Alexander Weigelt and Vasyl Fedorenko on Ukrainian regulations and wartime practice regarding charitable donations in the new issue of beck-online: Ukraine-Krieg und Recht – (UKuR) 2022 (Investitionen in Russland und der Ukraine).
Der russische Überfall hat international zu einer Welle der Solidarität mit der angegriffenen Ukraine geführt. Zahlreiche westliche Unternehmen und Privatpersonen wollen Empfänger vor Ort in der Ukraine unterstützen, deren Seriosität von außen nicht immer ohne weiteres erkennbar ist. Nachfolgend werden Rechtsrahmen und Praxis für den Empfang humanitärer Zuwendungen in der Ukraine dargestellt und Hinweise für die Compliance-Prüfung ukrainischer Empfänger gegeben.
The military aggression of the Russian Federation has motivated numerous individuals, businesses and organisations all over the world to provide financial support to Ukrainian people-in-need and victims of hostilities. An increasing number of Ukrainian organisations, volunteers and local initiatives has specialized in raising funds in Ukraine and abroad with the promise to distribute them where needed. Although many of them have professional websites and social media accounts in various languages, it is sometimes difficult to verify from abroad the legitimacy of charity fundraisers.
Traditionally, only charitable and non-governmental organisations were permitted to conduct charitable activities in Ukraine and to enjoy tax reliefs thereto. Starting with the Euromaidan (Revolution of Dignity) and Donbas conflict in 2014, the practice of charitable acti- vities has grown out of these regulatory limitations. After the outbreak of war in February 2022, regulations were further simplified, and the range of recipients and charitable activities was broadened.
I. Legal framework for charitable activities
[1] The Ukrainian legal framework for charitable and humanitarian activity is mainly set by the following legal acts:
Law of Ukraine “On Charitable Activity and Charity Organisations” No. 5073-VI dated 5.7.2012, as amended (‘Charity Law’);
Law of Ukraine “On Humanitarian Aid” No. 1192- XIV dated 22.10.1999, as amended (the ‘Humanita- rian Law’);
Law of Ukraine “On Public Associations”No.4572- VI dated 22.3.2012, as amended (‘NGO Law’);
Law of Ukraine “On Volunteer Activity” No. 3236- VI dated 19.4.2011, as amended;
Law of Ukraine “On State Registration of Legal Entities, Individual Entrepreneurs and Public Organisations” No. 755-IV dated 15.5.2003, as amended;
Tax Code of Ukraine dated 2.12.2010, as amended (‘Tax Code’).
[2] Numerous bylaws have been adopted for the practical implementation of the above laws, including recent legal acts under the Martial Law (first introduced by Decree of the President of Ukraine No. 64/2022 dated 24.2.2022 and later extended).
1. Charitable activity – definitions
[3] According to the Charity Law, charitable activity is a voluntary personal or property aid that does not generate any profit to a donor, nor makes to pay any remuneration or compensation to the donor by a beneficiary or on behalf of him.
[4] A beneficiary is a recipient of charitable assistance (an individual, a non-profit organisation or a territorial community) who receives such assistance free of charge. A legal entity that follows the charity goals as defined by the Charity Law can also be a beneficiary and receive charitable assistance.
[5] A donor (philanthropist) is a legally capable indivi- dual or a private legal entity, which voluntarily carries out charitable activities.
2. Subjects of charitable activity
a) Charitable organisations
[6] Charitable organisations are operating for charity purposes only. According to Article 1 No. 1 (3) of the Charity Law, a charitable organisation is a legal entity of private ownership that has enshrined in its founding documents one or more charitable activity types as the main purpose of operation. Charitable organisations can be created in the form of charitable partnership, charitable establishment, or charitable fund.
[7] A charitable organisation is deemed incorporated after state registration with the State Register of Legal Entities, Private Entrepreneurs and Civil Organisations (‘USR Register‘). A charitable organisation may enjoy a special “non-profit” regime that excludes payment of income tax once it has been registered by the tax autho- rities as a “non-profit” organisation. Non-profit status is granted only if the statutory documents prohibit income distribution among the participants (founders) and provide rules for asset distribution in case of an entity’s termination (liquidation).
