In
the State of Israel, there are four primary types of not-for-profit
organizations (NPOs), each with different requirements for formation,
membership, and public purpose. These include:
Associations
(Amutot, singular Amuta), governed by the Law of Associations, 1980;
Private
Companies for Public Benefit, governed by the Companies Act, 1999;
Cooperative
Societies, governed by the Cooperative Societies Ordinance, 1933;
and
Endowments,
governed by the Trust Law, 1979.
B.
Tax Laws
Tax
Exemption - The Income Tax Ordinance grants tax exemptions to
organizations that qualify as "public institutions"
[Article 9(2)]. To determine which organizations may be
recognized as public institutions, it is important to examine the
legal structure and public aims of the organization as well as the
activities in which it is engaged. Generally, any activity
involving religion, culture, education, science, health, welfare,
sport, or any other objective approved by the Minister of Finance
constitutes a public aim.
Tax
Allowance - Tax credits are available for donations to organizations
recognized as public institutions by the Income Tax Ordinance
[Article 46]. These tax allowances may not be granted for
contributions to a foreign not-for-profit organization unless the
foreign organization adheres to the Israeli standards for public
institutions and is registered in Israel.
Associations and
foundations can be formed and incorporated under several laws: the
Law of Associations ("Amutot"), 1980; the Companies Act,
1999; or the Cooperative Societies Ordinance, 1933. However,
incorporation is not required for tax purposes to be classified as an
NPO. Incorporation is necessary, however, to receive certain
governmental grants. .
The
Association ("Amuta") - The Law of Associations ("Amutot")
of 1980 introduced the Amuta as a type of corporate entity that has
all the legal rights and benefits of an incorporated legal entity.
[1] For not-for-profit institutions, the Amuta has become a popular
form of incorporation. This legal entity comes into being upon the
act of registration [Law of Associations, Article 1]. Articles of
Association, i.e., by-laws, may be attached to the registration
application, or the model Articles appended to the Law will serve as
the Amuta's by-laws.
Registration
of an Amuta requires the following [Note: all citations are to the
Law of Associations]:
Two
or more members, whether individuals or corporations (this
membership is non-transferable.) [Article 17];
Legal
purposes, i.e., almost all purposes other than those that undermine
the State of Israel and its democratic nature or those that provide
a safe haven for illegal activity. (Other than these prohibitions,
the Law of Associations does not provide further guidance regarding
permissible public purposes of the Amutot.);
The
organization's activities are not intended, as a primary purpose, to
be profit-making [Article 1];
Prohibition
of distribution of earnings (the "non-distribution constraint")
[Article 1]; and
A
name that is not misleading or prejudicial to the public and is not
the same as, or similar to, other registered Amutot or Israeli
corporations [Article 4].
An
Amuta must indicate its status by attaching, at the end of its name,
"Registered Amuta" or RA (written in Hebrew) [Article 4].
An
Amuta is also required to submit the following reports to the
Registrar:
Annual
financial statement;
Annual
director’s report;
Changes
in the membership of the board, audit committee, or external auditor
(CPA), and its address;
Changes
to the by-laws adopted by the organization's General Assembly; and
Any
legal claim presented against the organization or one of its board
members in his/her capacity as a board member.
Private
Companies for Public Benefit - Private companies may be created to
serve as not-for-profit institutions, according to the Companies Act
of 1999 ("the Act"). Unlike the Amuta, a company's purpose
must be in accordance with the Act, morality, and public order
[Companies Law, Article 2], and it must comply with at least one
category of the 13 public benefit aims specified in the appendix to
the law. The Act does not include the express prohibition against
aims that negate the existence of Israel or purposes that seem to
disguise illegal activities; rather, it states that a company must
act in accordance with the law. The Companies Registrar is charged
with ensuring that the company complies with all the conditions of
the Act, and the Court oversees the Registrar's determinations
[Companies Law, Articles 36-45]
There
is no minimum membership detailed in the Companies Act, and therefore
a company may be formed with only one person. The name of the company
must not be misleading or in opposition to public order [Companies
Law, Articles 27-28]. Once the company has been registered and has
received its certificate of incorporation, it becomes an independent
legal entity. When applying for registration, a company must submit
Articles of Association. The Articles of Association must comply with
tax laws in order for a company to be regarded as a not-for-profit
organization that would qualify for a tax exemption. This requires
that the Articles of Association:
Provide
that the company’s aims comport with the aims of a public
institution, as per the Income Tax Ordinance;
Include
a prohibition on the distribution of profits;
Define
the value of the shares as non-economic and prevent the transfer of
such shares, unless authorized by the court; and
Provide
for equal voting rights per share.
