Five considerations regarding the Charity Law

 

China Development Brief

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The Charity Law is an unquestionable milestone in the history of Chinese charity and law. Here are five aspects that should be carefully considered.

The Charity Law is a basic comprehensive law for all charitable activities. It is a milestone for both charity and the rule of law in China. It also holds an incomparable place among charity legislation in a global historic context.

Since the promulgation of the Charity Law, many interpretations and commentaries have expounded on this new law. This article is written to reflect on the Charity Law and, in sum, will draw attention to five aspects of the new law that should be carefully considered.

Will Professional Supervisory Units Continue to be a Mother-In-Law?
Registration and professional supervisory units form the dual-management apparatus at the core of the management of social organizations in China. This mechanism was proper during the period when social organizations were mainly initiated by the government. At the time it was understandable, since the professional supervisory units served as founders.

However, in this new historical stage, social organizations are increasingly being established by social forces. If these organizations continue to adhere to a dual-management system, this will create obstructions that will constrain social organizations (社会组织) [including charity organizations(慈善组织)]. If a social organization cannot partner with a government body to act as its professional supervisory unit (commonly known in China as receiving a ‘birth certificate’ from a ‘mother-in-law’), it cannot be legally established. Many experts’ interpretations of the Charity Law suggest that charity organizations are free from the shackles of the dual management system, getting a ‘birth certificate’ without a ‘mother in law’. However, this is not the case.

The Charity Law’s Article 9, despite not having clear stipulations for a ‘mother-in-law’ system, still acknowledges the existence of dual-management apparatuses. The logic of this law is reflected in the two following rules: the first one, Charity Law’s Article 8 Section 2, stipulates that ‘Charitable organizations include foundations, social groups and social service organizations (社会服务机构)’. The second, Charity Law Article 9 Clause 7, stipulates that charitable organizations must ‘meet other conditions stipulated by laws and administrative regulations.’ According to the ‘Regulations on Management of Social Organization (社会团体) Registration’, ‘Regulations on Management of Foundations’, and the ‘Private Non-Enterprise Unit Registration Management Regulations’, it is necessary to gain approval from a professional supervisory unit in order to register and establish social organizations, foundations and private non-enterprise units (the’social services organizations’of the Charity Law). A strict enforcement of the Charity Law would require a strict execution of these’other conditions stipulated by laws and administrative regulations’. The ‘mother-in-law’ problem cannot thus be avoided.

The Charity Law itself does not solve the ‘birth certificate’ problem of charitable organizations, but leaves it to the State Council. Article 20 states: ‘The State Council stipulates the organizational forms of charitable organizations and the specific methods of their registry management.’ This means that the State Council will either formulate a package of specialized administrative regulations or revise the three relevant regulations mentioned above.

Regardless of the forms of the specification, we can only wait to see if the State Council can solve the ‘mother-in-law’ issue before the implementation of the Charity Law on September 1, but the prospects are not optimistic. The modification of the three regulations has been in the pipeline for over ten years. The reason it has not been released is mainly due to the difficulty in finding a consensus on the ‘dual management system’ and the managing classifications. This is also the reason why the proposed Charity Law did not go through the State Council. It is true that government documents repeatedly reiterate that economic, technological and philanthropic organizations can register directly, and require a separation between social organizations and government departments, and the Civil Affairs office has loosened up the registration process for foundations by setting one unit as both the registration management authority and professional supervisory unit. In spite of all this however, proponents of the dual management system still exist; support for retaining professional supervisory units within the system still remains.

Especially when it comes to maintaining the level of management of social organizations after they are decoupled from their ‘mother-in-law’, there are after all real causes for concern. It can be said that the basic structure of Chinese social organization management is not changed by the introduction of the Charity Law.

