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posted 2 years ago
By Diane Fan:
Demand for philanthropy planning has surged in recent years, especially since the pandemic’s harsh impact on society and livelihoods, with many enterprises, social organisations, religious groups and benevolent individuals seeking efficient, powerful, targeted ways to help socially vulnerable groups.
This series of articles provides practical information for those intending to engage in philanthropy and set up a charity in Hong Kong, presenting an overview of establishment requirements, organisational structures, compliance and governance, obligations and tax exemption.
Although there are no specific laws and regulations overseeing the registration and operation of charities, the Inland Revenue Department (IRD) provides essential guidelines in the Tax Guide for Charitable Institutions and Trusts of a Public Character, first issued in the 1980s.
This is revised from time to time to reflect changes in the tax environment and practical needs, providing updated guidelines on taxation and other related matters of charities or trusts. Its latest revision was updated in September 2021.
The first article in this series introduces basic requirements of establishing a charity in Hong Kong, and the different organisational structures that can be adopted.
Establishment Requirements
According to the latest guidance, the following three requirements must be met to set up a legal charity:
Structures of Charities
Before setting up a charity, the founder must clearly define the organisation’s purpose and clarify its organisational structure to be adopted, based on practical operation and purpose. Generally, charities can be divided into the following categories:
A charitable trust is a trust established specifically for a charitable purpose, and its governing instrument is usually a trust deed that defines the purpose of the trust and the power of the trustee. A society is an unincorporated body formed by a group of voluntary members, bound by the rules in its articles of association.
On the other hand, the articles of association of a company limited by guarantee established under the Companies Ordinance limit liability of its members to the amount they undertake to pay as the assets of the company at its winding-up, and is therefore suitable for charities and non-profit-making organisations that do not require share capital and profit-sharing.
Judging from the actual operation of existing Hong Kong charities, most founders have chosen to set them up in the form of companies limited by guarantee.
The guidelines also mention that most of the charities recognised by the IRD for tax exemption are companies limited by guarantee. The reason for this is that, compared with the other structures, companies limited by guarantee have a certain degree of transparency increasing public confidence in their operation.
Among these reassurances are:
In addition, after choosing a name of the charity company, the founder only needs to submit an application form and Notice to the Business Registration Office to the Companies Registry, along with a copy of its articles of association, and pay the registration fee.
After the application is approved, the certificate of incorporation and business registration certificate can be obtained. Therefore, the process of setting up a company limited by guarantee is relatively simple, but it should follow another set of procedures to apply for tax exemption from the IRD.
Prior to setting up a charity, apart from establishing its general purpose, the organisation should take into account different operational and compliance considerations, including whether these meet all requirements set out in the guidelines, and understand the various applicable structures.
After confirming these requirements are met, the charitable organisation may move on to deliberate its governance policies. These relevant compliance requirements will be introduced and summarised in the next part of this series.
First published in June issue 2022 of China Business Law Journal.
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Note: This material has been prepared for general information purposes only and is not intended to be relied upon as professional advice for any cases. Should you need further information or legal advice, please contact us.
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