Audit of the activities of non-profit organizations in Ukraine
We were contacted by a Client, a representative of a famous American religious television. He wanted to implement a project of such religious television in Ukraine through nonprofit organizations, in particular, charitable foundations. To do this, he wanted to find a reliable charitable foundation, the purpose of which would be related to the implementation of such religious projects in Ukraine, and to join it. Ideally, he wanted to get the leverage to manage the foundation.
Our Client was interested in one nonprofit organization in Ukraine, which could help him realize his project and receive grants for such activities from American donors, owners of religious TV channels.
However, our Client had to be sure of the intended use of the funds of this Charitable Foundation, as well as of the integrity and reliability of their organization. Joining an organization or buying a company “with a history” is always a risk to get debts you were not told about before the deal, or to get an organization that may be about to lose its non-profit status.
We suggested he audit the organization for the last three years to identify the main tax risks and objects for charging taxes, particularly personal income tax, military fee, VAT, as well as the risks of depriving the organization of non-profit status.
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The audit showed that to join or merge with such an organization is extremely risky for the Client, since we revealed significant violations of statutory activities by its management bodies, in particular:
- distribution of funds (income) of the organization among the management members outside the Charter activities;
- payments from income under civil law contracts;
- in addition, during 2018 the Charitable Foundation received services “from satellite broadcasting of video programs/subjects on the air of a TV network” from a foreign TV channel, and did not pay VAT as a recipient of such services in Ukraine. Thus, there was a risk of additional tax liabilities on VAT on this economic operation, which excluding penalties amounted to almost UAH 390,000;
- receipt of both salary and income by the employee of the foundation as a sole proprietor under civil a law contract in one accounting period;
- and other violations of the requirements of the Tax Code.
All of the revealed violations are unconditional grounds for additional charges of taxes and fines, and the exclusion of the Charitable Foundation from the register of non-profit organizations, that is, the deprivation of the non-profit status.
Meanwhile, the non-profit status is important for any non-profit organization. It confirms the fact that an organization has an exclusive right to use the tax benefits, in particular, the exemption from income tax (the standard rate of which is currently 18%). Organizations with non-profit status pay no income tax, provided that they do not generate it.
Perhaps at this point the charitable organization has not yet attracted the attention of regulatory authorities, but it will happen anyway, and it is not worth it to be a party at this point, as we explained to our Client.
When do you need to audit a nonprofit organization?
- First, if you plan to join or merge with another nonprofit organization and have confidence that you will not lose nonprofit status thereafter;
- Second, when your organization is funded by grantmakers, as most donors require NPOs to have their financial statements certified by an independent auditor;
- Third, this should be done from time to time to determine correct accounting and tax optimization, as well as to advise on tax and other issues;
- Fourth, if you want to establish the effectiveness of the management structure in your organization, in order to optimize and improve the structure;
- Fifthly, when you need to find ways to optimize and reduce costs and at the same time increase income, for example, by looking for additional sources of funding.
As you have seen from our practical experience, the conclusion of the audit gives you a clear view of the main tax risks that may exist in the activities of a non-profit organization, as well as finding ways to minimize them.
As for our Client’s case, we offered him two possible options:
- Find another Charitable Foundation for the client with the same activity, history and reputation with the help of our lawyers. In this case we would guarantee its safety and perform an audit at the search stage.
- Register a new non-profit organization in the form of a Charitable Foundation with a transfer of all the assets from the audited organization, after which the primary Charitable foundation could be liquidated.
The desired sphere of activity of the charitable foundation was very specific, so we warned the Client that finding another similar organization that was engaged in charitable activities related to religious television and intended to reorganize was virtually impossible. Therefore, given all the options, the Client chose to create a new organization and transfer the assets of the existing foundation to it.
It bears reminding that with the merger of legal entities all the assets of the NPO, as well as its rights and obligations are transferred to the newly established legal entities from the merged organizations. And in case of accession of one organization to another, all its assets, rights and obligations are transferred to the latter, which continues to exist, etc.
The peculiarity of the reorganization of NPOs as legal entities is that NPOs cannot be reorganized into another organization, the activity purpose of which is to gain profit, i.e. commercial.
Our task is to take care of your safety and find the best way to meet your goal.
If you have doubts about the correctness of the company’s activities or want to check the activities of a particular non-profit organization, don’t hesitate to contact us. Specialized lawyers of our company will conduct an audit, will be able to identify all the tax and organizational risks, and find ways to minimize them.
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