By Anita Venanzi, Vincent Chong and Jessica Batke
This article originally appeared on ChinaFile’s The China NGO Project.
The last year has seen extensive discussion of China’s Foreign NGO Law, focusing especially on whether or not the law would cause a major shift in the kind of work foreign NGOs are able to do in the mainland. Less often examined, however, is how China’s new regulatory structure differs from those of other countries or territories. The most obvious comparison is with other countries, such as Russia, that have also recently implemented laws aimed at foreign non-profits. Russian NGOs’ footprint in China is relatively small (as of June 1, 2018, only two NGOs of Russian origin had registered or carried out an activity in China), but it could be more helpful to examine the differences between NGO regulation in China and in countries that have large numbers of NGOs operating in China.
The overwhelming majority of foreign NGOs now legally operating in the People’s Republic of China (P.R.C.) under the Foreign NGO Law are incorporated in Hong Kong and the United States. How do Hong Kong and U.S. foreign NGO regulatory structures compare with that of mainland China’s? More specifically, for NGOs coming from Hong Kong and the United States, how different a legal operating environment should they expect? Does China’s Foreign NGO Law really differ all that much from what is in place in Hong Kong and the United States?
Comparing laws on NGOs in different jurisdictions allows us to see more clearly the kinds of challenges foreign non-profits may face when adapting their work from their place of origin to mainland China. It also illuminates provisions in the United States, though dusty with disuse, that have the potential to restrict foreign NGO activity within U.S. borders as well.
Regulating Foreign NGOs, or NGOs that Happen to Be Foreign
The first challenge when comparing China’s, Hong Kong’s, and the United States’ non-profit regulations is a definitional one. The P.R.C. clearly distinguishes between foreign and domestic NGOs—so much so that it produced two separate laws to regulate them. A non-profit organization incorporated outside mainland China must adhere to an entirely separate set of provisions than one that was incorporated within China’s borders. This domestic-foreign distinction as a primary sorting mechanism is not the case in either the United States or Hong Kong, which primarily address NGOs through tax status and not national origin. Thus “foreign NGO” as a legal label is only applicable in the P.R.C.
Beyond this definitional question, we can look at how legislation in these three locations treats NGOs that happen to be foreign. In comparison to Hong Kong and the United States, NGOs in mainland China are subject to closer and more frequent monitoring from the state. This is couched in terms of national security, and indeed is one of the stated reasons why the P.R.C. chose to regulate foreign NGOs differently than it does domestic ones. The P.R.C. also imposes much more severe constraints on foreign NGOs’ sources of funding.
In contrast, U.S. and Hong Kong legislation concerning NGOs is less centralized, leaving NGOs in those places with a higher level of agency. In particular, NGOs in Hong Kong can choose from a variety of legal forms of incorporation to find the one that benefits their organization the most. These NGOs also enjoy a high degree of autonomy, with no government entity monitoring their activities unless they receive money from the Hong Kong government. In the U.S., limitations on NGOs’ funding and activities are the result of 9/11 and are focused on forestalling terrorism-related activity.
This relatively permissive situation in the United States, however, could see some changes as legislators and regulators attempt to beef up the Foreign Agents Registration Act (FARA). FARA, a 1938 law designed to combat Nazi propaganda, sat mostly unused in the intervening years, until U.S. government agencies began to express interest in more aggressive enforcement in the mid-2010s. The statute mandates that a “foreign agent,” or anyone acting on behalf of a “foreign principal” to influence U.S. policy, register with the Department of Justice. Now, as several bills to strengthen FARA’s provisions make their way through the U.S. Congress, and Congressional members invoke FARA as they question U.S. NGOs about their foreign ties, observers are pointing out that the law’s vague definitions—including what constitutes a “foreign agent” and what it means to act at the “request” of a “foreign principal”—mean that a wide range of non-profit and charitable organizations could be compelled to register under the law.
