Act CLVI on Public Benefit Organisations (1997 as amended 1998)

Translated by the International Cente for Not-for-Profit Law

ACT CLVI OF 1997 ON PUBLIC BENEFIT ORGANIZATIONS

As amended by Act XIV and Act XXXIII of 1998

In order to preserve the domestic traditions of non-governmental and not-for-profit organizations, to  increase their role in society, to make their public benefit operations and management more transparent, to promote their activities performed in the field of public service and to settle their relationship with the state budget, Parliament enacts the following Act:

CHAPTER I

GENERAL PROVISIONS

Objective of the Act

§ 1 The objective of this Act is to define the types of public benefit organizations, the terms of acquisition and termination of public benefit legal status, the order of operation and management of public benefit organizations, the rules of registration and account, and the rules on supervision of legality of operation and use of assets.

Types of public benefit organizations

§ 2 (1) The following organizations, registered in Hungary, may be qualified as public benefit organizations:

a) civil society organizations, except insurance associations, political parties and interest groups of employers or employees,

b) foundations,

c) public foundations,

d) public benefit companies,

e) public chambers, if allowed by the act regulating their establishment.

(2) If an organization defined in clauses (a)-(e) of paragraph (1) requests qualification as a public benefit organization simultaneously with its application for registration in accordance with the applicable rules, it may also be qualified as a public benefit organization. 

CHAPTER II

TERMS OF ACQUISITION OF PUBLIC BENEFIT LEGAL STATUS AND PREFERENCES DUE TO PUBLIC BENEFIT ORGANIZATIONS

Terms of acquisition of public benefit legal status

§ 3 An organization, which may be qualified as a public benefit organization (hereinafter: organization), acquires its public benefit legal status upon registration as a public benefit or prominently public benefit organization (hereinafter: public benefit registration).

§ 4 (1) To be registered as a public benefit organization, the founding document of the organization shall include:

a) a description of the sort of public benefit activity - defined in this Act - the organization pursues, and a statement that the organization, if a membership organization, does not exclude non-members from public benefit services;

b) a statement that the organization pursues business activity only in the interest of realizing its public benefit objectives, without jeopardizing them;

c) a statement that the organization does not distribute profits, but spends them on the activity defined in its founding document;

d) a statement that the organization does not pursue direct political activity, is independent of political parties and does not provide financial support to them.

(2) In addition to the requirements set forth in paragraph (1), the founding document of a public benefit organization shall comply with further requirements prescribed in this Act (§ 7).

§ 5 To be registered as a prominently public benefit organization, the founding document of the organization shall include, in addition to the requirements set out in § 4, a statement that the organization:

a) in the course of its public benefit activity fulfills a public duty which must be provided by state organs or local governments pursuant to an act or other law in accordance with the act’s authorization, and

b) shall disclose through the local or national press the most important data regarding its activities as defined in the founding document and its management.

Preferences due to public benefit organizations, supporters of public benefit organizations and recipients of public benefit services

§ 6 (1) In accordance with the extent and the terms determined by Act LXXXI of 1996 on Corporate Tax, Act CXVII of 1995 on Personal Income Tax, Act XCIII of 1990 on Fees, Act C of 1990 on Local Taxes, Act C of 1995 on Customs, Customs Procedure and Customs Administration and other applicable laws,

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        1. corporate tax exemption with respect to its targeted activity as defined in its founding document,

        2. corporate tax preference with respect to its business activity,

        3. local tax preference,

        4. fee preference,

        5. customs preference,

        6. other preferences defined by law;

a) a public benefit organization is entitled to:

b) recipients of services provided by a public benefit organization as targeted grants are entitled to personal income tax exemption with respect to the granted service;

c) supporters of a public benefit organization are entitled to corporate tax or personal income tax preference with respect to support given to fulfill the purposes of the public benefit organization as defined in the founding document (hereinafter: donation);

d) in case of a durable donation, the supporter described in clause c) is entitled to an extra preference from the second year of the support.

