The Legal and Regulatory Framework for CSO Self-financing in Romania

This publication was made possible through supportfrom the European Center for Not-for-Profit Law(ECNL) through funding provided by World Learningand the U.S. Agency for International Development(USAID), under the terms of Award No. 186-A-00-05-00103-00. The opinions expressed herein arethose of the authors and do not necessarily reflectthe views of USAID or ECNL.

This publication contains information prepared bysources outside NESsT, and opinions based on thatinformation. NESsT strives to provide accurate infor-mation and well-founded opinions, but does notrepresent that the information and opinions in thispublication are error-free. The laws and regulationscited herein may change regularly and NESsT doesnot undertake to update this publication. This publi-cation is for informational purposes, and NESsT isnot engaged in providing legal advice. As legaladvice must be tailored to the specific circumstancesof each situation, the information and opinions pro-vided herein should not be used as a substitute forthe advice of competent counsel.

NESsT wishes to thank Simona Constantinescu andOctavian Rusu of the Civil Society DevelopmentFoundation for their contribution to this guide.

For more information on NESsT, its publicationsand services, please contact: NESsTJosé Arrieta 89, Providencia Santiago, Chile. Tel: +(56 2) 222-5190 [email protected]

The Legal and RegulatoryFramework for CSO Self-financing in Romania

This guide examines the legal and regulatory framework that governs the use of

“self-financing” (i.e., income-generating, commercial) activities of civil society

organizations (CSOs) in Romania and provides an assessment of the relevant law

and its practical effects in order to identify areas where the law might be

improved. In Chapter 1, the guide explains the importance of understanding the

regulatory environment as it relates to self-financing, defines the concept of CSO

self-financing, and explains the methodology used by NESsT in researching and

assessing the legal framework in Romania. Chapter 2 outlines a generally-accept-

ed typology initially developed by the International Center for Not-for-Profit Law

(ICNL) for evaluating the legal framework that regulates CSO self-financing.

Chapter 3 presents the current regulatory framework and its application in

Romania. The chapter illustrates that CSO self-financing activities are permitted in

Romania if they are mission-related; otherwise a separate legal structure is neces-

sary to conduct commercial activities. Finally, in Chapter 4, five criteria are

applied to critique the Romanian legal framework, assess its current strengths

and weaknesses, and make recommendations for improvement.

Romania August

2007

Nonprofit Enterprise and Self-sustainability Team (NESsT)

NESsTLegalSeries English

Copyright © 2007 ECNL & NESsT. Do not cite, copy, distribute or duplicate without prior writtenpermission from NESsT. http://www.nesst.org

Written and edited by Loïc Comolli, Nicole Etchart, and Eva Varga

Nonprofit Enterprise and Self-sustainability Team (NESsT)

The Legal and Regulatory Framework

for Self-financing in Romania

August 2007

The International Center for Not-for-Profit Law

(ICNL) provided the typology for classifying the use of

economic or commercial activities among CSOs and the

framework for assessing the Croatian legislation.

Piera Lombardi and Jose Neira of Tesis provided the

design and layout of the guide.

Finally, NESsT wishes to recognize and thank the Staples

Trust, one of the Sainsbury Family Charitable Trusts in

London, for the generous support that made this

research and publication possible.

Nicole Etchart and Lee Davis

Co-Founders & CEOs

NESsT

January 2006

2

NESsT wishes to acknowledge the following

individuals and institutions for their invaluable

contribution to the development and publication of

this guide.

NESsT

The term “civil society organization” (CSO)encompasses the wide diversity of not-for-profit,non-state organizations as well as community-based associations and groups that fall outside therealm of the government and business sectors.Given the limited philanthropic and governmentassistance available, many CSOs undertake self-financing to generate revenues in support of theirmission and programs.

NESsT has documented hundreds of CSOs inLatin America and Central Europe that engage inthese types of activities and has analyzed theimpact of these strategies on the organizations’performance and sustainability. An important fac-tor that emerged from these investigations is theneed for a clear and supportive legal and regula-tory framework to foster the adoption of self-financing strategies among CSOs. This frameworkdefines whether CSOs can or cannot engage inself-financing activities and influences the circum-stances under which and the degree to which theywill do so. In addition, the tax structure, the levelof bureaucracy, and the clarity of the applicablelegal rules have a direct bearing on the use of self-financing activities. CSOs are often unaware of

3

Setting the Stage:

Purpose and Methodology

The Legal and RegulatoryFramework for Self-financingin Romania

Chapter 1

these rules. Many believe that they cannot prac-tice self-financing; others feel that if they do, itwill damage their public image or their relationswith donors. Even when CSOs are aware of therelevant legislation, they often do not understandwhat taxes they need to pay, what forms to file, orwhat procedures to follow. In Romania, self-financing activities by CSOs remain a rare prac-tice, partly because of the lack of capacity andentrepreneurial spirit on the part of the CSOs,but in part also because of the lack of a clearinterpretation of the legal framework which, inprinciple, allows CSOs to engage in commercialactivities.

Romanian legislation encompasses a variety oftypes of CSOs engaging in activities aiming toachieve general or common interest. Theyinclude associations, foundations, and federations(with the former two having the option to begranted public benefit status). This guide willattempt to clarify the legal framework faced byRomanian organizations, focusing on associationsand foundations, which constitute the bulk ofRomanian civil society. The guide will, then,assess the degree to which this framework pro-vides an enabling environment for these organiza-tions to pursue self-financing strategies.

1.1. What Is Self-financing and Why Is ItImportant?

Self-financing strategies are used by CSOs to gen-erate revenues in support of their missions. Theuse of self-financing is a response to the currentfunding paradigm in which CSOs compete for alimited pie of existing government and philan-thropic resources from both national and interna-tional sources. This reality makes many CSOsheavily dependent on short-term, project-basedfunding and prevents them from focusing atten-tion on the long-term, strategic development oftheir organizations. Through self-financing, CSOsmay be able to increase their long-term viability

and independence by generating some of theirown resources to supplement support from publicand private donors.

Self-financing need not lead to the commercial-ization of CSOs. Rather, self-financing can provideCSOs with a greater level of independence andsustainability without compromising their missionobjectives or values. Self-financing income can beone alternative for CSOs to support work that isoften difficult to finance through traditionalsources of funding (e.g., core operating expenses,new programs, advocacy efforts). NESsT does notargue that CSOs should entirely replace their tra-ditional sources of funding with self-financing,but instead posits that self-financing can provide apowerful complement to government and philan-thropic support. Through self-financing, manyCSOs are not only financially strengthened, butalso institutionally empowered by their ability togenerate new revenues and to determine thecourse of their work with fewer constraints fromfunders.

Furthermore, when pursued in a socially and envi-ronmentally responsible manner, the enterpriseactivities of CSOs can help create an “alternativeeconomy” more responsive to the needs of localcommunities, small producers and low-incomepeople. By purchasing products and services soldby CSOs, consumers are simultaneously promot-ing the mission of CSOs and contributing to amore equitable and sustainable world.

The types of self-financing activities include thefollowing:

• Membership fees: raising income throughdues from members or constituents of theorganization which is considered a fee forsome kind of product, service, or other bene-fit provided by the CSO to its membership.

• Fees for services: capitalizing on some exist-ing skill or expertise of the organization by



August 2007

Chapter 1

4



August 2007

Chapter 1

5

contracting work to paying clients in the pub-lic or private sector (e.g., a CSO providesconsultation services to businesses or localgovernment).

• Product sales: selling, rather than giving away,the products of CSO projects (e.g., books orother publications); reselling products (e.g.,in-kind donated items) with a mark-up; orproducing and selling new products (e.g., T-shirts, mugs).

• Use of “hard” assets: renting out CSO realestate, space/facilities, equipment, etc. whennot in use for mission-related activities.

• Use of “soft” assets: for example, generatingincome from license of CSO-held patents orother intellectual property, or by endorsingproducts with the CSO name/reputation.

• Investment dividends: passive investmentssuch as savings accounts and mutual funds,or other more sophisticated financial transac-tions (e.g., active trading on the stock mar-ket).

CSOs engage in self-financing activities primarilyto strengthen their financial resources, to advancetheir social mission, or both. On the one hand, aCSO may be purely interested in generating prof-its that it can use to fund its core mission pro-grams. In these instances, the organization is notconcerned with advancing its social missiondirectly through the self-financing activity, butrather indirectly by applying the revenues fromthe activity to further its social mission. An exam-ple of this is a health education organization thatstarts a printing press and uses the revenues tofund the organization’s research projects. Thisactivity would be considered non-mission-related.

On the other hand, a CSO may be primarily inter-ested in using a self-financing strategy to advanceits social mission. For example, a CSO whose

social mission is to offer carpentry training andjob placements to recovering substance abusersmay begin selling the furniture that the traineesproduce in order to pay for the costs of materialsand the salaries of the trainees. This activity wouldbe considered mission-related.

