Slovakia, August 15, 2003

QUESTION MARK OVER ENDOWMENTS IN SLOVAKIA

Zuzana Fraňová

The First Decade The fall of communism in Czechoslovakia in 1989 was followed by a civil society boom. It was in this period that the majority of currently existing foundations and associations in Slovakia were created. These institutions focused on education, science and research, health care, social issues (social services, humanitarian activities, self-help, sports for the disabled), children and youth activities, culture and arts, human rights and minorities, expansion of the non-profit sector, community and regional development, renovation of places of cultural interest and preservation of cultural heritage and the environment.

All the organisations were established under the Act on Association of Citizens, as well as under the Civil Code. Between 1992 and 1996, 2,634 foundations registered in Slovakia. Nevertheless, the majority of them performed public service activities and only a very small proportion focused on providing grants to third parties. These foundations mainly re-distributed funds from abroad. During this short period in the life of Slovakia's non-governmental, non-profit sector, the accumulation of funds and building of foundation endowments had not been given a legal basis - the law did not provide for endowments.

In 1996 the Act on Foundations was adopted, perceived by the majority of Third Sector organisations as very unfavourable to the sector. The Act was adopted in a period when these organisations were offered no alternative or re-registration, while creation of equity capital totalling 100,000 Slovak korunas (SKK) - about 2,415 euros - was required, which meant liquidation for many organisations at the time. After the law had been adopted, only 357 foundations re-registered under the new Act. We could say that "equity capital" represented an attempt at establishing a kind of foundation endowment. However, since the law did not sufficiently define its purpose, composition, or rules for its management, equity capital took on the form of a mandatory registration fee for the establishment of a foundation.

A New Foundation Law
In 2002, about 480 foundations were operating in Slovakia. The great majority of them conduct public service activities and only a small percentage act as grantmaking organisations. In March 2002 a new foundation law took effect that, among other things, defines the elements of a foundation's capital - one of them is the "foundation endowment", a new term in Slovak law, which is defined with great precision. Here are selected excerpts from the new Act on Foundations:

Article 3: Foundation's Capital
  • The Foundtion's capital consists of the Foundation Endowment, Foundation Fund and Other Foundation Property.
  • The Foundation Endowment shall mean the Foundation's property entered on the Foundation register. It shall consist of capital contributions made by individual founders at the time of the Foundation's establishment. The capital contribution of each founder shall be no less than 20,000 SKK. The registered Foundation Endowment shall amount to a minimum of 200,000 SKK (4,830 euros), consisting exclusively of monetary funds and immovable property. Any amount in excess of 200,000 SKK can consist also of movable property, securities, as well as other property rights and values having a definable cash equivalent. The amount of the Foundation Endowment cannot be reduced.
  • The Foundation Fund shall consist of monetary funds not being part of the Foundation Endowment or of Other Foundation Property.
  • Other Foundation Property, not being part of the Foundation Endowment or the Foundation Fund, shall consist of monetary funds, securities, as well as other property rights and other property values with a definable cash equivalent.

Apart from using one part of the foundation's funds for necessary costs of management (the proportion of managing costs as a percentage of the total costs is defined by the foundation's board of trustees), the foundation's property can also be used as follows (another quotation from the law):

Article 29: Other Uses of the Foundation's Property

  • The Foundation shall not conduct any business, apart from renting out its real estate, and organising cultural, educational, social and sports events, provided these activities shall mean a more efficient use of its property and shall comply with the Foundation's public service purpose.
  • The Foundation shall not be allowed to enter into agreements regarding a "sleeping partnership" [i.e. where one of the partners does not actively participate].
  • The Foundation's property cannot be used for financing the activities of political parties and political movements or for the benefit of a person running for an elected position.


Article 30: Use of the Foundation Endowment

  • The property that is part of the Foundation Endowment cannot be donated, serve as a contribution towards the establishment of another company, be subject of a debt, or be used for securing the Foundation's obligations or for securing the obligations of third parties.
  • The Foundation shall be obliged to deposit the funds that make up part of the Foundation Endowment on a bank account or in a branch of a foreign bank with banking authorisation in the territory of the Slovak Republic.
  • The financial resources that make up part of the Foundation Endowment can only be used by the Foundation for the purchase of:
    • state promissory notes and treasury warrants;
    • securities accepted in the market of quoted securities and mutual funds certificates from open-ended mutual funds;
    • mortgage bonds;
    • deposit deeds and deposit certificates;
    • real estate.


Challenges to Endowment Building
As can be inferred from the law, the foundation endowment is inviolable and only the profits derived from it can be used. In the same vein, the treatment of the foundation endowment at this point is rather conservative and strictly set forth by the law. We hope that after a certain period the government will have more confidence in foundations, relaxing the regulations and enabling them to obtain more funds for public benefit activities.

When the new foundation law took effect, a year of re-registration of foundations began. Due to the mandatory minimum amount of the foundation endowment, as well as the definition of foundations' main field of activities (granting), it can be reasonably expected that the number of foundations is going to fall considerably (150 - 200 of them will perhaps still be operating in Slovakia).

As for the total value of foundation endowments in Slovakia, it is difficult to quote a figure at present due to the transformation of the foundation sector. While next door in the Czech Republic, the government "donated" approximately 2 billion Czech korunas (63 million euros) to foundations, thus strengthening foundation endowments, as well as the position of foundations in society, a similar attempt by the Slovak foundation sector failed. What also influences the amount of the foundation endowment is the fact that in Slovakia income from foundation endowments is not exempt from taxes. Along with the restrictions on the use of endowment funds, this acts as a de-motivating factor for the creation of endowments in the foreseeable future.

Therefore, the total amount of foundation endowments is likely to remain very low both in the near and distant future, while the ability of foundations to act as strong and independent "banks" for the civil society sector is going to be greatly limited. This situation can change only if: 1) the corporate sector resolves to give more support to foundation activities or itself sets up more foundations, and 2) the state somehow finds the willingness and resources to assist the civil society sector through a "donation" aimed at strengthening the foundation endowments of Slovak foundations.

On a more positive note, the foundation sector is now preparing a draft law that would make income from foundation endowments tax-exempt. As a new government has come to power in Slovakia (general elections were held in September 2002), and has already created its legislative plan for 2003, we expect this bill to be adopted in 2004.

In the end, however, one thing is clear: the foundation endowment and its building in Slovakia is at the beginning of a very long journey, but what is important is that this process has started.

Zuzana Fraňová is Executive Director of the Donors' Forum (Slovakia) in Bratislava.
E-mail: franova@donorsforum.sk
Web: => www.donorsforum.sk

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

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