Organizations can’t operate without funding, and this truism also applies to international non-governmental organizations (INGOs) in China.
1.Funding Options under INGO Law
The Law on the Administration of Activities of International Non-Governmental Organizations in the People’s Republic of China (the INGO Law) stipulates that ‘international non-governmental organizations shall not engage in or fund for-profit activities within the territory of China’1.
If for-profit activities are prohibited, where do INGOs obtain operational funding for their activities in China?
Article 21 of the INGO Law states that ‘funds for international non-governmental organizations to carry out activities in China include:
(1) Funds from legitimate overseas sources;
(2) Interest on bank deposits within the territory of China;
(3) Other funds obtained legally within the territory of China.
INGOs shall not obtain or use funds other than those specified in the preceding paragraph for their activities in China. INGOs and their representative offices shall not conduct fundraising activities within the territory of China.’
2.Dilemmas in Practice
In practice, a considerable number of INGOs, in addition to receiving appropriations from their headquarters (i.e., the first category of funding sources under the INGO Law), need to collect fees when carrying out activities in China to amortize their operational costs in the country. Some INGOs, by virtue of their strong brand influence and professional capabilities, provide training and consulting services in accordance with industry demands and charge corresponding fees.
Such activities are consistent with INGOs’ missions of fulfilling public welfare undertakings and promoting industrial development, yet they conflict with the provision of the INGO Law that prohibits engaging in for-profit activities.
3.Re-examining the Concept of Non-Profit
To resolve these practical dilemmas, it is necessary to re-examine the precise meaning of the term non-profit.
A review of the primary legal regulations applicable to the administration of INGOs, including the INGO Law, the Guidelines for the Administration of Activities of INGOs in China and the Catalogue of Fields and Projects for INGOs to Carry Out Activities in China, reveals that none define or interpret the term non-profit.
The provisions on non-profit can be found in adjacent laws and regulations, as set out below:
(1) Article 87 of the Civil Code of the People’s Republic of China: A legal person established for public welfare purposes or other non-profit purposes that does not distribute the profits it earns to its funders, founders or members is a non-profit legal person. Non-profit legal persons include public institutions, social organizations, foundations and social service institutions. The examples of non-profit legal persons listed in the Civil Code are similar to the definition of INGOs in Article 2 of the INGO Law. In accordance with the logic of the Civil Code, therefore, the core meaning of non-profit is that there is no profit distribution.
(2) Article 2 of the Accounting Standards for Private Non-Profit Organizations (Document No.: Cai Kuai [2004] No.7, hereinafter referred to as the ‘Non-Profit Accounting Standards’) issued by the Ministry of Finance: Private non-profit organizations include social organizations, foundations, private non-enterprise units, temples, Taoist abbeys, mosques, churches and other institutions registered in accordance with the national laws and administrative regulations. Private non-profit organizations applying these standards shall also meet the following characteristics: (i) the organization is not established for the purpose of seeking profits; (ii) resource providers do not obtain economic returns for the resources they invest in the organization; and (iii) resource providers do not enjoy ownership of the organization.
It is evident that, in accordance with the accounting standards of the Ministry of Finance, the core meaning of ‘non-profit’ is also the non-distribution of economic returns to resource providers. INGOs also meet the above three characteristics. The Non-Profit Accounting Standards further stipulate that private non-profit organizations may own current assets, fixed assets, intangible assets and entrusted agency assets, and may also generate income2.
4.Solution: Allow Income Generation and Restrict Cross-Border Remittance
INGO representative offices in China are not legal entities, and cannot directly apply the rights and interests related to the legal person status stipulated in the Civil Code and the Non-Profit Accounting Standards. However, the definition of non-profit in these two regulatory documents is important and instructive, particularly regarding the treatment of the income of INGO representative offices in China. There should be no restrictions on their operational income.
The following suggestions are put forward:
(1) Allow INGO representative offices in China to generate income within the territory of China. For example, INGOs may collect fees through activities carried out in China that align with their operational missions, which shall be regarded as domestic income. Such income shall first be used to offset the cost of INGOs’ activities in China, and the surplus may be retained in the INGO representative offices in China but shall not be remitted overseas.
This approach offers dual benefits: it enables INGO representative offices in China to carry out more activities and better fulfill their founding missions, and most INGO representative offices in China maintain standardized accounting records and pay taxes in accordance with the law. This contributes to the prosperity of the market economy and the improvement of people’s wellbeing.
(2) Based on the core concept of non-profit as the non-distribution of profits, all income obtained by INGO representative offices in China shall be retained domestically and used for their subsequent activities in China, and profits shall not be remitted back to their headquarters or founders.
This principle is consistent with the definition of non-profit (i.e. no profit distribution) under the Civil Code, and prevents the inappropriate outflow of China’s capital. In the future, as China’s regulatory system of INGOs becomes more mature, consideration may be given to allowing the appropriate remittance of funds of INGO representative offices in China overseas for China-related affairs, provided such practices comply with relevant requirements. This will demonstrate China’s capacity and contributions in fulfilling its international responsibilities in the foreign-related rule of law and the reshaping of the international order.
We note that Shanghai’s Pudong New Area, a comprehensive reform pilot zone, allows qualified INGO representative offices to charge reasonable fees and issue official invoices on a trial basis3. We hope that over time, these successful practices will form a replicable model to enhance the legal system and practical supervision of INGOs in China.
For further information, please contact:
SUN, Jiangang (Roy), Partner, JunHe
sunjg@junhe.com
1. Article 3 of the INGO Law: For the purposes of this Law, an overseas non-governmental organization means a non-profit, non-governmental social organization legally established overseas, such as a foundation, a social organization or a think tank. Article 5 of the INGO Law: Overseas non-governmental organizations shall not engage in or fund for-profit activities or political activities within the territory of China and shall not illegally engage in or fund religious activities.
2. Article 58 of the Non-Profit Accounting Standards (Cai Kuai [2004] No.7) issued by the Ministry of Finance: Income refers to the inflow of economic benefits or service potential that a private non-profit organization obtains from carrying out its business activities and results in an increase in its net assets for the current period. Income shall be classified by source into major operating income such as donation income, membership fee income, service income, government subsidy income, investment income, commodity sales income and other income.
3. Circular on Issuing the Several Provisions of Pudong New Area on Promoting the Development of International Economic Organizations: Article 10 (Activity Guarantee): Representative offices of international economic organizations may collect reasonable fees for carrying out non-profit activities upon filing within the territory of China, and such fees shall be used for the organization and implementation of the activities and shall not be diverted for other purposes. https://www.shanghai.gov.cn/nw12344/20241209/c0a5030137ef4532990d82415edcda81.html
