There are over 6,000 charities in Hong Kong, responsible for raising more than HK$8 billion dollars in the fiscal year 2008-2009. However, the charity sector lacks a comprehensive framework for the establishment and regulation of charities as compared to other overseas jurisdictions. On 16 June 2011, the Hong Kong Law Reform Commission published a Consultation Paper on Charities (“Consultation Paper”), proposing to follow leading overseas jurisdictions and to establish a new regulatory framework for charities in Hong Kong. We now examine how the Consultation Paper proposes to modernize the present laws applicable to charities.
What is a “charity”?
In Hong Kong, the term “charity” is often used interchangeably with “non-profit organization” or “non-government organization” (“NGO”). Based on 19th century English case law, an institution in Hong Kong is considered to have a charitable purpose only if it aims to :-
(a) relieve poverty;
(b) advance religion;
(c) advance education; or
(d) benefit the community in ways not envisioned in the above 3 categories.
The Consultation Paper proposes that there should be a clear statutory definition of what constitutes a “charitable purpose” and adds the following categories to the existing 4 listed above :-
(a) the advancement of health;
(b) the saving of lives;
(c) the advancement of citizenship or community development;
(d) the advancement of arts, culture, heritage or science;
(e) the promotion of religious or racial harmony;
(f) the promotion of equality and diversity;
(g) the advancement of environmental protection or improvement;
(h) the advancement of animal welfare; and
(i) the provision of relief to the needy, by reason of youth, age, illness, disability, financial hardship or other disadvantages.
The Consultation Paper further recommends an additional requirement that, regardless of the “charitable” category, the purpose must also be shown to benefit the public. This will remove the existing common law presumption that charitable purposes are by definition for the public’s benefit.
Mandatory Registration and Filing
Currently, there is no formal, established registration system for charitable organizations in Hong Kong and no centralized regulatory body monitoring charitable organizations and their fundraising activities. An entity recognized by the Inland Revenue Department as a charitable institution or trust of a public character is entitled to tax exemption, but this department is not responsible for registering charities or for monitoring their conduct.
To build public confidence and increase transparency of charities, the Consultation Paper proposes to establish a mandatory registration system. This centralized register would be opened to public inspection, so the public may at any time ascertain whether a particular organization is a charity or not.
The registered charities would also have new filing obligations. This includes submitting annual activity reports, financial statements and reporting potential conflicts of interests. Although this would burden charities with additional administrative work, it is hoped this will better hold charities more accountable towards their donors.
A New Charity Commission
The formation and conduct of a charity is presently governed by various regimes depending on its legal structure, tax exemption applicability and fundraising activities. For example, a corporate charity is regulated by the Companies Ordinance and other companies regulations, whereas approval for tax exemption is separately obtained from the Inland Revenue Department. Similarly, a flag day would require the Social Welfare Department’s permission, while on-street selling would involve a temporary hawker licence granted by the Food and Environmental Hygiene Department, and selling lottery tickets requires the Television and Entertainment Licensing Authority’s approval.
To simplify the myriad of compliance requirements, the Consultation Paper proposes setting up a new “charity commission” (“Commission”) to handle all charity-related matters. This Commission would enjoy a wide range of powers and responsibilities, including :-
(a) scrutinizing charity registration applications, maintaining the register and handling all filing matters;
(b) issuing the relevant permits and licenses for fundraising activities;
(c) investigating alleged misconduct by charities; and
(d) exercising limited sanction powers where there is misconduct, such as changing the charity’s management team or deregistering the charity.
According to the Consultation Paper, all tax exemptions and other tax matters will remain the responsibility of the Inland Revenue Department. Therefore, the tax advantages presently enjoyed by applicable charitable organizations would continue.
The Consultation Paper has received mixed reviews. Critics have advocated for the inclusion of human rights advancement as a separate ‘charitable purpose’ category, and some have raised concerns about the possible abuses of power by a centralized Commission. Nonetheless, as the initial consultation phase just completed on 31 October 2011, there will likely be further changes and consultations to the proposals. We will update clients on its development from time to time.
If you have any question on the above e-News, our lawyers will be happy to assist you with any queries you may have on the formation, compliance requirements and other issues on charities, trust and other form of profit or non-profit organizations.