(2) Within the sphere of its targeted activities, a public benefit organization is entitled to employ  persons performing civil service.

(3) A public benefit organization is not entitled to these preferences, if it has public debts as defined by the Act on the Order of Taxation.

CHAPTER III

OPERATION AND MANAGEMENT OF PUBLIC BENEFIT ORGANIZATIONS

Rules related to public benefit operations

§ 7 (1) The founding document of public benefit organizations shall include rules concerning

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        1. the frequency of the meetings, which cannot be less than once a year,

        2. the order of convening the meetings and the way of communicating the agenda,

        3. the publicity and the quorum of the meetings and the decision-making procedure

a) as to the highest body and - if they are not the same - the administrative as well as the representative body (hereinafter together: governing body),

b) conflicts of interest of operating officers of public benefit organizations;

c) the establishment, powers and operation of the body controlling the operation and management of the public benefit organization, which is separate from the governing body (hereinafter: supervisory body), if its establishment or appointment is mandatory; and

d) the manner of approving the public benefit organization’s annual report.

(2) The founding document or - on the basis of its authorization - the internal regulations of a public benefit organization shall regulate

a) the keeping of a register on the content, date and scope of the governing body’s decisions and on the proportion (and the names, if possible) of those supporting and opposing the decisions;

b) the manner of communicating the governing body’s decisions to those concerned and the manner of publicizing them;

c) the right of inspection of the documents originating in the course of the operation of a public benefit organization; and

d) the public nature of the operation, the manner of receiving services, and communication of the reports of a public benefit organization.

§ 8 (1) No person shall take part in the decision-making process of the governing body, if that person or his or her close relative (Civil Code § 685 b) or common law spouse (hereinafter together: relative), on the basis of the decision

a) is exempted from an obligation or liability, or

b) obtains other benefits, or is otherwise interested in the legal transaction to be concluded. Non-financial services available for anyone, without limitation, within the framework of targeted grants of public benefit organizations and targeted grants corresponding to the founding document, granted on the basis of the relationship between civil society organizations and their members, is not regarded as a benefit.

(2) No person shall be a chairman,  member or  auditor of the supervisory body, who:

a) is the chairman or a member of the governing body,

b) apart from his commission, is employed or stands in another legal relationship aimed at employment, unless otherwise provided by law,

c) receives targeted grants of a public benefit organization, except non-financial services available to anyone without limitation and targeted grants corresponding to the founding document granted on the basis of the relationship between civil society organizations and their members, or

d) is the relative of the persons defined in clauses a)-c).

§ 9 (1) A person who held a leading position for at least one of the last two years in a public benefit organization which was terminated without paying its public debts as defined in the Act on Order of Taxation shall not be an operating officer of another public benefit organization for two years following such termination.

(2) The operating officer or a candidate for such position shall notify in advance all concerned public benefit organizations that he or she is simultaneously holding the same position with another public benefit organization.

§ 10 (1) If the annual income of a public benefit organization exceeds five million HUF, the establishment of a supervisory body separate from the governing body is mandatory, even if such obligation is not prescribed by other laws.

(2) The supervisory body determines its own internal procedures.

§ 11 (1) The supervisory body controls the operation and management of a public benefit organization. In this capacity, it may request reports from operating officers and information from employees of the organization, and it may review and inspect books and documents of the public benefit organization.

(2) Members of the supervisory body may participate, or, if this is provided by law or the founding document, shall participate at the meetings of the governing body with consultation right.

(3) The supervisory body shall inform and initiate the convening of the governing body empowered to take action, if it learns of

a) the occurrence of a violation of law, or an event (omission) otherwise seriously violating the interests of the organization in the course of its operation, which requires the decision of the governing body empowered to take action in order to terminate it or to avoid and reduce its consequences;

b) a fact giving rise to liability of the operating officers.

(4) The governing body empowered to take action shall be convened within 30 days following the motion of the supervisory body. If this deadline is ignored, the supervisory body is empowered to convene the governing body as well.

