By Samuel Wrest

China passed two new laws in 2016 that will play a major role in shaping its civil society sector. The Charity Law, already in effect, and the Overseas Non-Governmental Organization (NGO) Law, set for implementation in January, are closely intertwined, but while the former has been largely praised for incentivizing and simplifying charitable donations and funding, the latter has been widely condemned for restricting which charities can accept these donations and successfully operate in China.

China struggles with funding its civil society. In 2012, its charitable donations totaled $13.2 billion—4 percent of those made in the United States. There were 2961 philanthropic foundations registered during the same year—3 percent of the United States – and only 1.5 percent of those foundations actually funded grassroots NGOs. On the Charities Aid Foundation’s World Giving Index for 2015, China ranked 144th out of 145 countries, with only Yemen ranking below it.

The Charity Law attempts to address this imbalance. The law contains various tax incentives for charitable donations and charitable organizations, potentially increasing the amount of funding that they receive. When considered alongside the NGO law, however, the Charity Law’s potential impact is tempered. The NGO Law prohibits foreign charities from accepting donations in China, and looks set to further scale back their operations, significantly shrinking the pool of charitable organizations that the Charity Law could actually benefit.

Defining NGOs and charities in China

The Charity Law

Foreign and domestic charities are defined differently in China, with the new charity and NGO laws detailing what activities they can and cannot undertake.

The Charity Law has a specific list of activities that qualify as charitable, carried out by either providing services or donating property. They include:

  • Aiding the poor and the needy;
  • Assisting the elderly, orphans, the ill, and the disabled;
  • Alleviating damages from natural disasters, accidents, public health incidents, and other emergencies;
  • Promoting the development of education, science, culture, health, sports, and other causes; and
  • Preventing and controlling pollution and other public hazards ,and protecting and improving the ecological environment.

The law emphasizes that any organization carrying out charitable activities must abide by principles of being “lawful, voluntary, in good faith, and nonprofit,” and cannot “violate social morality, endanger national security, or harm public interest or the lawful rights and interests of others.” A definition of the latter terms, however, is not provided.

The Overseas NGO Law

Article 2 of the Overseas NGO Law refers to foreign NGOs as “not-for-profit, non-governmental social organizations lawfully established outside mainland China, such as foundations, social groups, and think tank institutions.” Article 10 further clarifies that foreign organizations must have existed for two years prior to entering China.

Article 5 of the NGO Law is perhaps its most arbitrary, broadly stating that foreign NGOs must not “endanger China’s national unity, security, or ethnic unity; and must not harm China’s national interests, societal public interest, and the lawful rights and interests of citizens, legal persons, and other organizations.” The vagueness of the language used, combined with shifting who NGOs are reviewed by from the Ministry of Civil Affairs to the Public Security Bureau—widely seen as an attempt to further crackdown on activism—is likely to have the biggest impact on their operations in China.

Tax incentives for charities

Incentives for companies making donations

Businesses—including foreign businesses—that provide charitable donations to domestic charities are able to obtain tax credits, with corporate income tax (CIT) waived on donations accounting for up to 12 percent of their profits. This can be rolled out over a three-year period. If a company donates $4 million and their profits are $10 million, for example, they couldn’t deduct the entire $4 million for a single year’s CIT, but would be able to do so incrementally over three years.

Additionally, overseas companies making donations are entitled to either a reduction or full exemption on China’s import duties and import VAT.

Incentives for charities and NGOs

Both the Charity Law and the NGO Law state that charitable organizations are eligible for unspecified tax incentives. This may be because the laws are new and still due for revision of specific policies, or that they’re intentionally vague to allow for individual assessments rather than a blanket tax reduction.

Qualifying for the incentives

In order for a charity to qualify for these incentives, they must appoint a trustee, have them sign a “charitable trust document,” and file it with their local department of the Ministry of Civil Affairs. Failure to do so makes the charity and companies making donations to that charity ineligible for tax benefits. It is therefore advisable for donating companies to check that the charity has gone through these procedures prior to making a donation.

Methods for funding foreign charities and future outlook

With foreign charities and NGOs prohibited from both receiving donations in China and conducting for-profit activities, their funding is essentially limited to overseas payments. These payments can gain interest in Chinese bank accounts, but any other funding method runs the risk of seeing the charity closed.

The implementation of the Charity and Overseas NGO laws will therefore draw a line between the funding available to foreign and domestic charities. Because of its restrictions, tax incentives as a funding source are limited to domestic companies, weakening overseas charities’ competitiveness and ability to operate in China. The same can be said for domestic charities that collaborate with or receive funding from their foreign counterparts, with such charities often closely monitored for doing so.

The two new laws present a mixed bag for the future of China’s civil society sector. The Charity Law is almost certain to provide a well needed boost to domestic charities, but, as indicated in its description of charitable activities, only to those engaged in certain areas, such as social service provision – a sector where civil society is well placed to fill the gap left by the state’s gradual withdrawal of funding. Engagement in other areas, such as political rights, labor rights, and religion, would likely be seen as harming the “national security” and “public interest” specified in the Charity Law. Conversely, foreign charities – which are generally more willing to engage in some of the latter areas – will have even less space to operate. In short, the implementation of the Charity and Overseas NGO Laws is further evidence that the Chinese government is crafting its own civil society; foreign charities do not feature heavily in its plans.

About the author: This article was originally published on Asia Briefing Ltd. , a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email [email protected] or visit www.dezshira.com.

 

 

Posted by Dezan Shira & Associates