FARA has an international dimension as well. As explained by the International Center for Not-for-Profit Law, a number of countries have used FARA to justify “legislation targeting civil society groups that receive international funding… While FARA has traditionally been narrowly enforced in the United States and it has critical differences with legislation in other countries, FARA’s broad language has made it easy for foreign governments to draw parallels between their legislation and U.S. law.”
Yet, until and unless FARA sees a serious change in its interpretation, enforcement, or its actual provisions, non-American NGOs operating in the United States will largely be treated the same as their domestically-incorporated counterparts. In this case, China’s Foreign NGO Law remains substantively different from the regulations governing non-profits in the United States and Hong Kong, not least in its explicit bifurcation of domestic and international groups.
Thus, a foreign NGO that opens a branch in Hong Kong has the same range of options that a local Hong Kong NGO would—it could choose to register as a company or an unincorporated society, among other options. Similarly, in the United States, a foreign NGO is treated largely the same as a domestic NGO, and is subject to the same registration requirements (which vary by state). In contrast, the P.R.C. has set out two different laws governing domestic and foreign NGOs, according them different privileges and levying different restrictions on their activities.
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What follows is an overview of the differing legal frameworks in China, Hong Kong, and the United States as they relate to foreign and domestic NGOs. These frameworks include provisions related to registration access, legal status, tax-exemption, government supervision, and even an NGO’s own agency. This overview is not by any means exhaustive, but provides some additional details about the regulatory structures in each location as a means of comparison. Without needing to delve into the specifics of each place’s regulations, however, the most salient difference between the P.R.C.’s regulatory structure and those of the United States and Hong Kong is simply that the P.R.C. has a separate set of rules for foreign NGOs while the others do not.1
Foreign NGOs in Hong Kong
Foreign NGOs in Hong Kong (that is, NGOs with headquarters outside Hong Kong that are seeking to open an office in Hong Kong) do not have to undergo special registration procedures separate from those of local NGOs.
In general, Hong Kong’s NGO-related regulations are relatively permissive. There are no centralized departments for coordinating non-profit-related issues. NGOs have a great deal of freedom to operate, especially if they do not apply for government funding or tax exempt status.
Definition and Registration
Generally speaking, an entity need only be lawfully established and comply with legal reporting obligations to operate in Hong Kong. So while it is not mandatory for NGOs to register as such, they must apply to the Inland Revenue Department if they wish to receive tax-exempt status. Only lawfully-established entities that are established exclusively for charitable purposes are granted tax-exemption. Groups incorporated as companies may also receive tax-exemption if they exclusively work as a charity.
This means there is no precise statutory definition of NGOs under Hong Kong law.2 For a group seeking charitable status, case law may be used to determine whether or not the group meets the criteria to be considered a charity.
Groups that wish to hold public fundraising activities, hold a lottery, or provide services in certain fields (such as health care or education) must seek permits from other departments, such as the Social Welfare Department or the Home Affairs Department.
NGOs in Hong Kong generally choose to incorporate in one of the following four forms:
- an unincorporated association registered as a society
- a company
- a statutory body under a specific ordinance, e.g. Po Leung Kuk, which is a social service provider
- a trust
The first and second forms are the most common and therefore this section will focus on them.
Societies are regulated by the Hong Kong Police Force under the Societies Ordinance, which means the Police Force is the registration authority for this type of group. Charities can either apply to register as a society or seek exemption from registration. NGOs of this type cannot enjoy legal entity status and therefore cannot carry out various legal actions, including entering into contracts. At the same time, due to limited statutory control, the operation of unincorporated societies is more flexible and inexpensive. NGOs that apply for unincorporated society status generally receive it unless they are affiliated with foreign political organizations or are deemed to endanger national security. (Though the concept of “national security” is not defined in the Societies Ordinance, the ordinance does provide protections against arbitrary refusal of registration, such as the right of applicants to explain why their application should not be refused, a written explanation of any refusal within 14 days of the decision, and an appeal mechanism—suggesting that even refusals under the national security exception can be subject to independent scrutiny. It also stipulates that societies may continue operations until the registration process is complete.) Foreign NGOs will also have to register their Hong Kong branch if they choose to be an unincorporated society.