A
company for public benefit must indicate its status by attaching, at
the end of its name, “Public Benefit Company” or PBC
(written in Hebrew). A PBC is required to submit the following
reports to the Registrar:
Annual
financial statement;
Annual
director’s report;
Changes
in the membership of the board, audit committee, and external
auditor (CPA); [2]
By-laws
changes adopted by the organization's General Assembly; and
Any
legal claim presented against the organization or one of its board
members in his/her capacity as a board member.
Cooperative
Societies - The Cooperative Societies Ordinance of 1933 ("the
Ordinance") governs the formation of associations called
cooperative societies. The Ordinance sets forth the aims of
cooperative societies as fostering "economy, independent
assistance, and reciprocal assistance between persons having common
economic interests, in order to effect an improvement in their living
conditions."
There
are several requirements for forming a cooperative society:
At
least seven members are required to form a cooperative society
(other corporate entities may be members);
The
aims of the cooperative society must be in compliance with the
Ordinance;
The
name of the cooperative society is subject to all the restrictions
contained in the Companies Act. Additionally, the words
"cooperative" and "limited" must follow the
names of all cooperative societies;
A
cooperative society must specifically prohibit distribution of
profits in order to be treated as an NPO. Although cooperative
societies generally do distribute profits, an express prohibition is
required for consideration as an NPO; and
Shares
are non-transferable.
Before
a cooperative society may register, the Registrar must determine that
the cooperative has complied with all the provisions of the
Ordinance. The Registrar also must categorize the cooperative and
decide in which of twenty-five classes of cooperative societies the
applicant belongs. Once the Registrar is satisfied, the cooperative
society may register and become an independent legal entity
Endowments
(under the Trust Law, 1979) - An endowment is a type of trust in
which the assets are set aside to benefit a specific public community
or accomplish a particular public aim. The Trust Law of 1979 governs
the formation of public endowments. Endowments are not membership
organizations and are not independent legal entities. The Law does
not require the formation of an endowment as a trust. A trust can
also register in a religious court.
To
create a public endowment, three steps must be taken:
The
endowment must be created through a deed of endowment. This document
sets forth the creator's public interest aims and intention to
create an endowment. The endowment is created once control of the
assets is transferred from the creator to the trustee;
A
trustee must be appointed; and
The
endowment must be registered. After the trustee is appointed, he or
she must notify the Registrar of Endowments within three months and
provide details of the endowment, assets, creator, and trustee(s).
In the event that there is no trustee, whether none is appointed or
the appointed party is unable to fulfill the duties of office, the
Public Trustee may take control of the endowment until the
appointment of another trustee.
IV.
Public Benefit Status
According
to the Income Tax Ordinance, an organization must satisfy certain
conditions to be recognized as a "public institution" for
purposes of tax exemption. One of these conditions requires a public
aim, defined broadly to include activities related to religion,
culture, education, science, health, welfare, sport, and any other
public aim approved by the Minister of Finance.
The
Law of Associations permits a broad set of purposes as discussed in
Part III. NPOs organized under the Companies Act must articulate a
public purpose in the Articles of Association. Cooperatives typically
are characterized by public benefit in the form of mutual aid and
reciprocal assistance [Cooperative Societies Ordinance, Article
11(b)]. Endowments are either "public" or "religious"—the
former are required to promote public purposes and the latter are
required to promote religious purposes.
V.
Specific Questions Regarding Local Law
A.
Inurement
The
laws prohibit associations, private companies for public benefit, and
endowments from distributing profits to their members [Law of
Associations, Article 1 and 34c; Companies Act, Article 345(g)]. The
Cooperative Societies Act, however, does not prohibit distribution of
profits. Any Cooperative Society that distributes profits is unable
to attain nonprofit status [Cooperative Societies Ordinance, Articles
39 and 40].