Yet these examples are not mutually exclusive –and neither are the financial and social goals thatmotivate CSOs engaging in self-financing activi-ties. Many times, CSOs aim to achieve financialand social goals simultaneously through a self-financing activity. The health organization may bebetter positioned to disseminate the findings fromits research by publishing its own materials, andthe job training organization may be able to applysurpluses from its furniture sales to fund otherprograms of the organization or its core operat-ing expenses. In each of these scenarios, theobjectives of CSO self-financing activities and therelation of these activities to the organization’sprimary mission strongly influence the success ofthe activities and may play a role in determiningthe legal treatment of these activities, as thisguide will illustrate.

1.2. Purpose and Contents of This Guide

In an attempt to diversify their funding base, anumber of Romanian CSOs have initiated self-financing strategies. For the most part, however,they have done so with little know-how, capital orother forms of support. NESsT research on theuse of self-financing among CSOs in Romaniademonstrates that many of them have limitedinternal capacity (i.e., staff skills and time, ade-quate financial resources, business plans) or theexternal support (i.e., financing, consulting sup-port, favorable legal/regulatory environment) toengage in self-financing activities. When suchorganizations nevertheless attempt to pursue self-financing strategies, they have to deal with arange of legal, financial, management and organi-zational issues for which support is not readilyavailable. If CSOs decide to pursue self-financing



August 2007

Chapter 1

The ICNL typology is presented in Chapter 2;Romania’s legislation is analyzed in the context ofthis typology in Chapter 3; and the five criteria ofthe typology are used as a basis for the assess-ments and recommendations offered in Chapter 4.

1.3. Background and Methodology

This guide is a component of NESsT’s efforts tofoster self-financing among CSOs in Romania. In1997, NESsT began conducting applied researchon CSO self-financing in Central Europe in orderto identify the typical challenges and needs in theregion. The objectives of the applied researchwere as follows:

• To assess the current use of self-financingactivities among CSOs in Central Europe.NESsT completed case studies documentingsuccesses and obstacles in CSO self-financingactivity in four Central European countries:Hungary, Slovakia, Czech Republic andSlovenia.

• To examine the current legal environmentfor CSO self-financing in the region overall,including the regulatory and tax frameworkin place at local and national levels thataffects the self-financing activities of CSOs.

• To disseminate lessons from the research – bypublishing case studies and legal guides andby organizing local workshops – for stake-holders from all sectors in an effort to devel-op strategies for assisting CSOs in the use ofself-financing.

In 2005, NESsT updated the research in thesefour countries and also conducted a similar assess-ment in Croatia as part of its strategy to expandits work to that country.

In 2007, such research was conducted inRomania. It was conducted using a methodologydeveloped by NESsT to evaluate the legal environ-

6

activities, it is important that they do so with theappropriate types and levels of technical andfinancial assistance and within an enabling exter-nal environment.

The pressures and demands faced by CSOs engag-ing in self-financing activities highlight the needto understand the legal environment affectingthem in Romania. In this context, the purpose ofthis guide is twofold:

A. To outline key laws, regulations and proce-dures governing the use of self-financing byCSOs in Romania. Chapter 3 explains whatRomanian law says about the use of self-financing and discusses the administrativeand tax regulations that apply to CSOs engag-ing in such activities. It also explains the pro-cedures – forms that must be completed andfees that must be paid – required to initiatesuch activities. It offers a general overview ofthe relevant laws and regulations, so thatRomanian CSOs have an idea of where theyfit within the legal system and what they haveto do if they wish to undertake self-financing.

B. To assess the relevant laws governing CSOself-financing in Romania, to evaluate theirpractical effects and to identify areas wherethe law might be improved. This guide iden-tifies the strengths and weaknesses ofRomanian laws – whether they help or hin-der the use of self-financing, and whetherthey foster the development of the sector as awhole. The legislation is considered within atax treatment typology that makes it easier tounderstand and assess.

The typology was first developed by theInternational Center for Not-for-Profit Law(ICNL) to examine the legal treatment of CSOeconomic/commercial activities in Central andEastern European countries; it has now become awidely accepted typology for understanding andassessing the tax treatments of such activities.



August 2007

Chapter 1

ment for CSO self-financing activity in a particularcountry. The following four areas were consid-ered:

A. What the law states. What is the current legaltreatment of CSO self-financing activities(including current legislation, legal provi-sions, history of the law, revisions of the law,regulatory approach, tax rates, reportingrequirements, other laws and regulations,legal cases, and organizations or lawyers pro-viding service or assistance)?

B. How is the law understood. Are the regula-tions of CSO self-financing activities under-stood by CSOs?

C. Effects of the law. What is the effect of cur-rent regulations on CSO self-financing activi-ties?

D. Recommendations for the law. What are themost important recommendations foraddressing current regulatory problems?

The research encompassed extensive interviewswith Romanian attorneys with a deep understand-ing of nonprofit law and Romanian CSOs engag-ing in commercial activities to assess their viewson the topic as well as an analysis of relevant laws,and a review of related literature. The guide wasthen reviewed by lawyers with extensive expertiseof the Romanian regulatory framework for CSOs.

7

9

Presenting a Typology

for Assessing the Legal and

Regulatory Framework

Chapter 2The Legal and RegulatoryFramework for Self-Financingin Romania

This chapter presents a typology for analyzing thelegal rules that govern CSO self-financing activi-ties. The typology was developed by theInternational Center for Not-for-Profit Law(ICNL). NESsT has expanded and modified it tomake it more applicable. The following sectionpresents four key areas that are vital for under-standing the legal structure for CSO self-financingbefore assessing the specifics of Romania: 1) thelegal characteristics of CSOs, 2) the legal defini-tion of self-financing, 3) the criteria for permit-ting self-financing, and 4) the taxation of self-financing activities.

It is important to note that in its texts, ICNL usesthe term “nonprofit organizations” or “NPOs,”which refers to a subgroup of the broader classifi-cation of “CSOs,” the term used by NESsT. Whilethe term “CSO” encompasses registered NPOs, italso includes community-based associations andgroups. This guide uses the term “CSO,” exceptin parts that specifically draw upon the ICNLtypology, where it maintains the original ICNLterminology. Romanian laws make reference tothe term “association” (asociatie) and “founda-tions” (fundatia), which are consistent with thebroad scope of organizations encompassed by theterm “CSO.”

2.1 Legal Characteristics of NonprofitOrganizations

These characteristics highlight the key differencesbetween nonprofit and for-profit organizationsand therefore provide a context for understand-ing how NPOs engage in self-financing or com-mercial activities. The discussion that follows inthis chapter and the rest of the guide addresses asubgroup of all NPOs – those whose not-for-profitpurposes are intended to promote the public ben-efit. While NPOs pursuing the public benefit rep-resent a large subgroup of all Romanian NPOs, itis important to recognize that some NPOs, suchas mutual associations of stamp collectors or chessplayers, may not pursue these goals. These organi-zations are still considered NGOs and generallythe same regulations apply, but this guide willaddress only those NGOs that pursue the publicbenefit. However, there is no fixed way of deter-mining what constitutes the public benefit, andwhile Romanian laws make mention of publicbenefit organizations (PBOs) the concept remainsvague and very few Romanian NGOs fall underthis status. ICNL also makes this distinction, andits typology accordingly identifies two basic legalassumptions that distinguish public benefit NPOsfrom for-profit entities:

1. Non-distribution constraint. Although NPOsare not prohibited from generating profits,these profits may not be distributed to privateparties who might be in a position to controlthem for personal gain, such as founders,members, officers, directors, agents, employ-ees, or any related party.

2. Public-benefit purpose. By definition, thisclass of NPOs is organized and operated pri-marily to provide a public benefit.

These characteristics are not primarily dependenton the particular legal form of the NPO.Accordingly, this discussion addresses NPOs regis-tered as associations and foundations as long as

10



August 2007

Chapter 2

they provide a public benefit and uphold theprinciple of non-distribution.

2.2 Legal Definition of Self-financing

There are many terms and definitions, both legaland non-legal, currently in use to describe activi-ties that generate revenues for CSOs (e.g. com-mercial activity, economic activity, nonprofitenterprise, social enterprise, social-purpose busi-ness, earned income, income-generating activity).ICNL uses the term “economic activity” to refer toself-financing activity. ICNL defines economicactivities as “regularly pursued trade or businessactivities,” with the exception of those that havetraditionally been excluded (i.e., ticket sales forcultural events, tuition fees at educational institu-tions, and patient fees at nonprofit hospitals).NESsT, on the other hand, uses the term “self-financing” to refer to activities that generate rev-enues for the CSO, including the six types ofactivities described in the previous chapter. InRomania, the terms “self-financing,” “economicactivities,” and “commercial activities” are usedinterchangeably to indicate both mission-relatedand non-mission-related activities undertaken byCSOs for revenue-generating purposes.

