Registration and operation of NGOs and Taxation of NGOs
 
 
Registration and operation of NGOs and Taxation of NGOs

By Natia Aphkhazava
Civil Society Institute - Georgia
Sofia 2010

 

CHARTER 1: Registration and operation of NGOs

  • Legal forms of NGOs

The Civil Code of Georgia is a core basis for the creation, registration, and operation of CSOs. In 2006 and in 2009 the changes and amendments to the Code substantially altered registration and managerial regulations. Pursuant to the Civil Code currently in effect, legal entities that carry out not for profit activities, are called non-entrepreneurial (non-commercial) legal entities. Such legal persons are not any more divided into unions and foundations, like priors changes. However, non-entrepreneurial legal persons may be member-based, dependent on or independent from the members' status.

  • Who can register an NGO

According Georgian legislation both physical (legal capacity) or as well as a legal entity may be a founder of NGO. Civil Code of Georgia says:
"Physical persons' legal capacity means the ability of a natural person to acquire and exercise his civilrights and duties in full by his willand action (legal capacity) shall arise upon the attainment of the age eighteen."
A legal person ( commercial and non commercial)  is an organized entity, created for the accomplishment of a certain object and having its own property under its ownership that is independently liable with its own property, acquires rights and duties in its own name, makes transactions and can sue or be sued.
Also municipalities or other public institutions can be founders of Non-entrepreneur (Non-commercial) Legal Entities, if it's permitted by the legislation. For examples according to the law on local self-governance, municipality/ city hall (local self-governance) has right to established Non-entrepreneur (Non-commercial) Legal Entities.

  • Is there a minimum capital requirement?

There is no capital requirement.

  • Is there a minimum requirement for founders/members?

There is no founders/members requirement according to Georgian legislation, one person can register an NGO.

  • Where are NGO registered

The Register of Non-entrepreneur (Non-commercial) Legal Entities shall be maintained by Public Law Legal Entity – National Agency of Public Registry, operating within the framework of the Ministry of Justice of Georgia. Registration in itself comprises both the civil and tax registrations, i. e. Civil and tax registrations take place when registering a non-entrepreneurial legal entity. Registration requires a submission of a notarially certified special registration application and a number of other documentation. Within 1working day after receiving a registration application and the attached documents, the National Agency of Public Registry makes a decision on registration or refusal to register.

  • Grounds for refusal of registration and grounds for termination of registration

If legal grounds for rejecting a registration exist, the National Agency of Public Registry draws up a motivated decision on a refusal to register a non-entrepreneurial legal entity. Request for registration may be rejected, if:
a. The goals of a non-entrepreneur (non-commercial) legal entity and a branch (representative office) of a foreign   non-entrepreneur (non-commercial) legal entity, applying for registration, contradict the law in force, universally recognized rules of ethics or the constitutional principles of Georgia;
b. Objectives of a non-entrepreneurial legal entity to be registered contradict current legislation, recognized moral norms, or the constitutional-legal principles of Georgia.
c. A non-entrepreneurial legal entity aims at bringing down the constitutional formation of Georgia or changing it through violence, encroaching on the independence of the country, infringing the territorial integrity of the state, or propagating the war, violence, or ethnic, regional, religious, or social hatred.
d. The application for registration is not made commensurate with the requirements of this Code;
e. The application for registration is not supplemented by documents, envisaged by this Code or submitted documents are incomplete;
f. The documents supplementing the application for registration are not executed (certified) commensurate with the procedure, envisaged by Georgian legislation.
A refusal on registration may be appealed against in the Court.