Private
Companies for Public Benefit - The Companies Act clearly
addresses the subject of transactions with interested parties and
imposes a fiduciary duty on the officers of the company [Companies
Law, Article 254]. When there is a potential conflict of interest,
the interested officer has a duty to disclose his interest and obtain
approval for the activity or transaction at issue from both the
internal audit committee and the board of directors [Companies Law,
Article 255]. Failure to do so may result in sanctions; the
transaction may be canceled or the officer may be subject to damages
claims [Companies Law, Article 345(13)]. In addition, payments to
executives and administrative expenditures should not exceed limits
designated in the Minister’s ordinance.
Amutot and
Cooperative Societies - Interestingly, neither the Law of
Associations (Amutot) nor the Cooperative Societies Ordinance
expressly addresses the issues of fiduciary duty and how to handle a
conflict of interest. While the Law of Associations does state that
members must act for the good of the Amuta, the Cooperative Societies
Ordinance is silent.
Despite
the lack of express provisions, office holders in Amutot and
cooperative societies are expected to adhere to fiduciary duties
similar to those applicable to for-profit companies. Further, other
general laws, such as the Penal Law impose certain responsibilities
on members and directors.
Endowments
- The Trust Law expressly forbids a trustee from obtaining any
personal benefits from management of the trust assets. As such, a
beneficiary of a trust is not permitted to act as trustee, unless the
deed of endowment specifies otherwise. In certain circumstances,
however, the court may grant the trustee permission to derive
benefits from the management of the trust when such an action is also
advantageous to the trust [Trust Law, Article 13].
B.
Proprietary Interest
Amutot,
private companies for public benefit, and cooperative societies are
all independent legal entities. The non-distribution constraint
requires that the members do not have a proprietary interest in the
organization. The non-distribution constraint also means that Amuta
or PBC cannot distribute assets upon dissolution. The articles of
association filed with the organization's registration create a
contractual relationship between the members and the organization
itself. [For associations, please see the Law of Associations,
Article 9]
An
endowment, however, is not a legal entity. The endowment is created
when control of the assets is transferred to the trustee, so a
trustee may have a proprietary interest in those assets.
C.
Dissolution
The
appropriate distribution of assets that remain after payment of
outstanding debt differs according to the type of organization. An
Amuta must distribute its remaining assets according to its articles,
which most likely provide for the transfer of assets to an NPO
engaged in the pursuit of similar goals. If the Amuta does not have
appropriate articles, or they are impractical, the Court will order
that the assets be distributed to a purpose related to the objective
of the Amuta [Associations Law, Article 58 and Companies Act, Article
345(21)]. [3] The Cooperative Societies Ordinance, however, allow
remaining assets to be distributed to members. Therefore, as noted
above, NPOs formed under the Cooperative Societies Ordinance need an
express non-distribution clause in order to qualify for tax
exemption.
D.
Activities
1.
General
All
the legal forms discussed above, except the endowment, become
independent legal entities upon completion of the proper registration
procedures. As such, these legal entities gain the right to
participate in all the appropriate activities to which such entities
are entitled, unless otherwise prohibited.
2.
Public Benefit Activities
The
Law of Associations does not specify what public purposes are
permissible for an Amuta, but it does prohibit activities that either
undermine the democratic nature of the State of Israel or serve as a
screen for illegal activity [Associations Law, Article 3]. The
purposes of a private company for public benefit, on the other hand,
must comply with the Companies Act, morality, public order, and the
general laws of the State of Israel [Companies Law, Article 2]. A
cooperative society's purpose is set forth as fostering "economy,
independent assistance, and reciprocal assistance between persons
having common economic interests, in order to effect an improvement
in their living conditions" [Cooperative Societies Ordinance,
Article 4]. And finally, an endowment's aims must be simply to
benefit a particular public community or fulfill a public aim.
3.
Economic Activities
NPOs
may participate in business activities by conducting such activities
as part of the organization’s operation or by holding shares in
a for-profit corporation. The business activities, however, may be
taxed, unless they are an integral part of the organization's
fulfillment of its public aims, and are not a substantial part of its
activities or income [Income Tax Ordinance, Article 9]. Additionally,
only active income, rather than passive income, will be taxed. An
NPO’s status as a "public institution" qualifying for
a tax exemption may be affected if business activities predominate.