[8] A charitable organisation may spend no more than 20 % of its annual income for administrative purposes (e.g. office rent, salaries), and all remaining income shall be distributed to beneficiaries.
b) Non-governmental organisations (NGO)
[9] According to Article 1 of the NGO Law, a non-governmental (civil) organisation (‘NGO’) is a voluntary association of individuals and/or legal entities for exercising and protecting rights and freedoms, satisfaction of public interests, in particular, economic, social, cultural or environmental interests. The main difference to charitable organisations is that NGOs have the main purpose (to be determined in the statutory documents) of solving social issues. NGOs are subject to state registration within the USR Register and may apply for non-profit status as provided above.
[10] Charitable organisations and NGOs with non-profit status are the most trustworthy options for charitable activity, as (i) the registration for charitable purposes or social issues (that can be verified online) provides a certain semblance of reliability and helps in negotiations, and (ii) registration as a non-profit organisation ensures that the lion`s share of raised funds will be spent for the need of beneficiaries and without tax deductions.
c) Commercial entities
[11] After recent changes to the Tax Code, even commercial (profit-oriented) legal entities are allowed to conduct charitable activity by fundraising and spending money for beneficiaries` needs, without having significant risks of impacting their usual business or taxation models. However, independent verification by donors is difficult as there is not specific registration in this regard.
d) Individuals
[12] Traditionally, charitable activity in Ukraine had been exclusively conducted by organisations.
[13] This exclusivity was opened during the Donbas conflict in 2014, when patriotic individuals started initiatives in their own name to collect money and distribute it to the at that time desperate Ukrainian army, irregular military units or specific military personnel in need. Reflecting this development, Ukraine introduced in 2014 a Register of Volunteers of the anti-terrorist operation and implementation of measures to ensure national security and defence, repulse and suppression of armed aggression of the Russian Federation in Donetsk and Luhansk regions (‘Volunteers Register’). Registration of an individual with the Volunteers Register has the effect that income on dedicated bank accounts of the registered volunteer is excluded from personal income taxation.
[14] The Volunteers Register should be accessible online and updated every 10 days on the website of the Tax Service of Ukraine, however, as of May 2022 it has not been made available online yet. In any case, the respective regional branch of the Tax Service of Ukraine issues registration certificates confirming the fact and the date of registration of the volunteer.
[15] Legislation on volunteers is ambiguous and in certain ways contradictory: Before April 2022, registration as volunteer was available only to individuals acting in the Donbas area (Donetsk and Lugansk regions of Ukraine). Following recent changes to the Charity Law, effective from 16.4.2022, any individual is eligible for registration with the Volunteers Register by providing a simple set of standard documents. Considering that registration applications are processed not centralized but on regional level, and as relevant by laws have not been amended, registration of an individual with the Volunteers Register should not be taken as a fully sufficient proof of that individual`s reliability.
[16] In practice, willing to help where they can, Ukrainian individuals often conduct volunteer and charitable activities without any volunteer registration, ignoring tax risks.
[17] There is no clear legal frame regarding taxation of such activities, in particular if funds are received on bank accounts that are also serving personal or business activities of such individual. Tax authorities tend to grant leniency in practice if funds are spent on selected beneficiaries (participants of military operations, employees of entities engaged in national security matters, current or former residents of areas affected by active hostilities). Where possible, formalized documents evidencing use of funds (e. g. payment documents indicating recipient, handover acts, agreements) should be kept.
3. Types and regulation of charitable activity
[18] Article 5 Nr. 1 of the Charity Law provides for 9 types of charitable activity, including gratuitous transfer of funds and other property, free of charge provision of services and performance of work, public fundraising, conducting charitable auctions, etc.
[19] Donations of funds and material objects and pu- blic fundraising are of most practical relevance.
a) Donations
[20] Under the general rule, donations are legally treated as a gift agreement. If a donation pertains to the transfer of personal or household goods (e.g. food, hygiene, clothes, mattresses), donations can be made without any documentary proof.
