The latest article by our associate Dott. Gianni Mario Colombo on the transitional regime for non-profit organizations, voluntary organizations and associations of social promotion.
Gianni Mario Colombo, January 2020.
With Resolution October 25th 2019, no. 89/E, the Revenue Agency took part in a controversial issue concerning the Third Sector: in the case of failed statute adjustment before June 30th 2020 , would that rule out the right to apply tax breaks to non-profit organizations, voluntary organizations and associations of social promotion?
Before examining the Revenue Agency’s reply, it is important to keep in mind that:
- Pursuant to art. 101, paragraph 3, Law Decree July 3rd 2017, no.117 (Third Sector Code), “the requirement necessary to enter the National Third Sector Register, as provided for by this Decree, is considered fulfilled by the associations and the Third Sector organizations if they enter one of the registers established by the current laws”.
- Therefore, the Voluntary Organizations Register, the Associations of Social Promotion Register and the Non-Profit Organizations Register are compared to the National Third Sector Register, until the latter is operational.
- Consequently, during the transition period (from January 1st 2018 until the tax period following the EU authorization, and in any case not before the tax period following the National Third Sector Register functioning), Voluntary Organizations, Associations of Social Promotion and Non-Profit Organizations shall be subject to some of the fiscal rules contained in the Third Sector Code (Articles 77; 78; 81; 82; 83; 84, paragraph 2; 85, paragraph 7; 102, paragraph 1, lett. e, f, g). The tax breaks on indirect taxes and charitable donations (Articles 82 and 83) are particularly noteworthy.
To the purposes of direct taxation, tax breaks (as established in Section X, Law Decree no. 117/2017) are subject to the approval of the EU.
A primary condition to enter the National Third Sector Register is adjusting the statute to the provisions of the Third Sector Code.
On that note, we should make a distinction between the manners of entering the Register.
Voluntary Organizations and Associations of Social Promotion that fulfil the requirements established by the law, will automatically move to the National Third Sector Register and will enter the corresponding sections of the Register.
Note that for Voluntary Organizations and Associations of Social Promotion the Code is already in force, except the sections that were given a different effective date.
The registers shall be annulled once the National Third Sector Register is operational (Art. 102, paragraph 4).
Non-Profit Organizations require a different reasoning: they shall choose whether to enter the National Third Sector Register and which section to enter, or even not to enter the Register in the first place.
At this point two questions need to be posed:
- What happens if a Non-Profit Organization chooses to enter the Register?
- On the contrary, what happens if the Non-Profit Organization decides against that?
As for 1., it is enough to say that the Non-Profit Organization shall make the necessary adjustments to the statute, follow the entering procedure to be outlined in the soon-to-be-issued establishing decree, and at that point they will automatically be inserted in the “Other organizations” section of the Register.
The Non-Profit Organization Register and procedure shall remain in force until the National Third Sector Register is operational (Art. 102, paragraph 9, Third Sector Code).
It should be noted that the same principles apply to the Non-Profit Organizations connected to state-recognized religious entities.
Pursuant to Art.101, paragraph 8, Third Sector Code, losing the Non-Profit Organization status after entering the National Third Sector Register, even as a social entrepreneurship, does not cause the dissolution of the organization, as established by Art.10, paragraph 1, lett. f) of Law Decree 460/1997 and Art.4, paragraph 1, lett. b) of the D.P.R. no. 633/1972.
This provision turned out to be necessary in order to prevent the organization from losing its assets when the organization becomes a Third Sector Organization.
Nothing is said, however, about the fiscal treatment of the assets that are transferred to the Third Sector Organization. Particularly, capital goods should not be involved in self-consumption, since institutional good are transferred from non-commercial entities performing de-commercialized activities (see Art.150, T.U.I.R) to a non-commercial Third Sector Organization.
At this point, an official interpretation by the Revenue Agency would be extremely useful.
As for 2., it is noteworthy that if the organization does not enter the Third Sector Register, it must dissolve its assets, as losing the qualification is equal to disbanding the organization (see Notice no. 168/E/1998).
In that case, the organization will continue to operate as a commercial or non-commercial organization, pursuant to Art. 73, paragraph 1, lett. b) and c), T.U.I.R. Note that, according to the Revenue Agency Notice no. 597E/2007, if the entity does not want to disband but it wishes to keep operating as a non-qualified entity, it has to dissolve its assets, limited to the increase in assets realized during the fiscal period during which the organization had enjoyed the Non-Profit Organization Status.
Deadlines and Effects of Statute Adjustment: Civil Aspects
As mentioned, notwithstanding Art.101, paragraph 2, Third Sector Code, the deadline for the adjustment of statutes for marching bands, Non-Profit Organizations, Voluntary Organizations and Associations of Social Promotion have been postponed to June 30th 2020.