2.3 Criteria for Permitting Self-financing

According to ICNL, “a threshold issue is theextent to which NPOs should be permitted toengage in economic or commercial activities with-out losing their not-for-profit status.” At this stageof the analysis, the question is not whether suchactivities should be tax-exempt, but under whatcircumstances they should be permitted at all.

In countries where NGOs are permitted toengage in commercial activities – NESsT arguesthat the prohibition of NGO commercial activi-ties is against good regulatory practice since itlimits the sustainability of the sector – thereare two typical tests used by governmentsaround the world for determining whether eco-



August 2007

Chapter 2

11

nomic activities are “nonprofit” or “for-profit”:

1. Principal-purpose test. The principal purposetest provides one legal model for regulatingNPO self-financing. It does not prohibit theuse of self-financing activities, but ratheremphasizes that the NPO is established andoperated primarily for not-for-profit purposesand not for private gain. The test implies thatself-financing would be for mission-related,not-for-profit purposes and/or would not bethe principal activity of the organization.Examples of principal-purpose test condi-tions typically found in government regula-tions include that: economic activities do notmake up the primary (i.e., main activity) pur-pose of the NGO; economic activities areaccessory (or additional) activities; economicactivities are related to statutory objectives.

2. Destination-of-income test. Contrary to theprincipal-purpose test, the destination-of-income test, in its pure form, ignores the eco-nomic or commercial nature of the activity inquestion and focuses exclusively on the pur-poses for which profits from the activity areused. Under this test, an organization mustdevote all of its income to its not-for-profitpurposes in order to qualify as an NPO.Accordingly, an organization that spends 99%of its time pursuing commercial endeavors,spends 1% of its time undertaking public-benefit activities, and devotes all of its profitsto these public-benefit activities could stillqualify as an NPO. An example of destina-tion-of-income test condition is that incomefrom economic activities is used to supportthe mission goals of the organization and isnot distributed as profit.

Under either test, an NPO is permitted to engagein economic activities that further the not-for-profit purposes for which it is organized. It shouldbe noted that governments can – and sometimesdo – use a combination of conditions under the

principal-purpose and destination-of-income teststo determine whether NGO commercial activitiesare permitted. For example, a government mayonly permit mission-related NGO commercialactivity (relating to the principal-purpose test)and require that income from the commercialactivity be used for mission activities (destination-of-income test). But what justification is there forgovernments to permit NPOs to conduct self-financing activities? There are two main publicpolicy rationales for permitting NPOs to engagein such activities:

A. Self-financing applies non-public resources tothe public good. Income from economicactivities is a primary source of funds forNPOs (particularly in countries in transition,where there is an absence of private capitaland philanthropic tradition) and enablesthem to do their public-benefit work with lessdependence on governmental support andcharitable donations.

B. Self-financing accomplishes public-goodobjectives. Certain economic and commercialactivities directly accomplish public-benefitpurposes. For example, although the sellingof a book on teaching techniques by an edu-cational organization is an economic activity,the distribution of the book directly servesthe public-benefit purpose of promoting edu-cation. Preventing NPOs from using suchcommercial and economic means to attaintheir goals could directly impair their abilityto serve public-benefit purposes.

2.4 Taxation on Self-financing Activities

While the legal treatment of CSO self-financingvaries on a practical level from country to country,most have ruled out polar extremes (i.e., a com-plete prohibition against economic activities orallowing economic activities to be the principalactivity in the organization). Beyond this decision,the issue becomes the tax treatment of such activi-

ties. Governments have typically employed fourapproaches, singly or in combination, to deter-mine the tax treatment for CSO self-financingactivities:

1. Blanket tax. A blanket tax policy taxes incomefrom all economic activities, regardless of thesource or destination of the income. Underthis approach, the organization is not limitedby level or type of activity, but is taxed for allrevenues generated through these activitiesregardless of how these revenues are used.

2. Destination-of-income tax. A destination-of-income tax policy exemptsincome from economic activi-ties that is used for public-benefit purposes. Under thisapproach, the organizationis not limited by level or typeof economic activity, but istaxed on all income that isnot used to further its public-benefit purposes. The destina-tion-of-income tax should notbe confused with the destination-of-incometest. The test is used to establish that CSOsmay conduct eco-nomic activitieswithout compromis-ing their nonprofitlegal status as longas any revenues aredestined to theorganization’s mission. The destination-of-income tax, on the other hand, focuses solelyon the tax treatment of nonprofit organiza-tions.

3. Source-of-income tax (or relatedness test). Asource-of-income tax policy focuses on thesource of income, granting a tax exemptiononly when the income results from activitiesthat are related to the public-benefit purposesof the organization. Under this approach, theorganization is taxed for all income generated



August 2007

Chapter 2

from non-mission-related activity even if theincome is used to support mission-relatedactivities.

4. Mechanical tax. A mechanical tax policymakes a rigid distinction based on fixed crite-ria in order to determine the differencebetween economic activities that are taxedand those that are not. An example of amechanical test is an exemption ceiling (i.e.,an income level below which economic activi-ties are tax-exempt and above which they aretaxable).

Some governments have created hybridtax policies that are based on two or

more of these approaches. For exam-ple, it is possible to allow netincome from economic activity to

be tax-exempt below a specifiedthreshold and to apply a mission-relatedness mechanical test to deter-

mine whether net income above thatthreshold should be taxed.

CSOs in Romania are explicitly permitted toengage in commercial activities, in line with the

non-distribution con-straint. They are onlyallowed to engage directlyin mission-related activi-ties, and can engage innon-mission-related com-mercial activities only by

setting up a separate, for-profit entity. As the fol-lowing chapter will discuss, CSOs are exempt fromtaxes on profit generated from their economicactivities up to a certain income level. Above thislevel, CSO income is taxed at the regular corpo-rate profit tax rate. In this respect, CSOs are taxedon profit from their economic activities using amechanical tax. For separate, legal entities estab-lished by CSOs to conduct commercial activities,profit is taxed regardless of the activity and on allincome levels, and therefore these entities aretaxed using a blanket tax.

12

Governments have typically employed

four public policy approaches, singly or in

combination, to determine the tax

treatment for CSO self-financing activities.



August 2007

Chapter 2

13

There is no consensus regarding which of thesetax approaches is best, since each entails certainbenefits and costs and defines a different publicpolicy objective. ICNL applies four criteria (adapt-ed by NESsT) to shed light on the practical impli-cations of each approach.

A. Complexity of administration and practicalimplementation issues. Blanket taxation of alleconomic activity is the simplest approach toadminister and implement – once economicactivities are defined. NPOs are treated thesame way as for-profit organizations. The des-tination-of-income rule is slightly more com-plex to administer and implement. The maindifficulty is establishing and enforcing crite-ria for what constitutes an expenditure in fur-therance of public benefit purposes and tosupervise the actual use of profits.

Nonetheless, it is still necessary to monitorNPOs and their use of funds, and this “polic-ing” function may prove to be administrative-ly difficult. Moreover, this approach creates agreater potential for abuse by unscrupulousindividuals seeking to use NPOs as vehiclesfor tax evasion. A relatedness test is the mostcomplicated to apply because it is difficult tospecify the necessary connection between theeconomic activity and the public-benefit pur-poses. This approach tends to work bestwhen developed over time through adminis-trative practice. On the other hand, this relat-edness approach is the most likely to keepNPOs focused on economic activities thatalso benefit the public good.

B. Effects on revenue collection. Assuming thetax rates under the various treatments areequal, the largest potential tax revenue isgenerated using the blanket taxationapproach, since it subjects the greatest num-ber of NPO self-financing activities to taxa-tion. However, empirically, it is unclear howmuch tax would in fact be collected, because,other things being equal, the level of com-

mercial activity by NPOs will presumably belower under this rule than under the others(because taxation provides a disincentive forNPOs to initiate commercial activities).

In its purest form, the destination-of-incomerule has the lowest potential to produce taxrevenue because all income from whateversources is free from tax if it is applied to per-formance of public-benefit purposes. In prac-tice, many countries impose limits upon theamount of income that is exempt under thedestination-of-income rule, thus limitingpotential losses to the state’s revenue base.The mission-relatedness test also potentiallyreduces the size of the tax base, but probablyless so than the destination-of-income test,because the former has the effect of channel-ing NGO economic activity into specific areasthat produce public benefit.

C. Effects on the commercial sector. The blan-ket taxation approach to NPO income fromeconomic activities is most favorable for thecommercial sector, since there is no possibili-ty of “unfair” or prejudicial competition (i.e.,NPOs do not receive preferential tax treat-ment compared with their for-profit peers).The destination-of-income rule, in its purestform, does nothing to prevent claims ofunfair competition, since the nature of theuse of income may give NPOs a tax advantagethat their for-profit competitors do not share.Naturally, a limit on this benefit reduces thecomparative advantage for NPOs. The mis-sion-relatedness test minimizes unfair compe-tition by encouraging NPOs to focus on activ-ities that produce a public benefit and byapplying the standard tax treatment used forfor-profit enterprises when NPO activities areconducted purely for profit. The difficulty inimplementing this mission-relatedness rulelies in establishing which economic activitiesadvance the public benefit and which do not(or which do not advance it enough).

