Czech Republic, August 15, 2002


Petr Pajas

During its last session before the June 2002 elections, the lower chamber of the Czech Parliament adopted laws which amend the Law on Public Benefit Corporations and the Law on Foundations and Funds. On April 24, 2002 the upper chamber, the Senate, approved the amendments. They will now be submitted to President Havel to become effective as of July 1, 2002.

These laws were originally enacted in 1995 and 1997 respectively. Law 248/1995 on Public Benefit Companies introduced a new legal form of a non-membership, public services-providing NGO. Law 227/1997 on Foundations and Funds redefined the legal prerequisites for establishment, operation and termination of a foundation and created a weaker legal version of it, known in Czech as a "foundation-like fund". While the two laws introduced many positive changes in the legal environment - especially in the areas of transparency, accountability, and governance - certain changes in these laws were found to be necessary.

Foundations and Funds
The most important amendments in the Law on Foundations and Funds broaden the possibility of efficient investment of endowment assets and the use of other foundation property. The endowment composition may be changed and optimally restructured, unless explicitly prohibited by the founder or donor, and it may also include modern investment tools, including a contract on investment care with a bank whose rating is better or equal to that of the Czech Republic. It was made clear that the bank must have a seat in the Czech Republic, including a seat of a branch of a foreign bank. Investment tools, like bonds, certificates and other securities, may be emitted or registered on a capital market in any country which is a member of the Organisation for Economic Cooperation and Development.

The amended law promotes in a more direct way the consolidation of endowed property into efficient foundations by requiring the merger of a weak and inefficient foundation with another foundation. Such a merger becomes mandatory whenever a foundation is not able in a span of one year to stabilise the value of its endowment above the required minimum. The monetary part of the foundation's endowment may now be converted into real estate, but it may not be lent.

It is also important that even the profit made from selling securities placed in the endowment of a foundation is to be exempt from special income tax, which may significantly enhance the chance of using collective investment instruments, otherwise limited to bonds and state-guaranteed securities.

The amendments have improved the procedure for liquidation and transfer to another foundation of the assets of a foundation undergoing termination. Also, a court may initiate moves to terminate a foundation if it has not been fulfilling its purpose for more than two years and, specifically, if it did not provide a single grant during this period of time.

Public Benefit Corporations
As regards public benefit corporations, the amendments in the law governing their establishment, operation and termination are mostly of technical value. However, the discrimination of foreigners has been fully removed, so that now any natural or legal person may not only establish a public benefit corporation but also serve on its board of directors or supervisory board without restrictions.

The amended law also allows the dismissal of a member of the board of directors if he or she in some way violates either the law or statutes of the corporation, which is essentially not the case under the current legal framework.

Last but not least, public benefit corporations will be able to set up branches abroad, whenever the legal system of the country involved regulates the activities of not-for-profit service-providing NGOs in a manner similar to the Czech law.

Petr Pajas currently serves as Executive Manager of First Consulting PBC and as an independent trainer in European Union affairs and advisor to the Czech Government, as well as an Associate Editor of the International Journal for Not-for-Profit Law and external consultant and regional coordinator to the International Center for Not-for-Profit Law (ICNL). He can be reached at => .

First published in SEAL (Social Economy and Law Journal), Summer 2002. See
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