According to the latest guidance, the following three requirements must be met to set up a legal charity:
- An institution or trust must be established solely for charitable purposes – charitable in the legal sense – and can be classified into four main purposes: (1) relief of poverty; (2) advancement of education; (3) advancement of religion; and (4) other charitable purposes that benefit society but do not fall into any of the preceding categories.
- A charity must be set up for identifiable public benefit, and the beneficiary must be the general public.
- A charity must abide by the law and bear the responsibility of safeguarding national security, and its resources must be used only for charitable work and not to engage in or support any acts and activities that are illegal or detrimental to national security. It is worth noting that this latest requirement is revised in response to implementation of the Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region.
Structures of Charities
Before setting up a charity, the founder must clearly define the organisation’s purpose and clarify its organisational structure to be adopted, based on practical operation and purpose. Generally, charities can be divided into the following categories:
- Charitable trust;
- Corporation (including company limited by guarantee) established under the Companies Ordinance; and
- Statutory body established in accordance with specific regulations.
A charitable trust is a trust established specifically for a charitable purpose, and its governing instrument is usually a trust deed that defines the purpose of the trust and the power of the trustee. A society is an unincorporated body formed by a group of voluntary members, bound by the rules in its articles of association. On the other hand, the articles of association of a company limited by guarantee established under the Companies Ordinance limit liability of its members to the amount they undertake to pay as the assets of the company at its winding-up, and is therefore suitable for charities and non-profit-making organisations that do not require share capital and profit-sharing. Judging from the actual operation of existing Hong Kong charities, most founders have chosen to set them up in the form of companies limited by guarantee. The guidelines also mention that most of the charities recognised by the IRD for tax exemption are companies limited by guarantee. The reason for this is that, compared with the other structures, companies limited by guarantee have a certain degree of transparency increasing public confidence in their operation. Among these reassurances are:
- Operations regulated by their articles of association, which clearly set out the rules related to the mode of operation and management, accessible to the public through the Hong Kong Companies Registry;
- They are required to keep and file audited annual financial statements, in accordance with the Companies Ordinance, and as a result financial statements are also available for public review, motivating proper accounts management; and
- With no need to share profits, the charity structure without share capital ensures they are not profit-oriented.
In addition, after choosing a name of the charity company, the founder only needs to submit an application form and Notice to the Business Registration Office to the Companies Registry, along with a copy of its articles of association, and pay the registration fee. After the application is approved, the certificate of incorporation and business registration certificate can be obtained. Therefore, the process of setting up a company limited by guarantee is relatively simple, but it should follow another set of procedures to apply for tax exemption from the IRD. Prior to setting up a charity, apart from establishing its general purpose, the organisation should take into account different operational and compliance considerations, including whether these meet all requirements set out in the guidelines, and understand the various applicable structures. After confirming these requirements are met, the charitable organisation may move on to deliberate its governance policies. These relevant compliance requirements will be introduced and summarised in the next part of this series.