Polina Nesterenko
Comparative analysis of Ukrainian
and European law on the
foundations
Studia Prawnoustrojowe nr 16, 165-172
2012
Polina Nesterenko
Faculty of Law
K harkov U niversity of H um anites
Comparative analysis of Ukrainian
and European law on the foundations
In tr o d u c tio n
U k ra in ia n legislation on legal en tities undergoes p e rm an en t tra n sfo rm a tions an d one of its m ain directions of reform ing is th e harm onization of the n atio n al legislation w ith th e legislation of E urop ean U nion (EU). However, th e Decree of the C abinet of M inisters of U kraine (CMU) d ated from J u n e 9, 2010 no. 1196-p, w hich ratified th e P la n of m easures concerning th e State P rogram for A daptation of U k ra in ia n Legislation to th e Legislation of the E uropean U nion in 20101, pointed out priority areas, in which first of all the
abovem entioned ad a p ta tio n should be im plem ented. It did not consider the legislative acts reg u latin g th e legal sta tu s an d peculiarities u n en terp risin g legal e n titie s’ activity.
D espite the fact th a t th e problem of legal sta tu s, classification and pecu liarities of non-profit e n titie s’ economic activity, in p a rticu la r of th e founda tions, have been a subject of scientific research of num erous civil law yers and rep resen tativ es of th e School of B usiness Law for a long tim e, regarding th e n a tu re and contents of th is concept debates and discussion still proceed. They have not found its logic conclusion in one scientific point of view as well as in legislation, w hich has a negative influence on th e practice of applying norm s concerning th e foundations.
The problem of legal regulation of foundations’ activity an d th e ir legal s ta tu s has been developed on m onographic level by the following scientists: Evgeniy Bulatov, Ivan Zhigalkin, D m itriy Leshchenko. Besides, problem s of certain types of foundations and u n en terp risin g com panies have been an aly zed in civil lite ra tu re , in particular, in th e works of G alina E rygina, M aria
1 L aw of U k ra in e of 18.03.2004 no. 1629-IV , On the S ta te P ro g ra m fo r A d a p ta tio n o f
U k ra in ia n L e g isla tio n to the L e g isla tio n o f th e E u ro p e a n U nion, [online] <h ttp ://z a k o n 1 .ra -
166 P o lin a N esteren ko
Tikhonova, Vadim Chepurnov. However, none of th e m onographies, scientific works or articles does contain more or less thorough analysis of E uropean experience of foundations’ legal s ta tu s regulations.
Thus, th e purpose of th is article is to analyze th e experience of legal s ta tu s regulation and foundations’ economic activities in M em ber S ta te s and to identify possible ways of im provem ent of U k ra in ia n law in th is area, tak in g into account the possible unification of U k rain ian and E uropean legal rules.
L eg a l s ta tu s o f th e fo u n d a tio n s
R egarding th e definition of th e foundation it should be noted th a t U k ra in ian legislation does not contain th e expanded and clear definition. The Civil Code of U k rain e only indicates th a t th e foundation is an organization founded by one or more persons (founders), w hich do not p articip ate in its ad m in istratio n and operative m anagem ent, by m eans of combining th e ir assets in order to achieve a goal defined by th e founders a t th e expense of th e foundation’s property2.
A nalysis of th is definition and its com parison to th e in te rp re ta tio n of the definition of “corporation”, as well as th e analysis of scientific positions on th is m atter, allows us to distin g u ish th e following featu res of the founda tions:
1) it’s a legal form of non-profit organization,
2) th ere is a prohibition on profit d istribution in favor of th e founders or o th er pre-defined entities;
3) it is establish ed on basis of a founding act by one person or several persons, am ong who no corporate relationship s exist and who are not its m em bers;
4) th ere is no m em bership,
5) it is created for non-com m ercial activities by combining (allocating) th e founders property, w hich is used to achieve the n o n -entrepreneurial purpose3.
R egarding th e la s t feature, th ere are o th er points of view on th is m atter. In particular, Ivan Zhigalkin notes th a t th e “foundations property has the
2 C ode o f U k ra in e o f 16.01.2003 no. 435-IV, T h e C ivil Code o f U kraine, [online] <h ttp :// z ak o n .rad a.g o v .u a/c g i-b in /la w s/a n o t.c g i? n reg = 4 3 5 -1 5 >.
