Zell & Co. - Articles & Rulings

Israeli Non-Profit Organisations and Tax Exemptions: A Brief Overview

December 2003

General

Appropriate Form for Non-commercial/Non-profit Organisation - Amuta

The appropriate form for organisations wishing to engage in non-commercial activities is to be set up as non-commercial societies – amutot, in Hebrew – under the Amutot Law, 1980 (the “Amutot Law”), registered with the Registrar of Amutot at the Ministry of Interior. However, mere registration as an amuta is not sufficient in itself in order to benefit from the tax exemptions which are available to non-profit organisations. In order to be eligible for such exemptions, an amuta needs to meet several requirements.

Taxation

Non-commercial Organisations Eligible for Income Tax Exemption

In the event that a non-profit organisation derives income, it is, provided it meets the definition of “public organisation” pursuant to section 9(2) of the Income Tax Ordinance [New Version], eligible to an income tax exemption in accordance with that section.

A “public organisation” is defined as a body of at least seven people the majority of whose members are not related one to another, or a trust the majority of whose trustees are not related one to another, which exists and operates for a public purpose, the assets and income of which serve solely for the achievement of the public purpose and which submits an annual report regarding its assets, income and expenses according to the applicable Regulations of the Minister of Finance.

The following are the criteria for an amuta’s eligibility for recognition as a “public organisation” under Section 9(2) of the Income Tax Ordinance:

The amuta has been created for a “public purpose” as defined in Section 9(2) – i.e., religion, culture, education, science, health, caretaking, sport, or any other purpose approved by the Minister of Finance; the Minister of Finance has given approval to such matters as assistance to struggling towns, encouragement of settlement in Judea and Samaria and environmental protection.
The amuta does not conduct any substantial part of its operation other than for a public purpose (This is required to enable the amuta to offer tax deductions on donations made to it, pursuant to Section 46(a) of the Income Tax Ordinance.)
The amuta comprises at least seven members, as opposed to the minimum of two members sufficient for establishing an amuta under the Amutot Law.
The majority of the amuta’s members are not related one to another (‘related’ is defined as a spouse, sibling, parent, grandparent, descendant, spouse’s descendant, and spouse of any of the above.)
The amuta has included in its Articles a provision according to which its assets and revenues serve solely for its purposes (which are as noted, public purposes) and any distribution of profit or benefits in any form to members is prohibited.
The amuta has included in its Articles a provision that upon liquidation, the assets of the amuta will be transferred to another public organisation within the meaning of Section 9(2) of the Income Tax Ordinance and will not be distributed between the members. Note that where an amuta adopts the Model Articles of Association (Schedule 1 to the Amutot Law) - an amuta is deemed to have adopted the Model Articles if it does not submit its own Articles upon registration - the standard practice is that section 21 of the Model Articles is amended regarding the non-distribution of profit and section 22 is added regarding assets upon liquidation, in order to conform to the statutory definition of a “public organisation” within the meaning of the Income Tax Ordinance. The Registrar of Amutot is notified of such amendment, usually at the same time as the registration of the amuta is applied for.
The amuta submits annual reports regarding assets, income and expenses in the prescribed form. This is further required for an amuta as a public organisation in order to offer tax deductions on donations made to it pursuant to Section 46(a) of the Income Tax Ordinance.

An amuta is created for operating in the chosen field for a chosen public purpose and not for a specific ad hoc case.

An exemption granted to a public organisation under Section 9(2) of the Income Tax Ordinance will not apply to income derived from a business that the public organisation operates, to dividend, interest or indexation paid by a body that controls the public organisation operating a business, unless the Minister of Finance has exempted such income of a public institution derived from such sources for the period and on the terms that he deems fit, which may occur if he is satisfied that such exemption is for the public good.

Donations to Public Organisation Tax Deductible for Donor

Donations to a public organisation recognised by the Minister of Finance and the Knesset Finance Committee are tax deductible for the donor pursuant to Section 46(a) of the Income Tax Ordinance (35% for amount over NIS 370, but the overall deduction limited to 30% of the donor’s taxable income).

Non-profit Organisations Eligible for Value Added Tax Exemption

For the purposes of value added tax, a non-profit organisation (“malkar”) is defined as an incorporated or unincorporated body whose activity is not for the purpose of profit and which is not a financial institution (Section 1 of the Value Added Tax Law, 1975), which is a much broader definition than that of the Income Tax Ordinance. As a matter of practice, however, an amuta seeking to be eligible for tax benefits will qualify for the more stringent requirements of the Income Tax Ordinance and apply for recognition of beneficial tax status to both tax authorities.