14

D. Effects on the development of the NPO sec-tor. The blanket taxation approach reducesresources for the nonprofit sector, essentiallytransferring money away from NPOs and intothe governmental sector. It is generallyaccepted that NPOs devoted to public-benefitpurposes, if not eligible for state subsidies,should at the very least not be required totransfer resources to the state (in the samefashion as for-profit enterprises). Blanket tax-ation of all NPO income from economicactivities eliminates the incentive to engagein income-generating, public-benefit activitiesand is most unfavorable to the nonprofit sec-tor. At the very least, NPO proponents claim,such taxes should be at a lower, preferentialrate than taxes for for-profit enterprises.

The destination-of-income rule provides thegreatest potential revenue to NPOs, since vir-tually any income can be made tax-exempt ifchanneled into public-benefit activities. Themission-relatedness test is less favorable toNPOs because activities that are undertakenpurely to obtain revenue enjoy no tax exemp-tion. However, the mission-relatedness teststill provides significant tax benefits forNPOs, particularly when they focus on activi-ties associated with public-benefit purposes.Moreover, the relatedness test channels NPOeconomic activities into more socially benefi-cial directions than the destination-of-incometest, which encourages NPOs to engage ineconomic activities that can earn the greatestpotential financial return.



August 2007

Chapter 2

15

Overview of Framework


The Romanian legal framework explicitly permitsCSO commercial activities as long as they are mis-sion related. CSOs wishing to engage in non-mis-sion related commercial activities have to set up aseparate, for-profit entity. The legal frameworkdoes not particularly promote CSO commercialactivities since both mission-related and non-mis-sion-related activities are regulated in the sameway that for-profit commercial activities are regu-lated. Moreover, Romanian legislation recognizesthe concept of public benefit are organization butthe definition remains vague and the benefits notwell-defined. A more precise legislation wouldgreatly aid in establishing an enabling environ-ment for the civil sector.

3.1 General Regulations for CSOs

CSOs in Romania are regulated by theGovernment Ordinance on Associations andFoundations, GO 26/2000, adopted in January2000, and modified and put into law in 2005 bythe Law on Associations and Foundations (No.246/2005). GO 26/2000 was further modified in2003 by Government Ordinance 37/2003, but GO37/2003 was later abrogated in part because of aproposed, new registration process that would

have required that the appropriate ministry signoff on an organization’s application before itcould be approved.1

GO 26/2000 replaced the previous law on associa-tions and foundations from 1924 (Law No. 21 forLegal Persons (Associations and Foundations) ofthe 6th of February 1924). Some changes betweenthe 1924 law and 2000 ordinance included theelimination of the required authorization (“aviz”)from the competent ministry during the pre-judi-ciary phase, the provision of clear deadlines dur-ing the entire registration procedure, a reductionin the number of members required to form anassociation (further reduced under 246/2005),and minimum asset levels to register the CSO.Moreover, GO 2000 mentioned for the first timethe concept of public benefit organizations.2 The2000 ordinance also provided associations andfoundations more independence from govern-ment oversight.3

According to Romanian law there are three typesof CSOs: associations, foundations, and federa-tions. These three types of organizations are com-monly referred to as “non-profit organizations” inRomanian legislation,4 though some laws also use“nongovernmental organizations” or “civil societyorganizations.”5

An association is defined as “a subject of law con-stituted of three or more persons who, on thebasis of an agreement, share, without being enti-tled to restitution, their material contribution,their knowledge and their lucrative activity, inorder to accomplish activities of general interest,

of community interest or, if such be the case, oftheir personal, non-patrimonial [non-financial ornot-for-profit] interest.”6

The members, or associates, must draw a constitu-tive act (charter) and statute (bylaws) for the asso-ciation. The charter specifies, among others, thefounding members, association name, initialassets (equal to at least the amount of one mini-mum gross salary), and the governing bodies(including the board of directors). The bylawsspecify, among others, the purpose and goal ofthe association and its asset and liability cate-gories.7

The Law specifies that an association should becomposed of three bodies: the general assembly,which has ultimate responsibility and authority forall matters relevant to the association, unless itsbylaws give ultimate authority to the board ofdirectors over certain matters; the board of direc-tors, which “ensures the execution of the deci-sions made by the general assembly”; and the cen-sor who ensures the internal financial control ofthe association. When membership exceeds 100members, a censors committee is required,formed by an odd number of members.8

A foundation is defined as “a subject of law creat-ed by one or more persons who, on the basis ofan act of will inter vivos or for cause of death,establish a patrimony designed permanently andirrevocably for achieving an objective of generalinterest or, if such be the case, of communityinterest.” 9

16



August 2007

Chapter 3

1 The 2005 NGO Sustainability Index for Central and EasternEurope, United States Agency for International Development. 2 Law No. 21 for Legal Persons (Associations and Foundations) ofthe 6th of February 1924; Ordinance on associations and founda-tions (Ordinance # 26 of 30 January 2000). 3 For example, the 1924 law states that for the modification of afoundation, “[t]he Court of Appeal, with the approval of the superi-or commission of legal persons, shall be able to decide, on therequest of the management and administration bodies, upon modi-fying the organization established by the founder, if this is foundindispensable for preserving the goods and achieving the aim of thefoundation.” The 2000 ordinance gives ultimate authority to modifythe foundation to its board of directors. 4 See Fiscal Code, Article 7, 18.5 U.S. International Grantmaking, Country Information, Romania,March 2007.

6 Government Ordinance 26/2000, Article 4.7 Government Ordinance 26/2000, Article 6 and 7.8 Government Ordinance 26/2000, Articles 20, 21, 24, 27.9 Government Ordinance 26/2000, Article 15.



August 2007

Chapter 3

17

The founder, or founders, must draw a constitu-tive act (charter) and statute (bylaws) containingsimilar requirements to those needed to registeran association. The initial assets (in-kind or cash)for a foundation must be equal to at least 100times the minimum gross salary, unless the goalof the foundation is to fundraise for other associ-ations or foundations, in which case the initialassets should be at least 20 times the minimumgross salary.10

The Law specifies that a foundation should becomposed of two bodies: the board of directorsand the censor. The board of directors is the lead-ership and administrative body, whose responsibil-ity is to achieve the purpose and goals of thefoundation. The censor’s authority is similar tothat for an association.11

A federation is established by two or more associa-tions or foundations. Federations operate underthe same provisions as associations.12

The concept of public benefit was first mentionedin GO 26/2000. Any association, foundation orfederation can be recognized by the Governmentas of public benefit upon meeting certain eligibil-ity conditions, including that the organization’sactivity be carried out for the general interest orfor that of a collectivity.13 As described below, thebenefits accrued to public benefit associationsand foundations are relatively small, and todayonly about 60 associations and foundations haveregistered under this status.

3.2 CSOs and Commercial Activities

Article 46 of GO 26/2000 defines revenues ofassociations and federations as: a) membership

fees/dues; b) interests and dividends resultingfrom financial investments; c) dividends fromcommercial companies; d) revenues from directeconomic activities; e) donations, sponsorships orlegacies; and f) other revenues. For foundations,revenues are the same as those defined for associ-ations and federations, except for membershipfees/dues.

Article 48 further specifies that associations andfoundations may carry out direct economic activi-ties “if they have accessory character” and as longas they are related to their mission (“purpose”).The law does not specify what constitutes anaccessory character, and this clause can be inter-preted as a principal-purpose test for regulatingCSO self-financing. As mentioned in Chapter 2,the principal-purpose test emphasizes that theCSO is established and operated primarily fornot-for-profit purposes and that self-financingwould not be the principal activity of the organi-zation.

The law is also vague about what constitutes mis-sion-related and non-mission-related economicactivities, and in theory fiscal authorities couldcompare bills and contracts generated from theeconomic activities with the CSO’s mission con-tained in the statute. However, it’s unclear how –and if – the law is applied in practice.

Associations and foundations can engage in non-mission related activities by setting up separate,commercial companies. Dividends obtained fromthe activities of these commercial companies,unless reinvested in the same commercial compa-nies, shall only be used for advancing the missionof the association or foundation.14

10 Government Ordinance 26/2000, Article 15 and 16.11 Government Ordinance 26/2000, Articles 28, 29, 31.12 Government Ordinance 26/2000, Article 35.13 Report on Public Benefit, The Romanian Process of Regulating thePublic Benefit, Civil Society Development Foundation; GovernmentOrdinance 26/2000, Article 38.