3 E.V. B ulatov, L e g a l s ta tu s o f a n in s titu tio n a s a su b ject o f econom ic rela tio n s [in U k r a in ia n ], I n s titu te o f E conom ic a n d leg al r e s e a rc h o f N A S o f U k ra in e , D o n e tsk 2005, p. 20; I.P. Z h ig a lk in , F o u n d a tio n a s leg a l e n tity [in U k ra in ia n ], K h a rk iv 2009, p. 20; D .S. L eshchenko,
T h e leg a l in s titu tio n s s ta tu s in C ivil la w o f U kra in e [in U k ra in ia n ], T he N a tio n a l U n iv e rs ity of
end use and should be used solely to achieve, firstly, a public benefit p urpo se, defined by its founder, secondly, th e ones, w hich are rela te d to th e objecti ves defined by th e founder by th e ir n a tu re and aim ed a t achieving public benefit purpose”4. It is h a rd to agree w ith th is statem en t, as long as U k ra
in ia n legislatu re (the Civil Code, th e Commercial Code of U k rain e and spe cial acts) does not contain obligatory norm s concerning th e specific non com m ercial p urpo ses of fou n d atio ns, th e n th e re is u su a lly a circle of beneficiaries th a t h as to be indefinite, b u t th e purpose of th e foundation m ay be th e protection of th e in te rests of a certain group of individuals (disabled persons, sportsm en, etc.).
If we refer to th e foundation law of EU countries, as long as th ere are no suitable directives or decisions aim ed a t harm onizing sta n d a rd s concerning th e foundations (a project of E uro p ean F oundation S ta tu te has not been adopted yet), th ere are less relev an t discrepancies.
E uropean F oundation S ta tu te would provide fu rth e r benefits to th e fo u nd atio n sector. It would help to clarify term s and the concept of foundations as organizations w ith th e ir own resources an d independent governance. It would also help to develop a common definition of “public benefit purpose” of th e foundations, as cu rrently th e term “foundation” is m uch too loosely used. B ut now w ithin th e EU each M em ber S ta te has a slightly different u n d e r stand ing of w h at foundations are. Foundations are independent, separately constituted non-profit bodies w ith th e ir own established and reliable sources of income. They are u su ally b u t not exclusively funded by an endowm ent, and have th e ir own governing boards. They have been given goods, rights and resources to perform work and provide support for public benefit p urpo ses, e ith e r by supporting organizations or individuals or by operating th e ir own program s. They do not have m em bers, b u t associate p riv ate resources for public in te re st purposes5.
The m ain focus of E uropean F oundation C entre a t p rese n t tim e is to see a E uropean F oundation S ta tu te become law, which would do m uch to over come the b a rrie rs w hich im pede foundations’ cross-border work. The S ta tu te would have th e effect of u n leash in g foundations’ potential economic im pact on public-good activities.
So, as we have no harm onization of foundation law in EU, th ere are more or less significant differences in foundation law in th e M em ber States. For exam ple, the N etherlan d s legislation does not contain strict req u ire m ents for foundations (p u rsu it of any law ful purpose, no m inim um initial endow m ent required, only ru d im en tary control by th e public atto rn ey as the S ta te au th o rity and w ith largely uncon strained economic activities, th ere are
4 I.P. Z h ig alk in , op. cit., p. 5.
5 G. Salole, W hy I s the E u ro p e a n F o u n d a tio n S ta tu te N e e d e d ?, „The I n te r n a tio n a l J o u r n a l of N o t-fo r-P ro fit L aw ”.
168 P o lin a N esteren ko
no restriction s on the im plem entation of business establishm ents), in con t r a s t to F rench law (p u rsu it of only public benefit purpose, m inim um initial endow m ent of usually € 1000,000, strong m onitoring by th e S ta te superviso ry authority). B u t we can still identify common features th a t foundations in th e E uropean U nion have. It is an independent organization (in m ost coun trie s w ith its own legal personality), which h as no form al m em bership, is supervised by th e S ta te supervisory authority, is created to serve a public benefit purpose (in some M em ber S tates: to achieve any law ful purpose), for which th e founder(s) allocated c e rtain property or has provided an endow m en t an d determ ined th e foundations” purpose and s ta tu te s, w hich also creates a by-law of th e foundation. B ut th e above listed features of founda tions are applicable for civil law countries only6.
In common law countries (Cyprus, Ireland, M alta and th e U nited K ing dom) legislation distinguishes betw een “charitable tru s ts ”, “charitable com p any”, and newly created “charitable incorporated organization”. However, these legal forms only have c e rtain sim ilarities w ith th e features of the public benefit foundations (absence of m em bership and corporate stru c tu re s an d legal personality. For th e m a tte r of th a t, in th e U nited Kingdom it seem s to be common to reg ard all “ch arities” as one single category (w ithout a distinction betw een charitable tru s t, charitable com pany an d charitable incorporated organization).
