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Establishing Charitable Organizations in Hong Kong



Charitable Organization


To be recognized as a charity, an organization must be established by law for wholly charitable purposes.


Definition of a Charity


To gain legal status as a charity, the institution or trust must be used exclusively for charitable purposes.


Charity in the legal sense includes four main parts: trusts for poverty alleviation; trusts for the promotion of educational development; trusts for promotion of religious beliefs; and trusts established for other purposes beneficial to community, which do not fall into any of the above.


As for other "community-beneficial" purposes, they range widely and include the following causes:


  • Protection of animals.

  • Protection of environment.

  • Promotion of health.

  • Promotion of equality and diversity.

  • Advancement of citizenship.

  • Promotion of racial harmony.


In practice, the Inland Revenue Department will insist that the purpose of the activity is for the benefit of Hong Kong, and if the benefit extends outside Hong Kong, the activity does not qualify as charity in Hong Kong. In addition, the following purposes do not qualify as charitable purposes under this heading:


  • Achievement of political goals.

  • Provision of recreational facilities.

  • Setting up a social fund for employees of a particular company or professional body.

Any charity or trust of a public character is exempt from tax and will be deemed to have remained tax exempt. In addition, donations to charities are deductible from income (for income tax purposes) as recognized charitable donations under sections 16D and 26C of the Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong).


Different Forms of Charitable Organizations and their Main Advantages / Disadvantages


A charitable organization can be one of the following forms:


  • A company limited by guarantee.

  • A society, usually registered under the Chapter 151 Societies Ordinance.

  • A charitable trust.


Company limited by guarantee


This form gives the entity a distinct legal personality (sometimes called a body corporate or legal person), and the company can hold assets and sue and be sued in its own name. The law treats an entity as a separate legal entity, distinct from the persons who form it or participate in it as members or directors. A company limited by guarantee has no share capital. Instead of shareholders, there are members who participate in the company like shareholders, but the articles of association generally prohibit the company from distributing company assets or income to members in dividends, bonuses, remuneration, or any other forms.


One of the disadvantages of forming a company is the costs involved in setting up and maintaining a company. A company's financial statements must be audited annually, while the accounts of a company limited by guarantee must be filed with the Companies Registry along with its annual return. These accounts would therefore be subject to public scrutiny, but this increases the accountability of those who manage the company's assets.


The Companies Ordinance will apply to any company incorporated in Hong Kong, including charities. The articles of association of a charitable institution incorporated in the form of a company must be registered and the company name must contain the word "Limited", unless a specific exemption is obtained under section 103 of the Companies Ordinance.


Society


Charities that take this form are usually formed by a group of people who associate themselves according to a set of rules and give themselves a unique name. The advantage of organizing themselves this way is that the rules (often called their constitution among members) can be tailored to suit their particular situation. Compared with other forms of philanthropy, societies are much cheaper to set up and manage, and have relatively less control over how they operate. However, the operations of members will be restricted as the society is not a separate legal entity and therefore cannot enter into contracts and cannot sue or be sued. Individual members often have to assume responsibility as agents. In addition, society is sometimes perceived as lacking in accountability. Because the identities of society members cannot be easily verified against public registries by people other than members, donors may be concerned about the accountability of societies in handling donations they receive.


Promoters of societies in Hong Kong should register under the Societies Ordinance (Chapter 151 of the Laws of Hong Kong). This is administered by the Hong Kong Police Force and they will provide the prescribed form by way of application to the Societies Officer for registration as a society, or an exemption from registration. The Societies Officer keeps a list of all societies, which is available for inspection (free of charge), and he has the right to require any society to provide him with information in writing on the performance of his functions under the Ordinance.


Charitable trust


It is a form of property ownership in which control of the property and benefit of the property are separated, legal title and control are vested in trustees, and law of equity enforces them to exercise this control for the benefit of the charity. The trustee has a fiduciary duty to act in the best interests of the beneficiaries of the trust and must ensure that assets are properly protected. Like societies, charitable trusts can contain provisions tailored to the specific needs of those involved and can be relatively private. To overcome the problem of inability to identify trustees to outsiders, trusts can (but need not) be registered with the Companies Registry under the Registered Trustees Incorporation Ordinance (Chapter 306 of the Laws of Hong Kong). The Ordinance facilitates the establishment of trustees appointed by certain bodies, associations and communities of individuals and allows trustees of charities to make provisions for purposes relating to the charity. Once registered, the trust will hold a certificate of incorporation granted by the Registrar of Companies and the trustees and their successors will become a body corporate and may sue and be sued in the name named on the certificate. The Registrar of Companies maintains a register which is open to public inspection for the purpose of ascertaining the names of individual trustees.