However, that does not mean that the statutes cannot be adjusted later on. On May 31st 2019 the Ministry of Work and Social Policy tackled the issue, clarifying that “adjusting the statute is the fulfillment of a duty that allows the organization to stay within the Third Sector” (in that regard, see Art. 101, paragraph 3).
Logically, the same notice ruled out the chance that failing to comply with the deadline would case the immediate elimination from the registers and the loss of the Non-Profit Organization, Voluntary Organization or Association of Social Promotion status. The notice also makes it clear that this circumstance will not be realized without granting the organization the chance to explain its reasons to the Office.
The Ministry ruled out the possibility that failing to comply with the June 30th 2019 deadline is enough reason to forfeit the right to the benefits established by the laws in force for Non-Profit Organizations, Voluntary Organizations or Association of Social Promotions.
In light of those clarifications, confirmed by Resolution no. 89/E/2019, the June 30th 2019 deadline is simply indicative. Pursuant to Art.101, paragraph 2, Third Sector Code, “compliance with the deadline allows to adjust the statutes in the manner and majority established for ordinary meetings”.
Notice no. 20, December 28th 2018 also pointed out that this manner is only applicable if mandatory rules are added to the statutes (that is, rules that concern mandatory provisions provided for by the Code). As an example we might mentioned the major cases:
- General-interest activities, as pursuant to Art.5;
- Solidarity or social utility purposes; different activities as pursuant to Art.6;
- No profit;
- Bequeathal of the assets to another Third Sector organization;
- Creation of dedicated assets; internal control, etc.
Fiscal Consequences of Non-Compliance with the Deadline
The Revenue Agency (reply 89/E/2019) is replying to a query, posed by the Third Sector forum, about the applicability of tax breaks if the June 30th 2019 deadline is not observed.
The forum proposed to “sterilize” paragraph 2 of Art.101, ruling out the chance that failing to adjust the Non-Profit Organization, Voluntary Organization or Association of Social Promotion statutes to the Code might have consequences on the previous tax breaks, until, as established by Art.104, paragraph 2 of the Code, the new Third Sector Organizations and social entrepreneurship tax system is fully operational, that is, “after the tax period following the EU authorization, and in any case not before the tax period following the National Third Sector Register being in force”.
Clearly, Non-Profit Organizations are very much involved in that respect, since they are not automatically transferred like Voluntary Organizations or Association of Social Promotions.
In their case, as mentioned by Notice no.13, the Ministry shall have 180 days to verify that their statutes are compatible with the Code, but they will apply to enter the National Third Sector Register, and the adjustment of their statutes shall be subject to a condition precedent until the Register is fully operational, or they shall lose the Non-Profit Organization status for unfulfilling the requirements during the transition period.
Accepting the Third Sector forum interpretation, the Agency specified that:
- An organization that is already present in the Voluntary Organization or Association of Social Promotion Registers will be able to continue applying the fiscal provisions established by the institutive laws, even if it does not adjust its statute before the June 30th deadline.
- An organization that is registered in the Non-Profit Organization Register will be able to continue applying the provisions of Law Decree no. 460/1997, until the deadline mentioned in Art.104, paragraph 2 of the Code, even if it does not adjust its statute before the June 30th 2020 deadline.
At this point, one aspect remains unclear.
Non-Profit Organizations, Voluntary Organizations or Associations of Social Promotion that, upon examination, decide not to adjust their statutes to the Code, might find themselves having lost the Third Sector tax breaks during the transitional period, never being registered in the Register, and having the Third Sector organization status. In that sense, is the aforementioned equivalence established in Art.101, paragraph 3 of the Code enough for fiscal purposes?
Non-Profit Organizations, Voluntary Organizations and Associations of Social Promotion, after the latest delay, must adjust their statutes to the Third Sector Code before June 30th 2020.
The Third Sector world has long been wondering if failing to adjust to the Code before term may cause losing the right to the tax breaks for Non-Profit Organizations, Voluntary Organizations and Associations of Social Promotion.
The Revenue Agency tackled the issue with an overall adequate reply.
Revenue Agency, Resolution 25h of October 2019, no.89/E
Law Decree July 3rd 2017, no.117, art.101, paragraph 3
Should a Non-Profit Organization choose not to enter the Register it would have to dissolve its assets, as losing the status is equal to disbanding the organization (C.M. no. 168/E/1998).
In that case, the organization will be able to operate as a commercial or non-commercial entity, pursuant to Art.73, paragraph 1, lett.b) and c), T.U.I.R