Although in the common understanding foundations and associations are associated with volunteers standing with cans or with collections organised on the Internet, this is not the only permissible form of their activities. And foundations and associations are perfectly allowed to carry out economic activities, either to finance some of their statutory objectives or to support their activities pro bono. However, when an organisation decides to do so, it must bear in mind a few key points.
To begin with, a small introduction. According to the Act of 7 April 1989. Law on Associations (Journal of Laws 1989 no. 20 item 104, as amended), i.e. specifically article 2, an association is a voluntary, self-governing, permanent association with non-profit purposes. A foundation, on the other hand, pursuant to Article 1 of the Act of 6 April 1984 on foundations (Journal of Laws 1984 No. 21 item 97), may be established for the pursuit of socially or economically useful purposes consistent with the fundamental interests of the Republic of Poland, in particular such as health protection, development of the economy and science, education and upbringing, culture and art, social care and assistance, environmental protection and care for historical monuments. Both types of organisations are subject to mandatory registration with the National Court Register. Another important term often used in this article will be statutory activities. It is accepted that it is: non-business, defined by law, defined by the statute of the entity in question. In view of the above, it can be seen that a foundation's activities can be divided into economic (profit-making) and statutory activities. One cannot be treated like the other and, as will be mentioned later, the two types of activity must be kept separate.
First and foremost, the money raised in the course of economic activities must be spent either on the organisation's statutory activities or on the development of economic activities. In both cases, the intention to carry out economic activities must be mentioned in the articles of association of the organisation. In other cases, it is presumed that one is dealing with a non-profit foundation/association. The fact that the foundation or association intends to carry out business activities and the extent of these activities must be included in the KRS. In the case of a foundation, it must also be specified how much of the capital will be allocated to business activities - the minimum must be PLN 1,000. Supervision over the lawfulness and compliance with the statutes of foundations and associations is exercised by public administration bodies.
Contrary to widespread opinion, economic and statutory activities can overlap: for example, a pro bono association providing economic education can also provide paid training. However, it is important to distinguish between paid statutory activities and economic activities. The former is e.g. the sale of 'bric-a-brac', educational materials, etc. Thus, foundations and associations cannot both sell books as educational materials and for business purposes. This is the only, but not an impassable restriction on the question of combining the commercial and non-commercial spheres of operation of foundations or associations.
What needs to be kept in mind is the separation of these two activities both in accounting and legal terms. A foundation or an association conducting business activity becomes an entrepreneur in the meaning of the law and is obliged to pay all necessary taxes, especially VAT. This is an unrelated tax and is independent of whether the organisation carries out business and paid activities. VAT depends on the specific services and goods sold and their qualification under the VAT Act and whether the organisation benefits from VAT exemption due to not exceeding the amount of taxable revenue (PLN 200,000 per year). In this aspect, therefore, nothing changes in relation to the foundation's ordinary activities.
If a foundation or association shows income that is not covered by the exemptions listed in the law then it must also pay income tax. Admittedly, income spent on:
- scientific activities,
- scientific and technical activities,
- educational activities, including those involving the education of students, cultural activities, physical culture and sport, environmental protection, support for social initiatives for the construction of roads and telecommunications networks in villages and the provision of water to villages, charitable activities, health care and social assistance, vocational and social rehabilitation of invalids and religious worship,
are, in principle, exempt from PDOP (corporate income tax), but if the funds come from the electronics, fuel, tobacco and alcohol industries, from precious metals or with the participation of these metals, the foundation or association will still have to pay the tax.
When running a business as an association or foundation, like a typical entrepreneur, one is obliged to send financial statements to the National Court Register. As of 2019, this obligation can be fulfilled electronically. The bookkeeping itself has to be much more detailed, as the requirement is to accurately separate the revenues and costs resulting from the operation. In this context, it is also worth mentioning the 'one-stop-shop' rule applicable to any matter dealt with at the KRS. Contrary to outdated information which can sometimes be found on the Internet, for some time now it has not been necessary to enclose update forms to the Central Statistical Office, the Tax Office or the Social Insurance Institution. The obligation to report to the above-mentioned institutions is when the information is not published in the KRS (e.g.: place of storage of accounting records, list of bank accounts, date on which the obligation to pay contributions arose, date on which the last person for whom the payer is obliged to submit insurance documents was de-registered from insurance, predominant type of statutory activity according to PKD).
Another aspect where it is usually worthwhile to take care of the separation of statutory and business activities is the question of the registered office of the foundation/association and the business premises. The separation of the two is particularly important when the registered office of the organisation is in rented premises. In such a situation, the tax treatment of the premises changes and the foundation may also be charged income tax on the advantage of having its registered office in the lent premises. It must be remembered that exemptions from property taxes are granted only if the flat, house or plot of land is used for statutory purposes.
It is also important to fulfil all obligations towards employees. Even if a foundation or association uses volunteers in its non-commercial activities, it is no longer allowed to use their help when running a business. Everyone involved in the profit-making part of the tasks must be employed at least on a contract of mandate and preferably on an employment contract. In many situations, this can lead to artificial demarcations such as the need to exclude some regular activists from specific activities, due to the lack of an activist contract and the commercial purpose of the task. However, these are the legal realities, which primarily serve to prevent the exploitation of volunteers.
Important information for those selling as part of the foundation's activities is that all sales, especially to private individuals, must be registered on an ongoing basis. You have to take into account the obligation to purchase and register a fiscal cash register with the tax office. When operating a fiscal cash register, mandatory daily and monthly reports must be remembered. These obligations are often forgotten, especially by entities that do not use cash registers on a daily basis and whose main activity is not based on sales (and foundations and associations will mostly fall into this category).
Foundations and associations are generally less costly to set up. Organisations also benefit from more favourable taxation rules and de facto offer cheaper access to legal personality than classic commercial law companies. What needs to be borne in mind is the servile nature of the profit-making activities of a foundation or association vis-à-vis its statutory goals, and the money earned cannot be freely spent. The establishment of such organisational and legal forms should not serve to 'circumvent' the Commercial Companies Code, but only to support the goals declared in the statutes. Business activities and their conduct are associated with a number of obligations imposed by law of a civil and public law nature. In a free market economy, economic activity also carries financial risks, affecting the organisation and implementation of the financial activity itself. Therefore, the decision to undertake it should be preceded by consideration of all the circumstances by the authorities of the organisation concerned.
advocate Michał Rytel
Stemplewska Law Group, Rytel
Adwokaci i Radcowie Prawni sp.p. with its registered office in Stare Babice
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