In the holidays’ season, there is no holiday in tax audits. The Costaș, Negru & Asociații team, in this guest post, decided to shed some light on a new series in financial and tax audits: Sponsorships and Sponsors. Tax Authorities included for sure.
Precisely, in the past few months there have been a number of financial-economic or tax audits with the purpose of checking various sponsorships, provided that they were financed from the corporate income tax due by Romanian taxpayers. Such audits concern the activity of foundations, associations (acting as beneficiaries of sponsorships) and legal persons (acting as sponsors) respectively.
This guest post follows a case-law based approach on a few sensitive matters.
Law No. 32/1994 regulates the legal framework for sponsoring non-profit activities in Romania. Articles 3, 6 and 10 of this law are essential in defining how sponsorships can be carried out. Relevant case law has significantly contributed to the correct interpretation and application of these provisions.
This article aims to analyze some of the relevant decisions of Romanian courts that have clarified the application of Law No. 32/1994, highlighting how courts have interpreted and applied its provisions in specific cases. These rulings deepen the understanding of the sponsorship regime and establish clear guidelines for compliance with current legislation.
- Article 3 – Restrictions on Sponsorship Sources
(1) Individuals or legal entities in Romania cannot carry out sponsorship or patronage activities from sources obtained from the state budget. (2) Public institutions and authorities, state-owned companies with majority capital and autonomous regies cannot carry out sponsorship activities benefiting individuals and family associations operating according to Law no. 300/2004 regarding the authorization of individuals and family associations engaging in independent economic activities, as well as private capital companies.
Consequently, article 3 of Law No. 32/1994 prohibits the use of public funds for sponsorship activities, stating that romanian individuals or legal entities cannot sponsor using funds obtained from the state budget. This provision is crucial for preventing the misuse of public funds for private or commercial purposes.
- The Timișoara Court of Appeal, by Decision no. 6260 of November 4th, 2015 confirmed the application of this prohibition, emphasizing that romanian individuals and legal entities cannot use public funds for sponsorship activities. In this case, the court determined that educational institutions, such as high schools, are not subject to this prohibition, as they do not operate under Law No. 300/2004 on the authorization of individuals and family associations conducting independent economic activities. Therefore, the court held that providing sponsorship to a high school does not violate the law, as it is not covered by the restrictions of Law No. 32/1994.
- The Constanța Court of Appeal, by Decision no. 1025 of November 23rd, 2020 further clarified this prohibition, noting that, with the entry into force of Law No. 350/2005, the allocation of public funds for non-profit activities must be carried out according to the specific regulations of that law, not through sponsorships. The court emphasized that public authorities cannot provide sponsorships from public budgets but only grants, following the regime stipulated by Law No. 350/2005. Thus, sponsorships cannot be financed with public funds for entities that do not meet the legal criteria.
These rulings underline that the prohibition on using public funds for sponsorship aims to prevent the misuse of public resources and ensure transparency in their utilization. Courts strictly apply this regulation, ensuring that public funds are used solely for lawful purposes.
- Article 6 – Tax Facilities and the Condition of Direct Control
The facilities provided in this law are not granted in the following cases:
a) reciprocal sponsorship between individuals or legal entities;
b) sponsorship made by relatives or in-laws up to the fourth degree inclusive;
c) sponsorship of a non-profit legal entity by another legal entity that directly controls or manages the sponsored legal entity.
Article 6 of Law No. 32/1994 stipulates that tax facilities for sponsorships are not granted when the sponsor directly controls the sponsored legal entity. Jurisprudence provides relevant clarifications on how this provision is interpreted and applied.
- The Timișoara Court of Appeal, by Decision no. 1691 of December 14th, 2021 ruled that “direct control” implies the sponsor’s direct legal involvement in the activities of the sponsored entity. The mere fact that a representative of the sponsor is a founding member of a non-profit entity does not automatically constitute direct control. In this case, the court concluded that the sponsoring company did not control the sponsored entity, and thus the tax facilities for the sponsorship could not be denied.
