China Charity Law Guidebook – Chapter 3: Charitable Organizations and Activities (Pt. 4)

We continue with Part 3 of our series on the China Charity Law and other regulations in  China in partnership with Shanghai Legal Center for NGO (ForNGO) with Chapter 3 of the China Charity Guidebook with an overview of charitable organizations and activities. For a full list of articles part of this weekly series, please visit our intro article or sector news page.​​​​​

1. Charitable Organizations ABC

1.1 Charitable Organization – A New Attribute Instead of a New Organizational Type

Before the Charity Law, China had a legal definition of the organizations conducting charitable activities. In the Law of the People's Republic of China on Donations for Public Welfare (“Public Welfare Donations Law”), these organizations are defined as public welfare social groups and public welfare non-profit public institutions[1]. Public welfare social groups include foundations, charitable organizations, and other social groups aimed at developing programs for public good; public welfare non-profit public institutions include educational institutions, scientific research institutes, medical and health care institutions, public cultural organizations, public sports organizations, and social welfare institutions. These organizations are non-profit and are engaged in the field of public welfare. It is thus clear that the public welfare social groups mentioned in the Public Welfare Donations Law are a large concept, including social groups in both a narrower sense (social groups as defined in the Regulations on the Registration Administration of Social Groups promulgated in 1998) and as foundations and private non-enterprise units. Afterwards, in the Decision of Several Problems on Building a Harmonious Socialist Society, passed at the sixth plenary session of the 16th National Congress of CPC in 2006, the concept of social organizations we are now familiar with was put forward for the first time, replacing the old concept of “non-governmental organization”. In the documents issued by the civil affairs department, social organizations are classified into three types: foundations, social groups, and private non-enterprise units.

After the promulgation of the Charity Law, the question of whether charity organizations were a new type of social organization unto themselves aroused much conversation among those in the charity industry.

According to Article 8 of the Charity Law, charitable organizations refer to legally established, non-profit organizations that aim to carry out charitable activities in society. Charitable organizations include foundations, social groups, social service organizations, and other entities. Thus, it can be seen that foundations, social groups, and social service organizations are types—or organizational forms—of charitable organizations. A charitable organization is not an entirely new kind of organizational form in itself.

According to Article 10 of the Measures for Recognition of Charitable Organizations, the term “charitable organization” is a designation achieved by complying with the institutional registration requirements of the three types of social organizations. Although scholars have pointed out that an enterprise may become an organizational form of charity, it does not happen in practice and also faces legal problems in theory. According to the provisions of the Charity Law, charitable organizations must be non-profit organizations; according to the provisions of the General Provisions of Civil Law, a business entity is a for-profit entity, and is therefore denied the charitable organization designation.

According to lawmakers’ comments on the Charity Law, charitable organizations are the principle drivers of the charity industry.  and the foundation of its existence and development. With this in mind, the development and perfection of China’s charity industry depends on the emergence of professional and specialized charitable organizations. The establishment and development of such organizations is encouraged, and their internal management and behavior is also standardized so as to promote the sound development of the charity industry at large.

1. 2 Organizational Types of Charitable Organizations

Before promulgation of the Charity Law, China already had “three major regulations” in the legislation of social organizations (namely, Regulations on the Registration Administration of Social Groups [published in 1998 and revised in 2016], the Interim Regulations on Registration Administration of Private Non-enterprise Units [1998], and Regulations on the Management of Foundations [2004]).

According to the Charity Law, the term “private non-enterprise units” has been replaced by “social service organizations”. According to the Interim Regulations on the Registration Administration of Private Non-enterprise Units, “private non-enterprise units” refer to public institutions, social groups, and other social organizations established with the use of non-state-owned assets for purposes of engaging in non-profit social service activities. The concept “social service organizations” refers to social service institutions other than social groups and foundations. It is worth mentioning that, after the Charity Law, many private non-enterprise units have wondered if they are now officially known as social service organizations—in fact, they are not; the official renaming of “private non-enterprise units” to “social service organizations” will take effect after the revision of the Interim Regulations on Registration Administration of Private Non-Enterprise Units is promulgated.

