Establishing NGOs in China

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By Christian Fleming
SHANGHAI, Apr. 11 – The establishment of not-for-profit, nongovernmental organizations (NGOs) in China is becoming increasingly popular as the necessity of providing private alternatives to social, economic, political, and cultural issues becomes apparent.

Indeed, if China is to continue to flourish and expand, NGOs will play a critical role in making sure that it is done in a socially healthy and constructive manner that will be beneficial to all. Recently, a slew of international NGOs have taken an interest in China such as trade and industry associations, charitable foundations, educational institutions and business societies.

Some of the more famous international NGOs currently operating in China are the International Youth Foundation, Save the Children, Red Cross, Salvation Army, Wildlife Conservation Society, Greenpeace, AIDS Foundation, Habitat for Humanity, Christian Action, Islamic Relief and the World Bank/IMF Staff Marco Polo Society.

This article will take a general look at the national policy and conditions related to establishing NGOs in the country. The application process is still tightly controlled by the Ministry of Civil Affairs and even well-connected organizations should be prepared to wait a few years and go through a painstakingly thorough review before approval.

China’s bureaucratic legal system can make running an NGO in the country difficult and trying. The country’s system is based on the general principles of civil law and separates nonprofit NGOs into three categories: foundations, social organizations (SOs) and civil non-enterprise institutions (CNIs).

It should be noted that, while these three categories of NGOs are technically not government agencies, the Chinese government still has an influence over them through various establishment and oversight mechanisms inherent in the national legislation.

Child Welfare Institute in Xi'an
A foundation is defined as an organization that undertakes projects with the intention of benefiting the public and is funded by donations from individuals, legal persons, or other organizations. The issuance of the 2004 Foundations Regulations has also made the distinction between public foundations and private foundations and regulates fundraising activities by public foundations.

Under the law, NGOs are allowed to establish a representative office in the country. An NGO must first find a relevant ministry in China that is willing to sponsor its registration. This can be hard to come by because ministries will not want to be associated with a potentially controversial organization.

If approved, the proposed foundation will then need to be reviewed by the Ministry of Civil Affairs but if the registration is rejected, there is no appeal process. Both social organizations and civil non-enterprise institutions can only be established by Chinese citizens and/or legal entities. The Chinese government is currently reviewing this policy and restrictions on foreign SOs and CNIs may be lifted in the future.

According to the United States International Grantmaking’s Council on Foundations (USIGCF), social organizations are formed to advance “the common desires of their members,” and are the primary NGO category in China.They may also be formed for mutual benefit or public benefit.

CNIs are usually institutions established by companies, institutions and other social forces using non-state assets and conducting non-profit-making social service activities. Private, not-for-profit hospitals, research institutes and private schools fall under the CNI category.

NGOs are subject to joint oversight by a civil affairs authority as well as a line ministry or a state organ which has jurisdiction over the organizations activity.

There are various laws that exempt NGOs from tax under Article 26 of the Enterprise Income Tax of PRC, passed last year. An NGO is exempt from income tax if it meets the following criteria:

  1. It has completed the registration for not-for-profit organizations according to law;
  2. It engages in public interest activities or not-for-profit activities;
  3. Income obtained is used entirely for the public interest or not-for-profit undertakings as registered, approved, or stipulated in the charter, with the exception of reasonable expenses related to the organization;
  4. Pursuant to the registration, approval or stipulations of its charter, the surplus properties of the organization after write-off shall be used for public interest or not-for-profit purposes or shall be donated via the Registration Administrative Organ to another organization of the same nature and with the same tenets, and shall be publicized to the general public;
  5. Properties and the benefits thereof are not to be distributed;
  6. No sponsor shall reserve or enjoy and property rights to the properties the sponsor gave to the organization in question; and
  7. Expenses for the salaries and fringe benefits of staff members are controlled within prescribed limits, and none of the organization’s properties shall be distributed in any disguised manner.

Other indirect taxes and subsequent exemptions, such as the business tax and value added tax (VAT), may also qualify certain NGOs in China. The business tax is applicable for the provision of services while VAT is for the sale of goods

According to the Interim Regulations on the Business Tax, policy dictates that NGOs in the service fields of nursing, medical, education, religious, cultural, or activities that employ the disabled be exempt from paying business tax.

Similarly, the Interim Regulation on the Value Added Tax exempts goods that are used towards education, experimentation and scientific research for the disabled. Goods donated by foreign governments and international institutions are also exempt from the VAT in China.

Furthermore, individuals working in China may deduct up to 30 percent of their taxable income for donations to organizations like NGOs. This may vary slightly depending on the type of taxpayer, the organization receiving the donation, and how the contribution will be used. NGOs are also exempt from real estate and urban land use taxes.

Setting up an NGO in China is a difficult and regulated process. It is unsure when China will relax restrictions currently in place although many believe it is in China’s best interest to do so sooner rather than later.