Poland, August 15, 2003

ENDOWMENT BUILDING IN POLAND: A FOVOURABLE ENVIRONMENT?

Endowment Building in Poland: A Favourable Environment?

Anna Kwiatkiewicz

Endowment building in Poland received a strong boost in March 2002 when the Supreme Court of Poland, deciding in favour of the Foundation for Polish Science (FNP), overturned a ruling of the Supreme Administrative Court (NSA): it ordered the tax authorities to pay back 22 million euros plus interest of several million euros to the Foundation.* The NSA stated that the Foundation's income from its investments in bonds, treasury bills and publicly traded shares in the 1990s was spent on its statutory goals, and was therefore tax-exempt. Although the ruling was very favourable for the Foundation, it did not directly concern the NGO sector as a whole, and so is not necessarily a precedent for similar cases in the future.

Foundations in Poland Today
The current situation of foundations concerning endowment-building and investment in various financial instruments is very complicated. In Poland there are approximately 4,500 foundations, but only 10 or so have their own capital that can serve as a basis for building an endowment. In the majority of cases this is a quasi-endowment or fixed-term endowment. Polish foundations are regulated by the Law on Foundations of 1984, the Law on Income Tax of Legal Persons, and their own statutes. The minimum starting capital for a foundation was set at such a low level (1000 zlotys, about 250 euros) that it does not guarantee adequate financial resourcing to ensure long-term stability. Moreover, there is no clear definition of foundation in the law. As a result, there are many quasi-foundations which act like business entities, e.g. clinics associated with hospitals offering paid health care services. This phenomenon is a result of the distorted market and enables business entities to lower the costs of transition to a market economy by finding a loophole in the costly, bureaucratic regulations on establishing new businesses. Foundation-like activity seems a perfect solution in such a case. At the same time, this type of entity weakens the image of foundations as non-profit organisations that play an important role in society. There is an urgent need to regulate these issues in order to avoid any further misunderstandings.

Draft Law in Parliament
At present, possible changes to the draft Law on Public Benefit Organisations and Volunteerism are being examined in Parliament. The proposed law would limit the possibilities of investment by foundations to state treasury bills and bonds, arguing that this type of investment is risk-free. However, making investment safer by limiting it to specified instruments hinders the possibility of obtaining higher interest rates through investment in a wider range of instruments, i.e. commercial financial instruments. The draft law has been sharply criticised both by foundations and the banking sector in Poland. Both groups argue that it is necessary to ensure returns from investment that can compensate for inflation and guarantee some extra income that could increase the endowment funds of a foundation. They also argue that as long as the principles of prudent management are applied, the risk undertaken by investing in publicly traded shares is limited. If these principles were precisely defined (e.g. the percentage of the endowment that can be invested in publicly traded shares, a list of approved financial instruments), the reasoning goes, the financial stability of the Third Sector would be secured.

Threats to an Endowment-Friendly Environment
Robert Thomas, in his report presented during the conference "Legal and Financial Aspects of Endowment Building" held in Warsaw in June 2002 underscored three major threats to Polish foundations:
  • lack of understanding of the role of NGOs in society
  • severe budget deficits
  • limited knowledge among MPs about the specific needs and characteristics of the NGO sector


To begin with, a lack of understanding of the role of the NGO sector is evident among parliamentarians when one observes their work on the draft Law on Public Benefit Organisations and Volunteerism: most of the remarks made by NGO sector representatives are immediately brushed aside. Secondly, the severe budget deficit seems to be a major obstacle, resulting in the negative attitude of the Ministry of Finance towards any tax exemptions and towards giving foundations the right to freely decide on which instruments to invest in. Thirdly, interactions with parliamentary deputies prove that the majority of MPs have a limited knowledge about the specific needs and characteristics of the NGO sector and that their attitude is far from being supportive. A recent example of this was the attempt by a number of foundations to persuade a group of MPs to submit an amendment that would make the draft law more precise by defining various types of financial instruments appropriate for investment by NGOs. Thus far, parliamentarians have not shown much concern about the financial aspects of foundation operations.

White Paper on Philanthropy
In Spring 2002 the Academy for the Development of Philantrophy in Poland (ARFP) began work on the White Paper on Philantrophy in Poland. This report will include a comprehensive analysis of the current legal-fiscal framework, evaluating the main laws and regulations governing philanthropic activities from the viewpoint of whether or not they are favourable to such activities, as well as recommendations for the future. Since a number of leading Polish foundations are cooperating closely with the ARFP on this project, the report can be seen as reflective of the views of the foundation sector. The White Paper can serve as an educational tool for politicians to improve their understanding of the importance of endowment building in Poland.

The Road Ahead
Polish foundations have a lot of work ahead of them with regard to improving the legal and fiscal climate for their activities, including endowment building. Current laws and regulations are inadequate, legislative work is not going in the right direction, and the dialogue between the Ministry of Finance and Polish foundations is far from satisfactory.

On the other hand, the favourable ruling in the Foundation for Polish Science court case is a sign that there is already a degree of goodwill and understanding among public officials. Foundations should work towards making these attitudes more widespread in public institutions. There is growing recognition among foundations that their active participation in legislative activity is necessary, as is cooperation with the banking sector in order to help them design the most appropriate financial instruments to increase foundations' capital in a risk-free manner. There is also an emerging need for foundations to become more knowledgeable about financial management so they can become equal partners for the banking sector. Furthermore, there is an acute need for a legal definition of the term "endowment" and regulations concerning the investment of endowment funds.

It may also be worth considering the issue of obligatory spending, i.e. so-called payout requirements. A specific form of the payout functioned in Poland in 1995 and 1996. The relevant regulation implied that in order to be eligible for a tax exemption, a foundation should spend its entire budget within two years of obtaining the funds earmarked for the budget. If the foundation sector in Poland is to be strengthened, it seems reasonable - at least for the foreseeable future - not to have a mandatory payout in the initial period of a foundations' operation as it may render its endowment-building capacity insufficient.

Conclusion
Foundations should continue to work towards changing the attitude of parliamentarians and the Ministry of Finance regarding the efforts to create an endowment-friendly environment in Poland. Otherwise, it could turn out that all these efforts have been in vain and the worst part of it would be that not only foundations, but the entire civil society sector in Poland would be losers.

Anna Kwiatkiewicz is Coordinator of the Polish Donors' Forum Initiative in Warsaw.
E-mail: => akwiatkiewicz@batory.org.pl

* See SEAL Winter 2000-2001 (p. 3) and Summer 2002 (p. 45)

Bibliography:
Thomas, Robert. Report on Endowment Building and Endowment Management Conditions in Poland, Warsaw, June 2002, conference materials Perkowski, Tomasz. The Management of Endowments by Foundations, Warsaw, June 2002, conference materials The Academy for the Development of Philanthropy in Poland. White Paper on Philanthropy in Poland, => www.monitorprawa.ngo.pl (2.12.2002)

First published in SEAL (Social Economy and Law Journal), Winter 2002-2003. See => http://www.efc.be/publications/sealabstract.html .

=>   www.monitorprawa.ngo.pl

TOP
Terms of UsePrivacy Policy
Copyright © 2008-2012, CEE Trust. All rights reserved!
Agile software development by A115 Ltd.