Foundation frustrations

Monday, 17 February 2014
Asher Dovev on the obstacles to establishing a family charitable foundation in Israel.

Philanthropy and charity giving are effective ways to establish a family legacy, unite family members and give back to the community. Many families have decided, instead of making ad hoc donations on an informal basis, to establish a family charitable foundation. In some jurisdictions, inheritance tax applies and provides a substantive reason and incentive to establish family charitable foundations. However, in Israel there is no such incentive, as there is no inheritance tax.

In realising such a philanthropic objective, families are usually concerned with two issues: (i) family members should control the family charitable foundation; and (ii) the foundation should be established on a tax-efficient basis.

A number of jurisdictions meet these criteria. However, in Israel there is no specific legal vehicle for family-based charitable foundations. Instead, Israel has promulgated a number of laws and regulations in order to establish a substantive legal basis for charities, including their encouragement and regulation. The promotion of non-profit activities in Israel is effected through non-governmental or non-profitable organisations (NPOs), which are established and operate under certain statutory frameworks, namely: the amuta, charitable company and public endowment.

Amuta

An amuta is incorporated as a legal entity and governed by the Amutot Law 1980. It is the most prevalent of the NPOs established in Israel. The Amutot Law provides for the relatively uncomplicated creation of a legal entity. An amuta is required to register with the Registry of Amutot (which is an integral part of the Corporations Authority). The three fundamental requirements of an amuta are that it is prohibited to distribute any profits, directly or indirectly, to its members, including its founders; and it cannot be registered if any of its objects negate the existence or democratic nature of the State of Israel; or if its main objective is profit-making. The Amutot Law does not require or provide a list of purposes, charitable or otherwise.

Charitable company

A charitable company is incorporated as a private company and is governed by the Companies Law 1999. Section 345a of the Companies Law states that the objects of a charitable company shall be set out in its articles of association and state one of the ‘public purposes’ specified in the Schedule to the Companies Law. As with the amuta, for a company to be recognised as a charitable company, there must be a prohibition on any distribution of dividends to its shareholders.

Public endowment

Another way to promote charities is through an NPO conventionally known as a ‘public endowment’, which is established as a trust, and governed by the Trust Law 1979 and regulations promulgated thereunder.

Such an NPO enjoys certain tax benefits, the primary one of which is to be tax exempt under s9(2) of the Income Tax Ordinance 1961, unless the income is categorised as business income, and provided that the NPO must have at least seven shareholders or members of whom a majority shall not be related to one another. The other requirement is that the NPO is required to act for a public purpose according to the definition set out in the Ordinance.

A precondition set by the Ordinance concerning the composition of the shareholders or members of the NPO effectively precludes families from establishing an Israeli family charitable foundation, given that the regulator will not allow them to ‘control’ the foundation. In addition, the shares in a family charitable company, as well as membership in an amuta, cannot be inherited, thus preventing the continued involvement of the family’s future generations in the company.

A further obstacle to which family charitable foundations are subject concerns the strict and technical nature of the regulations which apply to NPOs, including the supervisory requirements (essentially imposing internal and external governance constraints). However, these requirements do not distinguish between a ‘regular’ NPO, which raises money from public donations, and a family charitable foundation, which only distributes the foundation’s money to charitable purposes.

In this regard, an important constraint under Israeli law is that the NPO is required to utilise its resources for the promotion of its objectives. An NPO that unreasonably accumulates assets or capital for a prolonged period without investing in the promotion of firmly based objectives, or that has no up-to-date practical and efficient programme for the use of such funds with the aim of promoting the objectives, will not be entitled to receive a certificate of proper management (the purpose of such a certificate is to ensure that public funds provided to the NPO from the state or the public are properly applied).

An overseas charitable entity that wishes to operate directly in Israel will be required to register as a foreign NPO in Israel; hence the rules and regulations that apply to Israeli-established NPOs will also apply to such an overseas entity.

There may be solutions for overcoming the restrictions regarding the nature of the relationship of the members of the NPO, requiring both creativity and detailed legal analysis, on a case-by-case basis.

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Asher Dovev

Asher Dovev TEP is a Partner at Herzog Fox & Neeman.

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