Before the revision of the Non-state Education Promotion Law (hereinafter referred to as the old Education Promotion Law) in 2016, the founding of for-profit non-government educational institutions was not allowed. Article 66 of the law stipulates that “the administrative measures for operational non-governmental training institutions registered with industrial and commercial administrative departments shall be stipulated additionally by the State Council.” It is yet to be seen if the State Council will undergo any such additional stipulation of provisions. Some private educational training institutions, originally intended to be developed for-profit, were at first registered as private non-enterprise units, with profits distributed by a variety of discreet means. According to the provisions of the Interim Regulations on Registration Management of Private Non-enterprise Units, private non-enterprise units are non-profit organizations; however, the existence of “profit-making” units has damaged the integrity of the non-profit status of all non-profit non-enterprise units. After implementation of the Charity Law, the old Non-state Promotion Law was also revised correspondingly, in which a distinction was made between profit-making and non-profit institutions; for-profit, non-state-run schools were required to be registered with the administrative department for industry and commerce. After the new Non-state Education Promotion Law takes effect, some profit-making private non-enterprise units will be legally registered and run as taxable companies again; meanwhile, non-profit private non-enterprise units will be recognized as charitable organizations, according to the related tax policies. Supporting provisions from different provinces are either in the draft process or are already promulgated, such as the Measures for Classified Registration Administration of Non-State-Run Schools.

1.3 Newly Established Organization Recognition and Existing Organization Recognition Are Two Basic Forms of Recognition Attribute Confirmation of Charitable Organizations

According to the provisions of the “three major regulations” on the administration of social organizations in China, a charitable organization can be established only after both the approval of the business supervisory unit and registration with the Civil Affairs Department. According to Article 10 of the Charity Law, the establishment of charitable organizations follows a direct registration system—however, it is a mixed registration system in practice. In other words, a charitable organization under dual management still needs to receive prior-approval from its relevant professional supervisory unit. The Article states that, “…those establishing a charitable organization shall apply for registration with the civil affairs department of a people’s government at the county level or above. The civil affairs department shall issue a decision within 30 days of receiving the application; organizations meeting the requirements stipulated by this law shall have their registration approved, and the decision shall be publicly announced; registration shall be withheld from organizations that do not meet the requirements stipulated by this law and the reasons explained in writing.” In addition, it’s also stipulated in this Article that, “non-profit organizations such as foundations, social groups, and social service organizations that were established before the publication of the Charity Law may apply for identification as a charitable organization with the civil affairs department with which they registered.” Non-profit organizations established before the promulgation of the Charity Law will not be automatically qualified for charitable status, but will rather need to apply for such a qualification. Those confirmed by the Civil Affairs Department to have satisfied all conditions can then be recognized as charitable organizations.

For social organizations that were registered before the Charity Law took effect (not before its promulgation, because between the promulgation of the Charity Law and its actual effective date, social organizations in the process of registration could not register as charitable organizations), they may obtain the attribute of charitable organization status by way of recognition by the Civil Affairs Department.

As for social organizations established after the effective date of the Charity Law, but which were not registered as charitable organizations during the registration period—will they be able to be recognized as charitable organizations at some point in the future?

In the draft of the Measures for Recognition of Charitable Organizations[2] (“Measures for Recognition”), there is a provision which indicates that foundations should, within one year from the date when the Measures are implemented, go to the Civil Affairs Department where they were previously registered for reissue of the registration certificate indicating their charitable organization status). This so-called recognition work is primarily targeted at social groups and social service organizations. If either of these two kinds of organizations were registered before the promulgation of the Charity Law, they shall apply for recognition as charitable organizations within five years of the date when the Measures are implemented; social groups and social service organizations not registered as charitable organizations after the implementation of the Charity Law shall not apply for recognition as a charitable organization again. Although foundations are not explicitly distinguished from the two other kinds of social organizations, in the final version of the Measures for Recognition, foundations will possess the attribute of charitable organization status in practice. Therefore, newly registered public welfare charity foundations must now, according to the regulations of the Civil Affairs Department, be registered as charitable organizations. Moreover, inventory foundations are also encouraged to actively apply for such recognition. This is consistent with the requirement of foundations to work for charitable causes, a clause stipulated in the existing Foundation Management Regulations[3]. When social groups and social service organizations apply for registration as charitable organizations, registration authorities and competent business departments hold them to stricter examinations.