[21] Donors are entitled to set a condition precedent for their donation, and to select types of beneficiaries to receive the donation.
[22] Theoretically, donors are entitled to supervise how their donation is spent, however, no procedure has been adopted in this regard. In practice, individuals collecting and distributing donations provide written reports and photo-/video evidence upon a donor’s request.
b) Public fundraising
[23] Public fundraising is a voluntary collection of targeted assistance in funds or property among an indefinite number of persons, using public means of communication. Websites and social media are the primary channels of targeting Ukrainian and foreign prospective donors. Public fundraising also applies to charity auctions, lotteries and concerts.
[24] Article 7 of the Charity Law provides detailed requirements for individuals acting as fundraisers for a charitable organisation (external fundraisers):
[25] Individuals acting on behalf of a charitable organisation need to have a notarized power of attorney from such charitable organisation.
[26] Individuals acting for the benefit of a charitable organisation need to have a written agreement with such charitable organisation, specifying details of the charitable organisation; details of the external fundraiser; purposes of fundraising; place and term of fundraising; procedure of use of the fundraised assets; procedure of access to the financial statements of the charitable organisation.
[27] Individuals acting on behalf or for the benefit of other beneficiaries need to have an agreement with such beneficiaries or their legal representatives.
[28] In practice, it is common and advisable that bank accounts and payment alternatives to which fundraising is directed are specified in detail in the relevant authorisation documents from a charitable organisation. In practice, personal bank accounts of volunteers and alternative payment instruments such as PayPal, Western Union, Bitcoin are commonly used for attracting donations from non-Ukrainian donors.
II. Recommendations for verifying charitable organisations and volunteers in Ukraine
[29] Ukraine combines a post-Soviet tradition of extensive paper documentation with a surprisingly modern system of online transparency. This enables relatively comprehensive background research of legal entities and many individuals. Typically, verification of a charitable organisation and individuals acting on behalf of it could include, besides standard check of social media, the following:
Online check of registration information (including date of registration, statutory representatives), tax debts, pending and closed court disputes, open enforcement procedures against the charitable organisation.
Online check if an organisation is registered with the Tax Office in the Register of non-profit organisations.
If donations are requested to a personal bank account of an individual, that individual should provide authorisation documents (notarised power of attorney, written agreement with the charitable organisation). In addition, written confirmation should be provided by a statutory representative of the charitable organisation under the organisation`s letterhead.
Any individual acting as a volunteer should provide the confirmation of registration with the Volunteer`s Register from the regional branch of the Tax Service of Ukraine.
Before transferring larger amounts of money to the Ukrainian bank account of an individual or charita- ble organisation, it should be confirmed with the Ukrainian bank which kind of payment confirming documents the bank requires. As a rule of thumb, amounts exceeding UAH 400,000 (approximately EUR 13,000 as of May 2022) trigger specific financial monitoring.
The charitable organisation should provide evidence of spending previously received donations and should commit to provide documentary or photo/video evidence of new donations.
Download pdf here: UKuR_2022_04_Gesamt_2.pdf
To find more detail you can follow the link: https://beck-online.beck.de/Dokument?vpath=bibdata%2Fzeits%2Fukur%2F2022%2Fcont%2Fukur.2022.h04.nameinhaltsverzeichnis.htm&anchor=Y-300-Z-UKUR&opustitle=UKuR (Investitionen in Russland und der Ukraine - page 139).
* Ukraine-Krieg und Recht – UKuR, the new online magazine, informs quickly and accurately every two weeks about legal issues in connection with the war in Ukraine. It provides legal news, short essays written by legal scholars and practitoners as well as the latest case law on economic law issues for a readership from the German legal sector.
This publication is for informational purposes only. If you would like to learn more or seek legal advice, please contact the following or your usual Nobles contact:
Alexander Weigelt (partner), Vasyl Fedorenko (senior associate).
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