How can the System for Foreign Charities be linked up?
The Charity Law does not specify the content of foreign charity: not only in order to avoid specifying the activities of overseas charitable organizations in China, but also to avoid addressing the issue of Chinese charities going overseas. Currently, numerous foreign and international organizations conduct charitable activities within China, and a growing number of Chinese charitable organizations are going out of the country to carry out international charitable activities. With further globalization, the trend towards charity without borders will only increase. The Charity Law does not specify anything regarding foreign charities, mainly due to the Overseas NGO Management Law that is still in development, and whose management system and ideas stand in opposition to the Charity Law.

Before the Overseas NGO Management Law was introduced, foreign charities could only be managed in accordance with existing laws and administrative regulations. The outstanding problem is the need to follow the Foundation Management Regulations provisions, specifying that foreign foundations should establish representative offices in China. After introducing the Overseas NGO Management Law, the foreign-related contents found in the Foundation Management Regulations will need to be modified according to the Overseas NGO Management Law, because there are no regulations regarding this purpose in the Charity Law. (editor’s note: the revised version of Foundation Management Regulations is released for public consultation on May 26 by Ministry of Civil Affairs)

The best scenario in accordance with the current logic would be for the representative offices of The Ford Foundation, the Gates Foundation and other foreign charitable organizations (外国慈善组织) in China not to be managed in direct accordance with the Foundation Management Regulations and no longer to be regulated as charitable foundations, but centrally-managed as foreign non-governmental organizations(境外非政府组织). Regarding the activities conducted by these institutions and domestic charity organizations, we also need to clarify the application of the various laws and policy measures.

Thus, in spite of the Charity Law, foreign charitable organizations regarded as charitable organizations cannot be included in the Charity Law management. This would require organic links in the management system in order to achieve the necessary combination, and a delicate balance between the management of charities and foreign NGOs. In terms of the domestic management system and policy, there is also a need to overcome this logical impasse in order to avoid a contradiction between what is wished and what can actually be achieved.

How to Regulate the Investment of Charitable Organizations’ Property?
The Charity Law’s Article 54 provides the investment management principles for a charitable organization’s property. The main content of these principles was adopted from the Foundation Management Regulations.

Charitable organizations should follow legal, safe, and effective principles in order to ensure the value of their property. Investment profits should be made exclusively for charitable purposes. Legitimacy is the prerequisite, safety is the bottom line, effectiveness is the goal, and using profits for charitable purposes is the principle. The procedural requirements for investment decision-making, conflicts of interest, and other prohibitions are also properly defined.

On the other hand, the Charity Law authorizes the Civil Affairs Department of the State Council to ‘stipulate specific methods for the matters regulated in the previous paragraph’. This writer feels that from the point of view of the regulation’s validity, this invitation to ‘wait until the next episode for disclosure’ is superfluous.

The main reasons are as follows: first of all, the Article 54 of the Charity Law defines the provisions of investment management principles and conflicts of interest in property.In terms of property investment management, legislation can only be written down to this extent, in the form of advocated principles and red-line prohibitions. Regarding the Charity Law’s principles and prohibitions, the Civil Affairs Department of the State Council basically have no space to offer interpretations or explanations. For principles that cannot be further detailed by the more powerful authorities under the State Council, it is even more unlikely for the Ministry of Civil Affairs to offer interpretations or explanations, and to expand on the prohibitive provisions of the Charity Law nor advise on how safe and effective a charity’s investments are.

Secondly, the increased value of a charity’s property is mainly concentrated in charitable organizations such as private foundations with an endowment. The legal requirement of annual expenditure for public fundraising foundations and other charitable organizations determines the maximum amount of their property investment. For example, the Gates Foundation, the Ford Foundation, the Narada Foundation and other organizations have very professional and strategic investment portfolios. Some of their investment mechanisms are even independent of their founders. They cherish the charity’s property as if caring for their own eyes. This value-added approach complies with market regulations, tends to avoid sluggishness and recklessness, and does not have to accept the guidance of the Administrative authorities.

Once again, although Article 54 (2) is defined as an authorizing regulation, for the purposes of Civil Affairs, it in fact constitutes a statutory obligation. This causes one to worry that the Ministry of Civil Affairs will be forced to either over-regulate or interfere with the conduct of charitable organizations’ investments in order to accomplish this statutory obligation.