As of January 22, 2018, among 3,406 charitable organizations, there were 2,612 foundations and 794 social groups and social service organizations.

2. Practical Guide 

 

Social Service Organizations (private non-enterprise units)

Foundations

Social groups

New Requirements for Charitable Organizations

Advantages of Charitable Organizations

Establishment

  • Combination[4] of direct registration[5][i] and dual management[ii]

 

  • Combination[6] of direct registration[7] and dual management

 

  • Combination[8] of direct registration[9] and dual management
  • For applications for charitable organization recognition, there are additional material requirements on the basis of the establishment of social groups[10]

None

Accepting Donations

  • Able to accept donations[11]
  • Able to apply for donation receipts[12][iii]
  • Currently unable to apply for pre-tax deductions for public welfare donations[13][iv]

 

  • Able to accept donations [14]
  • Able to apply for donation receipts [15]
  • Able to apply for pre-tax deductions for public welfare donations[16]
  • Able to accept donated property[17]
  • Able to apply for donation receipts [18]
  • Able to apply for pre-tax deductions for public welfare donations[19]
  • It is legally obligatory (i.e. not optional) to issue donation bills while accepting donations[20]
  • Public welfare marketing should have a corresponding donation agreement, and it should be made public[21]

Public welfare marketing refers to the organizer of operational activities vowing to use earnings for the purposes of charity in whole or in part.

  • Advantages of donation receipts (social service organizations only)

According to Article 38 and Article 40 of the Charity Law, it is a legal obligation for charitable organizations to issue donation receipts after accepting donations.

Currently, it is difficult for social service organizations to apply for donation receipts. However, the possibility that social service organizations with charitable status may enjoy advantages over non-charitable social service organizations in the future cannot be excluded.

  • If the donations of charitable organizations are promised openly and agreed in writing to be used for the purpose of small scale charity, they shall not be withdrawn in principle.[22]

Charity has a narrow sense and broad sense: Charity in the narrow sense is traditional charity, or small-scale charity, which mainly refers to poverty alleviation, help for the needy, and disaster relief.

Tax Administration

  • Possible to apply for the income tax exemption [23][v]
  • Unable to obtain the pre-tax deduction for public welfare donations
  • Possible to apply for donation receipts[24]

 

  • Able to apply for the income tax exemption[25]
  • Able to obtain the pre-tax deduction for public welfare donations
  • Able to apply for donation receipts [26]

 

  • Possible to apply for the income tax exemption[27]
  • Able to obtain the pre-tax deduction for public welfare donations[28]
  • Able to apply for donation receipts [29]

 

 None

  • The social service organizations and social groups recognized as charitable organizations enjoy a higher tax preference than social service organizations and social groups which are not charitable organizations according to the letter of the Charity Law. However, separate provisions for the tax preference of charitable organizations have not been introduced.

Fund-raising

  • No public fundraising[vi]is allowed
  • Public foundations can do public fund-raising[30]
  • Existing non-public foundations and newly established foundations without the certification qualifying them for public fund-raising shall not conduct it
  • No public fundraising is allowed
  • The qualification application for public fund-raising has higher requirements for the improvement of internal governance[31]
  • The four legal forms for public fund-raising are limited[32]
  • Except for public collections to prevent emergencies, donation plans shall be filed in advance for public fund-raising[33]
  • Charitable organizations qualified for public fund-raising shall conduct it actively; if they do not carry out public collection activities for six consecutive months, they will be flagged for abnormal activities.[34]
  • All charitable organizations meeting the relevant conditions can conduct public fund-raising [35](for social service organizations and social groups, the advantage is more significant)

Public fundraising will not be exclusively conducted by public foundations any longer. The original non-public foundations, social groups, and private non-enterprise units (social service institutions) can apply for the qualification certification for public collection when all conditions are met and their status as charitable organizations is recognized.

