What forms of charitable trust, charitable company, or philanthropic foundation are commonly established by individuals, and how is this done?
Private Client (2nd edition)
Israeli law recognizes the creation of NGOs. Such organization may be entitled to tax exemption on certain types of income and may also issue certificate of credit to contributions made to them (please see Section 7 above). Such organizations are normally formed as "Amutot", under the Israeli Association Law 1980. Such law generally requires each Amuta to be held by at least seven persons, and not be controlled by any one person. Israeli corporation law also enables the formation of special companies for the benefit of the public; however, the Taxing Authority requires such entities to have similar governance as Amutot, in order to be entitled to the relevant tax benefits.
Charitable bodies are regulated pursuant to the Charities Act 2009, by the Charities Regulatory Authority.
The most common forms of charitable structures are:
- Companies Limited by Guarantee (“CLG”), which are established by a constitution and incorporated in the Companies Registration Office like other private companies as referred at Question 19 above. CLGs are the most popular form of charitable bodies.
- Charitable Trusts, which are established by deed of trust.
- Unincorporated Bodies, which are also established by a constitution. However, unlike CLGs, these type of charitable bodies do not have limited liability and do not have a separate legal personality to their members.
Two types of legal bodies are frequently used by individuals for charitable reasons: private foundations and non-profit associations. Unlike a non-profit association, a private foundation has no members. Its assets must be used by its directors for an ‘altruistic’ private purpose, e.g. the wellbeing of a disabled child. A non-profit association is often dedicated for furthering a more social cause.
Individuals in the US commonly establish private grant-making foundations, private operating foundations, public charities, and supporting organizations, which are tax-exempt charitable organizations typically structured as either charitable trusts or nonprofit corporations. Individuals may also establish split-interest trusts, which are trust arrangements that allow individuals to make charitable contributions of property, while retaining (or transferring to non-charitable beneficiaries) an interest in the property transferred.
Private grant-making foundations are nonprofit organizations primarily funded by one family or business. The private foundation’s endowment is invested to generate returns, and the foundation uses its endowment to fund its operations and to make grants to other charitable organizations.
Private operating foundations are private foundations that directly conduct charitable activities. Examples of private operating foundations include certain museums, zoos, and libraries that do not receive substantial support from donations by the general public.
Public charities are publically-supported organizations, meaning that they receive significant support in the form of contributions from government units and/or the general public. Public charities make grants to other charitable organizations and directly provide charitable services.
Supporting organizations are charitable organizations that support one or more public charities by providing them with financial resources and/or conducting charitable activities that the public charities would otherwise have to undertake themselves.
To establish a private grant-making foundation, private operating foundation, supporting organization, or public charity, an individual must first establish a legally-recognized trust or corporation in the state in which the charitable entity will be located. Then, to receive federal tax-exempt status, the individual must apply for recognition of exemption from the IRS.
Split-interest trusts are trust arrangements in which an individual retains (or transfers to non-charitable beneficiaries) either an income or remainder interest in the trust property, while passing the other trust interest to a charitable organization. The individual may receive income, gift and estate tax charitable deductions for the present value of the property that is expected to pass to charity. In order to establish a split-interest trust, an individual need only create a legally valid trust arrangement, but there are strict rules regarding the language required in the Trust Deed.
Public benefit bodies may take the form of trusts, companies (which may apply to omit the word “Limited” from their name) or foundations. The Council of Ministers grants exemption from income tax to bodies for public benefit purposes incorporated exclusively and solely for the promotion of the arts, the sciences or sports which do not seek to gain profits for the body or its members.
In Austria there are two ways to establish a charitable foundation. On the one hand a genuine charitable foundation, on the other hand a private foundation with charitable character.
A charitable foundation has permanently dedicated assets with legal personality, the proceeds of which serve to fulfil charitable purposes. The minimum assets amount to EUR 50,000 and may not be less at a later date.