(5) If the empowered body does not take action in order to restore the legality of operation, the supervisory body shall immediately notify the organ carrying out the supervision of legality [translator’s note: i.e. public prosecutor].

Rules of fundraising for public purposes

§ 12 (1) Fundraising in the name or for the benefit of a public benefit organization shall not involve harassment of donors and other persons, or a violation of personal rights and human dignity.

(2) Fundraising in the name or for the benefit of a public benefit organization may only be performed on the basis of the public benefit organization’s written authorization.

§ 13 Donations granted to a public benefit organization shall be registered at book price, or in the absence of the latter, at usual market price.

General rules of management

§ 14 (1) A public benefit organization shall not distribute its profits, but shall spend them on the activity defined in its founding document.

(2) With the exception of normative support, a public benefit organization may only receive support from the subdivisions of state budget on the basis of a written contract. The terms and the manner of accounting for the support shall be determined in the contract.

(3) The availability, amount and terms of the support described in paragraph 2 shall be published in the press. Information concerning targeted grants provided by a public benefit organization is available to anyone.

(4) A public benefit organization shall not provide targeted grants to responsible persons, supporters and their relatives, with the exception of services available to anyone without limitation and grants corresponding to the founding document and provided on the basis of the legal relationship between civil society organizations and their members.

§ 15 (1) In accordance with rules determined in the founding document, a public benefit organization may distribute its targeted grants through competition. In this case, the competition shall not include terms which, after considering all circumstances, make it clear that the competition has a predetermined winner (fake competition).

(2) Fake competition shall not form the basis of targeted grants.

§ 16 (1) A public benefit organization shall not issue bills of exchange or other securities creating a credit facility.

(2) A public benefit organization, except a public benefit company

a) shall not draw credit with the aim of developing its business activity to an extent which jeopardizes its public benefit activity;

b) shall not use supports received from the subdivisions of the state budget as credit security or repayment of credit.

§ 17 A public benefit organization pursuing investment activity shall prepare investment rules which are approved by its highest body.

Record-keeping rules

§ 18 (1) A public benefit organization shall record its income and expenditures derived from its targeted activity and its business activity separately.

(2) Income of a public benefit organization includes the following:

a) support or donations received from the founder, the subdivisions of the state budget, or other donors, for public benefit purposes or covering operational costs;

b) income derived from or related directly to pursuing public benefit activity;

c) income derived from or related directly to pursuing other targeted activity;

d) income derived from investing the organization’s funds;

e) membership fees;

f) other resources determined by other laws;

g) income derived from business activity.

(3) Expenses of a public benefit organization include the following:

a) direct expenses (expenditures, costs) occurring in the interest of public benefit activity;

b) direct expenses (expenditures, costs) occurring in the interest of other targeted activity;

c) direct expenses (expenditures, costs) occurring in the interest of business activity;

d) indirect expenses (expenditures, costs) occurring in the interest of public benefit and other business activity, which must be divided in proportion to income.

(4) Otherwise the applicable rules on bookkeeping shall apply to the records of a public benefit organization.

Reporting Rules

§ 19 (1) Simultaneously with approving the annual report, a public benefit organization shall prepare a public benefit report.

(2) Approval of the public benefit report belongs to the exclusive powers of the highest body.

(3) The public benefit report contains:

a) the financial report;

b) the utilization of budgetary support;

c) report on the use of assets;

d) report on targeted grants;

e) the extent of support received from central budgetary organs, separate state funds, local governments, municipal minority local governments, associations of municipal local governments, government of health insurance and their organs;[1]

f) the value and amount of benefits granted to operating officers of public benefit organizations;

g) a brief summary of public benefit activities.

(4) Anyone may review the annual public benefit report of a public benefit organization and may copy it at his or her own expense.

(5) The provision contained in paragraph (3) clause a) does not affect the application of the accountancy rules related to the obligation to prepare, deposit and publish the annual report.

§ 20 Upon the termination of its public benefit legal status, a public benefit organization shall pay any outstanding public debts and fulfill its duties arising from its contracts on the performance of public service proportionally with time.

