1. NESsT © NESsT - Not for circulation, duplication or use without permission from authors.www.nesst.org NESsT International Conference on Public Financing of NGOs Tax exemptions and other incentives to encourage CSO economic activities; The situation of Romania in a regional context Eva Varga & Ana Negrila, NESsT Bucharest, September 14

2. NESsT © NESsT - Not for circulation, duplication or use without permission from authors.www.nesst.org NESsT 2 NESsT mission NESsT works to solve critical social problems in emerging market countries by developing and supporting social enterprises that strengthen civil society organizations’ financial sustainability and maximize their social impact.

3. NESsT © NESsT - Not for circulation, duplication or use without permission from authors.www.nesst.org NESsT 3 NESsT “University” NESsT Consulting NESsT Marketplace 1 2 34 NESsT Venture Fund Philanthropic investment funds supporting social enterprise portfolios in emerging markets. Promoting accountability, innovation, leadership and professionalism in the field Providing professional services in social enterprise development A global on-line shopping directory of social enterprise products & services NESsT initiatives

4. NESsT © NESsT - Not for circulation, duplication or use without permission from authors.www.nesst.org NESsT 4 Setting the scene in Central Europe Comparison of tax regulations – in 6 countries: Romania, Hungary, Slovakia, Czech Republic, Croatia and Poland –re VAT, profit tax and indirect incentives (tax incentives provided to third parties on their donations or investment into CSOs) Main issues and challenges: –Unfair competition vis-à-vis for-profit sector? –Caps can be counter-productive –Administration, filing –Accounting

5. NESsT © NESsT - Not for circulation, duplication or use without permission from authors.www.nesst.org NESsT 5 VAT regulations for CSOs in Croatia: OGI, Osijek Mission: To initiate and provide support to positive processes of social development in local communities through 3 programs: human rights, community development and NGO support. Social enterprise: To provide specialized accounting and financial management services to local small and medium size NGOs in the regions of Slavonija and Baranja.

6. NESsT © NESsT - Not for circulation, duplication or use without permission from authors.www.nesst.org NESsT 6 VAT regulations for CSOs in Croatia: OGI, Osijek VAT exemption up to 85.000 kuna/year turnover (EUR 11.600) allowed to launch the social enterprise – within association Competitive pricing while offering unique experties Once revenues exceed cap –new legal entity (doo) owned by OGI –price increase to reflect increased costs –financial projections reflect changes as of year 4 (1st year is VAT exempt for newly set-up for profits)

7. NESsT © NESsT - Not for circulation, duplication or use without permission from authors.www.nesst.org NESsT 7 Setting up a separate entity (ltd) in Hungary: Kava, Budapest Mission: Experts in theater in education Kava provides workshops to disadvantaged children about serious social problems, such as discrimination, drug use, and crime. Social Enterprise: selling drama-based trainings in conflict resolution and communications to a new sector: private companies interested in worker satisfaction, retention, and performance.

8. NESsT © NESsT - Not for circulation, duplication or use without permission from authors.www.nesst.org NESsT 8 Setting up a separate entity (ltd) in Hungary: Kava, Budapest Sales volume increase exceeded capacity Separate entity improved transparency Ltd pays profit tax like any for-profit company (16%) Ltd houses costs of social enterprise activity Ltd after tax profit turned back into Kava Association’s nonprofit programs Possibility of transforming Ltd into nonprofit Ltd (new form)

9. NESsT © NESsT - Not for circulation, duplication or use without permission from authors.www.nesst.org NESsT 9 Using other forms of indirect support in Czech Republic : Diakonie, Plzen Mission: Create conditions for securing social services for mentally disabled people and people in a difficult life situation, including day care programs and housing. Social enterprise: Café and Tearoom “Kacaba” in Plzen, which provides skill training to and employs mentally disabled persons. Providing catering services to companies for the value of the fine those would pay for not employing people with disability

10. NESsT © NESsT - Not for circulation, duplication or use without permission from authors.www.nesst.org NESsT 10 Romanian legal environment for CSOs and social enterprises According to Romanian law there are –3 types of CSOs: associations, foundations, and federations – All commonly referred to as "non-profit organizations" in Romanian legislation CSOs in Romania are regulated by the –Government Ordinance on Associations and Foundations, GO 26/2000, adopted in January 2000, further modified and put into law in 2005 by the Law on Associations and Foundations (No. 246/2005). The Romanian legal framework explicitly permits CSO commercial activities as long as they are mission related. CSOs wishing to engage in non-mission related commercial activities have to set up a separate, for-profit entity. There is a limited profits tax benefit for CSOs CSOs are due for VAT, which is not reimbursable, and must pay customs duties CSOs must file financial reports (balance sheet, etc)

11. NESsT © NESsT - Not for circulation, duplication or use without permission from authors.www.nesst.org NESsT 11 Social Enterprise Archetypes EmbeddedIntegratedComplementary Source:Alter, Kim, Social Enterprise Typography. The Inter-American Development Bank, Washington, DC, 2003.