The laws governing fiduciary duties of trustees, including the statutory duties contained in the Registered Trustee Incorporation Ordinance, mean that all charitable trusts (whether registered or not) have a stricter standard of care. All trustees are responsible for their actions, receipts and any neglects and/or defaults, and must properly maintain the trust and the administration of the trust property.


To establish a valid charitable trust, there must be a written document setting out the terms of the trust. Hong Kong's trust law system is based on common law and principles of equity, supplemented by local legislation.


It's worth noting that the Inland Revenue Department will require all purposes of these organizations to be exclusively charitable, and generally prohibits anyone involved with the organization from receiving remuneration. The organization must also prohibit the distribution of any surplus or assets of the organization to its members.


The main disadvantages of charitable status are the aforementioned reporting obligations and the cost of administering the entity. However, an important benefit of having charitable status is that the organization is generally not subject to Hong Kong tax and those who donate to it can claim the amount of the donation as a deduction against their taxable income for Hong Kong tax purposes.


Main Regulatory Authorities for Charitable Organizations


Charities are required to obtain permission from the Social Welfare Department before they can conduct fundraising activities in public places. For example, if a charity wishes to solicit donations in a public place, it will need to obtain a public subscription permit under section 4(17)(i) of the Summary Offenses Ordinance (Chapter 228 of the Laws of Hong Kong). The permit will contain information about the dates and location of the approved fundraising activity, as well as the charity's name and permit number.


Many charities raise money by selling flags or small paper tokens. The Social Welfare Department regulates the event so that the flag-selling activities could be carried out in an orderly manner on the designated date.


To host a sweepstakes or lottery, a charity needs a license from the Television and Entertainment Licensing Authority. The permit will contain the terms of the sweepstakes or lottery, including the time period during which the sweepstakes/lottery will be held, and the charity must report the income generated by the event and the expenses incurred by the event to the Television and Entertainment Licensing Authority.


Charitable organizations wishing to engage in street hawking activities are required to hold a temporary hawker license issued by the Food and Environmental Hygiene Department. The license will specify:


  • Approved event times.

  • The name of the charity.

  • Approved locations for sale of items.

  • The main item that will be sold.


Requirements of Persons Managing Charitable Organizations


There are no specific eligibility requirements to serve as a trustee or director of a charity. However, if the charity is formed as a company limited by guarantee, the age limit for directors in the Companies Ordinance (Chapter 622 of the Laws of Hong Kong) (directors must be at least 18 years of age), as well as disqualification provisions (for example, bankrupt individual disqualified from acting as a director) will apply.


In general, trustees or directors are not permitted to receive any form of remuneration for serving on the charity's governing board. There may be some exceptions (e.g. the principal of the school who is also a member of the school's Incorporated Management Committee (IMC)) which must be approved by the Inland Revenue as part of the application for charitable status, but for any decision touching such a paid member, the member must recuse himself and not participate in the decision-making process. In all cases, the number of paid trustees or directors on the governing board must be a minority of the total membership.


Taxation of Charities and Exemptions and/or Reliefs from Taxation


Under section 88 of the Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong), the Inland Revenue Department will grant tax-exempt status to charitable organizations or charitable trusts. However, only charities within the jurisdiction of the Hong Kong courts are exempt from taxation.


A charity may carry on a trade or business and still be entitled to tax exemptions, provided it complies with the conditions set out in the proviso to section 88. These conditions include the following:


  • Profits from the trade or business must be used for charitable purposes only.

  • Profits must not be substantially expended outside Hong Kong.

  • Either:

the trade or business is carried on in the course of furthering the stated aims of the charity; or

Work in connection with the charity's trade or business is primarily carried out by the beneficiaries of the charity's establishment.


Taxation Benefits for Donors to Charities


Taxpayers may deduct any approved charitable donations from their assessable profits or chargeable income for the year of assessment under section 26C of the Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong). Section 16D of the Ordinance also allows approved charitable donations made by taxpayers subject to profits tax to be deducted from profits taxable income.


Registration Formalities to Operate an Overseas Charity in Hong Kong


A charity incorporated overseas may establish a place of business in Hong Kong but must be registered under Section 776, Part 16 of the Companies Ordinance (Chapter 622 of the Laws of Hong Kong). The establishment may acquire charitable status if it complies with section 88 of the Inland Revenue Ordinance. Registration must be made within one month of establishment of the place of business, and the application will require identification of an "authorized representative". The term "authorized representative" means one of the following:


  • A natural person resident in Hong Kong.

  • A corporation of solicitors as defined in section 2(1) of the Legal Practitioners Ordinance (Chapter 159 of the Laws of Hong Kong).

  • A corporate practice as defined in section 2(1) of the Professional Accountants Ordinance (Cap. 50 of the Laws of Hong Kong).

  • A firm of practicing solicitors or certified public accountants authorized to accept service of any processes or notices required to be served on the non-Hong Kong company on behalf of the registered non-Hong Kong company.


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