CHAPTER IV

SUPERVISION AND REGISTRATION OF PUBLIC BENEFIT ORGANIZATIONS, AND RELEVANT JUDICIAL PROCEDURE

Supervision of public benefit organizations

§ 21 Tax audits of public benefit organizations are carried out by the competent tax authority based on the location of the registered office of the public benefit organization. The utilization of budgetary support is supervised by the National Audit Office, while the supervision of legality - with respect to public benefit operations - is carried out by the public prosecutor’s office in accordance with the applicable laws.

Rules of procedure for public benefit registration, re-ranking and deletion from public benefit registry

§ 22 (1) An application for public benefit registration, re-ranking between public benefit categories and cancellation of public benefit legal status shall be submitted to the court competent for registration of the organization.

(2) An applicant shall indicate the public benefit category in which it intends to be registered. Only one public benefit category may be indicated in the application.

(3) The court determines public benefit registration, re-ranking and cancellation in a non-contentious, expedited procedure. The court also conveys its decision to the public prosecutor’s office.

(4) If a public benefit organization’s operation does not comply with the requirements set forth in § 4-5, it shall within 60 days request cancellation of its public benefit legal status or a re-ranking to the lower public benefit category.

§ 23 The public prosecutor may initiate the cancellation of public benefit legal status or a re-ranking to a lower public benefit category with the court competent for public benefit registration, if the operation of a public benefit organization and the use of its assets do not comply with the provisions of this Act, the founding document, or the internal regulations prepared thereunder, and the organization fails to make corrections after receiving notice from the public prosecutor.

Court registry of public benefit organizations

§ 24 (1) By registering as a public benefit organization, the organization’s previously registered data are supplemented by data on the public benefit category, the date of acquisition, modification and cancellation of public benefit legal status.

(2) The data on the court registry of public benefit organizations mentioned in paragraph (1) are public.

§ 25 The data processed on the basis of this Act may be used for statistical purposes, and  statistical data may be supplied in a manner which precludes personal identification.

CHAPTER V

CONCLUDING PROVISIONS

Construing provisions

§ 26 In the application of this Act the terms below have the following meanings:

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        1. maintenance of health, prevention of illness, medical care and health rehabilitation activities;

        2. social activities, family aid, care of elderly people;

        3. scientific activities, research;

        4. education and instruction, development of skills, dissemination of general knowledge;

        5. cultural activities;

        6. preservation of cultural heritage;

        7. protection of monuments;

        8. preservation of nature, protection of animals;

        9. protection of the environment;

        10. protection of children and youth, representation of the interests of children and youth;

        11. promoting equal opportunities for groups in a disadvantageous social position;

        12. protection of human and civil rights;

        13. activities related to national and ethnic minorities in Hungary and to Hungarians living beyond the borders;

        14. sports, with the exception of sports activities pursued on the basis of employment or commission as defined by the civil law;

        15. protection of public order and traffic safety, voluntary fire fighting, rescue, and disaster prevention;

        16. consumer protection;

        17. employment rehabilitation;

        18. promotion of training and employment for those having a disadvantageous position in the labor force market, and related services;

        19. promotion of Euroatlantic integration;

        20. services provided for and only available to public benefit organizations;

        21.[2] activities related to the performance of flood prevention and protection against ground water inundation;

        22.[3] activities related to the improvement, maintenance and operation of roads, bridges or tunnels open to traffic;

a) targeted grant: a financial or non-financial service provided by a public benefit organization within the framework of its targeted activity;

b) targeted activity: every activity that directly serves the achievement of the objective indicated in the founding document;

c) public benefit activity: the following targeted activities included in the founding document of the organization, directed towards the satisfaction of the common interests of the society and the individual:

d) direct political activity: political party activity and nomination of candidates for Parliamentary and local governmental elections at the county level, including the city of Budapest;

