Background
Many Hong Kong
businesses have come to see corporate giving as an important activity, and as a
key component of their corporate social
responsibility activities.
While for some
businesses it will be satisfactory for their giving to be directly to
philanthropic causes, many businesses, particularly larger companies, will wish
to form their own private charitable foundations, and to fund all giving
through that charity.
Rationale for a
company forming its own charity
There are a number of
benefits to a company in the formation of its own charitable foundation:
(a) Participation
With a company
charitable foundation, a company's staff can be involved in its management and
administration. This allows for staff to be fully engaged in the projects and
the charitable giving.
(b) Reputation
The formation and
funding of a charitable foundation can be used in the company's CSR material.
The causes supported by the charitable foundation can be monitored to ensure
that these are appropriate and will not cause reputational harm to the company.
(c) Endowment
The timing of direct
giving can be difficult as causes may not be readily identifiable; also,
profits can fluctuate. A company charitable foundation can hold, invest and
accumulate funds while projects are being identified. With retained funds, the
foundation will be able to support projects as and when need arises (for
example, responding to natural disasters and emergencies).
(d) Sustainability
A charitable
foundation can accumulate reserves. This can allow a company to continue its
charitable giving strategy even in years in which profits are lower than usual.
(e) Tax relief
If a Hong Kong charity
is formed, a Hong Kong corporate donor would obtain relief from Hong Kong
Profits Tax. A business donor can claim a deduction for the aggregate of its
approved charitable gifts of up to 35% of its taxable profits. In practice, a
business may quickly cover the costs of forming its own charity through the tax
relief it obtains when it comes to make gifts. If employees give to the
charity, they will also obtain tax relief.
Formation of a Hong
Kong charitable foundation
Hong Kong law allows
for a wide definition of charitable purpose: activities relating to health and
education and which are socially beneficial may be considered charitable. In
most cases, a Hong Kong charity can support causes outside of Hong Kong if that
is desired.
A preliminary issue to
be determined is whether a charitable foundation should be formed as a trust or
a company. Either structure is possible, with the choice depending on a number
of factors such as the activities to be undertaken:
(a) use of a company
might be consistent with the governance mechanism of a corporate donor, with
the board of directors concept facilitating proper management of a charity;
while
(b) a trust might be
appropriate with a professional trustee involved to help safeguard the
charity's assets.
With both types of
vehicles, governance and operating arrangements need to be considered in the
preparation of the charity's
constitutional
documentation.
Once the charity has
been formed, an application to the Hong Kong Inland Revenue Department for tax
exempt status would be made. While this application is being made, practical
steps can be taken such as the opening of bank accounts and initial meetings of
the board.
The content of this
article is intended to provide a general guide to the subject matter.
Specialist advice should be sought about your specific circumstances.
-Mondaq
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