Are we allowed to use a foundation or an association for business purposes? That is a question whose answer is very much relevant from a tax perspective.
The starting point of this article is art. 1 of Government Ordinance no. 26/2000, which stipulates that natural persons and legal persons who pursue activities of general interest or in the interest of some collectives or, as the case may be, in their personal non-patrimonial interest may constitute associations or foundations (…). From this it emerges that the mentioned entities cannot aim to obtain a profit, the possibility of the existence of a patrimonial purpose being excluded in their case.
From a fiscal point of view, according to art. 13 para. (1) Fiscal Code, Romanian legal entities are obliged to pay profit tax and are called taxpayers. There are several exceptions to this rule that can be found in art. 15 Fiscal Code. One of the exceptions is provided by para. (2), according to which in the case of non-profit organizations, trade unions and employers’ organizations, when calculating the fiscal result, there are various categories of income that are non-taxable, such as membership fees and registration fees, monetary or in-kind contributions of members and sympathizers, donations, such as money or goods received through sponsorship or patronage, income from dividends, interest, as well as from exchange rate differences related to availability and non-taxable income, etc.
For the entities provided by art. 15 Fiscal Code, other incomes are also non-taxable, up to the level of the equivalent in lei of 15,000 euros, in a fiscal year, but not more than 10% of the total non-taxable incomes provided for in art. 15 para. (2) Fiscal code. These entities owe profit tax for the part of the taxable profit that corresponds to income, other than those considered non-taxable income according to art. 15 para. (2) Fiscal code, on which the tax rate of 16% is applied. Of course, there are exceptions to this quota, such as those provided by art. 18 Fiscal Code, but these exceptions are not the subject of this analysis.
Among the entities mentioned in art. 15 Fiscal Code, non-profit organizations are relevant in this discussion, and they will be analyzed from the perspective of taxation. Associations and foundations established according to Government Ordinance no. 26/2000 are legal entities under private law without patrimonial purpose, which is why the name used in the following will be that of non-profit organizations.
Considering these aspects, it emerges that in the case of non-profit organizations there is no profit-generating activity component, since in their case the resources are not used with the aim of generating a patrimonial gain. Nonprofit organizations’ resources come from various sources, such as donations, sponsorships, or bequests. They can also come from members’ contributions, from interest and dividends resulting from the placement of available amounts, from the dividends of commercial companies established by these non-profit organizations, as provided by art. 46 of G.O. no. 26/2000.
It should be noted that in the case of associations and foundations there is another income-producing source, that provided by art. 46 para. (1) lit. d) from Ordinance no. 26/2000, respectively the income from direct economic activities. So, this aspect is probably a point of divergence considering the fact that non-profit organizations do not carry out profit-making activities. As provided by art. 48 of Ordinance no. 26/2000, associations, foundations and federations may carry out any other direct economic activities if they have an accessory character and are closely related to the main purpose of the legal entity.
Therefore, a distinction must be made between the income-generating activities carried out by companies and the economic activities that are admitted to a limited extent in the case of non-profit organizations. If in the case of companies economic activities represent the main purpose, in the case of non-profit organizations they are allowed only as a means of obtaining additional resources to finance the activities necessary to achieve the main purpose. Therefore, the income generated by non-profit organizations cannot be obtained for profit, but only to finance the entity in order to carry out the activity for which it was founded. Associations and foundations can carry out economic activities that contribute to the generation of income, which will be used strictly for the achievement of the object of activity, with the obligation to comply with the rules regarding taxation.
As it was stated in the previous paragraphs, non-profit organizations enjoy (or not) an exemption threshold of 15,000 euros, within which incomes from sources other than those provided by art. 15 para. (2) Fiscal Code are considered non-taxable. Obviously, in relation to this threshold there had to be an additional condition, namely that no tax is due up to the equivalent in lei of 15,000 euros, but no more than 10% of the total non-taxable income provided for by art. 15 para. (2) obtained in a fiscal year.
We emphasize that this threshold applies to the income obtained by non-profit organizations from sources other than those provided by art. 15 para. (2) Fiscal Code, therefore including in the case of income obtained from the economic activities carried out by these entities. It is important to remember that the equivalent in lei of the 15,000 euros, as well as any other sums representing profit, cannot be used for the distribution of dividends, as their destination is strict, being used only for the fulfillment of the object of activity, the goals and of the programs run by the nonprofit organization.
Another relevant aspect should be mentioned, namely that in applying the provisions of art. 13 para. (1) lit. a) from the Fiscal Code, the category of Romanian legal entities includes associations and foundations. So, from the perspective of the Fiscal Code, non-profit organizations, like companies, are taxpayers, who have the obligation to pay profit tax. Associations and foundations, according to art. 41 para. (5) Fiscal Code, have the obligation to declare and pay the annual profit tax by February 25 inclusive of the year following the one for which the tax is calculated, except for those that fall under the provisions of art. 16 para. (5), who have the obligation to submit the declaration and pay the profit tax related to the fiscal year, respectively until the 25th of the second month inclusive of the closing of the modified fiscal year.
Therefore, associations and foundations are obliged to pay the profit tax, when the ceiling provided by art. 15 para. (3) Fiscal code, for those incomes that are not considered non-taxable. These entities must have the obligation to pay the annual profit tax registered in the fiscal vector.
As far as a non-profit organization is concerned, it can carry out two categories of activities from a VAT perspective, namely non-profit activities, i.e. those activities that fall within the scope of the organization’s object of activity, as well as economic activities, as they were described in the previous section .
Considering these two categories of activities, VAT may or may not be due. In the case of non-profit activities, VAT will not be due, but in the case of carrying out economic activities, associations and foundations may be considered taxable persons. Therefore, art. 269 of the Fiscal Code includes the scope of taxable persons from the point of view of VAT, being considered taxable any persons who carry out, independently and regardless of place, economic activities of the nature of those provided for in paragraph (2), whatever the purpose or result of these activities.
Paragraph (2) of the aforementioned article defines economic activities as the activities of producers, traders or service providers, including extractive, agricultural activities and the activities of liberal professions or similar to them. Moreover, the exploitation of tangible or intangible assets for the purpose of obtaining income with continuity is an economic activity.
Therefore, in the case where a non-profit organization carries out economic activities in order to obtain resources to finance the activities necessary to achieve the main purpose, they are obliged to register as VAT payers with the tax authority when the legal ceiling is exceeded, and there is also the obligation to prepare accounting and tax records specific to VAT, as well as that of reporting the VAT situation to the fiscal body.
Considering these aspects, it can be stated that associations and foundations mostly enjoy certain exceptions that exempt them from paying profit tax and value added tax. However, these exceptions become ineffective when it comes to the provision of an economic activity, which can only be carried out under certain conditions, since in such situations the income of the non-profit organization may become taxable. However, associations and foundations cannot carry out any economic activity, but only those economic activities aimed at generating funds in order to support the main activity of the non-profit organization.
Our recent practice shows that tax authorities have already reconsidered the status of certain foundations that have been found to carry an extensive economic activity.
In the legal domain Fundamental Rights and Liberties, the lawyers of Costaș, Negru & Asociații provide legal services in the practice area Associations and Foundations (for details, visit the link here).
This article was prepared for the Blog of Costaș, Negru & Asociații by Mr. Bogdan Șuta (Cluj Bar Association).
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