of goods or services to the United Nations or any of its specialized agencies (including UNMIK) is also exempt from the profit tax (Section 5(d), Profit Tax Regulation). Other legal entities pay profit tax at the rate of 20% on taxable profit. NGOs without public benefit status are taxed on their profits in the same manner as other legal entities.
B. Deductibility of Charitable Contributions
Donations by legal entities and individuals made for humanitarian, health, educational, religious, scientific, cultural, environmental protection, and sports purposes may be deducted from income up to a maximum of 5% of taxable income (Section 9, Corporate Income Tax Regulation; Section 16, Personal Income Tax Regulation). The donation must be made to an NGO that has received and maintained public benefit status or to “any other non-commercial organizations that directly perform activities in the public interest and not-for-profit,” including medical, educational, and other specified types of institutions (Section 9.2, Corporate Income Tax Regulation; Section 16.2, Personal Income Tax Regulation). Deductions are not allowed if the contribution will directly benefit a person related to the donor.
An NGO is prohibited from accepting more than € 1000 from a single source in a day unless it receives a written exemption. An NGO is required to include in its annual report disclosure of each contribution in currency if total contributions in currency from that source exceed € 5000 per year (Regulation 2004/2 on the Deterrence of Money Laundering and Related Criminal Offences, Sections 4.1, 4.3, and 4.6.).
C. Value Added and Turnover Taxes
The standard VAT rate is 15%. A zero rate is applied to export transactions, transactions within the former Republic of Yugoslavia, and transactions related to the international transportation of goods and persons (Section 10, VAT Regulation). Registration is required of all legal entities with an annual turnover of more than €100,000. Goods and supplies funded by grants made to UNMIK by governments and NGOs for humanitarian or reconstruction programs in Kosovo are exempt from VAT (Section 11(c), VAT Regulation). Imports of medicines, medical services, and medical instruments are VAT exempt (Section 11(f), VAT Regulation). The provision of medicines, medical services, and medical instruments, as well as public education services, are also VAT exempt (Section 12, VAT Regulation). NGOs with public benefit status are entitled to rebates on VAT paid for imported goods (excluding items such as alcohol and cigarettes), provided that the goods are to be used for their public benefit activities (Section 13.2(b), VAT Regulation).
D. Property Tax
A tax is levied on all immovable property in Kosovo. The Municipal Assembly of each municipality in Kosovo sets a tax rate of between .05% and 1% of the market value of immovable property on an annual basis. The taxpayer is in the first instance the property owner; however, where the owner cannot be determined or located, the lawful occupier or user, or actual user, of the property is held liable for the tax (Immovable Property Tax Regulation Sections 3-6).
NGOs with public benefit status are exempt from property tax, provided that they use the property exclusively for their public benefit purposes. Exemption is also extended to foreign donor agencies carrying on work in the fields of humanitarian aid, reconstruction, civil administration, or technical assistance, as well as religious institutions approved by the municipalities in agreement with the Tax Administration, if their property is used for religious purposes. Exemptions from the tax are not applicable to property used or held for use in commercial activity for the production of income (Immovable Property Tax Regulation Section 7).
F. Double Tax Treaties
No tax treaties have been entered into between Kosovo and the United States.