While a non-profit organisation is exempt from value added tax, with regard to its operation in Israel a salary tax will be levied on salary paid by such non-profit, as determined by the Ministry of Finance with approval of the Finance Committee of the Knesset (Section 4 of the Value Added Tax Law).

Rights and Duties of Amuta Members

The rights and liabilities of an amuta member in his capacity as a member are set forth in the Model Articles.

Member's rights

Under the Model Articles, a member is entitled:

to vote in the amuta's general meetings and to elect or be elected to the amuta's board (“vaad”) and an audit committee (“vaadat bikoret”) (Section 2 (a) of the Articles)
to participate in the amuta's activities and enjoy its services (Section 2 (b) of the Articles)
to terminate his membership at will by 30 days' notice (Section 3 (a)(2) of the Articles)

Member's duties

Under the Model Articles, a member must:

pay membership dues if the Board decides to impose them (Section 2 (c) of the Articles) and will be liable for the payment of membership dues up to the date of termination of membership (Section 2 (d) of the Articles). Failure to pay his membership dues entitles the amuta's general meeting to terminate his membership (Section 3 (b) of the Articles).
abide by the provisions of the amuta's Articles and resolutions of its general meeting, on the pain of having his membership terminated by the amuta's general meeting (Section 3 (b) of the Articles).

A member may not:

act in contravention of the amuta's purposes, on the pain of having his membership terminated by the amuta's general meeting (Section 3 (b) of the Articles).

In the event a member has been convicted of an offence involving an act of moral turpitude, his membership may be terminated by the amuta's general meeting (Section 3 (b) of the Articles).

Member’s liability

General

In general, the principle of a member’s liability in an amuta is that of limited liability, so that a member would only be liable to the amount of his unpaid membership (probably zero). Similarly to corporations, the principle of the limitation of a member’s liability for the activities of an amuta will be foregone in cases where the lifting of the veil is appropriate, such as when a member causes an amuta to be involved in criminal activity. On the issue of liability, the Amutot Law contains the following provisions:

Liability of amuta members and others for fraud

A member of the amuta, as well as an employee and a member of the audit committee is liable to imprisonment for any of the following: (1) giving a false answer or providing false information in response to an question or information request under the Amutot Law; (2) continuing to act in the name of the amuta which is undergoing dissolution, with a fraudulent purpose (Section 64 of the Law).

Strict liability offences

Anyone responsible for certain breaches by an amuta listed in Section 64A of the Amutot Law (failure to maintain a membership ledger, a ledger of board members, and books of account; failure to hold annual general meetings, failure to keep minutes of general meetings; failure to permit a board member, audit committee member or auditor to inspect the amuta’s records; failure to file to the Registrar resolutions and reports that an amuta is obligated to file; action in disregard of the liquidation procedure), even absent mens rea or negligence will be liable to a fine.

Amuta’s Administrative Organs

After the amuta has been registered, it must elect a board (“vaad”) and an audit committee (“vaadat bikoret”) or auditor (Section 19 of the Amutot Law).

The board and the audit committee must have at least two members each (Sections 12 and 19 of the model Articles). The first board will include the founders (Section 26 of the Amutot Law).

These positions cannot be filled by the same people (Section 32 of the Amutot Law), or by people who are not members of the amuta or who provide services to the amuta for consideration other than qua a member of the board or member of the audit committee (Section 33 of the Law). A corporate member of the amuta cannot be a member of the board or of the audit committee but can designate an individual representative to fill such position even if such representative is not himself a member of the amuta (Section 33 of the Law).

Board member's duties

Members of the board are to act for the benefit of the amuta within the framework of its purposes and in accordance with its Articles and the resolutions of the general meeting (Section 27 of the Amutot Law).

Additional Considerations

General considerations regarding foreign involvement

Wherever the involvement of a foreign element is envisaged, consideration must be had to the fact that an Israeli amuta must file reports to the Registrar of Amutot and to the tax authorities. Since a flow of funds from collected donations will result, and probably transfers abroad will occur, the considerations of avoiding any appearance of money-laundering must be addressed. Requirements for a local presence and registration may arise with the bank selected to handle the funds and transfers thereof, as the bank’s duties include monitoring suspect money-laundering activities.

DISCLAIMER: The above memorandum is made available to visitors to our website as a courtesy. It is not intended as legal advice and should not be relied on as such. Persons seeking legal advice concerning Israel law should consult with a qualified advocate admitted to practice in Israel under the Chamber of Advocates Law 5721 - 1961.