12. NESsT © NESsT - Not for circulation, duplication or use without permission from authors.www.nesst.org NESsT 12 Summary of Romanian Tax Treatment of CSO commercial activities Company profits tax Depends on Structure of Economic Activity Is activity Mission- related? Direct Economic Activity Separate Commercial Company YesTaxed on all profits, if revenue above EUR15.000 – at 16% At 16% on all profits NoSeparate for-profit company must be set up. At 16% on all profits VATOn all purchases VAT to be paid at standard national rate 19%, if turnover over EUR 35.000 + limited exemptions Customs dutiesOn all importsAt standard customs tariff rates

13. NESsT © NESsT - Not for circulation, duplication or use without permission from authors.www.nesst.org NESsT 13 Setting up a separate entity (ltd, srl) in Romania: Bioterra Mission: the Association of Organic Farmers of Romania, Bioterra, is a non profit organization, whose mission is to promote organic farming and food products in Romania and to provide training and support for small farmers who want to cultivate and produce organic agricultural products. Social enterprise: fee based consulting services on organic farming, organization of demonstration plot visits, publishing books and pamphlets. Expansion of services (agro-tourism, e-commerce) and growth of sales volume (passing 15.000 EUR revenue threshold) necessitates setting up SRL –Will pay 16% profit tax –Will be able to hire more staff with business skills –Will lessen burden of enterprise on program staff –Will maintain strong links to organization’s mission and programs

14. NESsT © NESsT - Not for circulation, duplication or use without permission from authors.www.nesst.org NESsT 14 Using legislation to aid SE, sheltered workshop: Motivation Foundation Mission: to create sustainable programs to increase the quality of life of people with disabilities of all ages in Romania Social enterprise: production and sales of wheelchairs and other mobility equipments; grant funded program till 2003, is now expected to provide 20% of total revenues although Motivation SRL incorporated in 2001 Model: –Separate economic entity - SC Motivation SRL –Third party payment system - contracts with county offices of the National Health Insurance Company This allows MRF to fulfill its mission and to generate self financing income for the nonprofit organization. 2006 legal provision provides incentives to potential employers to purchase products from sheltered workshops as an alternative to hiring people with disabilities Mission impact: in 2006 Motivation employed 45 full-time paid staff (a 60% increase over 2004) and served 927 beneficiaries (a 112% increase over 2004). The organization currently employs 74 full- time staff, of which 17 are wheelchair users.

15. NESsT © NESsT - Not for circulation, duplication or use without permission from authors.www.nesst.org NESsT 15 Legal framework for social enterprise in Romania - limitations Fiscal advantages for CSO/non-profit/public benefit organizations are limited. In Romanian legislation the concepts of public benefit organization and mission- related activities are not well-defined and leaves room for interpretation. There is little involvement from CSOs in policy-making and legislative process.

16. NESsT © NESsT - Not for circulation, duplication or use without permission from authors.www.nesst.org NESsT 16 Other ways public funds can help CSO economic activities –Guarantee schemes –Loan funds with soft conditions –Venture capital –Community Interest Tax Relief –Mandatory reduction in local authority tax – gov’t subsidizes local authorities –Using publics funds to open up markets, equip CSOs to enter them (e.g. pass on assets, tax breaks on investments into CSO social enterprises) Do these schemes exist in CEE? Would they make sense?

17. NESsT © NESsT - Not for circulation, duplication or use without permission from authors.www.nesst.org NESsT 17 Improving the legal framework in Romania; Recommendations Allow CSOs to directly engage in non-mission related economic activities Reform tax regime: eliminate (or lower) revenue threshold for profit tax for CSOs Expand VAT exemptions on CSOs comemrcial activities Introduce a uniform and clear concept of public benefit organization, specifying criteria, rights and obligations; provide tax incentives Increase CSO involvement in the legal drafting process.

18. NESsT © NESsT - Not for circulation, duplication or use without permission from authors.www.nesst.org NESsT 18 Thank you for your attention! Ana Negrila, Enterprise Development Manager for Romania anegrila@nesst.org Eva Varga, Enterprise Development Director, Europe evarga@nesst.org www.nesst.org