  • Individuals or organizations without the qualification for public collection can cooperate with the charitable organizations who have.[36]

Activity Expenditures and Administration Expenses

 No special requirements

  • Requirement for the expenditure of public welfare [37][vii]
  • Requirement for management expenses [38][viii]

Foundations have always been regulated strictly and there are corresponding provisions for their expenditures and management expenses. Particularly, the provisions on "70%" of public welfare expenditures and "10%" and "8%" of management expenses of non-public foundations are strictly executed by the Civil Affairs Department.

 No special requirements

  • More rigorous definitions and provisions for the expenditure of charitable activities [39] (the requirements are higher for social groups and social service organizations)

The Provisions on Annual Expenditures and Administration Expenses for Charitable Organizations to Carry Out Charitable Activities have more specific provisions for the annual expenditures and management expenses from charitable activities, but a narrow definition of the expenditures of charitable activities (stricter for charitable organizations).

  • “Three-year carryover” is specified.[40]
  • Some exemptions are given to charitable organizations with low annual management expenses[41]
  • Some adjustment plans are given to charitable organizations for whom annual management expenses are not commensurate with their provisions[42]

Internal Governance

  • The power organ of social service organizations is the board of directors.
  • Affiliation - no relevant provisions
  • The power authority of a foundation is the board of directors.
  • In case of a connection between the director’s individual benefit and the foundation’s benefit, the director shall not participate in the foundation’s decision making; directors, supervisors, and their immediate relatives shall not have a transactional relationship with the foundation.
  • The power organ of social groups is the general assembly of members (member representatives).
  • Affiliation - no relevant provisions
  • More rigorous limitation on affiliation

Article 14 of the Charity Law specifies, “founders, major donors and management staff of a charitable organization must not abuse their connections to harm the interests of the organization, the interests of the beneficiaries, or social public interests. Where the founders, major donors and management staff of a charitable organization are involved in a business transaction with that organization, they shall not participate in the decision-making of the charitable organization concerning that transaction and the circumstances of the transaction shall be made public.”

 

Financial Management

  • Accounting Policy for Private Non-profit Organizations shall apply
  • Accounting Policy for Private Non-profit Organizations shall apply
  • Obligation to report the approval of the legal financial accounting report[43]
  • Accounting Policy for Private Non-profit Organizations shall apply

 

  • A unified accounting system[44] shall be implemented
  • Obligations to report the approval of the legal annual work report and financial accounting report[45]

 

Information Disclosure

  • There is no express legal requirement for information disclosure
  • The principle for legal information disclosure includes truthfulness, accuracy, and integrity
  • Express obligation of information disclosure [46] and information disclosure content[47] (including information disclosure to beneficiaries[48])
  • There are more rigorous requirements for public foundations, including the activity plan and implementation condition of public foundations
  • Special requirements for public foundations[49]
  • There is no express legal requirement for information disclosure [50]
  • Information disclosure principles include truthfulness, integrity, time lines[51]
  • Requirements for the content of information disclosure[52]
  • Requirements for information disclosure to donors[53] and beneficiaries[54]
  • Requirements for information disclosure to charity trusts[55]
  • Requirements for the information disclosure of Internet fund-raising[56]

(Overall, the requirements for social groups and social service institutions are increased)

N/A

Administrative Supervision and Management

  • A general description of the duties for pre-event, in-event, and post-event management, supervision, and inspection, as well as the penalty rights of the registration authorities[57]
  • A general description of pre-event prior-approval and the post-event supervision and management[58] of professional supervisory unitsx
  • A fundamental social public welfare supervision[59]
  • A general description of the duties of pre-event, in-event, and post-event management, supervision, and inspection, as well as the penalty rights of registration authorities[60]
  • A general description of pre-event prior-approval and the post-event supervision and management of professional supervisory units[61].
  • Requirement of information disclosure[62] to meet the standard of social supervision
  • A general description of the duties of pre-event, in-event, and post-event management, supervision, and inspection, as well as the penalty rights of registration authorities[63]
  • A general description of pre-event prior-approval and the post-event supervision and management of professional supervisory units[64].
  • Basic social public welfare supervision[65]
  • More specific administrative measures from administrative authorities[66]
  • Annual inspection is changed to an annual report system[67]