14 Government Ordinance 26/2000, Article 47.

There is no limit on the amount of income a CSOcan generate from commercial activities, eitherdirectly or through a commercial company.15

Debate on Public Benefit Organizations

Various debates are under way about the treat-ment of commercial activities as they relate topublic benefit organizations. With a few excep-tions concerning tax exemptions on revenuesfrom advertisements, certain imported products,and fees for vehicles, public benefit organizationsdo not enjoy fiscal exemptions. The currentdebate relates to whether public benefic statusshould grant additional fiscal exemptions, includ-ing for commercial activities. Among the propos-als regarding commercial activities of public bene-fit organizations are an increase in the thresholdfor profit tax exemptions or elimination of thethreshold altogether (see below).16

3.3 Tax Treatment of CSO CommercialActivities

3.3.1 Profit Tax

CSO commercial activities conducted directly bythe CSO – and hence mission-related – areexempt from profit tax up to a certain income



August 2007

Chapter 3

18

threshold. Above this level, the CSO must pay aprofit tax of 16%, the same rate paid by commer-cial companies. The income threshold is 15,000euros earned from economic activities in one fis-cal year, but not more than 10% of the organiza-tion’s total tax-exempted income. The fiscal codedefines a total of 11 categories of tax-exempt non-profit income, including member dues, registra-tion fees, and contributions; income from sportsactivities donations received through sponsorship;dividends and interests from investment ofexempt incomes; public and private grants;income realized from occasional fundraisingevents; occasional income from selling assetsowned by the CSO, other than those used for acommercial activity; income for which the tax onshows is payable (see section 3.3.4 on othertaxes); and income obtained from advertising andpublicity (only applicable to public benefit organi-zations operating in certain fields).17

With regard to income realized from occasionalfundraising events and used for social or profes-sional purpose in accordance to the organiza-tion’s bylaws, it appears that some organizations,not being aware such events are tax exempt, paytaxes on this income. While the law explicitlyexempts income on such events, it does not

15 Interview with Octavian Rusu, Civil Society DevelopmentFoundation, May 2007.16 Interview with Octavian Rusu, Civil Society DevelopmentFoundation, May 2007.

17 Fiscal Code, Article 15.

SUMMARY OF CSO COMMERCIAL ACTIVITY TAX TREATMENT

Structure of Economic Activity:

Direct Economic Activity Separate Commercial Company

Yes Taxed above certain income level Taxed regardless of income level

Mission

related:

No Not applicable Taxed regardless of income level



August 2007

Chapter 3

19

define some key terms such as occasional, socialor professional purpose, so CSOs should be awareof the potential tax implications.

To illustrate the payment of the profit tax, let’sassume a CSO is generating 10,000 euros inincome from its mission-related economic activity.This commercial activity’s profit is tax exemptbecause income falls below the 15,000 eurosthreshold at which the profit tax is applied.Furthermore, if the 10,000 euros do not representmore than 10% of the CSO’s total tax-exemptincome, the profit earned on this income is alsotax exempt. However, if the CSO’s total taxexempt income is 50,000 euros, the income fromthe economic activity represents 20% of theCSO’s total tax exempt income, exceeding thetax-exempt income level of 10%. In this case theCSO would have to pay the profit tax.

For CSO commercial activities conducted througha separate, for-profit entity – necessary if the com-mercial activity is not mission related – the CSOmust pay the profit tax of 16% on all profitsearned by the commercial activity (regardless ofincome levels).

Foundations established as a result of a legacy areexempt from paying the profit tax.18

The basis of the profit tax assessment is the profitdetermined as the difference between incomeand expenses, with additions or deductions inaccordance with the provisions of Article 19 ofthe Fiscal Code. CSOs are required to pay theprofit tax on an annual basis on or beforeFebruary 15 of the year that follows the year forwhich the tax is computed.

As mentioned above, a current debate in the CSOsector is whether public benefit organizationsshould be granted special tax exemptions for

their economic activities. One proposal is toincrease or eliminate the income limit of 15,000euros and to make all revenues from commercialactivities, regardless of the amount, exempt fromprofit tax.

3.3.2 Value Added Tax (VAT)

New legal provisions on VAT are applicable sinceJanuary 1, 2007 when Romania became a fullmember of the European Union. Former regula-tions on VAT zero quota or VAT reimbursementare no longer applicable, which has producedconfusion among CSOs and fiscal authorities, par-ticularly in the case of projects developed withforeign funds.

For CSO nonprofit (i.e., non-commercial) activi-ties, CSOs are considered final users/beneficiariesand they are not reimbursed for the VAT paid ongoods, supplies or services. For CSOs conductingprojects funded by international donors, especial-ly the European Union, new regulations relatedto EU accession came into effect in January 2007that dramatically changed the VAT regime. Until2007, the VAT paid on goods, supplies, and servic-es purchased using international funds was reim-bursable by the Romania government, and thisgreatly assisted CSOs who could not, under manygrant agreements with international donors, usegrants to pay for the VAT portion of the price of aservice or product. However, with EU accession,changes to the Fiscal Code ended governmentVAT reimbursements, essentially leaving CSOswith no choice but to pay the full cost of VAT. AnEmergency Government Ordinance issued inFebruary 2007 apparently clarified this situationby establishing that the Romanian governmentwould reimburse VAT on EU pre-accession funds(EGO 11/2007). At least two issues still remain: itis unclear how fiscal authorities should apply thisprovision (some interpretations of EGO 11/2007

18 Fiscal Code, Article 15, para 1.

state that CSOs are not covered by the emergencyordinance), and the Emergency Ordinance treatsonly projects funded from EU pre-accessionfunds, leaving aside all other projects funded byinternational donors that do not accept VAT pay-ments as eligible expenses. Negotiations are nowpending between the Ministry of Finance andCSOs to resolve this issue.

With regard to CSO commercial activities, theyare subject to the same VAT as that applying tocommercial companies. The basic VAT rate paidon all goods and services sold is 19%, and areduced rate of 9% applies to certain productsand services: delivery of books, newspapers andmagazines, and school manuals19; deliveries oforthopedic products; and accommodations withinthe hotel sector.20 Current regulations allow VATexemptions on some “operations of public inter-est,” on which VAT is paid on the purchase ofgoods and services but not charged on the deliv-ery of these operations of public interest. Theexempt operations are listed in the Fiscal Codeand include provisions of goods and/or servicesclosely related to assistance and/or social protec-tion made by entities recognized as having socialcharacter; services related to children and youthprotection; authorized providers of vocationaltraining; services only provided for members (i.e.,membership fees are exempt); sports services;services related to fundraising; productions anddistribution of motion pictures, TV and radio pro-grams; publishing activities; sales of religiousmaterials and objects; and certain imports.

CSO commercial activities (and commercial com-panies) whose annual revenues are below 35,000euros are exempted from VAT.21 When revenuesare below this amount the CSO may request to beregistered as a VAT payer if the organizationwants the right to deduct VAT paid for purchasedgoods and services.22 The CSO would then have

the obligation to charge VAT for all goods andservices it delivers to its clients. Since the imple-mentation of the new Fiscal Code in 2007, VATdeductions are limited to a few services that maynot warrant VAT registration.

If a CSO earning less than 35,000 euros fromcommercial activities decides not to register asVAT payer, the Fiscal Code and associated legisla-tion do not specify a legal framework applying tothese organizations’ value added tax. The only taxregulation applying to these CSOs relates to thepreparation of a special declaration of value-added tax if the CSO is the beneficiary of certainsupplies of services performed by persons andorganizations established abroad.23

If revenues from CSO commercial activities sur-pass 35,000 euros in a given fiscal year, the CSOmust request registration as a VAT payer within 10days after the date of exceeding the threshold.Once the exemption threshold is exceeded, theCSO may not request the application of VATexemption, even if subsequently it realizes annualrevenues that are less than the exemption thresh-old provided by law.

CSOs registered as VAT payers have the obligationto maintain certain records associated with theiroperations. These include maintaining account-ing records according to law and providing fiscalauthorities the necessary documents to determinethe operations performed by the CSO.24

3.3.3 Dividends

In the case of non-mission related commercialactivities, a Romanian CSO must set up a separatelegal entity under Company Law. As a generalrule, profit may be distributed to a shareholderonly after payment of the profit tax and dividendstax. The dividends tax stands at 10% of the gross



August 2007

Chapter 3

20

19 This clause excludes publications intended exclusively for publicity.20 Fiscal Code, Article 140; U.S. International Grantmaking, CountryInformation, Romania, March 2007.21 Global Legal Group, The International Comparative Guide toCorporate Tax 2007, Romania.22 Fiscal Code, Article 152, para 7.