The pursuit of charitable purposes does not necessarily have to take the form of a genuine charitable foundation; a private foundation can also be purely charitable in nature under the private foundation act or at least combine charitable elements with those of benefit to others.
The charitable foundation is created when it is established by a declaration of foundation and when it is entered in the foundation and fund register.
The private foundation is established by a declaration of foundation and entry in the commercial register.
Such non-profit organisations take the form of either an association or a foundation. The procedure for their establishment is more or less the same as the one applicable to private benefit non-profit organizations. However, public benefit non-profit organisations are subject to stricter rules in terms of registration, management structure and accounting. Certain tax exemptions apply.
Charities are recognised under argentine legislation. However, in Argentina there is not a single regulatory authority for all charities. In addition, unlike some other jurisdictions, the Argentine law does not provide an exact definition of a "charity".
Despite the lack of a legal definition, charity can be defined as an organization whose purpose is to work for the public benefit without making a profit. The two main types of not-for-profit organizations are:
- Foundations (fundaciones). These are non-profit legal entities created with certain funds or assets which have been endowed by its founders to carry out some specific activity for the public benefit without seeking profit. Foundations are governed by Chapter 3 of the CCC.
- Civil associations (asociaciones civiles). These are non-profit legal entities with a public benefit purpose. Unlike foundations, they are incorporated by a number people willing to carry out its charitable purpose for the benefit of those who are members of the organisation. Civil associations are governed by Chapter 2 of the CCC.
To incorporate a charity, the founding members must file the following documents with the local Public Registry of Commerce:
- Constituting documents: memorandum of association and the bye-laws (Estatuto).
- Financial forecast for the first three years.
- Details of activities to be performed during the first three years.
- Evidence of paid-in capital or assets. The assets initially donated or promised to the foundation must be at least prima facie sufficient to carry out its purpose to obtain the registration by the relevant authority.
Local registration is mandatory, and the appropriate registry will be determined by the domicile of the foundation or association. For example, in the City of Buenos Aires, foundations and civil associations are registered with and controlled by the Public Registry of Commerce (Inspección General de Justicia), the government agency with supervisory authority over companies registered in the City of Buenos Aires. In other provincial jurisdictions, the same body that controls commercial companies may also be in charge of regulating charities, and registering them in the local Public Registry of Commerce.
Once the charity is registered with the Public Registry of Commerce, it must be registered with AFIP. The AFIP will provide the charity an identification number, which will identify the organisation as a charity, with all applicable tax exemptions.
The benefits for individuals when setting up a charitable organisation are the following:
- Separate legal personality. The law recognizes the charity as having a separate legal personality to that of their founders or members. Therefore, people may engage in charitable activities limiting their responsibility, and the charity's assets are segregated from the patrimony of the founder.
- Tax benefits. Most charities are exempt from property tax and/or value added tax (VAT). Charities are also usually income tax-exempt, provided the income is:
- used for charitable purpose only; and
- not directly or indirectly distributed among its members, founders or directors.
Charitable activities are usually carried out in Italy by Italian foundations (see 18).
Charitable trusts can be established in Bermuda, and Bermuda was the first jurisdiction to introduce legislation permitting non-charitable purpose trusts under the Trusts (Special Provisions) Act 1989, which provides creative solutions for philanthropic structures where a client’s objectives reach beyond the fairly narrow scope of the traditional definition of “charity”, and extend to more philanthropic, benevolent and socially useful purposes.
27.1 The simplest form of English charity is the charitable trust (§19.2). The named trustees (§19.2) hold and control the assets of the charity in their personal names but must use them for exclusively charitable purposes in accordance with the terms of the trust. This arrangement is suitable for the simplest charities, particularly those which are grant making, do not pursue charitable activities themselves, and will not have employees or own land.
27.2 Another common form of English charity is a charitable incorporated organisation ("CIO"), which is like a charitable company (§27.3) but is regulated only by the Charity Commission for England and Wales (§27.5). The compliance obligations falling on a CIO are somewhat lighter than those falling on a charitable company. A CIO only comes into existence once it has been registered with the Charity Commission for England and Wales, which can take several months.