Dividends from for-profit corporations are taxable at a rate of 25%.
E.
Political Activities
There
is no express provision governing the extent to which an NPO may
participate in the political process. The Amutot Law does not
prohibit lobbying or any other political activity, so long as these
activities are not aimed at achieving representation of the NPO in
the Israeli parliament (the Knesset). An NPO can work to influence
the legislation process as well as the outcome of political
elections. It can support publicly a political party or candidate and
call on the public to vote for a particular candidate or party. Under
the law, a minister or a member of parliament cannot be a member of
an NPO. [4]
F.
Racial Discrimination
The
definition of what constitutes a public aim, as set forth in the law,
court rulings, administrative orders, and the orders of the Minister
of Finance, includes the improvement of public welfare without
discriminating. Israeli law does not otherwise address racial,
ethnic, gender, or religious discrimination in connection with NPOs.
G.
Control of Organizations
An
Israeli NPO can be controlled by another NPO, by a for-profit entity
(which would lead to additional IRS scrutiny), by the government, by
a local authority, or by a local or foreign grantor charity.
VI.
Tax Laws
The tax laws in Israel
do not distinguish among legal forms or types of NPOs. Therefore, the
determination of taxable income and tax exemption does not depend on
how an organization was originally formed. The two main tax laws –
Income Tax and Value Added Tax – do not have the same
definition for “public institution.” While the Income Tax
Ordinance ("Tax Ordinance") relates primarily to the aims
of the organization, the VAT Law refers to the nature of its
activities.
A. Tax Exemption
Only
"public institutions" are granted some exemption from
taxes, according to the Tax Ordinance. Although there is no automatic
exemption upon incorporation of an organization, there are some forms
of organizations that are given a preference in being recognized as
"public institutions." For example, Amutot, private
companies for public benefit, and endowments are given preferential
treatment because of their prohibitions on distribution of profits to
their members. To determine which organizations may be recognized as
public institutions, it is important to examine the legal structure
and public aims of the organization, as well as the activities in
which it is engaged.
There
are six criteria that an organization must meet to qualify for tax
exemption:
The
organization does not have to be an association, but must consist of
a collection of people operating together;
There
must be at least seven members (individuals and/or corporations);
The
majority of the members may not be related to each other;
The
organization must have a public aim;
The
income and resources of the organization must be used in pursuit of
the public aim; and
The
organization must provide annual reports (financial and director's
report), detailing, inter alia, its expenditures, resources, and
income to assure compliance with its public aims.
The
law, court decisions, and administrative rulings have defined "public
aim" to include activities related to religion, culture,
education, science, health, welfare, and sports, as well as any other
public aim approved by the Minister of Finance. However, the Supreme
Court has indicated that the definition should be narrowed, and the
Tax Authority will likely do so in 2013.
An
NPO may engage in both commercial and not-for-profit activities, but
the business activities may be taxed. If income is generated by a
business that is a critical part of accomplishing the organization's
public aim, it will be exempt from tax. The Minister of Finance may
grant a tax exemption for income of a public institution from
business sources, as long as the public will still benefit.
Additionally, according to the Tax Ordinance, only active income will
be taxed, not passive income (i.e., dividends and interest).
B.
Value Added Tax
The
Value Added Tax Law of 1975 imposes a tax on the ultimate consumer.
With a focus on the nature of an organization's business, the Law
provides that not-for-profit organizations engaging in non-commercial
business receive the status of "Malkar" (Hebrew
abbreviation of “Not-for-Profit institution”).
In
order for an organization to attain Malkar status, it:
Must
be a collection of people (though not necessarily incorporated;
'people' includes individuals and corporations);
Must
not engage in for-profit business activities; and
Must
not be a financial institution.
Organizations
with Malkar status:
1.
Pay value added tax ("VAT") upon buying goods or services;
2.
Are not permitted to issue a tax invoice; i.e., to collect VAT from
their customers;
3.
Are not reimbursed for the VAT paid (input tax); and
4.
