Legal Environment for Endowments in Hungary

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

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

3. Nonprofit Sector Economy

4. 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%)

5. 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)

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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.

13. 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