27.3 Another common form of English charity is a charitable company limited by guarantee. This form is generally less attractive than a CIO (§27.2) because it is regulated by both the Charity Commission for England and Wales (§27.5) and Companies House and filings must be made to both bodies. However, unlike a CIO, a charitable company limited by guarantee can be established very quickly and is a familiar form of legal entity recognised around the world.
27.4 Whatever form is chosen, a trust or body is not a charity for the purposes of English law unless it is established (and its constitutional document requires its property to be used) only for one or more of the statutory purposes and only for the public benefit. The statutory purposes include the relief of poverty, and the advancement of education, religion, health, and the arts, and may be carried on anywhere in the world.
27.5 The Charity Commission for England and Wales is the body responsible for the regulation of charities in England and Wales. Most English charities with an annual income over £5,000 must be registered with and send annual filings to the Commission, which maintains a public register including for each registered charity the names of its trustees, its charitable purposes, and copies of its filed accounts.
In Colombia, charitable projects are usually carried out with foundations in Colombia. Foundations are characterised as the union of assets dedicated to a social benefit activity.
Foundations are incorporated either through a private document or a deed of foundation, with compliance of requirements established by law. These must be registered before the chamber of commerce of the entity’s domicile. The governor of the corresponding jurisdiction (or the mayor, in the case of Bogota) exercises surveillance and control over foundations. Specific documents must also be filed before these entities.
Charitable trusts, STAR trusts and foundation companies are typically used for benefiting charities or charitable purposes.
The Cayman Islands have enacted the Non-Profit Organisation Law, 2017 which requires certain charities operating in the Cayman Islands and raising funds from the public (whether from within the Cayman Islands or overseas) to register on the Non-Profit Organisations Register. The law gives the public access to certain information in relation to registered charities.
Charitable foundations (“gemeinnützige Stiftungen”) in the meaning of the German civil code are quite common. They have to be approved by the foundation supervisory authority (“Stiftungsaufsicht”) and constitute a legal entity. As such they realise their altruistic purpose chosen by the settlor. In contrast to charitable foundations the legal regime of charitable companies is much less rigid. For example, the terms of a charitable company can be changed much easier than the articles of a charitable foundation.
In Singapore, charities are commonly established as charitable purpose trusts or companies limited by guarantee. Philanthropic foundations are a civil law planning instrument and are, accordingly, not available as a vehicle for establishing charities.
To establish a valid charitable purpose trust, the purpose of the trust must fall within one of four categories, i.e. for the relief of poverty, advancement of education, advancement of religion or other purposes beneficial to the community.
Charities in Singapore are required to be registered, and subject to regulation under, the Charities Act.
Private foundations are the most commonly established by individuals. The specific forming procedure varies according to the type of foundation.
Under Monegasque law, a charity may be created in Monaco in the form of an association (Law 1.355 of 23 December 2008) or a foundation (Law 56 of 29 January 1922).
France also strictly controls charitable and philanthropic matters. This is the main reason why it is not a common practice for French resident individuals to establish charitable trusts, company or philanthropic foundations subject to French law.
However, very wealthy individuals wishing to establish charitable or philanthropic structures may consider creating charitable trusts or philanthropic foundations governed by laws of countries (other than France) which encourage private charitable initiatives.
Charitable trusts and charitable foundations (whether purely or preponderantly charitable) are the most common legal forms used for the pursuit of charitable purposes in Liechtenstein. Besides these, other legal forms (in particular, establishments or trust enterprises) may also be considered for charitable purposes. Under Liechtenstein law, purposes are regarded as charitable if the intended activities of the trust or foundation foster the public benefit in charitable, religious, humanitarian, scientific, cultural, moral, social, sporting or ecological fields, even if the activities are only in favour of a determined circle of persons.