23 Fiscal Code, Articles 152, 155, 156, and 157.24 Fiscal Code, Article 156.



August 2007

Chapter 3

21

dividend paid to the shareholder, except whenthe shareholder is a Romanian legal entity thathas owned more than 15% (this will be reducedto 10% starting in 2009) of the shares of anotherRomanian legal entity for a period of two yearsprior to the payment of the dividend (Art. 36 para2, 3, 4). By exception, the dividends obtainedthrough the investment of profit-tax exemptedrevenues of a CSO are also tax free (art. 15para.(2) lit.(f).

3.3.4 Other Taxes

The legal framework includes a number of localtaxes and fees that require payments to local fiscalauthorities.

A. Tax on buildings

Any CSO that owns a building must pay an annualtax on this building. The Fiscal Code allows eachLocal Council to establish exemptions for associa-tions and foundations owning buildings used forhumanitarian activities. At the same time, theFiscal Code also stipulates exemptions for certainorganizations and facilities for the taxation onbuildings. These exceptions apply to:• foundations established by testament to

maintain, develop or assist national culturalinstitutions, as well as to support activitieswith a humanitarian, social or cultural char-acter;

• organizations whose exclusive activity is theprovision of social services for free within spe-cialized units ensuring hosting; social andmedical care; assistance, support, rehabilita-tion, and social reinsertion for children, fami-lies, disabled persons, and the elderly.

• buildings that are used exclusively for theprovision of tourist services for a period ofnot more than 5 months during a calendaryear, and on which the tax on buildings is tobe reduced by 50%.

The tax rate is established by a decision of thelocal council and may be set between 0.25% and1.50% of the building’s accounting value.

B. Tax on land

Any CSO owning land must pay an annual tax onthis land. The exemptions for certain organiza-tions and facilities are the same as those for thetax on buildings. The land tax is established at afixed amount per square meter, depending on therank of the locality where the land is located, andthe zone and/or category of use of the land.

C. Tax on shows

Any CSO organizing an artistic performance,sporting competition or other entertainmentactivity is required to pay a tax on shows. The taxon shows is to be computed by applying theappropriate tax rate to the amount collected fromthe sale of entrance tickets and subscriptions. Therate of tax varies depending on the show or per-formance, or the floor space depending on thetype of location used for the show. If a show isorganized for charitable purposes, which the lawdoes not further define, the taxable portion ofthe receipts from the sale of entrance tickets orsubscriptions is to exclude the amounts paid forcharitable purposes. The tax on shows does notapply to shows organized for humanitarian pur-poses.25

D. Custom duties

For the most part CSOs and commercial compa-nies pay the same custom duties on importedgoods. However, a number of goods are exemptfor CSOs that obtain authorization from theMinistry of Finance. These goods include: dona-tions with social, humanitarian, religious, cultural,educational, or sport aim; and equipment andoffice supplies received as donations and used for

25 Fiscal Code, Chapter VII.



August 2007

Chapter 3

22

nonprofit activities. Thus, custom duties are paidfor any product/good meant to be used for com-mercial activities.

E. Fees

The fiscal code also defines a number of feespayable to the local fiscal authorities. These feesinclude: • Fees on means of transportation, such as cars,

buses, trucks, etc. Vehicles adapted for peoplewith physical disabilities are exempt from thisfee.26 Furthermore, public benefit organiza-tions are exempted from fees on means oftransportation for vehicles donated or direct-ly financed from grants. However, the fee isapplied for the first registration of all com-mercial vehicles.27

• Fees for the issuing of certificates, approvalsand authorizations by local authorities. Thesefees must be paid prior to the issuing of thesecertificates, approvals, and authorizations.

• Fees for advertising and publicity services,paid by the beneficiaries of these services atrates between 1% and 3% from the value ofthe services. Fees are waived for advertise-ments in the written and audio-visual media.

• Fee for hotel accommodation. The value ofthe hotel accommodation fee is determinedby the local council, and may vary between0.5% and 5% of the accommodation fee.Payment of the fee does not apply to peoplewith “severe or serious” handicaps, pension-ers, students, and other specified groups.28

3.4 Tax Filings

CSOs must comply with the same tax filingrequirements for their commercial activities as anyfor-profit entity. In this context, the tax laws, laborlaws, and other special laws apply to each caseaccording to the specific activity in which the CSO

engages. All tax filings are submitted to the localfiscal authorities. For CSOs, these filings include: • Profit tax: Nonprofit organizations are

required to pay the profit tax on an annualbasis on or before February 15 of the yearthat follows the year for which the tax is com-puted.29 Form 101 (the most commonly usedform to file the profit tax) is to be submittedto the appropriate Fiscal Authority(“Administratia Financiara”) office.

• VAT: VAT is usually paid on a monthly basis,on or before the 25th day of the month.CSOs registered as VAT payers and with rev-enues not exceeding 100,000 euros during afiscal year may choose to pay VAT on a quar-terly basis. Form 300 (the most commonlyused form to file the VAT) is to be submittedto the appropriate FRS office.

• Building and land taxes and fees on meansof transportation: these must be paid on anannual basis, in four equal installments, onor before March 15, June 15, September 15and November 15.30

• Fee for advertising and publicity services:these must be paid on a monthly basis, on orbefore the 10th of the month.

In addition to the above tax filings, CSOs mustpay social contribution taxes on the gross incomepaid to their employees. These generally includecontributions to social security (19.5% of theemployee’s gross salary), health insurance (6%),unemployment insurance (2%), salary guarantee(0.25%), risk and accident (0.4%), and to theChamber of Labor (0.75% when the labor con-tracts are kept by the Chamber of Labor, and0.25% when the labor contracts are kept by theemployee). In addition to employer contribu-tions, the following taxes and contributions arepaid by the employee, applied as well to the grossincome: social security (9.5%), health insurance(6.5%), and unemployment insurance (1%).

26 Fiscal Code, Article 262.27 Report on Public Benefit, The Romanian Process of Regulating thePublic Benefit, Civil Society Development Foundation.28 Fiscal Code, Article 280.

29 Fiscal Code, Article 34, para 3.30 Fiscal Code, Articles 249, 253, 255, and 285.



August 2007

Chapter 3

23

CSOs have the possibility to opt between payingall these contributions and taxes on a monthly orannual basis (Art. 109, para.(2) from FiscalProcedural Code).

3.5 Reporting Obligations

Reporting obligations required by tax legislationare subject to the guidelines described above.CSOs are also required to register any modifica-tions to their constitutive act (charter) and statute(bylaws) with the Registry of Associations andFoundations at the clerk’s office of their jurisdic-tion.31 Other reporting obligations only affectCSOs registered as public benefit organizations.

Public benefit organizations have the obligationto communicate to the responsible administrativeauthority annual activity reports and balancesheets. Excerpts of the activity reports and the bal-ance sheet must also be published in the OfficialGazette of Romania, as well as in the national reg-istry of nonprofit organizations.

List of Laws Concerning CSO Operations andCommercial Activities:• CSO laws: Government Ordinance on

Associations and Foundations No. 26/2000,as approved by Law No. 246/2005

• Tax laws: Fiscal Code - Law No. 571/2003;Fiscal Procedural Code – GovernmentOrdinance 92/ 2003; Law on Local Taxesand Fees No.273/ 2006 as modified;Emergency Government Ordinance 11/2007modifying EGO 63/1999 regarding the man-agement of non reimbursable funds from theEuropean Community

• Laws relating to donations: Law onSponsorship No. 32/1994 as modified

• Laws relating to volunteerism: Law onVolunteerism No. 195/2001

• Public-law legislation: Law on the Conditionsof Non-refundable Financing from PublicFunds Assigned for General Interest Non-profit Activities No. 350/2005

• Labor, social security, and social laws: Law onSocial Insurance State Budget no. 487/2006,Emergency Government ordinance 150/2002 regarding the organization and func-tioning of the health social insurance system,

• Special laws on certain organizations: Law47/2006 regarding the national system ofsocial assistance, Decree-Law on HandicraftCo-operatives No. 66/1990; Law on the TradeUnions No. 54/2003.

3.6 Expertise Needed to ManageCommercial Activities and Sourcesof Assistance

The civil society sector in Romania has grown sig-nificantly since the 1989 revolution in terms ofactive CSOs, the fields in which they operate, andthe quality of the services they provide. Despiteclose to 20 years of rapid development, the CSOsector is still largely funded by grants and dona-tions. A 2003 Ministry of Finance report on finan-cial statements of more than 17,000 CSOs showedthat about 15% of CSOs’ funding comes fromeconomic activities. It should be noted that thisfigure includes all types of legal entities registeredas associations and foundations, and thereforedoes not only apply to CSOs conducting publicbenefit activities (as defined in ICNL’s typology,not in the legal framework). CSOs continue toneed support services such as training, capacitybuilding, and technical assistance in businessplanning, financial management, and legal issuesto develop and sustain commercial activities.While such support remains limited, the organiza-tions below offer services to assist in the develop-ment of CSO commercial activities.

