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.
Copyright ©
2003 Zell & Co..
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.
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