Law of Charitable Foundations in Pakistan
June 9, 2008
By Yasser Latif Hamdani and Binish Zafar Razi
This opinion covers the benefits and legal requirements of establishing a charitable foundation.
In general, a charity is an organization established for humanitarian purposes. It may make a profit but all profits should be applied in furthering the charitable purpose of the organization. The owners, members, trustees or other private persons who may control or influence the organization may not use the profit of the charitable organization for their personal gain.
The benefits of establishing and registering a charitable foundation/Non-Profit Organization under Pakistani law, are three fold:
(a) Tax Exemption for all activities under Income Tax Ordinance 2001 and Income Tax Rules 2002.
(b) Tax Exemption for the donors vis a vis donations made to such a foundation/NPO.
(c) Some of the various laws that deal with the issue confer the status of artificial legal person to the organization and hence the assets owned by such an organization shall be held in perpetuity and recognition as a bona fide foundation.
These are in addition to the benefits gained from Corporate Social Responsibility (e.g. good public relations, competitive edge, good reputation, employee participation and retainership).
- Process and order
In order to gain all the benefits outlined in section 3 above, the setting up of the charitable foundation should be taken as a two-stage process.
First a charity/foundation is registered under any of the relevant laws detailed in section 5 below.
Second the same charity/foundation applies on a separate application form for approval as a non profit organization and tax exemption under the relevant Income Tax laws detailed in section 6 below.
An erroneous assumption is that once a charitable foundation is registered, it is automatically registered with the CBR. This is wrong and requires careful consideration.
- Legal requirements/relevant laws
The various laws that deal with charitable foundations/non-profit organizations may be broadly classified into these categories:
Those that require registration and are relevant to us are as follows:
(a) Companies Ordinance 1984 – In the purview of Section 42, the Ordinance allows a company to be incorporated for objectives such as Charity, Commerce, Sport, Religion, Education, Culture, Arts and any other socially useful purpose.
(b) Trusts Act 1882 Public Charitable Trusts may be set up under this by executing a trust deed, registerable under Trust Act 1908.
(c) Societies registration Act 1860 i.e. Societies, Associations, Clubs etc are all registered under this. Fine Arts, Science, Museums, Libraries, educational endeavors, think tanks etc may all be registered under these.
(d) Voluntary Social Welfare Organizations Ordinance 1961 covers the welfare of the disadvantaged members of society women, children, oppressed religious and ethnic minorities and other backward classes of people , delinquents, handicapped people, beggars, destitute and poor, senior citizens, socially handicapped people or for parents education, social welfare in general etc.
Others that – mostly irrelevant to our particular situation- recognize certain kinds of
(e) Charitable and Religious Trusts Act 1920
(f) Musalman Wakf Act and the two Musalman Wakf Validating Acts 1923, 1913 and 1930 respectively
(g) Charitable Endowments Act
Nonprofit Organizations in Pakistan may be registered or incorporated by adopting any one of four forms, namely, society, trust, nonprofit company with limited liability, and social welfare agencies.
A. Societies Registration Act 1860
A society may be established under the Societies Registration Act, 1860, if seven or more persons join together of whom at least three must be the members of the Managing Committee. To establish a society a Memorandum and Rules and Regulations of Association must be printed. These documents must contain clauses which not only state the objectives for which the society is being established, but also how it will operate. This is considered to be one of the more lenient Acts with respect to registration requirements and to accounting and audit regulations.
The Memorandum of Association must include the following:
- The name and registered address of the society.
- The names, addresses and occupation of each present member of the Managing Committee.
- Rules and Regulations of the society or Articles of Association duly signed by all office bearers.
- In the case of an educational society, the academic certificates of all the subscribers must be produced.
- Copies of the National Identity Cards of the office bearers.
- Rent agreement of the office premises.
In addition to the Memorandum of Association, the Rules and Regulations for governing the society must be set out and filed with the Registrar of Societies. The Rules and Regulations, certified by not less than 3 members of the Managing Committee, must contain obligatory clauses relating to:
- General Body and Managing Committee
- Meetings and quorum
- Notices for meetings
- The manner of elections and removal of officers
- Procedures relating to accounting and audit
B. Trusts Act 1882
A trust is a ‘gift’ of property to a person or institution providing benefit to both parties. In order to create a trust it is necessary that there should be a creator or author of the trust, a person in whom confidence is reposed, i.e. the trustee, and a person for whose benefit the trust is created i.e. the beneficiary. Beneficiaries cannot be specific individuals, but must be society generally or a particular section or class of society.
A trust is established under the Trusts Act, 1882. For this type of trust, the three conditions of a creator, trustee and beneficiary being present, are unconditional requirements. A public charitable trust is a trust which is established for the benefit of the society or at least a certain section of society. There are no particular laws relating to public trusts. However, the rules in the Trust Act of 1882 can be applied to the public and charitable trusts. In the case of public charitable trusts, the conditions governing private trusts are equally important. However, if the objectives are not clear, unlike the private trusts, these trusts would be sustained as long as there is an intention of charity.
- There must be some trust property, whether in cash or capital assets (land or buildings)
- The objectives of the trust must be charitable or for the benefit of society
The application for the registration of trust requires the following:
- Particulars of documents creating the trust.
- Particulars of the trustees and the beneficiaries.
- Details of what the trust property is going to be. There is no minimum value of property for starting a trust. If the property is an immovable property then the transfer deed shall be on a stamp paper on the value of the property and it shall be registered.
- Preparation of the trust deed, that is, i.e. declaration of having created a public charitable trust.
C. Companies Ordinance 1984
A nonprofit company is registered under Section 42 of the Companies Ordinance, 1984 as a public company with limited liability provided it meets the following criteria:
- It directs, or it intends to direct its profits, if any, or any other form of income from the business carried out, in advancing its objectives.