Must pay a payroll tax ("Wage Tax") based on the amount of
wages paid to their employees.
The
VAT rate in Israel is 17%, and the Wage Tax is 7.5%.
C.
Property Tax
The
Property Tax and Compensation Fund Law of 1961 governs the taxation
of property owners in Israel. Adopting the definition of “public
institution,” NPOs may be exempt from property tax if:
The
association has at least seven members;
Most
members are unrelated to one another;
The
purpose of the NPO involves the pursuit of a public aim - religion,
culture, education, science, health, relief, or sports;
The
property is used in pursuit of one of the above-named aims; and
Any
income generated from the property is used to pursue the
organization's aims.
Alternatively,
the Property Tax and Compensation Fund Law gives the Minister of
Finance discretion to grant tax exemptions for property that serves a
public aim. The Finance Committee of the Knesset (Israeli
Legislature) also must approve the exemption.
D.
Tax Allowances
Article
46 of the Income Tax Ordinance provides donors with a tax credit for
donations to certified public institutions. To qualify for such an
allowance, the following conditions must be met:
The
organization must satisfy the Tax Ordinance definition of a “public
institution;" and
The
organization must be approved by the Finance Committee of the
Knesset.
Individual
donors may receive a 35% tax credit for contributions to certified
NPOs that exceed 300 New Israeli Shekels (NIS) but are not greater
than 7,000,000 NIS, or up to 30% of the donor’s total tax.
Under
the above limitations, the tax credit afforded to corporations is
equal to the company tax (25% in 2013).
Foreign
not-for-profit institutions must be registered in Israel according to
the Israeli standards for public institutions in order for donors to
benefit from tax allowances.
E.
Double Tax Treaties
On
January 1, 1995, the 1975 U.S.-Israel Income Tax Treaty ("Israel
Treaty") took effect. Article 15A of a 1980 Protocol to the
treaty allows U.S. donors to deduct contributions to Israeli
charities as long as the charitable organization would have qualified
for exemption according to U.S. standards. The Israel Treaty fixes
the percentage limitation on charitable deductions at 25%. This
percentage is calculated according to the amount of income the U.S.
donor has from sources within Israel. The treaty provision makes it
easier for some US grantmakers – those with business in Israel
– to make grants to Israeli charities.
It should be
noted that the U.S. definition of the territory of Israel is
different from the way the State of Israel defines itself. This issue
of territorial definition may introduce complications regarding the
proper application of the Israel Treaty.
VII.
Knowledgeable Contact
Dr.
Nissan Limor, Head of Civic Responsibility Institute, The College for
Academic Studies, nissanl@mla,ac,il
Head,
The Van Leer Third Sector Forum (VLTSF), The Van Leer Jerusalem
Institute, nissanl@vanleer,org.il
Footnotes
[1] In December 2009,
the parliament approved amendment number 12 to the Amutot Law, 1980.
This amendment adds a new chapter: D2 - Merger (articles
34e-34i). Until then, two or more nonprofit organizations (Amutot)
could not merge. If two NPOs wanted to merge, one of them had
to dissolve, request the permission of the court to transfer its
assets (if any) to the other, and the members of the dissolved NPO
had to apply for membership in the other NPO. The new amendment opens
a new possibility that two or more NPOs can merge and form one legal
entity with all assets, rights and obligations of all merging
organizations. The amendment also allows for the merger of Amutot and
Companies for Public Benefit.
[2]
The General Assembly of the PBC must appoint an audit committee.
Unlike the audit committee of a public (for-profit) company, neither
a board member nor an executive of the company may serve as a member
of the audit committee. A PBC must nominate an Internal Auditor if
its volume exceeds 10 Million New Israeli Shekel (NIS).
[3] The Companies Act
allows return of certain property to its owner, if at the time of
transferring this asset to the PBC for its use, it was agreed and
properly documented that this asset was given for use and not as a
gift.
[4]
The Political Parties Law of 1992, however, distinguishes between
registered parties and NPOs. The law defines a party as: “A
body of persons organized in order to advance political or social
objectives by legal means and to win their representation in the
Knesset through election.” Although registered parties are
associations, they are not governed by the Law of Associations.