Will the annual statutory expense rate deviate?
The annual statutory expenses of charitable organizations (MAE: including the annual minimum expense rate and the highest expense rate for administrative expenses) is not typically legislated by most countries across the globe. In America, there are no legal regulations regarding the administrative expenses of charitable organizations. There are no legal regulations regarding the minimum expense rate for the charitable assets of public charities (note ‘public charity’ as opposed to ‘private foundation’). Only private foundations have mandatory requirements for the minimum expense rate of charitable assets, which must not be lower than 5 per cent of the account surplus for the previous year.

When looking at these ratio sets, there are two factors to consider: the first is that when a private foundation is viewed as a vessel for public charity, it can receive various tax breaks, but it cannot accumulate wealth that is not being used for charitable activities. Secondly,the 5 per cent requirement is mainly concerned with limited endowment investment appreciation ability, avoiding an early exhaustion of the foundation’s wealth.

The Foundation Management Regulations by the State Council borrow from the above-mentioned American foundation management measures, but in regards to the MAE provisions, they go a step further. Accordingly,every year public fundraising foundations will pay the expenses of the charitable activities specified in their by-laws, and this must not be lower than 70 per cent of the gross income from the previous year. Every year non-public fundraising foundations will pay the expenses of the charitable activities specified in their by-laws, and this must not be lower than 8 per cent of the foundation’s surplus from the previous year. The foundation’s staff members’ salary, benefits and administrative expenses must not exceed 10 per cent of the current year’s total expenditure.

The charity sector and independent experts have voiced many criticisms regarding the Foundation Management Regulations’ above-mentioned rate guidelines. These guidelines are strictly enforced in practice, but despite this some foundations have no choice but to adopt ways of evading the laws in order to meet the statutory requirements (the most commonly seen method has been founders privately replenishing the lack of administrative funds). Article 60 of the Charity Law regarding the MAE provision responds to the concerns of the charity industry and experts. It aims to increase the flexibility of the regulations and stabilize the existing differences. But there are also three drawbacks of article 60 that have to be carefully considered.

First of all, certain regulations are relaxed even when they would best not be. Article 60 only stipulates regulations for foundations with public fundraising qualifications regarding yearly expenditures for charitable events (which must not be less than 70 per cent of the gross income for the previous year, or 70 per cent of the average annual income for the previous 3 years), as well as for yearly administrative fees (which cannot exceed 10 per cent of the total yearly expenditure). A provision has been made for these regulations. This provision relaxes the MAE limitations for qualified public fundraising foundations (mostly government-run foundations). Not only is there a three-year flexibility for annual expenditures, but exceptions can also be made for annual administrative expenses in some cases. One draft of the law even included a 15 per cent proportion of administrative expenses.

In fact, the required proportions for annual expenditures and annual administrative expenses stipulated in the Foundation Management Regulations are quite sufficient for public fundraising foundations, so it might be better to go a step further and tighten restrictions as opposed to relaxing them.

Secondly, certain aspects are left neglected even though they should not be. There are no explicitly written regulations regarding the annual expenditures of non-public fundraising foundations (equivalent to American private foundations). This is a rather obvious omission in Article 60 of the Charity Law. Annual expenditures are most in need of clear laws, especially for non-public fundraising foundations using endowment funds.

In fact, since the Charity Law stipulates that ‘where the donation protocol in regards to using individual donations for charity event expenses and administrative expenses includes an agreement, they are to be used in accordance with that agreement’ regarding expense exceptions,this allows for more flexibility in the MAE expense proportion for donation-dependent charitable organizations. This is actually flexible enough as to make the mandatory MAE proportions for charitable organizations meaningless. By contrast, in regards to the mandatory yearly expense regulations for non-public fundraising foundations that are not donation-dependent, regulations are all the more necessary. This is also the reason why the American government set a 5 per cent annual expense rate for private foundations.