- It disallows the payment of any return to its members.
Registration is done through the SECP.
5. Approval of a Non-Profit Organisation
This section examines the income tax benefits of setting up a non-profit organisation. The references to the “Ordinance” and the “Rules” in this section shall mean the Income Tax Ordinance 2001 and the Income Tax Rules 2002 respectively.
The definition of “non-profit organization” is contained in Clause 36 of Section 2 of the Ordinance:
“2(36) “non profit organization” means any person
a) established for religious, charitable or educational purposes or for the promotion of amateur sport;
b) which is registered under any law as a nonprofit organization and in respect of which the Commissioner has issued a ruling certifying that the person is a nonprofit organization for the purposes of this Ordinance; and
c) none of the income or assets of the person confers, or may confer a private benefit on any other person.”
A. Tax Benefits
Charities approved by the Commissioner of Income Tax are exempt from the levy of minimum tax of 0.50% of their turnover.
Charitable donations, both in cash or in kind, entitle the donor to a tax credit (tax rebate) against its tax liability (subject to certain conditions).
The following heads of income are exempt from tax for any trust or charitable organisation established under any legal obligation (e.g. Muslim Waqf, Societies Registration Act 1860, Charitable Endowments Act 1890, the Social Welfare Agencies (Registration and Control) Ordinance 1961 or the Companies Ordinance 1984). The exemptions are applicable to the extent the monies are actually applied or set apart for application to the religious or charitable purposes of such organisation in Pakistan:
(a) Voluntary contributions including donations and subscriptions.
(b) Grants received from Federal, Provincial or District Governments.
(c) Foreign grants.
(d) Income from property.
(e) Profits on investments in the securities of the Federal Government.
(f) Profit on debt from scheduled banks.
B. Registration as a Non-Profit Organisation
In order to get approval from the Commissioner of Income Tax pursuant to the Ordinance an application must be made in the prescribed form (detailed in Rule 211) and the application form must be signed by the President or Secretary of the organisation.
The documents required to be submitted along with the application form are as follows:
(a) a duly attested copy of the constitution, memorandum and articles of association, rules and regulations or bye-laws;
(b) a certified copy of the registered trust deed, in case of a Trust;
(c) a certified copy of certificate of registration of welfare organisation;
(d) duly attested copies of the balance sheet and of revenue accounts of the organisation as audited by a qualified accountant for the year immediately preceding the year in which the application is made;
(e) the names and addresses of the promoters, directors, trustees, president, secretary, treasurer, manager and other office bearers, as the case may be, of the organisation, and indicating clearly their family relationships, if any, with each other;
(f) an evaluated and certified report with regard to the performance of the organisation for achieving its aims and objects during the preceding financial year preceding the date on which application is made. This can be done by the Philanthropy Centre of Pakistan or the concerned Commissioner of Income Tax.
In addition, the constitution, memorandum and articles of association, trust deed, rules and regulations or bye-laws, as the case may be, must conform(s) to the provisions of sub-rule (1) of rule 213. This requires the following:
(a) for the audit of the annual accounts of the organisation every year by a qualified accountant;
(b) for welfare organisations other than Trusts for the quorum of a meeting of the members of the body to be not less than four or one-third of the total number of the members of such body, whichever is greater;
(c) where the organisation is a Trust as defined in the Trust Act, 1882, for the quorum of a meeting of the members to be not less than three or one-third of the total number of the members of such a body, whichever is greater;
(d) for the transfer of its assets, in the event of its dissolution, after meeting all liabilities, if any, to another organisation which is an approved non-profit organisation, within three months of the dissolution under intimation to the Commissioner;
(e) for the utilisation of its money, property or income or any part thereof solely for promoting its objects;
(f) for prohibiting any portion of its money, property or income being paid or transferred directly by way of dividend, bonus or profit to any of its members or the relative or relatives of a member or members;
(g) for the maintenance of accounts of the organisation being kept in a scheduled bank or in a post office or national savings organisation, National Bank of Pakistan or nationalised commercial banks;
(h) for prohibiting the making of any changes in the constitution, memorandum and articles of association, trust deed, rules and regulations or bye-laws, as the case may be, without the prior approval of the Commissioner; and
(i) for restricting the surpluses or monies validly set apart, excluding restricted funds, upto twenty-five per cent of the total income of the year:
Provided that such surpluses or monies set apart are invested in Government securities, NIT units, a collective investment scheme authorized or registered under the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003, mutual fund, a real estate investment trust approved and authorized under the Real Estate Investment Trust Rules, 2006, or scheduled banks:
Explanation: For the purposes of the Rules, “restricted funds” mean any fund received by the organization but could not be spent and treated as revenue during year due to any obligation placed by the donor.
On receipt of the application, the Commissioner may make such inquiries or call for such further information as the Commissioner may deem necessary and after completion of formalities may approve the organization for the purpose of clause (36) of section 2 of the Ordinance.
The Commissioner may refuse to approve the organisation if the Commissioner is satisfied that the organisation -
(a) has been or is being used for personal gain of any particular person or a group of persons;
(b) has been propagating the view of a particular political party or a religious sect;
(c) has been or is being managed in a manner calculated to personally benefit its members or their families; or
(d) has not been or will not be able to achieve its declared aims and objects in view of its set up, administration or otherwise as evaluated and certified by an independent certification agency.
The Commissioner of Income Tax will finalise applications within two months of receipt of the application.
C. On-going obligations of Non-Profit Organisations
(a) To file a Return of Income with specified attachments;
(b) To collect, deduct, withhold tax at source;
(c) After every three years to provide an evaluation and certified report on its performance and achieving its aims and objects during the three preceding financial years;