Slovenia, August 15, 2003

CHALLENGE OF ENDOWMENT BUILDING IN SLOVENIA

Dr. Edvard Kobal

Introduction
The Foundations Act adopted by the National Assembly of the Republic of Slovenia at the end of October 1995 reintroduced after five decades a system of foundations as legal entities into the Slovenian legal system. The Foundations Act is thus important for the new legal system, as well as for the broader establishment of civil society. It enables individuals and organisations as legal entities to institutionalise their desire to organise operations of broader benefit and charitable purposes. A law more liberal than similar Foundation Acts in certain European countries was deliberately prepared with the intention of encouraging individuals and organisations to establish foundations and to cooperate within the framework of foundations, including the provision of support (financial and otherwise) to this end. On the other hand, the adoption of a more liberal Foundations Act in Slovenia also has a "dark side" - the "endowment" or "a foundation's permanent capital fund" is for the majority of the approximately 120 foundations established to date insufficient to allow them to achieve their purpose solely from the income generated by the management of founding assets. There are thus only a few foundations in Slovenia which can be considered endowed foundations. The vast majority are non-endowed foundations, while all of them are dependent in carrying out their mission on revenues generated during the business year.

Legal Framework: Founding Assets of Foundations

Two laws have been important for the operation of foundations in Slovenia in the 20th century. The first Foundations Act was issued in 1930 by the Drava banovina, an administrative unit of the Kingdom of Yugoslavia, which included the bulk of the territory of modern-day Slovenia. The second Foundations Act was adopted by the Republic of Slovenia (established in 1991) in October 1995. The adoption of a new Act was required both due to the re-establishment of private property and civil society and due to the altered legal, political and economic system within the context of the new state. Foundations are inextricably linked to private property, civil society and the possibility of obtaining support for their operations. They are institutions of civil society, while the assets available to foundations are one of their defining elements.

The first initiatives calling for the establishment of foundations in the Republic of Slovenia appeared shortly after the establishment of an independent state, and so the Slovenian state permitted the application of the 1930 Foundations Act right until November 1995, when the new, modern Foundations Act came into effect. The first 11 foundations, which today remain the most important foundations in Slovenia, were established in this period.

In terms of arrangements for foundations, the 1995 Foundations Act derives from classic foundations based on general benefit or charitable purposes or so-called public purposes and from the principle of permanence of purpose and of the foundations themselves, while structurally it is based on so-called "personified dedicated assets".

In terms of content, the Act is comparable to the German, Austrian and Swiss arrangements for foundations. Foundation assets are defined under Slovenian law as assets with which a foundation fulfils a precisely defined purpose. Such assets consist of founding assets as well as subsequently acquired or created assets in the form of donations, grants or income from interest on bank deposits. Founding assets may take the form of money, moveable property or real estate.

With regard to founding assets, the 1995 Foundations Act states only that the extent of such assets must be appropriate for the implementation of a foundation's purpose. The Act does not specify the minimum extent of founding assets. The legislature thereby permitted the establishment of foundations with small founding assets. Given the financial capacity of the majority of founders of foundations in Slovenia, this was the only option for encouraging individuals and organisations to establish foundations.

Assets of Slovenian Foundations

Slovenian foundations generate revenues within the framework of management of founding and subsequently acquired assets. The 1995 Foundations Act further defines the conditions under which founding assets may be reduced, and stipulates who conducts supervision of the assets and operations of foundations.

The more liberal system for the establishment of foundations in Slovenia compared to Foundations Acts in certain European countries enabled relatively rapid annual growth in the number of new foundations. This grew particularly rapidly in the period from 1998 to 2000 - 14 new foundations were established in 1998, 18 in 1999 and as many as 34 in 2000. In 2001, when only 17 new foundations were established, the number of new foundations returned to the level of 1998-1999. Although the annual growth in the number of new foundations is satisfactory for a European country with a relatively small population (around 2 million), after the "turnaround" in 2001, we can safely conclude that willingness to establish new foundations is declining among individuals and increasing among private companies. In recent years the latter, particularly banks, are more frequently choosing to establish foundations.

The liberal system for the establishment of foundations has influenced founders in that they are very often inclined towards relatively low founder stakes for new foundations (on average from 220 to 1000 euros; the founder's stake was much higher in only one case - around 50,000 euros). As a result, the founding assets are often relatively small (ranging for medium-sized Slovenian foundations between 1500-4500 euros; only for the largest foundation is it around 500,000 euros).