Thirdly, organizations with different characteristics are mixed up. Other charitable organizations qualified to receive public donations are not regulated alongside public fundraising foundations. Rather, they and others that are not qualified to receive public donations are classified together, creating a standard MAE rate for organizations with obscure and mixed characteristics. This could mislead the development of regulations at the lower level, and increase the difficulty of coordination.

In any case, the charity law’s regulations regarding MAE proportions regretfully remains in this state, ‘collecting the seeds and throwing out the watermelons’(concentrating on trivial matters and neglecting important ones). It is in need of complementary regulations by the authorized departments.

How can charitable trusts be activated?
Chapter five of the Charity Law, which is on charitable trusts (慈善信托), compensates chapter six of the Trust Law on public interest trusts(公益信托)[1].

Since its implementation on October 1st, 2001, the Trust Law has contributed greatly to the structure of for-profit trusts. However, its chapter on public interest trusts remains lackluster due to two reasons. Firstly, according to the law, the establishment of public interest trusts and the assignment of trustees must gain approval from the relevant public interest management authorities. However, the relevant authorities have not been clearly identified for the past 15 years. Secondly, there are no incentives such as benefits or tax breaks for public interest trusts.

The regulations on charitable trusts contained in chapter five of the Charity Law attempt to break the deadlock, and prevent the rigidity which implementing a strict administrative approval system might cause. Therefore, the Charity Law adopts a free contract mode similar to that of the for-profit trusts. At the same time, it stipulates a document filing system with the department of civil affairs, allowing the civil affairs department to serve as the public interest management authority. Even if a trust fails to file with the civil affairs department, it will only lose the tax breaks, but the legitimacy and effectiveness of its establishment are intact.

Despite the fact that charitable trusts are classified as public interest trusts in the Charity Law (慈善信托属于公益信托), there are significant differences between charitable trusts under the Charity Law and public interest trusts under the Trust Law, especially regarding the use of administrative approval management. This leaves Article 50 of the Charity Law very confusing. (‘Article 50. The establishment of charitable trusts, trust asset management, trust parties, the termination and liquidation of charitable trusts, and other items that are not regulated in this chapter shall be governed by other chapters of this law; If not regulated by this law, they shall be governed by the relevant articles of the Trust Law of the People’s Republic of China.’)

Charity is a type of public interest with the participation of private forces. It is included in the category of public interest Therefore, the charitable trusts system cannot replace the public interest trusts system. But there is no doubt that the Charity Law takes precedence over the Trust Law since it is a specialized law, passed by the National People’s Congress later than the Trust law. Whether the regulations will be successfully activated depends upon the following factors:

First of all, if they break away from the restraints of being public interest trusts, then charitable trusts need to rely on the business trust system to motivate the trustees. The work of a trustee of a charitable trust is not charitable. Rather, it is professional, commercial, and competitive and can generate profit at a market rate.

Secondly, the tax breaks for charitable trusts must be clarified. Otherwise, the filing system with the civil affairs department will just be an empty shell. This will severely damage the credibility of charitable trusts and the supervision capacity of the civil affairs department.

Thirdly, the country should vigorously promote the development of charitable trusts to create a stimulating atmosphere with freedom of contract, a high credibility for trusts, proper supervision, and favorable policies.

The five considerations mentioned above should be taken as suggestions rather than criticism. Mencius said: ‘ the great end of learning is nothing else but to seek for the lost mind.’

My only hope is for these thoughts, based on common sense, to contribute to the implementation of the Charity Law and the drafting of relevant regulations. We must have the courage to face problems rather turning a blind eye.

Dong Zijin is director of AlilA. Translated by Herman Zheng, Leanne Deckert, Li Yuanhui.

Tagged in: Charity law


Footnotes

  1. ^ In Chinese, ‘Charity’(慈善) refers more to traditional activities to provide help for those in need, while ‘public interest’ (公益) tends to refer to modern organized philanthropic activities.

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