For exam ple, th e legislation of th e US unlike th e one of common law countries, uses th e term “foundation”, although the u n d e rsta n d in g of which differs significantly from th e “foundation” in th e civil law country. In th e U nited S tates, a “foundation” is a sub-category of a tax-exem pt “ch arity ” (tru s t or non-profit corporation) defined by some functional c riteria depen ding on th e source of its income. The In te rn a l Revenue Code distinguishes betw een “private foundations” (usually funded by an individual, family, or corporation) and public charities (other charities th a t raise m oney from the g eneral public). P riv ate foundations have m ore restrictions (e.g., prohibition from controlling affiliated enterprises) and fewer tax benefits th a n public charities.
In addition to the above m entioned features th e E uro pean foundations are generally (but not always): are created for an indefinite period, exist u n d e r control of public au th o rities, should not allot the received profits (donation, gift, inheritan ce, etc.) betw een th e founders or betw een th e m em bers of foundation executive body. As U k rain ian , E urop ean legislation u su a l ly consolidates full legal p ersonality for foundations, w hich includes lim ited liability and full tra n sa ctio n a l capacity. The only exception is Luxem bourg,
6 F ea s ib ility S tu d y on a E u ro p e a n F o u n d a tio n S ta tu te . F in a l R ep o rt, E u ro p e a n C o m m is sion, p. 224 [online] <h ttp ://e c .e u ro p a .e u /in te rn a l_ m a rk e t/c o m p a n y /d o c s /e u fo u n d a tio n /fe a sib ili- ty s tu d y _ e n .p d f>.
w here th e foundations are allowed to hold only im m ovable property if it is necessary for reaching a public benefit purpose. The reason for th is is the p reservation of influence theory of “dead h a n d ” or “m o rtm ain”7. Historically, th e foundations for a long tim e (until th e tw e n tie th century) were dooming property to serve a specific purpose (for exam ple, th e provision of educatio nal services), giving “th em into a ‘dead h a n d ’ (m ain m orte, Tote H and)”8. And th e founder of the foundation defined th e purpose and lim ited legal capacity of his foundation. A sim ilar situ a tio n existed u n til recent tim es in Belgium and Italy, th e o u tdated provisions were abrogated by th e relev ant laws in 2002 and 1997, th u s, expanding th e foundations legal capacity. In France the corresponding lim itatio n is still preserved, b u t only w ith respect to the p u blic benefit associations.
Some M em ber S tates consolidated the require of approval by th e State supervisory au th o rity on acquiring by foundations some categories of assets (e.g., donations, im m ovable property). It is arguable w h ether such rules should be reg ard ed as a lim itatio n of foundations’ legal capacity or as a m easure of (preventive) S ta te supervision. We follow the la tte r approach, as long as th e ratio n al explanation for th e existence of this rule is conside red: less th e fear of th e “dead h a n d ” and more the w ish to prev ent abuse (which is also th e ratio n ale for o th er rules of preventive S ta te supervision). Consequently, these rules are discussed along w ith the o th er m easures for S tate supervision.
There is no such rule in U k ra in ia n legislation regarding such founda tions as legal en tities of private law, b u t according to our point of view, any restrictio ns on tran sactio n s (even th ro u gh the estab lish m en t of rules related to fu rth e r approvals of these tran sactio ns) lim it the capacity of a legal e n tity an d are not th e ordinary prevention of tran sg ressio n from th e side of foundations’ executive bodies.
E co n o m ic a c tiv itie s o f th e fo u n d a tio n s
An im p o rtan t issue, in our opinion, is to fix opportunities for foundations to carry out economic activities. According to th e article 86 of th e Civil Code of U krain e foundations can carry out economic activities along w ith th e ir principal activity, unless otherw ise provided by law and in case th e ir activity m eets th e purpose for w hich they were founded, and contributes to its achie vem ent. B ut th e Civil and th e Commercial Codes do not contain a general rule as for th e possibility for foundations to be a founder (m em ber) of e n te r