CENTRAS

Established in 1995 with the mission to contributeto the development of democracy in Romania bystrengthening the nonprofit sector. CENTRASprovides training, technical assistance, and infor-mational support to communities, NGOs, busi-nesses, and governments interested in civil society

31 Government Ordinance 26/2000, Articles 33 and 34.

and democracy development. CENTRAS has abranch in Constanta and supports a network ofregional resource centers.

011454 Bucharest, Bd.Maresal Averescu nr.17,Pavilion 7, et.3, sector 1Tel: +4 021 223 00 10, +4 021 223 00 11Fax: +4 021 223 00 12E-mail: [email protected]: www.centras.ro

Civil Society Development Foundation

CSDF supports the development of civil societyorganizations by promoting the active involve-ment of individuals in their communities and byencouraging the efforts of non profit organiza-tions to improve the quality of life and tostrengthen democracy in Romania.

Splaiul Independentei nr. 2k, et. 4 sector 3,BucharestTel: +4-021-310-0177Fax: +4-021-310-0180Email: [email protected]: www.fdsc.ro/index.htm

Foundation PACT

Foundation PACT’s mission is to contribute tosustainable community development by promot-ing local and regional initiatives, partnership andsocial responsibility. The organization’s team hasexpertise in training and consultancy projects inthe field of community development, participato-ry planning, project planning and management,organizational development, public relations,fundraising, financial education and entrepre-neurship.

Street Doctor Lister nr 55, Et.2, Ap 5, Sector 5,Bucharest, RomaniaTel: + 40 031 690 09 61 / + 40 021 4101058Fax: + 40 031 690 09 61Email: [email protected]: www.fundatiapact.ro

Romania Fund for Social Development

RFSD assists the development process of poorcommunities in Romania through grants awardedto sub-project proposals based on communities’demands, and contracted with community-basedorganizations and intermediary organizations thatdirectly receive the funds to implement subpro-jects. RFSD provides grants and training for com-munity-based and CSO commercial activities.

Elisabeta Blvd 3, floor 3, BucharestTel/Fax: +40 1 315 34 95, 315 34 40Web: www.frds.ro

National Organization of People with Handicaps

of Romania

ONPHR (by its Romanian acronym) providesassistance for the development of self-financingactivities to its 78 member organizations workingin the field of disability.

Centrul Comunitar “Daniel Vasilescu”B-dul Maresal Averescu nr. 17, Pavilion 7, et. 3,Bucharest, sector 1, 011454, RomaniaTel: + 40-21-224.14.89Fax: + 4-031.81.05678E-mail: [email protected]; [email protected]: www.integration.ro

Nonprofit Enterprise and Self-sustainability Team

NESsT works to solve critical social problems inemerging market countries by developing andsupporting social enterprises that strengthen civilsociety organizations’ financial sustainability andmaximize their social impact. NESsT operates theNESsT Venture Fund, a philanthropic investmentfund providing capacity building and financialsupport to social enterprises.

Str. Popa Tatu, Nr 3, Ap. 8 Sector 1BucharestTel: +40 311 0946Web: www.nesst.org



August 2007

Chapter 3

24

Interpreting and Critiquing

The Romanian Legal and

Regulatory Framework


As discussed in the previous chapter, the basiclegal framework applying to CSO commercialactivities contains differences with the frameworkapplying to for-profit commercial activities, yetthese differences remain small. By treating CSOand for-profit commercial activities in a similarfashion, the framework has the benefit of provid-ing a simple way to regulate all commercial activi-ties (both for-profit and not-for-profit), butNESsT argues that this perspective fails toacknowledge and promote the social benefitsthat CSOs contribute to Romanian society.

This chapter evaluates the practical effects ofRomanian laws on CSO commercial activities,discusses the strengths and weaknesses of thelegal framework, and offers recommenda-tions for the reform of the system whichwould enhance the development of CSOcommercial activities, and, in turn, increaseand sustain the contributions of the sector toRomanian society as a whole.

25



August 2007

Chapter 4

26

4.1. Evaluating the Romanian LegalFramework for CSO CommercialActivities

A legal framework that is grounded in fair princi-ples and applied accurately and consistently isessential to the social, political and economic sta-bility of any country. In this respect, while makingprogress in the past few years, the Romanian legalsystem remains weak in terms of the rule of law,independence, and accountability. Indeed,Romania’s judiciary was a major obstacle to thecountry’s process of accession to the EuropeanUnion.32 In the more specific area of legal treat-ment of CSO commercial activities, the frame-work is clear, but it does not promote the devel-opment of these activities. The law specificallyallows CSO commercial activities, yet applicablelaws and regulations mirror those of for-profitcompanies, leaving CSOs with few preferential taxtreatments. This lack of fiscal incentives does notencourage CSOs to develop economic activities –and sometimes even discourages them fromdoing so – and does not contribute to thestrengthening of civil society. Romanian CSOswould benefit from a legal and regulatory systemthat would treat a for-profit company differentlyfrom, for example, a CSO selling products madeby marginalized people who would not otherwisefind appropriate jobs in the marketplace.

This section evaluates the Romanian legal frame-work with respect to the five analytical criteriaestablished by the ICNL typology and presentedin Chapter 2.

Complexity of Administration and Practical

Implementation Issues

Since CSO commercial activities are uniformlyregulated not only within the sector but also inline with the for-profit sector – aside from a fewdifferences – the system is relatively simple toadminister. The same rules apply to all entities

(not-for-profit and for-profit) engaging in com-mercial activities with respect to reporting and taxfiling (with minor adaptations for CSOs in termsof filing dates and forms). Furthermore, the sys-tem exempts entities from paying taxes on rev-enues below certain levels (15,000 euros for theprofit tax and 35,000 euros for VAT). Under theICNL typology, this system would be classified as amechanical tax system since the differencebetween economic activities that are taxed andthose that are not is based on fixed criteria.Because the Romanian mechanical tax systemtreats CSO commercial activities similarly to for-profit commercial activities (in a similar fashion toa blanket tax treatment), the system is relativelyeasy to administer. The only potential difficulty inimplementing current laws and regulations relatesto what constitutes mission-related commercialactivities. It appears that, in practice, authoritiesdo not monitor CSO commercial activities beyondtheir tax implications, and up to now this issue hasnot been a source of implementation difficulties.

From the perspective of CSO proponents, the sim-plicity of the system underscores its problems, forthe uniform treatment of commercial activitiesconducted by CSOs and for-profit businesses failsto recognize and specifically promote the publicbenefits achieved by CSOs. NESsT thereforebelieves that although administration of the sys-tem would be complex as a result of the reformsproposed later in this chapter, such complexitiesare a small price to pay in exchange for the bene-fits that would accrue from these reforms.

Effects on Revenue Collection

Considering the mechanical tax treatment dis-cussed above, the current Romanian system doesnot generate as much tax revenue as it wouldunder a pure blanket tax treatment, yet it stillpotentially generates more than other tax treat-ments (destination of income or relatedness test).Aspects of the system, particularly the absence of

32 Nations in Transit, Freedom House, 2006.



27

August 2007

Chapter 4

tax discounts for CSOs engaging in commercialactivities, make it difficult to assess the impact onthe level of revenue-collection. First, many CSOsare discouraged from initiating commercial activi-ties because they perceive that the incumbent taxburden would make it difficult to yield a profit.Thus, CSOs under the current system often con-duct commercial activities at lower levels thanthey might within a more supportive regulatoryenvironment. At the same time, those conductingsuch activities above certain revenue levels arealso paying the full profit tax. It is unclearwhether this revenue base would increase ordecrease with a higher level of CSO commercialactivity but a lower rate of taxation. GrantingCSOs full tax exemptions would obviouslydecrease revenue-collection.

Effects on the Commercial Sector

Because CSO commercial activities receive a simi-lar legal and regulatory treatment as that of for-profit commercial activities, the nonprofit sectordoes not have an unfair advantage over for-profitcompanies. While some CSOs receive tax exemp-tions (e.g., no profit tax paid on revenues under15,000 euros, VAT exemption on protection ofchildren and youth), these represent tax exemp-tions on low levels of economic activity or onincome closely tied to specific nonprofit activities(such as social services, employment models, andtraining of public authorities and CSOs) that facelittle competition from for-profit companies.

Because of its tax treatment of the two sectors, theRomanian legal system could actually be consid-ered more favorable to for-profit companies thanto CSOs. Taxing CSOs at the same level as theirfor-profit counterparts is considered stronglyfavorable to the commercial sector since for-profitcompanies do not conduct resource-intensive mis-sion activities – they do not carry the social costsoften present in CSO commercial activities suchas higher levels of capacity-building and lowerproductivity levels from the employment of bene-

ficiaries – and they have access to financial instru-ments facilitating economic activities (i.e., debtand equity) as well as tax breaks and write-offsthat are not available to CSOs.