  • Structure of the NGOs

Until the amendments to the Civil Code of December 2006, the law provided for 2 forms of legal organization for non-profit legal persons, namely, a union and a foundation. Following amendments, non-profit persons cease to be officially categorized into these two. Nevertheless, legal entities may opt for internal organization based on membership or choose to be independent of membership (i.e. to be membership-neutral). Within the our research area, every second non-profit legal person is legally and organizationally established as a membership-based union (53%), while the so-called foundations constitute mere 16%.
In the case of requesting the registration of a non-entrepreneur (non-commercial) legal entity the application shall be supplemented by founding document (charter/members' agreement), signed by all the partners of the non-entrepreneur (non-commercial) legal entity concerned and duly notarized, which document should specify:
a. Data concerning the managerial body of the non-entrepreneur (non-commercial) legal entity;
b. The procedure of setting up (election) of the managerial body of the non-entrepreneur (non-commercial) legal entity and the term of office thereof);
c. Data concerning the top manager of the non-entrepreneur (non-commercial) legal entity (first name, last name, date of birth (day, month, year), residential address, personal number);
d. The procedure and rules of making a decision by the managerial body (top manager) of the non-entrepreneur (non-commercial) legal entity;
e. Person(s) authorized to represent the non-entrepreneur (non-commercial) legal entity; the procedure of his (their) election and term of office;
f. Data concerning person(s) having representation authority (first name, last name, date of birth (day, month, year), the place of birth, residential address, personal number);
g. The procedure of acceptance as a member of non-entrepreneur (non-commercial) legal entity, withdrawal from membership and striking off from the list of members, when the legal entity concerned is membership-based;
So on the structure of NGO should be written on the founding document (charter/members' agreement).

  • Is there a public benefit status in your country?

According Georgian legislation a Charity status of organization exists. For an organization to receive a charity organization status, the following requirements should be met:

  • It should be created for carrying out charity activities;
  • It should be duly registered under the law;
  •  It should have at least one year experience of conducting charity activities.

Pursuant to the Tax Code of Georgia, charity activity is an activity aimed at assisting persons in need of assistance directly or through the third persons, voluntarily and free of charge. Following this general definition, the Code lists specific instances of charity activities. For example, assisting persons in need of social protection and adaptation and medical assistance, as well as vulnerable physical persons including the disabled, elderly, orphans, persons left without a bread-winner, refugees, internally displaced persons (IDPs), patients, families with many children and their members, victims of wars, armed conflicts, accidents, natural disasters, catastrophes, epidemics, and/or epizootics; organizations caring after or serving the children, elderly, and disabled, including children's houses, boarding schools, pre-school and other children institutions, houses for the elderly, free dining rooms, medical institutions, rehabilitation centers, etc. is considered a charity activity. The Code also qualifies as charity activities any undertakings of an organization for public benefit in the fields such as human rights protection, environmental protection, democracy and civil society development, culture, education, science, arts, physical training sports, health care, and social protection.
A charity organization status is granted by the Tax Inspection according to the organization's location (tax registration). The Tax Inspection is obliged to make a decision on granting or rejecting the charity organization status within 1 month after filing an application. If no decision is made within this period, the status will be deemed as granted. Besides receiving the status of a charity organization, an entity is undertaking a number of additional duties, in particular:
1. A charity organization has to provide a relevant tax agency with:

  •  Program activity report for the last year, including the description of activities (economic among others);
  • Financial report on received incomes, with indication of sources and relevant expenditures;
  •  Financial documentation for last year certified by an independent auditor.

2. A charity organization should ensure the publication of program activity report and financial documentation for the last year (balance and profit/loss report) in the periodic press and its availability for all interested parties.

  • Reporting requirements and oversight authorities

As to the state control of operations of a non-entrepreneurial legal entity, it is limited to the suspension or prohibition of operations of such an entity through a decision rendered by the court in the cases prescribed by and according to established rules under the organic law of Georgia. The court may prohibit the operation of a public association that aims at bringing down the constitutional formation of Georgia or changing it through violence, encroaching on the independence of the country, infringing the territorial integrity of the state, or propagating the war, violence, or ethnic, regional, religious, or social hatred, which establishes or has already established armed formation, or which resumes carrying out entrepreneurial activities after its suspension by the court.
When a non-entrepreneur (non-commercial) legal entity is registered, but it fails to comply with terms, envisaged by law of Georgia for registration, or these terms dissolve later, the entity shall be granted 30-days period from the date of disclosure of the deficiency for the correction thereof. In the case of failure to correct the deficiency within timelines set for the correction thereof, the registering authority or/and interested person shall be required to apply to the court for the initiation of the liquidation procedure. Registration shall be cancelled only after the completion of the liquidations procedure.