It is clear from the table above that for foundations, the new charitable organization status requirements have not changed much in terms of the number of such requirements. The approach was more to refine and clarify them on the basis of the original standards. Although the advantages are not too significant, those which are not deemed as charitable organizations might encounter a barrier in the process of carrying out their previous charitable activities. For newly established foundations, the pronouncement of the administrative authorities effectively deems them charitable organizations.

The advantage for social service institutions and social groups lies in the fact that they can both obtain the qualification for public fundraising and enjoy a higher tax preference than they had as charitable organizations. That said, the policies implemented for the tax preference of charitable organizations are not clear. The new requirements have increased substantially and in various aspects, including in the areas of information disclosure, internal governance, public expenditure, and the management of expenses. This will increase compliance burdens for social service organizations and social groups after they achieve recognition as charitable organizations.

 

[1]Law of the People's Republic of China on Public Welfare Donation, Standing Committee of the National People's Congress, June 28, 1999

[2]Ministry of Civil Affairs, released on August 31, 2016, and effective on September 1, 2016

[3]State Council, released on March 8, 2004, effective on June 1, 2004

[4]Article 5 and Article 6 of Interim Regulations for Private Non-enterprise Unit Registration Management

[5]Article 5 of Opinions on Reforming the Management System of Social Organizations to Promote Their Sound and Orderly Development

[6]Article 6 and Article 7 of Foundation Management Regulations

[7]Article 5 of Opinions on Reforming the Management System of Social Organizations to Promote Their Sound and Orderly Development

[8]Article 6 and Article 9 of Social Group Registration Management Regulations

[9]Article 5 of Opinions on Reforming the Management System of Social Organizations to Promote Their Sound and Orderly Development

[10]Article 10 of the Charity Law; Article 3 and Article 7 of Measures for Recognition of Charitable Organizations

[11]Article 9 of Law of the People’s Republic of China on Public Welfare Donation

[12]Article 2 of Interim Measures for Use Management of Public Welfare Donation Bills; Notice of Ministry of Finance and Ministry of Civil Affairs on Further Specifying the Related Problems of Public Welfare Social Organizations’ Applying for Public Welfare Donation Receipts (C.Z. [2016] No.7)

[13]Article 4 of Notice of Ministry of Finance, State Administration of Taxation, and Ministry of Civil Affairs on Related Problems of Pre-tax Deduction of Public Welfare, C.S [2008] No. 160 Donations

[14]Article 9 of Law of the People’s Republic of China on Public Welfare Donation; Several Provisions on Standardizing the Foundation’s Behaviors (trial implementation)

[15]Article 2 of Interim Measures for Use Management of Public Welfare Donation Receipts; Notice of Ministry of Finance and Ministry of Civil Affairs on Further Specifying the Related Problems of Public Welfare Social Organizations’ Applying for Public Welfare Donation Receipts (C.Z. [2016] No.7)

[16]Article 4 of Notice of Ministry of Finance, State Administration of Taxation, and Ministry of Civil Affairs on Related Problems of Pre-tax Deduction of Public Welfare, C.S. [2008] No.160

[17]Article 9 of Law of the People’s Republic of China on Public Welfare Donation; Several Provisions on Standardizing the Foundation’s Behaviors (trial implementation)

[18]Article 2 of Interim Measures for Use Management of Public Welfare Donation Receipts; Notice of Ministry of Finance and Ministry of Civil Affairs on Further Specifying the Related Problems of Public Welfare Social Organizations’ Applying for Public Welfare Donation Receipts (C.Z. [2016] No.7)

[19]Article 4 of Notice of Ministry of Finance, State Administration of Taxation, and Ministry of Civil Affairs on Related Problems of Pre-tax Deduction of Public Welfare, C.S. [2008] No.160

