Comment on the Measures for the Designation of Charitable Organizations

Comment on the Measures for the Designation of Charitable Organizations

By Flora Sapio

1. On 14 July 2016, the Ministry of Civil Affairs of the People's Republic of China issued the Measures for the Designation of Charitable Organizations (Opinion Soliciting Draft) for public comment.

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2. The Measures for the Designation of Charitable Organizations (hereinafter the Measures) are an important piece of legislation. Together with the Charity Law, the Regulations on the Registration and Administration of Social Groups, the Measures on the Administration of Public Fundraising by Charitable Organizations, and other relevant rules and regulations, they will give life to an entirely new regulatory framework on not-for-profit entities. My comments on the Measures are presented to the Ministry of Civil Affairs in the spirit of a proactive and constructive communication.

4. The Measures are coherent with the broader goals set by article 1 of the Charity Law of the People's Republic of China. These goals are:

(i) developing the charity field to promote a culture of charity,
(ii) regulating charitable activities,
(iii) protecting the legal rights and interests of charitable organizations, donors, volunteers, and beneficiaries,
(iv) promoting social progress and sharing the developmental accomplishments.

The Measures aid the achievement of each one of these goals, because they expand the rules made by article 10 of the Charity Law. Article 10 of the Charity Law regulates the registration of charitable organizations, and contains the concepts of registration (登记) and designation (认定). Registration is a mandatory procedure to be fulfilled by all those charitable organizations that wish to enjoy the protection of the law.

6. Designation (认定) as a charitable organization is a different concept.

7. The distinction between registration and designation is found not only in the Measures, but also in the Regulations on Registration and Management of Social Service Organizations. Article 30 of the Regulations says: “(...) Social service organizations which are registered as, or designated as, charitable organizations shall establish supervisors”. The use of the disjunctive 'or' (或者) in articles 30, 43(2), 45 and 46 means that law-makers conceived of registration and designation as two separate procedures. This is further confirmed by article 3 of the Measures, where it is said that the civil affairs departments responsible for registering social service organizations and social groups are also responsible for the designation of these entities as charitable organizations.

8. Designation as a charitable organization allows a foundation, a social service organization, or a social group to enjoy the status of an entity which engages in not-for-profit activities on a voluntary basis, or carries out the public interest activities listed by article 3 of the Charity Law. Enjoying this legal status is a condition to allow foundations, social service organizations and social groups to enjoy the benefits introduced by Chapter IX of the Charity Law.

9. A registered foundation, social service organization, or social group need not necessarily be a charitable organization. A chamber of commerce or an industry association, for instance, has goals different from a group of citizens who distribute food to the poor and the elderly. Accordingly, article 2 of the Measures makes it clear that while all not-for-profit entities must register, a general obligation to apply for designation as a charitable organization does not exist. Social groups and social service organizations may (可以) follow the Measures: they may choose whether to apply for designation as a charitable organization or not. On the other hand, foundations shall (应当) apply for designation.

11. The Measures acknowledge that the choice of whether to apply for designation as a charitable organization is a choice that depends on the will of physical or legal persons. In fact, article 6 states that a not-for-profit entity can apply for designation only if the assembly of its members, or the board of directors, so decides. Yet, the application for designation is mandatory for Foundations, which “shall (应当) go to the civil affairs departments”.

12.The Measures would better achieve their goal if designation as a charitable organization were made entirely voluntary and optional for all non-profit entities: social service organizations, social groups, and foundations.

13. Social service units and social organizations pursue the public good but, some social service units and social organizations do not have, strictly speaking, a charitable purpose. This is the case not only of chambers of commerce – both Chinese and foreign ones – but also of a number of organizations ranging from literary societies, readers' clubs, bridge associations and so on. The same reasoning applies to foundations. Foundations can serve the public good, or private interest, depending on the will of their founders and members.

Designation as a charitable organization allows a legal entity to access benefits ranging from tax exemptions, to preferential conditions in the use of land. Accessing these benefits involves the use of financial and other resources which are pooled or else owned by the Chinese people as a community. These resources moreover are scarce and finite. If designation is made compulsory, then all entities, regardless of whether they actually perform charitable activities, will be entitled to these preferential conditions, and to the use of limited resources belonging to the community. In reality, not all foundations, social organizations and social service units may have the objective need to access these preferential policies.

Making the application for designation as a charitable organization voluntary, and more clearly distinct from registration, would lead not-for-profit entities to work harder in order to obtain designation as a charitable organization. Making organizations work harder in order to access public resources is necessary: if an organization has an objective need to enjoy preferential policies and tax deductions, then the organization will invest additional energies in applying for the status of charitable entity. The introdution of this 'regulatory barrier' will also reduce the chances for potential abuses and misuses of benefits, thereby contributing to preventing corruption.

14. The Measure already acknowledge that application for designation is an administrative act that can be initiated autonomously by social service organizations, social groups, and foundations. Article 6 has created a rule whereby the application needs to be passed by vote at an assembly of members in the case of social groups, or by the board of directors of social service organizations. Absent such collegial deliberation, it is clear that neither social groups nor social service organizations can be designated as charitable organization.

15. Making the application for designation completely voluntary would benefit the growth of the charitable sector, as well as contributing to building up the capacity of not-for-profit entities. If existing not-for-profit entities are allowed to compete to access scarce resources, and to obtain benefits as tax deductions, then a fair competition may benefit the charitable sector as a whole by progressively weeding out those organizations created with the sole goal to engage in fraud.

16. The choice of whether to apply for designation as a charitable organization is among the most important choices a not-for-profit entity can make, in that it will have tangible repercussions on its existence and operations. Article 6 is correct in acknowledging such importance. It could be useful, however, to specify whether the decision to apply for designation should be passed through a simple majority vote, or whether a more stringent requirement, such as the favorable vote of three-quarters of the assembly of members, should be preferred. Seeking the consensus of a professional supervisory unit is an equally important administrative act. Therefore, the Measures could specify that the consent of a professional supervisory unit is to be sought after the assembly of members or the board of directors have reached a consensus on the need to apply for designation.

17. One of the problems that may be faced during the implementation of the Measure concerns the case of those social groups and social service organizations which were established before 1 September 2016. The solution law-makers have adopted is allowing all of these social groups and social service organizations an opportunity to apply for the status of charitable organization.

The Measures distinguish between entities established before 1 September 2016, and those what will be established after this date. Not-for-profit entities created before the Charity Law goes into effect can apply to civil affairs departments they registered with to be confirmed as charitable organizations ex post. Whereas not-for-profit entities created after 1 September 2016 will have to apply for registration at civil affairs departments, and also require to be confirmed as charities. This is a fair solution. Yet, article 13 poses an obligation for social groups and social service organizations established before 1 September 2016 to apply for designation within a 5-years period of time. This is somehow in contrast with the principle, implied in the Measures, that the choice on whether to apply for designation is a voluntary choice of a not-for-profit entity. On the one hand, introducing a 5-years span of time is necessary to avoid that civil affairs are flooded by applications to be confirmed as a charity. It is suggested that the obligation article 13 seems to create be altered to a possible choice offered to existing not-for-profit entities, and that the 5-years window be maintained.