Legal Environment for Endowments in Hungary Nilda Bullain ICNL Polish NGO Seminar, Warsaw, June 6-7, 2002

Economic Environment Macroeconomic growth Nonprofit sector growth Increase in disposable income Increase in consumption Trust in private investments halted Financial literacy emerging

Nonprofit Sector Economy

Total Sector Revenue (2000) : US$ 1,830 million Revenue from Financial Transactions: US$ 41 million (2.2%) Revenue from Interest: US$ 40 million (2,3%)

Nonprofit Sector Economy Highest percentages of income from financial transactions and interest: Education (12%), economic development (10,1%), research (8.4%) Private Foundations (5.5% from financial transactions, 3,4% from interest)

Nonprofit Sector Economy NGOs expend 96% of their revenues Foundations expend 92% of their revenues Amount unexpended in 2000: US$ 40,000,000 Value of fixed assets in foundations (2000) : US$ 215 million Value of fixed assets in public benefit companies: US$ 288 million

Political Environment Government intention has been to exercise control over state funds Public Law Foundations not suitable for investment (dependent on state budget, annual renewal) – yet they represent a growing proportion among foundations Endowing / tax exemption of investment income was not a priority Lack of communication among NGOs, government and financial community

Legal Environment Establishment Closed foundation (“default form”) Initial capital as investment Open foundation Initial capital as start-up fund for operations In practice, mostly open foundations with low amounts of initial capital

Legal Environment Governance & Liability Founder has little influence over the operations of the foundation Liability regulations do not address this issue Principles of investing Entrepreneurial activity only without endangering foundation purposes (PBOs) If investing, it should have investment policies Voluntary Mutual Insurance Funds (1993) model

Legal Environment Taxation Entrepreneurial activity taxed (not all economic activity is entrepreneurial) For foundations, grant support, gifts or own income serving statutory purposes not taxed Entrepreneurial income for PBOs tax exempt under 10% of whole income or 10 million HUF; above that taxed proportionally

Legal Environment Taxation Interest received from the credit institution or issuer of securities, or yield of state bonds, partially not taxed (in proportion to revenue from statutory activity in the whole revenue) Question of dispute: “securities” Law on Accounting uses the term for credit type facilities only; not for shares Corporate Tax Law uses the term for both, but uses “interest” in this paragraph

Legal Environment if a PBO does not have commercial activity at all, its income from investments in credit type securities will not be counted as entrepreneurial income; while income from investments in shares, limited partnerships and perpetual funds will be tax exempt only as long as it is under 10% of its total revenue or less than 10,000,000 HUF.

Conclusion Endowments in Hungary do not exist, but timing might be right to address the barriers So far this has not been a political priority but new government is open to suggestions Increasingly favorable economic environment Nonprofit sector growth indicates opportunities Need to improve financial management skills in NGOs Need to establish communication with the financial/banking community