Article China: Charity Law Adopted

(May 17, 2016) On March 16, 2016, the National People’s Congress of the People’s Republic of China (NPC , the country’s parliament) passed the country’s first Charity Law. It will enter into force on September 1, 2016.  The Law has 12 chapters containing 112 articles and covers, among other topics: charitable organizations, charitable fundraising, charitable donations, charitable trusts, charitable assets, charitable services, information disclosure, promotional measures, supervision and management, and legal responsibility of charities.  (Zhonghua Renmin Gongheguo Cishan Fa [Charity Law of the People’s Republic of China] (Mar. 16, 2016), NPC website; 2016 Charity Law (Mar. 16, 2016), CHINA LAW TRANSLATE; see also Charity Law for Dummies, CHINA DEVELOPMENT BRIEF (Mar. 28, 2016).)

Overview

Annual donations to charities in China grew from 10 billion to 100 billion yuan in the past decade, but at the same time a number of major scandals occurred in which managers of charities misused funds and the organizations’ reputations suffered, causing the public to call for more transparency and tighter management of charities. (Xinhua Insight: Charity Law to Smooth China’s Last-Mile Drive to 2020 Targets, XINHUA (Mar. 16, 2016); Xinhua Insight: NPC Hopes Charity Law Can Help Poverty Fight, XINHUA (Mar. 9, 2016).)

In the view of Wang Shengming, a member of the Internal and Judicial Affairs Committee of the NPC Standing Committee, the most valuable chapter of the new Law is the one on information disclosure, which he characterizes as “the main plank of the legislation.”  Wang stated, “[i]t will now be compulsory for organizations to disclose their basic information on a regular basis; the condition of its charity projects; the reason for raising money; how much you’ve got; where it’s being used; how much they have left and so on, as well as its legal liabilities.”  (Chi Huiguang, NPC Passes China’s First Charity Law to Encourage Participation, CRI ENGLISH.COM (Mar. 16, 2016).)

The new Law also eases restrictions on charities’ fundraising and operational activities; “[o]nly a handful of charities are currently allowed to raise money from anyone, while others are restricted to specific groups of donors.”  (Xinhua Insight: Charity Law to Smooth China’s Last-Mile Drive to 2020 Targets, supra.)  The draft law had stated that operational costs should be kept below 10% of the amount raised by a charitable organization, but the finalized Law apparently just states that charitable organizations should minimize operational costs.  (2016 Charity Law, art. 56 ¶ 1.)

In response to a general complaint that businesses that make large charitable donations do not receive enough tax concessions, the government waived the tax on the donations made from company profits, for amounts that constitute up to 12% of the profits.  (Id.)  Under the new Law, if the donation exceeds 12% annually, the balance can be deducted from the taxable income over the following few years.  (Id.; Corporate Income Tax Law (Mar. 16, 2007, in force on Jan. 1, 2008), art. 9, KPMG; for a list of legal documents related to charitable donations in China, see “National Laws and Regulations Affecting Sector,” NGO Law Monitor: China (last updated Mar. 11, 2016), the International Center for Not-for-Profit Law website (scroll down page to view section).)

Charitable organizations may not engage in or fund “activities that endanger national security or social public interests,” and must not accept contributions with conditions attached, or attach conditions for beneficiaries, that violate laws and regulations or are contrary to society’s ethical norms. (Id. art. 15.)

The Law designates September 5 of every year as the country’s “National Charity Day.” (2016 Charity Law, art. 7.)

Selected Provisions of the Law

  • Charitable Activities and Organizations and Charitable Trusts

“Charitable organizations” are not-for-profit organizations that are lawfully established in conformity with the Charity Law’s provisions with the objective of carrying out socially oriented charitable activities; they take the form of foundations, associations, social service agencies, or other organizations.  (Id. art. 8, ¶¶ 1 & 2.)  “Charitable activities” are voluntary deeds of public welfare, carried out by means such as donation of assets or provision of services, by natural persons, legal persons, and other organizations, and including, among other activities, aid to the poor;  assistance to the elderly, orphans, the sick, and the disabled; disaster relief and help in public health crises; promotion of projects involving education, science, culture, health, and sports; and pollution and public hazard prevention and protection of the environment.  (Id. art. 3.)

Urban and rural community organizations and work units can conduct mass mutual assistance and aid activities within those organizations and units (id. art. 110) and organizations other than charities may carry out charitable activities to the extent of their capabilities (id. art. 111).

Charitable trusts are trusts in the public interest, created by the lawful entrustment, for charitable objectives, of a trustor’s assets to trustees who, in carry out management and disposition of the assets in conducting charitable activities in the name of the trustor.  (Id. art. 44.)  Those who fail to properly record the establishment of such a trust with the civil affairs department at the county level or above of the place where the trustee resides will not enjoy preferential tax treatment (see section on tax benefits, below).  (Id. art. 45.)

  • Registration, Charter, and Reporting Requirements

Organizations, including those already established before the promulgation of the new Law, must apply to register as a charitable organization with the civil affairs department at the county level or above. The organizations that meet the Charity Law’s requirements will be permitted to register, and their status will be announced to society; those that do not conform to the requirements will not be registered and the reasons will be given in writing.  (Id. art. 10 ¶¶ 1 & 2.)

A charitable organization must have a charter (id. art. 11) and submit an annual work report and a financial accounting report to the civil affairs department with which it is registered (id. art. 13).

  • Fundraising, Donations, and Assets

Charitable fundraising under the Law includes both public solicitation and targeted solicitation. (Id. art. 21.)  To carry out public solicitation, the charitable organization must obtain public fundraising credentials by applying to the civil affairs department where they have been lawfully registered for two years.  (Id. art. 22.)  Public fundraising may be carried through setting up donation boxes in public places; holding charity performances, competitions, exhibitions, auctions, galas, and so on, aimed at the public; and solicitation through radio, television, newspapers, the Internet and other media.  (Id. art. 23.)