Companies are regulated by the Registrar of Companies. Groups registered as limited companies have a structure similar to private companies, and they enjoy status as a legal entity. They must fulfill disclosure requirements as specified in the Companies Ordinance. One exception to a lack of distinction between domestic and foreign NGOs is that foreign NGOs have the option to register as a non-Hong Kong company.
Funding, Financial Disclosure, and Monitoring
There are no explicit requirements related to NGO funding in Hong Kong. As to disclosures of financial statements or other financial information, groups seeking tax exempt status or the ability to organize public fundraising activities must provide financial statements as requested by relevant government departments, such as the Inland Revenue or Social Welfare Departments. NGOs registered as companies must file their audited accounts to the Companies Registry, but these are not necessarily disclosed to the public. Other types of NGOs are not required to prepare or disclose annual reports. Unincorporated societies are not required to file such accounts with the police, for example. NGOs running schools, hospitals, or government-subsidized services, however, are subject to greater scrutiny.
Penalty for Breach of Laws
NGOs in breach of regulations are subject to legal sanctions based on the administrative powers of various government oversight bodies. For example, the Inland Revenue Department may choose to rescind the tax-exempt status of an NGO. If an NGO’s legal violations involve deception, criminal liabilities may also be imposed on senior personnel.
Foreign NGOs in the United States
There are about 1.5 million NGOs currently operating in the United States, but as there is no legal differentiation between domestic and foreign NGOs in terms of registration, funding, or management (with the exception of organizations that the Department of Justice deems must register under FARA), this section will analyze the regulations that serve as the general framework for all NGOs in the United States.
Definitions and Registration
There is no single, national-level statutory definition of what constitutes an NGO in the United States, but some states require groups with charitable purposes to register with a state charity official (registration requirements vary by location). Generally, most states require a description of the structure and the aims of the organization, the organization’s name, the contact information of an agent within the state in which the organization intends to operate primarily, and a small fee. A quick comparison of the general requirements can be found on the websites of agencies and law firms that provide support for NGOs seeking registration.
Even though in some states and under some circumstances there is no requirement for an NGO to formally incorporate, doing so may offer certain tax benefits. Tax-exempt status for NGOs is issued at the federal level, as part of a broader set of regulations governing organizations eligible for tax benefits. The rules that concern the wide variety of American associations, and the related process of application for tax exempt status, are contained in Title 26, section 501 and the Revised Procedures 2017-5, 2017-1 I.R.B. 230, of the Internal Revenue Code (IRC). In addition, the Internal Revenue Service has issued an official publication (Publication 557) as a sort of procedural handbook for NGOs’ reference.
Within this framework, there are a variety of different ways to categorize tax-exempt status; many NGOs can be categorized as 501©(3) organizations. 501©(3) organizations are defined as being organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports, or to prevent cruelty against children or animals.
Thus, “NGO” does not exist as a standalone regulatory category in the United States, but can refer to a wide range of incorporated and unincorporated organizations, including a number of different charity-related tax statuses.
Filing and Financial Disclosure
Filing and financial disclosure in the form of annual reports is managed according to the assets, annual gross receipt amounts, and typology of the organizations that fall within the 501©(3) definition. Academic observers suggest that disclosure requirements became more rigorous as a response to the 9/11 terrorist attacks.
Generally, institutionalized organizations (such as certain types of religious and state-run organizations) are not required to submit annual information returns. Fewer benefits are granted to those organization that are private rather than public, and to those that engage in partisan political activities. Lobbying activities have their own tax benefit restrictions.