7 Ib id em , p. 52.
170 P o lin a N esteren ko
prise legal en tities (private en terp rises, corporations), as th e article 167 of The Com m ercial Code of U k rain e clearly indicates th a t “holding corporate rig h ts shall not m ean e n tre p re n e u rsh ip ”, and is th e m ediated participation of th e foundation in e n tre p re n e u ria l activities of a n o th er entity. If we tu r n to special law s governing th e sta tu s of a specific foundations’ type, for social- c u ltu ral foundations, it can be seen th a t th ere are no special lim itations for such possibility. Thus, th e Law on H igher E ducation of U kraine (article 23) indicates directly th a t a u n iversity can be a founder (co-founder) of others legal en tities w hich carry out th e ir activities in accordance w ith the direc tions of educational, scientific an d in d u stria l activities of high school, and th e “List of groups of in te rn a l funds of b u d getary foundations, requirem ents reg ardin g th e ir founding an d application directions” approved by Resolution of CMU from M ay 17, 2002 No 659 (article 1 § 2) indicates th e funds, which public foundations receive from economic and in d u stria l activity of auxiliary, educational-auxiliary en terprises, farm s, workshops, w hich have legal perso n a lity 9 . Fixing th is opportunity for a h igher education in stitu tio n is reaso n a ble because th ere was a regulatory en actm ent in Soviet U nion acting since 1929. It allowed to found in d u stria l en terp rises w ith legal e n tity ’s rig h ts for scientific research foundations, technical universities and colleges10.
If we tu rn to th e experience of th e R u ssian F ederation, th e Civil Code of R u ssian F ed eratio n sta te d th a t „foundations funded by owners m ay be p a rti cipants in business companies an d investors in p a rtn e rsh ip s w ith th e p e r m ission of th e owner, unless otherw ise prescribed by law ” (article 66 § 4). B u t in R u ssian civil lite ra tu re th e following m a tte r rem ains controversial: should the subject of activities of en terprises, whose founders or m em bers are non-profit organizations, m eet th e ir sta tu to ry purposes of th e latter. A c e rtain group of scientists supports th e position th a t th e correspondence has to ex ist11, an o th er group of scientists indicates th a t legal en tities estab li shed by foundations m ay carry out any kind of economic activity w ith no lim its12. In U k ra in ia n civil lite ra tu re th is m a tte r is not sufficiently develo ped. B ut th ere is a position, according to w hich it is suggested to introduce to legislation a legal provision th a t would prohibit the foundations to contri b u te to th e authorized capital of th e en terp rises whose subject of activity does not correspond to its basic functions13. Besides, it is proposed to allot
9 R e so lu tio n of C a b in e t o f M in is te rs of 17.05.2002 no. 659, L is t o f g ro u p s o f in te rn a l
fu n d s o f b u d g e ta ry fo u n d a tio n s, re q u ire m e n ts re g a rd in g th e ir fo u n d in g a n d a p p lic a tio n d irec tio n s, O fficial B u lle tin of U k ra in e , 2002, p. 1032.
10 V.K. M a m u to v (ed.), T ra n sp a ren cy o f b u sin e ss en titie s a n d econom y crim e p re v e n tio n [in U k ra in ia n ], D o n e tsk 2007.
11 E.A. S u k h a n o v (ed.), T h e C iv il L a w [in R u ss ia n ], M oscow 1998.
12 M .J. T ih o m iro v a (ed.), C o m m e n ts to the F ed e ra l L a w on N G O s [in R u ss ia n ], vol. 1, J u rin fo c e n tr, M oscow 1998, p. 816.
th e rule in th e Civil Code (and th e Com m ercial Code) of U kraine, th a t a foundation has to contribute to th e authorized funds of en terp rises (inclu ding corporations) only th e property belonging to it, w hich h ad been received not from th e founder, b u t a t th e expense of its own business an d other economic activities14.
Concerning th is m a tte r we should refer to E uropean experience. The civil law of th e m ost E uro pean countries allows th e foundations to carry out th e business activity w ithout any special clauses. B ut in some countries th ere are still c e rtain restrictio n s on th e “economic activities”. In th is case, th e grounds of such restriction s in m ost cases are the protection of creditors in terests, som etim es foundations assets protection, as long as, according to E uropean researchers, direct e n tre p re n e u ria l activity is n a tu ra lly more risky th a n investing. Therefore fu rth e r EU legislation allows the foundations to create (or to be co-founder) of associated en terp rises/ subsidiary corporations and com panies (subsidiary tra d in g company). The prohibition exists only in L ith u an ia, Slovenia and th e Czech Republic (w ith some exceptions). Notably, th e countries, w hich prohibit direct e n tre p re n e u ria l activity of th e founda tions, in m ost cases allow th e ow nership of corporate rig h ts as an alternative (in particular, M alta, Greece, Slovakia, and to some extent, D en m ark15). But France and Luxem bourg allow th e foundation to create en terp rises an d cor porations rela te d to th e m ain purpose of foundation activity (“if rela te d to th e m ain objectives of th e foundation”)1 6.