Effects on the Development of the Nonprofit

Sector

As mentioned above, the current legal systemdoes little to encourage CSO commercial activi-ties and thus to promote the development of thecivil society sector. The mechanical tax treatmentis unfavorable for CSOs since it transfersresources from CSOs to the government. Settinga threshold for tax exemption on mission-relatedcommercial activities discourages CSOs fromdeveloping socially oriented enterprises that pro-vide more sustainable solutions to the issues theyare addressing. It continues to put emphasis onCSOs’ seeking grants and donations, which arerelatively limited in Romania and which furtherinhibits the development of the sector. A moreenabling legal environment would encourageCSO commercial activities and contribute to thesector’s sustainability.

4.2 Working Within the System

Although the Romanian system explicitly allowsCSOs to conduct direct commercial activities (ifthey are mission related), some organizationshave faced difficulties dealing with the fiscalauthorities regarding the amount of tax pay-ments. Specifically, some organizations havereported difficulties obtaining VAT reimburse-ments because interpretation of the CSO’s non-profit and commercial activities were left to thetax authorities, who often questioned the level ofeligible reimbursements given the CSO commer-cial activities. Moreover, in some instances whereCSO nonprofit and for-profit activities share thesame resources (office space, vehicle, etc.), it maybe difficult to demonstrate to fiscal authoritiesthe expense amount related to each activity. Insuch cases fiscal authorities may limit the amountof deductible expenses under the CSO economic



28

August 2007

Chapter 4

activity. CSOs should therefore have strong finan-cial systems in place to establish operational rulesthat do not allow much room for interpretation.

In response to the current tax treatment,which does not provide specific benefits toCSO commercial activities, some CSOs havedevised ways to lower their tax liabilities. Onecommon example is for a CSO to set up a sepa-rate, for-profit company to generate revenuesfor the nonprofit mission and to account for asmany costs as possible in order to reduce tax-able income. This strategy is more likely to beimplemented when a CSO commercial activityis forecasted to surpass the revenue thresholdsat which a profit tax liability is incurred(15,000 euros from commercial activities ormore than 10% of the organization’s total tax-exempted revenues). Furthermore, and relatedto the point above, in the past some CSOs havepreferred registering separate, for-profit legalentities to avoid interpretation by the fiscalauthorities on the amount of expenses allocat-ed to for-profit and nonprofit activities.

4.3 Perception of CSOs

Less than one in three Romanians trustNGOs, but in the past few years the publicperception of CSOs has improved. This posi-tive development is due in part to greaterfreedom of the press, which has soughtinformation and opinions from CSO leaderson a variety of topics, in particular related togovernment transparency. The government,both at the local and national levels, hasmade a concerted effort to reach out toCSOs on important issues such as EU acces-sion. In addition, the 1% and 2% campaignsled to increased outreach efforts from CSOsthat motivated the public to becomeinformed about the sector and particularissues.33 After two years of implementation,

8.6% of taxpayers have contributed to theCSO sector through the 1%-2% law.34

4.4 Reforming the System

So far this guide has provided an overview of thelegal framework regulating CSO commercialactivities in Romania and a review of its practicalimplications. This section presents a critique ofthe existing system and offers recommendationsfor improvement of the current situation. It ishoped that these ideas will inform the debate onhow CSO commercial activities are regulated withthe ultimate objective of promoting such activi-ties, strengthening the organizations that conductthem and enhancing their abilities to contributeto Romanian society. Emphasis is placed on twoaspects of the system that could be improved tocreate a more favorable environment for CSOsand their commercial activities.

A. The legal framework does not promote CSOcommercial activities. As described inChapter 3, while the legal framework explic-itly allows CSOs to engage in commercialactivities, it does not promote such activities.The following criticisms are offered aboutthe current legal framework:

i. CSOs can only engage directly in mission-related commercial activities. The require-ment that CSOs set up separate subsidiariesto carry out non-mission-related commercialactivities puts unnecessary legislative burdenon CSOs, forcing them to develop manage-ment systems based on external legislationrather than organizational needs.

ii. Only a few differences hold in the way taxregulations treat CSO and for-profit commer-cial activities. The quasi-uniform applicationof these regulations to CSOs and for-profitentities fails to acknowledge the public bene-fits produced both directly and indirectly byCSO commercial activities. Specifically, the

33 The 2005 NGO Sustainability Index for Central and EasternEurope, United States Agency for International Development;Nations in Transit, Freedom House, 2006.

34 Report on the situation of direct governmental financing forNGOs in Romania. Civil Society Development Foundation.



29

August 2007

Chapter 4

profit tax penalizes CSOs for generatingminor amounts of self-financing income(15,000 euros or 10% of the total non-exempt revenues), placing a significant bur-den on CSOs attempting to diversify theirfunding base and to become financially sus-tainable.

iii. VAT exemptions for CSO commercial activi-ties are limited. Under the current regulation(see Section 3.3.2 above), VAT exemptionsare only provided to services closely relatedto social assistance/protection and protec-tion of children and youth, leaving manyCSO commercial activities subject to VAT.However, in many cases, customers benefit-ing from CSO commercial activities are fromlow-income or marginalized groups. Formany CSOs, including the VAT in the priceof goods significantly diminishes their cus-tomer base and reflects an additional chal-lenge to the already difficult task of making aprofit in a low-income or marginalized com-munity.

B. The legal concept of public benefit statusremains vague. First introduced in 2000, andlater improved in 2005, the concept of publicbenefit does not clearly define the general orcollective interest these organizations shouldserve. Moreover, the public benefit status as itcurrently stands lacks clear incentives forCSOs to seek this status. This is a seriousshortcoming as different types of associationsand foundations pursuing various goals areplaced on the same standing, effectively dis-advantaging CSOs operated to provide a pub-lic benefit.

In response to the two criticisms presented above,the following recommendations are offered:

1. Allow CSOs to directly engage in non-mission

related commercial activities. Since the cur-rent legislation allows both mission and non-mission related CSO commercial activities,regulations should be simplified to allowCSOs to engage directly in either type ofactivity. Tracking the accounting of commer-cial activities separately from program activi-ties should suffice in maintaining clear andtransparent financial systems.

2. Clarify the "accessory character" clause in thelegislation to eliminate interpretations. Or,consider removing this clause for mission-related activities since, by definition, theyadvance the mission of the organization bothdirectly and by generating revenues destinedto support the mission.

3. Reform the taxation regime for CSO com-mercial activities. Providing tax incentives isa necessary condition for the development ofCSO commercial activities. The Romanianlegal system should eliminate the revenuethreshold at which CSOs start paying theprofit tax, or at the very least increase it toallow more tax-free income. Allowing CSOsto keep a greater share of their commercialactivities’ income would motivate moreorganizations to engage in such activities andwould help to increase their sustainability.

4. Expand VAT exemptions on CSO commer-cial activities. The Romanian regulatory sys-tem should provide additional VAT exemp-tions on CSO commercial activities beyondthose already accorded for social assis-tance/protection and protection of childrenand youth services, such as those providingservices to low-income communities in eco-nomic development, education, environmen-tal protection, health, and human rights.These communities benefit from the prod-ucts and services that CSOs sell, since very

often for-profit companies do not operate inthese markets.

5. Clarify public benefit status and its benefits.The legal framework should clearly identifypublic benefit organizations as those provid-ing a benefit to the public at large and not totheir members only. Furthermore, publicbenefit status should be promoted throughtax incentives in the areas of the profit taxand VAT (see above) and potentially localtaxes.

6. Rely on increased CSO awareness to modifythe legal framework. An increasingly positiveperception of CSOs among the general pub-lic provides an opportunity to reform thelegal framework, as the public is better ableto understand the impact CSOs have in thecommunity. This should translate into a pub-lic that is more supportive of providing taxbenefits to CSOs to increase their financialsustainability and long-term impact. Theprogress made by Romanian CSOs in the pastfew years in improving their public imageand reaching out to their constituents shouldbe an opportunity to reform the legal frame-work and strengthen the sector.

Conclusion

As described in Chapters 3 and 4, a single legalframework is applied to both CSO and for-profitcommercial activities in Romania. This uniformtreatment fails to promote the beneficial effectsthat CSO commercial activities can produce forRomanian society.

In practice, many CSOs within Romania conductcommercial activities, but the payments they maketo the tax authority tend to be small, bothbecause they usually conduct commercial activi-ties at low levels and because standard accountingpractices significantly reduce or eliminate their

taxable income. Creating favorable legislation forCSO mission-related commercial activities, partic-ularly in the area of taxation, would not signifi-cantly reduce overall tax revenues, but it wouldcreate meaningful incentives for CSOs to initiatecommercial activities and hence enable them topursue their missions more effectively and in amore sustainable manner. Such reforms would gofar in promoting CSOs and in strengthening theirability to contribute to Romanian society.



30

August 2007

Chapter 4

The Legal and Regulatory Framework for CSO Self-financing in Romania

Documents

Transcript of The Legal and Regulatory Framework for CSO Self-financing in Romania