e) responsible person: the person indicated as an operating officer in the founding document and internal regulations of the organization or otherwise having substantive decision power, and the person entitled to represent the organization and dispose of the bank account as authorized in the founding document, resolution of the highest body of the organization or contract;

f) highest body: the managing body (organization) of foundations and public foundations, the highest body of a civil society organization according to its charter, and the members’ meeting of a public benefit company;

g) founding document: the charter of a civil society organization, the statutes of foundations and public foundations, and the articles of association or statutes of public benefit companies;

h) non-financial support: the partial or total conveyance or ceding of valuable and negotiable property, intellectual property or valuable right, permanently or temporarily, entirely or partially free of charge, and the provision of services;

i) competition: invitation made public or within a pre-determined limited circle, which indicates the  terms on which competitors will be compared, the targeted grants to be won by the competition, and the main conditions of evaluation (including the deadlines of submitting and evaluating the competition as well as the persons entitled to judge the competition);

j) support: financial and non-financial grants;

k) investment activity: activity aimed at acquiring securities, or valuable rights arising from shares in a company, real property and other assets serving long term investment from the public benefit organization’s own funds;

l) business activity: economic activity aimed at or resulting in the acquisition of income or property, not including targeted activity involving income and support granted for public benefit activity;

m) operating officer: the trustee of a foundation or public foundation, or the chairman and member of its organizational trustee or its supervisory body; as well as, if the organizational trustee of the foundation is a separate legal entity, an organization without legal status or a state organ, the individual responsible leader of the organizational trustee or a member of the body acting in that position; the chairman or member of the administrative or representative or supervisory body of civil society organizations; the managing director or the chairman or member of the supervisory board of public benefit companies, and the individual, employed by or otherwise in a legal relationship aimed at employment with organizations registered as public benefit organizations, who is responsible for leadership duties under the founding document;

n)[4] durable donation: granting financial support (in the case of a private individual supporter or  the delivery of security) on the basis of a written contract concluded between the public benefit organization and its supporter, if in the contract the supporter undertakes the duty of giving support at least once a year in the same or increasing amount, without consideration, in the year of concluding (modifying) the contract and at least the subsequent three years. If a public benefit organization refers to the name and activity of the donor within the framework of its services, that is not regarded as consideration.

§ 27 (1) This Act enters into force on January 1, 1998. Organizations registered before this Act entered into force which were established to pursue a public benefit activity mentioned in clause c) of § 26 and which submitted applications for their public benefit registration before June 1, 1998, automatically qualify for legal status in accordance with the public benefit category indicated in the application, from January 1, 1998 through the date when the resolution mentioned in paragraph (3) of § 22 becomes final, or through the date on which the court rejected their application.

(2) Organizations established after January 1, 1998 are entitled to tax preferences and exemptions related to public benefit legal status from the date of registration, if their public benefit registration occurred no later than the last day of the year of registration.

(3) Organizations which were founded by assets arising from subdivisions of the state budget, or which receive regular budgetary support according to their founding documents, shall apply for  public benefit registration through the date indicated in paragraph (1). If an organization neglects this duty, the granting of the support shall be suspended, and the organization’s termination may be requested in compliance with the applicable rules.

(4) The Government is authorized to determine the specific rules related to concluding contracts with public benefit organizations aimed at fulfilling services under the scope of the Act on Public Purchase.

(5) [ This paragraph amends portions of Act CXXVI of 1996 on the Use of a Specified Portion of Personal Income Tax According to the Designation of the Taxpayer to accord with the present Act.]


[1] Translator’s note: The municipal minority local governments are the representatives of minorities at the local level. Municipalities under Hungarian law can also create “associations” for efficiency purposes, like smaller towns creating associations to handle particular duties. The government of health insurance is the administrative body for social security matters.

[2] This provision comes from amendments made by Act XIV of 1998, which enters into force on March 24, 1998.

[3] This provision comes from amendments made by Act XIV of 1998, which enters into force on March 24, 1998.

[4] As amended by § 58 of Act XXXIII of 1998, to be applied from January 1, 1998.