  • Possibility for direct economic activity

Non-entrepreneur (non-commercial) legal entity can carry out direct economic activity. There are several requirements that have to be followed: the economic activity must be related to the non-profit activity; it has to be additional to the non-profit activity; the income from economic activity must be used only for achieving the non-profit purposes of the NGO and the profit cannot be distributed to the founders or members of the NGO.

  • Possibility to register a commercial company

According Georgian legislation non-entrepreneur (non-commercial) legal entity has right to register a commercial company.

  • Possibilities to engage in political/public policy activity

According Georgian legislation non-entrepreneur (non-commercial) legal entity is forbidden to engage in political/public policy activity.

 

 

 

CHARTER 2: Taxation of NGOs

  • Is NGO income taxed?

Existence of a non-entrepreneurial legal entity does not automatically imply the exemption from any taxes. Exemption of non-entrepreneurial legal entities from certain types of taxes is linked to the operations conducted by the entity and the sources of income.
According to Georgian legislation taxpayers of income tax are:
a) resident physical persons;
b) non-resident physical persons receiving income from sources, existing in
Georgia.
Grants received by physical persons are exempt from the income tax.
Non-entrepreneur (non-commercial) legal entity is not taxed with profit tax (income tax).

  • Is there a tax on the NGO's economic activity income?

            If non- entrepreneurial legal entities carry out economic activities, they fall in general tax environment and incomes received through such activities are subject to general rules of taxation. The additional economic activity of an NGO is annually taxed with 15% profit tax on the positive financial results.

  • Is there a tax on donations?

Donations and membership fees received by an organization are exempt from the profit tax.

  • Are there exemptions for donors of NGOs (both physical and legal)?

The Tax Code incorporates one of the important mechanisms stimulating charity activities. Namely, pursuant to Article 186 of the Tax Code, amounts donated to charity organizations by business entities are deducted from the total incomes of an business entity up to 8% of its annual taxable income.

  • Is there a tax on income from passive investments (interest on deposits, dividends, etc)?

There are gaps in Georgian legislation about the incomes form passive investments considered to dividends, when the non-entrepreneurial legal entity establishes its own trade company and receives a % from the annual profit there is no regulations on this. However there is a legal regulation if a trade company receives dividends from another trade company, this income is exempt from the profit taxes.
Non-entrepreneurial legal entity's (if the NGO has a deposit bank account) percentage receiving from bank is exempt from tax.

  • Are there taxes on the property owned by NGOs?

Non-entrepreneurial legal entities are exempt from paying the property tax, except for the land and property used for economic activities. In other words, non-entrepreneurial legal entities pay a property tax only on:

  • Land in its ownership, as well as the land in state ownership being in use or factual possession as prescribed under the law.
  • Property (fixed assets registered on its balance, uninstalled equipment, unfinished construction, and intangible assets) used for economic activities.
  • Is there an inheritance tax on property inherited by an NGO?

According to Georgian Legislation we don't have such kind of tax.

  • Is there tax on grants?

Grant received by an organization is exempt from the profit tax.
Pursuant to the rules established by the President of Georgia, import of goods under the grant agreement is exempt from the customs taxes and fees.

  • Are there any exemptions from VAT for NGOs?

Import of goods by the grant issuer or recipient within the scope of grant agreements is exempt from the VAT tax. Further, a grant recipient, which purchases goods under the grant agreement conditions and pursuant to the Law of Georgia on Grants, and/or receives services on the same grounds, has the right to reimburse VAT paid for these goods or services or offset it with other taxes, based on presenting the tax invoice to the tax agency or paying according to the rules established by the Minister of Finance of Georgia (document certifying the VAT payment). Registration or return of VAT takes place only if an application is filed with the tax agency within 3 months from carrying out the taxable operation.

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