- The Timiș Tribunal, by Judgment no. 170 of the February 18th, 2021 reiterated that mere affiliation between the sponsor and the beneficiary is insufficient to activate the prohibition under Article 6(c). The court noted that, although the sponsor’s administrator was a founding member of the sponsored associations, this did not constitute direct control, as the non-profit entities had independent governing bodies, such as boards of directors, making decisions autonomously.
- The Bihor Tribunal, by Judgment no. 367/2022 emphasized that the notion of “affiliation” in the Fiscal Code does not align with the specific requirements of Law No. 32/1994. Even if a sponsor is the sole associate or founder of a foundation, this does not automatically imply direct control. The court concluded that only direct and formalized involvement in the decision-making by the sponsor could justify denying tax facilities.
These decisions demonstrate that courts apply a strict and narrow interpretation of “direct control,” avoiding unwarranted extensions of the provision to situations where tax facilities could be denied based on subjective or insufficient evidence. The mere fact that a representative of the sponsor has a connection with the beneficiary of the sponsorship is not enough to exclude granting of tax benefits, as long as the sponsored entity operates autonomously.
- Article 10 – Direction of Beneficiary’s Activities
(1) The sponsor who, directly or indirectly, seeks to direct the beneficiary’s activity does not benefit from the facilities provided in this law.
(2) The provisions of paragraph (1) do not remove the parties’ right to conclude, in accordance with the law, legal acts subject to conditions, as long as these do not direct or condition the beneficiary’s activity.
Article 10 prohibits sponsors from influencing the activities of the sponsorship beneficiary to the detriment of its declared purpose. Jurisprudence on this article highlights how courts evaluate the relationship between sponsors and beneficiaries to determine if there is undue influence.
- The Craiova Court of Appeal, by Decision No. 77 of the January 14th, 2010 ruled that using the beneficiary’s name and image in a promotional campaign does not violate Article 10 if the sponsored activities—such as training young athletes—are not affected or conditioned. The court concluded that promotional activities carried out by the sponsor to promote its campaign are permitted, given that the sponsorship’s purpose remains clearly distinct from the sponsor’s commercial activities.
- Similarly, The Dolj Tribunal, through Decision No. 1195 of the June 18th, 2009 analyzed a sponsorship agreement between a company and a sports school. It was found that the parties did not agree on clauses allowing the sponsor to influence or direct the school’s training activities. Even though the sponsor used the school’s name and image in its promotional campaign, the court held that this did not amount to directing the beneficiary’s activities.
This jurisprudence underscores the principle that sponsorship must primarily support non-profit activities. Sponsors may use the name or image of the beneficiary only insofar as this does not interfere with the purpose and conduct of the sponsored activities. Therefore, the courts aim to ensure a balance between the sponsor’s rights and the protection of the beneficiary’s independence.
Conclusion
Law No. 32/1994 is a vital legal tool for regulating sponsorships, particularly in the context of prohibiting the use of public funds, imposing strict conditions for granting tax facilities and protecting the independence of beneficiaries. Through jurisprudence, courts have clarified controversial aspects, ensuring a balance between legal compliance and encouraging sponsorships for non-profit purposes.
During pending economic-financial and tax audits, the lawyers of Costaș, Negru & Asociații provide legal assistance and representation in intricate cases requiring the appropriate understanding of tax law and Law no. 32/1994.
This article was prepared, for the Blog of Costaș, Negru & Asociații, by Laura Vasilache, a student with the Faculty of Law, Babeș-Bolyai University Cluj-Napoca, in the context of an internship programme.
Costaș, Negru & Asociații is a civil law firm with offices in Cluj-Napoca, Bucharest and Arad, which provides assistance, legal representation and consultancy in several areas of practice through a team of 17 lawyers and consultants. Details of the legal services and the composition of the team can be found on the website https://www.costas-negru.ro. All rights for the materials published on the company’s website and through social networks belong to Costaș, Negru & Asociații, their reproduction being allowed only for information purposes and with the correct and complete citation of the source.