Regarding th is it m u st be pointed out th a t, according to th e case law, th e m ere holding of shares, even controlling shareholdings, is insufficient to characterize as economic activity of th e e n tity holding those shares, w hen it gives rise only to th e exercise of th e rig h ts a tta ch e d to th e s ta tu s of a sh areholder or a member, as well as, if appropriate, the receipt of divi dends, w hich are m erely th e fru its of th e ow nership of an asset. On th e other hand, an en tity which, owning controlling shareholdings in a company, ac tu ally exercises th a t control by involving itse lf directly or indirectly in th e m anagem ent th ereo f m u st be regarded as tak in g p a rt in the economic activi ty carried on by th e controlled undertaking.
Also “E uropean F oundation Project: D raft” includes following rules: “E u ropean Foundations m ay not carry out a business in th e ir own nam e. E u ro p ean Foundations m ay hold a controlling in te re st in a business en terp rise
14 V.K. M a m u to v (ed.), op. cit., p. 334.
15 A p a r tic u la r fe a tu re o f D a n is h fo u n d a tio n s is th e p o ss ib ility to en g ag e in m a jo r com m erc ia l a c tiv itie s a n d u se a spec ia l leg al form to do so. T he A ct o f 1991 o n C o m m ercial F o u n d a tio n s e s ta b lis h e d th e leg a l fram e w o rk for fo u n d a tio n s to e ith e r d ire c tly en g ag e in com m erc ia l a c tiv itie s or h o ld c o n tro llin g in te r e s t in co m m ercial e n titie s . T h e law also allow s D a n is h co m m ercial fo u n d a tio n s to com bine co m m ercial a n d p u b lic b e n e fit p u rp o se s a n d r e q u ire s th e c h a r te r s o f su c h fo u n d a tio n s to in clu d e a re g u la tio n o f d is tr ib u tin g p ro fits.
172 P o lin a N esteren ko
(or in an o th er u n d e rta k in g which operates a business) only if th is business is w ith in th e ir public benefit purpose (related economic activities) or in the circum stances described in th e next parag rap h . E uropean F oundations m ay hold a controlling in te re st in a business en terp rise (or in a n o th er u n d e rta king w hich operates a business) w ith a view to profit (un related economic activities) if any profits derived therefore are used only in pursu ance of its public benefit purposes and th e economic activities them selves are only a n cillary to those purposes as a m eans to th a t end”1 7.
N evertheless, none of EU countries, which generally allow shareholding, fixes th e restriction s rela te d to tra n sfe rrin g funds of th e foundations, a ssi gned to it by th e founder. Therefore, to our opinion, th e U k ra in ia n legislation h as to fix th e rules sim ilar to th e legislative sta tu te s of F rance and Luxem bourg, w ith the aim of foundations assets protection from scattering, and possible tresp asses, and, in c u rre n t realities, not to allow u n restric te d p a rti cipation of foundations in business establishm ents.
C o n c lu sio n
All sta te d above points out th a t th e U k ra in ia n foundation law allots the regulations sim ilar to E uropean analogues, although w ith some differences. In our opinion, the general rules on th e legal s ta tu s and possible forms of foundations’ p articip atio n in economic activities should be precisely fixed in th e Civil Code an d th e Commercial Code of U kraine, tak in g into account the experience of leading E uro pean countries (in particular, w ith regard to fixing lim its on th e foundation of affiliated business entities).
S tr e s z c z e n ie
A n a liza p o ró w n a w c za fu n d a m en tó w p r a w a u kra iń sk iego i p r a w a eu ropejskiego
S łow a kluczow e: fu n d a c ja, p o d m io ty n iek o m ercy jn e.
A rtykuł dotyczy podstaw praw nych um ożliw iających prow adzenie dzia łalności gospodarczej przez fundacje. Pomimo że s ta tu s prawny, klasyfikacja i główne cechy działalności gospodarczej podmiotów niekom ercyjnych, w tym fundacji, były bad an e przez u kraiń sk ich praw ników cywilnych i przedstaw i cieli School of Law, c h a ra k te r i treść tego pojęcia są n ad al przedm iotem dyskusji. A utorka przed staw ia zasady praw ne działalności gospodarczej fun dacji w państw ach członkowskich UE i n a U krainie.
