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Hong Kong – Charity Law Reform: What Do The Proposed Changes Mean For You?

3 March, 2014

 

Legal News & Analysis – Asia Pacific – Hong Kong – Regulatory & Compliance

 

On 6 December 2013, the Law Reform Commission published a report on charities following a six-year review of charity law in Hong Kong.

 

In recent years there has been widespread concern over a lack of oversight of the 7,500 tax-exempt charitable organisations currently operating in Hong Kong (there are thought to be many more who have not registered for tax exempt status). There is no single piece of legislation in Hong Kong governing charitable organisations and the current law has been criticised for being inconsistent, archaic and unclear. The Law Reform Commission has therefore proposed 18 reforms which push for greater accountability and transparency to build public trust and confidence through proportionate regulation.

 

In this bulletin, we summarise the key proposals from the Law Reform Commission’s report and highlight a number of steps which Hong Kong charities would have to take to prepare for the implementation of these reforms.

 

Summary Of Key Proposals

 

Registration System

 

Hong Kong currently lacks a formal register of charities. Although the Inland Revenue Department (the main government body regulating charities in Hong Kong) maintains the largest list of charities, this only includes those organisations which have been successfully granted tax exemption under section 88 of the Inland Revenue Ordinance.

 

One of the key recommendations of the Law Reform Commission is therefore the creation of a centralised database and the introduction of a registration requirement for all organisations that:

 

  • have been granted tax exemption; and/or
  • make charitable appeals.

 

Existing charities which are currently exempt from tax under section 88 of the Inland Revenue Ordinance will be ‘grandparented’ into the registration system should the new regime be put in place.

 

Statutory Definition Of ‘Charitable Purpose’ And Legal Structure

 

A further important recommendation of the Law Reform Commission is that there should be a clear statutory definition of what constitutes a charitable purpose. To retain a measure of flexibility in interpretation, it proposes that a two-limb test be adopted, so that an organisation must have a purpose which:

 

  • is ‘for the public benefit’; and
  • falls within a specific list of charitable purposes.

 

Existing charities which are currently exempt from tax under section 88 of the Inland Revenue Ordinance will, again, be ‘grandparented’ into the new regime so that they will continue to be considered a charitable organisation.

 

In terms of the legal structure of charities, the Law Reform Commission has decided to maintain the current system of allowing a variety of legal forms, including an incorporated company, unincorporated company, trust, or statutory body.

 

Governance, Accounting And Reporting

 

The following measures have been proposed to improve governance of, accounting and reporting by charities:

 

  • the adoption of a specifically formulated financial reporting standard;
  • the imposition of varying filing requirements by Government departments on charitable organisations in their applications for charitable fundraising licences and permits;
  • a requirement for tax-exempt charities to publically disclose certain documents including financial statements and reports of activities; and
  • a frequent review by the Inland Revenue Department of the accounts of tax-exempt charities to ascertain whether their activities are compatible with their objectives.

 

In terms of enforcement, the Law Reform Commission has suggested that a Government bureau or department would be most appropriate to ensure compliance with the filing and disclosure requirements. Proposed consequences of non-compliance include refusal of applications, revocation of existing fundraising licences for permits, loss of tax exemption privilege, de-registration, or referral to law enforcement agencies.

 

Charitable Fundraising

 

The Law Reform Commission has recommended that the requirements and application procedure for fundraising events be standardised. It has therefore been proposed that an application form with common basic requirements regarding different types of charitable fundraising licence or permit application be adopted. In addition, the Law Reform Commission has suggested that a platform of coordination among government departments be established to deal with applications for fundraising licences.

 

In order to increase transparency, the Law Reform Commission has also recommended the mandatory display of a charity’s registration number for all forms of charitable fundraising activities, including webpages which allow donations via the internet.

 

To facilitate good practice in charitable fundraising, the Law Reform Commission has proposed:

 

  • the implementation of a non-statutory code which encourages charitable organisations to work with institutions;
  • the issuance of good practice guidelines; and
  • engagement in public education.

 

Establishment Of Charity Commission Put On Hold

 

Due to high level of opposition expressed during the public consultation process, the Law Reform Commission has not recommended the establishment of a charity commission to regulate charities and monitor their compliance.

 

Although charity commissions have proven successful in jurisdictions such as England, Ireland and New Zealand, the Law Reform Commission stated in its report that more time is needed before the introduction of a charity commission in Hong Kong.

 

What Does This Mean For Hong Kong Charities?

 

In order to prepare for the introduction of the proposed reforms outlined above, we would encourage Hong Kong charities to:

 

  • conduct an internal review of governance policies and procedures; and
  • ensure financial accounting and reporting procedures are in compliance with the proposed new requirements.

 

Those charities which are not currently exempt from tax under section 88 of the Inland Revenue Ordinance should also consider their charitable objectives against the proposed new statutory definition of ‘charitable purpose’ and pay close attention to whether they are fulfilling their objectives.

 

It is, at present, unknown how or when the Hong Kong Government will implement the recommendations made in the Law Reform Commission’s report. We are monitoring developments in this area and will keep you informed of any progress.

 

herbert smith Freehills

 

For further information, please contact:

 
Gareth Thomas, Partner, Herbert Smith Freehills

gareth.thomas@hsf.com
 

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