[20]Article 38 of the Charity Law

[21]Article 37 of the Charity Law

[22]Article 41 of the Charity Law

[23]Notice on Related Problems of Recognition of Tax-exempt Qualification of Non-profit Organizations (C.S. [2014] No.3

[24]Notice of Ministry of Finance and Ministry of Civil Affairs on Further Specifying the Related Problems of Public Welfare Social Organizations’ Applying for Public Welfare Donation receipts (C.Z. [2016] No.7)

[25]Notice on Related Problems of Recognition of Tax-exempt Qualifwication of Non-profit Organizations (C.S. [2014] No.3

[26]Notice of Ministry of Finance and Ministry of Civil Affairs on Further Specifying the Related Problems of Public Welfare Social Organizations’ Applying for Public Welfare Donation receipts (C.Z. [2016] No.7)

[27]Notice on Related Problems of Recognition of Tax-exempt Qualification of Non-profit Organizations (C.S. [2014] No.3

[28]Notice of Ministry of Finance, State Administration of Taxation, and Ministry of Civil Affairs on Related Problems of Pre-tax Deduction of Public Welfare (C.S. [2008] No.160)

[29]Notice of Ministry of Finance and Ministry of Civil Affairs on Further Specifying the Related Problems of Public Welfare Social Organizations’ Applying for Public Welfare Donation receipts (C.Z. [2016] No.7)

[30]Article 3 of Foundation Management Regulations

[31]Article 5 of Administrative Measures for fund-raising of Charitable Organizations from the General Public

[32]Article 23 of the Charity Law

[33]Article 24 of the Charity Law; Article 10~12 of Administrative Measures for fund-raising of Charitable Organizations from the General Public

[35]Article 22 of the Charity Law; Article 5 and Article 6 of Administrative Measures for fund-raising of Charitable Organizations from the General Public

Article 26 of Charity Law; Article 17 of Administrative Measures for fund-raising of Charitable Organizations from the General Public

[37]Article 29 of Foundation Management Regulations

[38]Article 29 of Foundation Management Regulations

[39]Article 60 of the Charity Law

[40]Article 10 of Provisions on Annual Expenditures and Administration Expenses for Charitable Organizations to Development Charity Activities

[41]Article 11 of Provisions on Annual Expenditures and Administration Expenses for Charitable Organizations to Development Charity Activities

[42]Article 12 of Provisions on Annual Expenditures and Administration Expenses for Charitable Organizations to Development Charity Activities

[43]Article 36 of Foundation Management Regulations

[44]Article 12 (2) of the Charity Law

[45]Article 72 (2) of the Charity Law

[46]Article 30 of Foundation Management Regulations

[47]Article 4 and Article 5 of Measures for Information Disclosure of Foundations

[48]Article 7 of Measures for Information Disclosure of Foundations

[49]Article 25 (2) of Foundation Management Regulations

[50]Article 29 (3) of Social Group Registration Management Regulations

[51]Article 71 (2) of the Charity Law

[52]Article 72 of the Charity Law

[53]Article 74 of the Charity Law

[54]Article 72 of the Charity Law and Article 71 of the Charity Law

[55]Article 69 (3) of the Charity Law; Article 71 of the Charity Law; Article 73 of the Charity Law and Article 75 of the Charity Law

[56]Article 16 of Administrative Measures for fund-raising of Charitable Organizations

[57]Article 19 of Interim Regulations for Private Non-enterprise Unit Registration Management

[58]Article 20 of Interim Regulations for Private Non-enterprise Unit Registration Management

[59]Article 23 (3) of Interim Regulations for Private Non-enterprise Unit Registration Management

[60]Article 34 of Foundation Management Regulations

[61]Article 35 of Foundation Management Regulations

[62]Article 38 and Article 39 of Foundation Management Regulations

[63]Article 24 of Social Group Registration Management Regulations

[64]Article 25 of Social Group Registration Management Regulations

[65]Article 26 (3) of Social Group Registration Management Regulations

[66]Article 93 of the Charity Law

[67]Article 13 of the Charity Law