Foreign NGOs in China
Unlike the United States and Hong Kong, China has specific, central-level laws that pertain to NGOs. The Chinese government distinguishes foreign NGOs from domestic ones, and enacted a law exclusively for foreign NGOs in 2017 (the “Law of the People’s Republic of China on Administration of Activities of Overseas Nongovernmental Organizations in the Mainland of China”). The Ministry of Civil Affairs is responsible for overseeing domestic charities (as spelled out in 2016’s “Charity Law”), while the Ministry of Public Security manages foreign NGO activity. Chinese regulation of foreign NGOs is more restrictive than that of the U.S. or Hong Kong, subjecting organizations to many more requirements, including mandatory registration.
Definitions and Registration
The Charity Law defines charitable organizations as non-profit-making, for public benefit, and involving charitable activities, including the promotion of development, disaster relief, prevention of pollution, etc. Domestic NGOs in China are also obligated to register under the Charity Law. However, domestic NGOs that fail to do so are not subject to criminal liability unless they carry out fundraising activities. Separately, the Foreign NGO Law covers “non-governmental” and “non-profit-making” organizations established outside mainland China that engage in public-welfare-related type of work in China. Foreign NGOs are obligated to register (or, in the case of temporary activities, file) under the Foreign NGO Law; failure to do so is grounds for detaining a foreign NGO’s representatives and stopping funding transfers to Chinese partners.
Foreign NGOs can register in one of the two following ways under the Foreign NGO Law:
Establish a Representative Office
This structure is for NGOs who wish to have a permanent presence in China. Representative offices can work nationwide or just in specified provinces, depending on the terms of their registration, and do not need a Chinese Partner Unit to initiate any particular project or service. They are still subject, however, to supervision by a Chinese government entity that acts as their Professional Supervisory Unit. To apply for registration, foreign NGOs must submit extensive documentation regarding their operations, finance, and chief representative. Representative offices do not have legal standing and the headquarters of foreign NGOs bear ultimate responsibility for their representative offices’ activities. Foreign NGOs must also have two prior years of work history overseas before they can apply to establish an office in China.
File for Temporary Activities
This structure is for NGOs who do not wish to have a permanent presence in China. To file for a temporary activity, a foreign NGO must hold the activity in conjunction with a Chinese Partner Unit, and the details of the particular project must be submitted in advance to the appropriate provincial or national public security office. Temporary activities may not last longer than one year; foreign NGOs must file again if they wish to continue carrying out an activity for more than one year.
Funding, Financial Disclosure, and Monitoring
Foreign NGO representative offices may apply for employment permits or tax benefits, which are not available to NGOs only carrying out temporary activities. Representative offices bear greater administrative burdens, such as providing annual plans and reports to their Professional Supervisory Units and Public Security authorities and adopting Chinese accounting standards. Professional Supervisory Units are legally entitled to monitor representative offices’ activities.
All foreign NGOs are forbidden from fundraising in China, required to use a designated bank account for transfers across the border, and are prohibited to solicit membership in China.
Penalty for Breach of Laws
The law mandates that foreign NGOs that violate the Foreign NGO Law be de-registered; their representatives may also be detained. Foreign NGOs are criminally liable if such violations involve endangering national security, mishandling public money, or engaging in illegal political/religious activities. The authorities also have the power to expel foreign NGOs from China. Public security authorities may investigate and public security departments may seize assets/facilities of foreign NGOs when they suspect the representative offices have violated the law.
1 The theoretical framework for this comparison makes use of Bloodgood et al.’s definition in their article “National Styles of NGO Regulation” (Nonprofit and Voluntary Sector Quarterly, 2014) of a restrictive or permissive model based on the accessibility enjoyed by NGOs on the aforementioned levels of analysis. 2 Gallagher, Steven, Equity, and Trusts in Hong Kong: Doctrines, Remedies and Institutions, Sweet & Maxwell, Hong Kong, September, 2017, p.219-220 (not available online).