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IPE special report May 2018

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EU plans foundations statute

Foundations are a growing force in institutional investment but face obstacles to cross-border activities. Now the EU, supported by sector associations, is devising a statute. Gail Moss reports

Foundations have, in legislative terms, been the forgotten sector of Europe. Yet the sector is expanding rapidly. There are an estimated 96,500 foundations based in 24 EU countries, according to figures from the Brussels-based European Foundation Centre (EFC).

These represent total assets of at least €244bn and annual spending of upwards of €46bn.

Together, these foundations employ well over 300,000 people, supporting even more jobs via grants and capital support to their beneficiaries.

This growth is likely to continue, according to Gerry Salole, chief executive, EFC.

"The expansion of the sector is largely due to escalating levels of private wealth both within and outside Europe," says Salole. "And in the next few years, we expect to see the philanthropically inclined baby-boomer generation transferring a large slice of the wealth they have amassed from new industries such as information technology and bio-science to the kind of activities for the ‘public good', which coincide substantially with the areas in which foundations have expertise."

Salole says the foundation sector in Europe is also growing in terms of cross-border and multilateral work.

Nearly two-thirds of EFC members work beyond their home countries. Individual and corporate donors are also becoming more mobile, increasing their assets or investments in several countries.

But international foundation work is hampered by barriers in civil and tax law. One obstacle is that it is difficult to ensure that national authorities recognise the legal personality of foreign-domiciled foundations.

Another problem is legal insecurity over national recognition of the ‘general interest' nature of a resident foundation's work outside its country of residence. Furthermore, in some countries it is virtually impossible to transfer a foundation's headquarters to another EU state. In Germany, for instance, a foundation is likely to have to be liquidated and then re-incorporated for this to happen.

Setting up branches in other countries is also unduly onerous - in administrative terms - as well as expensive.

Foundations operating in several countries have to comply with different rules and regulations in different jurisdictions.

Besides these legal constraints, foundations with cross-border operations are subject to the different fiscal environments of different member states. Many countries do not permit cross-border donations to be tax-deductible, while foreign-based public benefit foundations are sometimes subject to discriminatory tax treatment. As a whole, the annual cost of these barriers is between €90m and €102m, according to the European Commission.

For many of those active in the foundation sector, the solution to these problems would be a European foundation statute - a legal vehicle for foundations that would be automatically recognised in all EU member states. The need for such a statute was identified as a medium-term priority in the EU Company Law and Corporate Governance Action Plan adopted in 2003.

In February 2009, the EC published the results of a feasibility study on a statute, at the same time launching a public consultation exercise intended to help it assess the need for, and the impact of, such a statute.

"It is a great opportunity for fundraisers and will help to free up and mobilise the movement of funds across Europe," says Chris Carnie, director, Factary, a research consultancy specialising in fundraising from non-profit organisations and which works across Europe. "Furthermore, it may help reduce confusion about what it means to be a foundation in Europe. The variety of organisations calling themselves foundations is enormous. For instance, in Germany, some foundations are linked to political parties, which is prohibited in, say, the UK. In other countries, some foundations may run businesses without making charitable donations."

Carnie says: "In the long term, a pan-European statute will force national governments to bring national foundations into line with the pan-European model. This is good in terms of transparency and consistency and in releasing money for doing good."

The EFC has been at the forefront of the movement to create a common statute.
One major argument is that it would reduce administrative and legal costs for foundations, allowing them to spend far more of their income on their beneficiaries.

Some other reasons for developing a statute fall into the policy area - for instance, it would help the pooling of private resources in Europe to address pressing needs in areas such as education, the environment and development. "A statute would also provide a benchmark of accountability, transparency and good governance in channelling funds for public purpose across the EU and beyond," says Hanna Surmatz, legal affairs officer at the EFC. "It would also clarify the concept of foundation and provide a common definition of ‘public benefit purpose foundations' across the EU. At present, the term ‘foundation' is much too loosely used to refer to very diverse undertakings, ranging from personal benefit to commercial endeavours."

The statute would be optional - leaving foundations and other non profit-making bodies free to use existing legal structures in their own countries - and would be intended specifically for organisations wishing to pursue public benefit activities in more than one country.

Rui Chancerelle de Machete, president, Fundação Luso-Americana para o Desenvolvimento, which supports educational links between Portugal, the US, Brazil and Africa, as well as research on economic issues, says a foundation statute would ease co-operation between non-profit organisations globally.

The EFC's own suggested model statute includes a public benefit purpose, activities in at least two EU member states, a minimum endowment or starting capital, transparency of accounts, financial and activity reporting, and clear supervision mechanisms at EU level or delegated at national level.

In terms of their tax status, the EFC considers that a European foundation should be treated like a tax-exempt national foundation. This is also the approach suggested by the feasibility study.

The EC will publish the results of its consultation this autumn. Before launching a proposal for new EU legislation, the EC would then have to undertake a cost/benefit analysis. A political decision on the matter is expected to be taken by the newly elected EC.

Surmatz believes that the odds are in favour of the eventual creation of a statute. "The economic weight of the foundation sector is significant, and its needs can no longer be ignored," she says. "The development of a statute is seem as the best policy option for addressing cross-border barriers and stimulating activities by foundations."
 

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