The third sector recently underwent a reform, heavily penalizing cultural associations.
Our associate Dott. Gianni Mario Colombo, administrative and tax expert, overviews the current situation in an article on Ratio Quotidiano.
Dott. Gianni Mario Colombo, Ratio Quotidiano; September 30, 2019.
The third sector’s code exempted third sector associations (section 89, par. 1, lett. a) from the application of section 148.
Therefore, third sector associations are not required to decommercialize paid activities carried out for partners, according to sec. 148, par. 3 of the consolidated tax act.
Furthermore, third sector entities are allowed to postpone the implementation of the law until the reform actually takes effect.
Section 148, par. 3 of the consolidated tax act is only applied to political associations, trade unions, religious groups and amateur sports clubs.
Law June 28 2019, number 58, section 14, par. 1, which converted decree 34/2019 (also known as growth decree), changes section 148, par. 3 of the consolidated tax act, ruling that: “Paid activities done with institutional purposes by political associations, trade unions, religious groups, welfare organizations, cultural societies, amateur sports clubs, social development and out-of-school education societies, are not considered trade-related…”
Still, Par. 2 of section 14, referring to par. 4 of section 89 of the third sector’s code, exempted cultural societies, social development and out-of-school education societies from applying section 148, par. 3 of the consolidated tax act.
With these changes, section 148 pre-third sector’s code is re-established, incorporating adjustments made by the 2019 budget law, regarding “private outlying structures necessary to non-economic public bodies in order to conduct public interest services.”
In some circumstances, this may cause a paradox, of which cultural societies are a perfect example.
Before the reform, thanks to the benefits obtained through sec. 148, par 3 of the consolidated tax act, cultural societies were labeled as not trade-related entities.
Therefore, cultural societies could apply a 3% flat rate coefficient on any possible trade related activity, as ruled by law 398/91.
Let’s see now some situations that could possibly occur in the future.
Through the third sector reform, the society decides not to be classified as a third sector entity, keeping its not trade-related entity status.
If the entity does not perform trade-related activities, it will not pay taxes on revenues, as stated by sec. 143 of the consolidated tax act.
On the contrary, if the society performs trade-related activities, it might be heavily penalized.
Not only will it not receive tax benefits, but it may also lose its not trade-related status.
If the society decides to become a third sector entity, it will not be able to benefit from the advantages of section 143, par. 3 of the consolidated tax act.
In that case, paid activities, even for partners, are considered not trade-related or trade-related depending on section 79, par. 2 of the third sector’s code.
If the activity is considered trade-related, it is necessary to tax incomes according to the flat rate system as regular taxation, as stated by section 80 of the third sector’s code.