Donations are defined in the Law as acts of voluntary, uncompensated donation of assets for charitable purposes by natural persons, legal persons, and other organizations. (Id. art. 34.) Donors can donate through charitable organizations or directly to beneficiaries.  (Id. art. 35.)  Donated property may be money, material objects, buildings, securities, stock equity, intellectual property rights, and other tangible and intangible assets.  (Id. art. 36 ¶ 1.)  Organizations and individuals are enjoined from violating the law by using charitable donations to promote tobacco products or to promote by any means products and matters prohibited by law.  (Id. art. 40.)  Charities that accept donations must issue receipts that explicitly state the name of the donor, the type and amount of the donated assets, the date of the receipt, and so on. (Id. art. 38.)

The assets of charitable organizations, which must be used only for the purposes provided in the organizations charter and donation agreements, may include start-up assets donated or contributed by the founder; assets gathered through fundraising; and other lawful assets. (Id. art. 51.)  The Law proscribes the private division, embezzlement withholding, or misappropriation of assets by any organization or individual.  (Id. art. 52.)

  • Information Disclosure and Promotional Measures

The Law calls upon people’s governments at the county level or higher to promptly make public, on a uniform information platform, information about charities and to provide information release services for free.  (Id. art. 69.)  The Law bans the publicizing of “information related to state secrets, commercial secrets, or personal privacy, as well as information such as the names, titles, address, and contact method of donors or charitable trust trustees who do not consent to it being disclosed.”  (Id. art. 76.)

People’s governments at the county level or above are to formulate policies and measures to promote charitable undertakings. (Id. art. 77.)  To support charitable organizations in providing services to the public, all levels of government may use methods such as purchase of their services.  (Id. art. 87.)  The Law provides for the state to promote a culture of charity and to foster citizens’ awareness of charity; for schools and other educational institutions to include philanthropy in teaching content; and for media, including the Internet, “to actively conduct charity and public interest publicity activities … and spread philanthropic culture.”  (Id. art. 88.)

  • Tax Benefits

Charitable organizations and those who donate to them are to enjoy tax benefits according to law. (Id. art. 79). Donors may carry over the amount of donations that exceed the annual ceiling for such deductions for one year into the calculation of taxable income over the next three years.  Donations made to overseas charities are lawfully entitled to a reduction or exemption from import duties and from import value-added-tax.  (Id. art. 80.)  Beneficiaries that accept aid from charities are also lawfully entitled to tax benefits.  (Id. art. 81.)  Special additional preferential policies are applied by the state for charitable activities carried out for poverty relief and aid.  (Id. art. 84.)

  • Oversight and Management

If a charitable organization is suspected of being in violation of the Law’s provisions, the concerned civil affairs department has the authority, among other measures, to carry out on-site inspections of its offices and the place where the charitable activities occur.  (Id. art. 93.)  The relevant civil affairs department will establish a transparent credit record system for charitable organizations and their responsible persons and also a system for assessing the organizations.  (Id. art. 95.)  Charity industry organizations are to establish and perfect industry standards and strengthen industry self-regulation.  (Id. art. 96.)  There is also a procedure for filing complaints about an organization.  (Id. art. 97.)

  • Prohibited Activities and Aspects of Legal Responsibility

To avoid conflicts of interest, the Law proscribes a charitable organization’s founders, major donors, and managers from using their ties of affiliation to the organization to harm the interests of the organization, its beneficiaries, or the public, and, if they take part in transactions with the organization, from participating in the decision-making process concerning those transactions. Moreover, the circumstances of the transactions must be made public.  (Id. art. 14.)

A charitable organization will be given a warning and ordered to take corrective action within a certain time if, among other actions, it causes loss of charitable assets, uses assets for investment that should not be used for that purpose, or arbitrarily changes the use of donated assets.  (Id. art. 99.)  Any associated unlawful gains may be confiscated by the civil affairs department; persons in charge and other directly responsible personnel will be fined from RMB20,000 to RMB200,000 (about US$3,073-$30,734).  (Id. art. 100.)

If a charity practices fraud to obtain tax benefits or engages in or funds activities that endanger national security or the public interest, the tax authorities or other relevant organs will investigate and make a disposition on the matter; if the circumstances are serious, the organization’s registration certificate will be revoked, with a public announcement made to that effect. (Id. arts. 103 & 104.)  Public security organs will investigate cases of using the guise of a charitable organization to obtain assets by deception.  (Id. art. 107.)

Reactions to the Law

It has been pointed out that the regulation of persons appealing for aid was notably absent in the draft version of the Law, so citizens were neither forbidden from asking for help online or encouraged to do so; the Law as adopted does not fill this gap. (Xinhua Insight: NPC Hopes Charity Law Can Help Poverty Fight, supra.)  The Law is also not clear about “newer forms of fundraising, such as crowd-funding through social media,” a matter of concern to grassroots organizations.  (The Good — and Bad — About China’s New Charity Law, WALL STREET JOURNAL (Mar. 16, 2016, 1:45 p.m.).)

While concern has been expressed by some experts that the Law may meet resistance from local government officials and possibly even from some nonprofit groups, it has been generally praised for doing “several things that, theoretically at least, could uncork an expansion of civil society.” (Id.)  Namely, it not only makes registration and fundraising smoother but also allows for groups to legally exist even without being registered, encourages more giving through enhanced tax incentives and easier establishment of charitable trusts, and “[c]rucially, …doesn’t limit the number of nonprofit groups that can work in any one area — a tactic some governments use to keep civil society fragmented.”  (Id.)

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