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China Builds New Framework Governing Civil Society Organizations, Part I: Charity Law

Since the Xi administration’s pledge during the Fourth Plenum of the 18th Central Committee of the Chinese Communist Party in October 2014 to promote the rule of law (or, as the ambiguous language was interpreted by many, “rule by law”), China has issued a number of final and draft laws and regulations of significance to Chinese society and the foreign and foreign-invested entities that see China as an integral part of their own strategies. These laws and regulations include a new National Security Law, new Counter-Terrorism Law, draft Network Security Law, and draft Foreign Investment Law. These new laws and regulations may increase transparency and consistency in the regulation of some aspects of Chinese society and economy. However, through explicit language or broad or vague terms, many of the legislative highlights from the past 18 months provide a greater legal basis for significant government action and discretion.

New laws governing civil society in China are a case in point. During its meetings in March 2016, the National People’s Congress passed a new Charity Law that will go into effect on September 1, 2016 and govern all charity organizations in China. Thereafter, on April 28th, the Standing Committee of the National People’s Congress passed a controversial new Law on the Management of the Activities of Foreign Non-Governmental Organizations Within China (“Foreign NGO Law”).

This article examines the new Charity Law; a follow-on article will analyze the new Foreign NGO Law.

Charity Law

The stated goal of the new Charity Law is to build a single, comprehensive regime for the regulation and management of charity organizations in China. For decades, charities and, more broadly, civil society organizations have found themselves operating and fundraising in gray areas. The new law and subsequent implementing regulations will likely bring a (somewhat) greater measure of clarity to the regulatory environment. However, critics worry that more thorough management of civil society will provide the Chinese government with more tools for constraining civil society to achieve political goals.

Eleven years in the making, the Charity Law is China’s first comprehensive national-level legislation governing the charitable sector. The law’s provisions affect not only domestic and foreign non-profits, but also a wide range of companies and corporate social responsibility (CSR) initiatives. The law touches on a number of hot-button issues including direct registration, donation management, and transparency. Some highlights are as follows:

  • Broad scope. The first chapter of the law broadens the definition of what constitutes “charitable activities,” including within its scope “public interest activities voluntarily carried out…through the donation of property, the provision of services, or other means” related to poverty relief; environmental protection; care for the elderly and orphans; disaster relief; the development of science, education, culture, health, sports; and “other causes,” as well as “other public interest activities in accordance with this law.”Charitable organizations are defined as “legally established non-profit organizations that…aim to carry out charitable activities catering to society” and may include “foundations, social groups, social service organizations, and other forms of organization.”

  • Single Registration. Previously, charitable organizations needed to register both with the Ministry of Civil Affairs or relevant local counterpart thereof (“civil affairs department”) and also with a “professional supervisory unit” — in other words, a sponsoring government agency. Under the new law, Chinese charitable organizations no longer need to find a government sponsor. They will merely need to register with the appropriate civil affairs department. The Charity Law does not mention foreign charitable organizations, but under the new Foreign NGO Law — discussed in our next post in this two-part series — most foreign NGOs may only set up representative offices (or engage in temporary activities), which is handled by the Ministry of Public Security and its local counterparts rather than the civil affairs authorities.

  • Public Fundraising Rules. The new law attempts to provide more structure and clarity with respect to fundraising within China. While the new rules may represent an easing over the status quo in some respects, public fundraising in China will remain severely restricted and tightly managed by the government. While charities previously engaged in some online fundraising under the argument that online fundraising was not covered by previous rules (many of which were issued before online fundraising became mainstream), the new law removes any such ambiguity by explicitly covering fundraising over the Internet.

Only charitable organizations that have applied for and received public fundraising certificates may fundraise. Those without such qualifications may fundraise publicly only if they do so in cooperation with an entity approved for public fundraising.

Charitable organizations, which previously had limited and obscure paths to obtaining public fundraising status, may now apply for public fundraising certificates to the civil affairs department under which they are registered — after they have been operational for two years. The registering civil affairs department needs to deem the applicant organization as having sound internal governance and a good record of legal compliance. Certificates may be immediately granted to foundations and other social organizations that are permitted to fundraise under other laws and regulations. Once an organization receives a public fundraising certificate, each of its public fundraising activities must be filed with the registering civil affairs department. Online fundraising activities must be published on an online platform designated by civil affairs authorities.

Charitable organizations are encouraged to conduct on-site fundraising activities within the geographic area covered by the registering civil affairs department; if the fundraising must be conducted outside of those geographic boundaries, then the record filing must be made with the civil affairs department governing that location.

  • Limitations on Administrative Costs. Public foundations are required to keep their administrative costs at a level no greater than 10% of overall expenditures for a given year. The new law does not set out specific limits for the administrative costs of other charitable organizations, but it is possible that implementing regulations may do so.

  • Volunteer Management Rules. The new law sets out rules for the management of volunteers, requiring charitable organizations to conduct real-name registration of volunteers and to record information including the time and substance of volunteer activities performed by each volunteer and an evaluation of volunteers’ contributions.

  • Tax Incentives. Charitable organizations are to be given tax benefits, as are those who make charitable contributions. However, the law does not explain what exactly those tax benefits are. It also states that overseas donations are eligible for a reduction or exemption from import duties and import VAT “in accordance with the law.”

As is common in China’s unique legal system, the Charity Law provides high-level guidance.  The full impact of the law will not be known until regulating government agencies issue implementing regulations. Companies, organizations, and individuals — both domestic and foreign — with interests in China’s social sector should closely monitor these developments.

Read Part 2 here. 

© 2017 Covington & Burling LLP

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About this Author

Ashwin Kaja, Covington Burling, beijing attorney, international trade lawyer
Associate

Ashwin Kaja is an associate in the firm’s Beijing office and is a member of the firm’s International Trade, Public Policy & Government Affairs, and Data Privacy & Security practice groups. He has advised multinational companies, governments, and other clients on a range of matters related to international trade, public policy and government affairs, data privacy, foreign investment corporate law, real estate, and the globalization of higher education. Prior to joining the firm, Mr. Kaja was an associate at another major international law firm in Beijing.

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Tim Stratford, International Trade Corporate attorney Covington Burling law firm
Partner

Tim Stratford is a partner in the firm's Beijing office and a member of the International Trade, Corporate and Public Policy and Government Affairs Practice Groups.  Mr. Stratford’s practice is focused on advising international clients doing business in China, as well as on assisting Chinese companies seeking to expand their businesses globally.  As a former Assistant U.S. Trade Representative, Mr. Stratford is the most senior former US trade official to join the US business community in China.  He is fluent in Mandarin and Cantonese.

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