The minimum statutory capital for a charitable foundation is CHF 30,000. Charitable foundations must have an auditor who is appointed by the court upon proposal by the founder. Charitable foundations come into existence upon entry in the Commercial Register and are subject to supervision by the Foundation Supervisory Authority ("Stiftungsaufsichtsbehörde").
As opposed to charitable foundations, there is no minimum capital or minimum trust fund required for charitable trusts. A charitable trust is created by
- a written instrument (trust deed) between the settlor and the trustee;
- a written unilateral declaration by the settlor, which must be followed up by a written acceptance by the trustee; or
- a will;
and, in each case, the transfer of the trust property to the trustee.
The trust comes into existence at the time of formation. Where a trust is created with a term of more than twelve months, it must be registered in the Commercial Register or deposited with the Commercial Register within twelve months from its formation. The Liechtenstein courts as the supervisory authority have jurisdiction over a trustee of a Liechtenstein trust (whether charitable or not).
In Mexico, two types of moral persons can be constituted for charitable or philanthropic purposes: the civil association (“A.C.”) and the private assistance institution (“I.A.P.”).
A civil association is a non-profit private entity with full juridical personality made up of individuals for the fulfillment of cultural, educational, dissemination, sports or similar purposes, in order to promote among its members and / or third parties any social activity.
The steps to constitute a civil association are the same as those regulated to constitute any entity in Mexico and basically consist of the following:
- The association must be made up of at least two people, who must be natural persons in accordance with the Mexican Federal Civil Code.
- The corporate name or name of the association must be chosen, which must be registered before the Ministry of Economy of the Mexican federal government.
- The statutes of the association must be drawn up, where the corporate purpose must be indicated. The corporate purpose cannot pursue lucrative purposes.
- These statutes must be notarized before a notary public.
Regarding their administration, these associations may have an individual or collegiate administrative body, which shall be called Director or Directors, without having any additional requirements for their appointment.
Finally, it should be noted as to the heritage of these associations that unless they are authorized as an authorized grantee (“donatarias autorizadas”), they may freely acquire, dispose of and / or tax their assets, without requiring any prior authorization or have to give some notice or notification in this regard.
For their part, people who want to perform philanthropic or welfare work in Mexico can also do so through a private assistance institution.
Like public associations, private assistance institutions are also legal entities intended for assistance, with the following differences:
- Social object, it is important to distinguish that private welfare institutions, unlike a civil association, which may have other purposes, comply solely welfare purposes.
- As for its form of constitution, the A.C. do not require authorization or special permission to be constituted, instead the I.A.P. needs to obtain the prior approval of their bylaws by the Private Assistance Board, a work plan must be added, and they must be subsequently notarized and registered in the Public Registry of Legal Entities of its City.
- Regarding its Social Reason, in the constitution of the A.C. the corresponding authorization must be requested from the Ministry of Economy, unlike the I.A.P. that the request is made directly before the Private Assistance Board, who will give a reply within 15 working days.
- Regarding its Heritage, in the I.A.P., the members cannot alienate immovable property of the institution without prior authorization from the Board of Private Assistance.
Finally, it is important to mention that both types of companies can obtain authorization from the tax authorities to receive tax-deductible donations for the persons who perform them, provided that they process their authorization to be an authorized grantee (“Donataria Autorizada”) before the tax administration service.
Under the Brazilian Civil Code (Law no. 10.406/2002), there are two main legal forms of organizations in the charity sector: associations and foundations.
Whereas associations can have a wide range of purposes, are subject to less regulations (no public authorities oversight), and can be incorporated by at least two members, charitable foundations must be incorporated exclusively for the development of certain public activities and assets are required for its incorporation.
Both may benefit from tax immunity or tax exemptions depending on their purpose, activity and the fulfilment of special rules and conditions required by special laws.
There is no provision for trusts in the Brazilian legislation.
Law no. 13.800/2019 was recently enacted to create and regulate endowment funds in order to encourage the investment in education, science, technology, research and innovation, culture, health, environment, social assistance, sport, public safety, human rights and other public interest objectives. This a very new structure that still need to be better developed.