The small size of founding assets generates little revenue from asset management. Consequently, in the majority of cases foundations in Slovenia depend on revenues generated during the business year. A review of the available data for around 10% of all foundations established up to the end of the 1990s showed that medium-sized Slovenian foundations are able to secure average annual revenues of 13,000-17,500 euros, with only the most successful generating up to 200,000 euros.

Given that the vast majority of Slovenian foundations (more than 90%) do not have even a single full-time employee, we can conclude that the bulk of funds collected during the year (we estimate up to 15,000 euros for the average foundation) are geared towards implementation of foundations' statutory purposes, while part goes on administration and operations. Only the largest foundations are able to spend 200,000 euros or more (up to 400,000 euros) on realising their goals.

Allocation of Investments by Slovenian Foundations

Most foundations - 88 out of a total of 115 (76.52%) - were established up to the end of 2001 for the implementation of purposes in four vital areas: 26 foundations (22.6%) in the area of "social duties", 25 (21.74%) in the area of "art/culture", 22 (19.13%) in the area of "education/training" and 15 (13.04%) in the area of "health". Other areas ("environment/landscape/nature", "science/research", "sport") were represented by only a few foundations. In short, three-quarters of all Slovenian foundations operated in the areas most often represented in the second half of the 1990s in foundations in the developed countries of Europe, which is undoubtedly a good thing. Unfortunately, we have no data on the number of foundations active in 2001, nor on the annual amounts they directed towards realising their goals, either individually or collectively. It must be noted here that the bulk of revenues were intended for realising the goals of foundations the main purpose of which is to support activities in the areas of "science/research" and "environment/landscape/nature" - in other words foundations which, at the end of 2001, were relatively few in number in Slovenia: 7 in the area of "environment/landscape/nature" and 6 in the area of "science/research". Of these, the "strongest" were the oldest foundations, generally established prior to the adoption of the Foundations Act in 1995.

Tax Environment and Foundation Asset Management

Current tax legislation in Slovenia does not encourage citizens and organisations to invest assets in foundations. Tax relief is merely symbolic. This is also the main reason why founders and donors generally provide small sums for their establishment or operation during the year. Average annual donations by individuals are particularly low (20-40 euros). Average donations by private companies range from 200 to 800 euros. An appropriate solution would be to attract a large number of so-called small donors or a few donors able to donate around 50,000 euros each to foundations. However, in a country with a population of around 2 million, this is difficult to achieve. In terms of the level of development, Slovenia is still a developing country; this is also reflected in the small number of potential major donors - private companies - which over a few years could substantially improve the position and financial stability of the majority of active foundations.

Conclusions
  • The liberal Slovenian legislation pertaining to the establishment of foundations has an encouraging effect on potential founders in terms of taking the decision to establish foundations.
  • Unhelpful tax legislation represents a major obstacle to the growth of foundation assets, particularly of "a foundation's permanent capital fund". Equally, it does not encourage donations from citizens and organisations to an extent which would enable the maximum level of independence of investments and would maximise their impact on the development of Slovenian society.
  • The unfavourable conditions for the existence and development of the majority of Slovenian foundations have led to foundations beginning to establish ties among themselves in order to solve problems together, particularly in the area of legislation (Foundations Act, tax incentives). The Association of Slovenian Foundations, currently linking 13 foundations, was established in December 2000.
  • Asset growth, particularly of "a foundation's permanent capital fund", is essential for an enhanced independent role of foundations as a factor in the development of Slovenian society.

 

Dr. Edvard Kobal is Director of the Slovenian Science Foundation in Ljubljana.
E-mail: edvard.kobal@ustanova-szf.s i
Web: www.ustanova-szf.si

References:

  • Foundations Act, Slu´┐Żbeni List of the Drava Banovina, no. 28, 2 October 1930.
  • Foundations Act, Official Gazette of the Republic of Slovenia, no. 60-2788/95, 20 October 1995.
  • "Regulations on Societies and Foundations with Introductory Explanations" by Slavko Debeljak and Verica Trstenjak, Official Gazette of the Republic of Slovenia, Ljubljana, 1996, pp. 53-95.
  • Kobal, E. (ed.), "Foundations and the Culture of Property", Proceedings, Slovenian Science Foundation, Ljubljana 2000.
  • Kobal, E., "Foundations in Slovenia at the End of 90s", SEAL, Winter 1999-2000.


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

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