Source: http://www.icnl.org/research/journal/vol4iss4/art_5.htm
Timestamp: 2019-04-23 02:00:46+00:00

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The freedoms of expression, association, and peaceful assembly are the hallmarks of a democratic, open society. Individuals should be empowered to pursue their common objectives and interests both individually and associated in organizations, should they feel that might be a more effective method of accomplishing the desired goals. Individuals may form groups that range from ad hoc neighborhood organizations created to solve problems of dirty streets to large assemblies of individuals joined together to protest natural and environmental pollution/degradation. Known variously as “non-profit”, “non-governmental”, or “civil society” organizations, this set of institutions includes within it a bewildering array of entities – hospitals, universities, social clubs, professional organizations, day care centers, hobby clubs, environmental groups, family counseling agencies, sports clubs, job training centers, human rights organizations, volunteer fire brigades, and many more. Nonetheless they all have common features that distinguish them from both market and the state.
NPOs are predominantly organized as institutions, separated from the state (private; non-governmental), they do not distribute profit to managers and “owners”, they are self-governing (having control of their own affairs) and voluntary (membership is not legally required and they attract some level of voluntary contribution of time and money). Such organizations may be informal, without separate legal personality, or formal legal entities/persons, i.e. established and registered in compliance with governing laws of a particular country. Trends indicate that NPOs organized as legal persons play a crucial role in the process of creation of an open, diversified, democratic society. There are several reasons for that, which range from having a separate bank account and having perpetual existence separate of the existence of any member, to becoming eligible form tax and other benefits/incentives and receiving donations. These obvious advantages contribute to their structural, and most notably, to their financial potential/strength, which leads to increased influence in a society as a whole.
Democratic societies must have laws that protect the right of individuals to express their opinions and views freely, and to come together in a joint effort in pursuit of a common objective. The laws should permit, protect and regulate the civic organizations that choose to obtain legal personality, thus enshrining and securing the freedoms of expression, association and peaceful assembly for all citizens. At the same time there must be laws that are aimed at protecting the public from possible abuses by civic organizations.
Modern times are characterized – amongst other trends – by an ever-growing interest in a wide array of social organizations that function outside the market and the state. This is true in Central and Eastern Europe, in Newly Independent Countries (NICs) of the former Soviet block, throughout Asia, Africa, Latin America, as well as in the traditional welfare states of Western Europe and North America. The interest of the public corresponds to the unprecedented growth of such organizations, not solely through an increased number of legally registered entities, but through their increased importance in the social milieux over the past several decades. The “associational revolution” (Salamon 1994) may have resulted from reduced capabilities of the state to cope on its own with the social welfare, development, environmental challenges, etc., of our time, and from the fact that citizens have sought to take a more direct and active part in solving social problems and public affairs in general.
International treaties and case law have paid close attention to these developments, and a number of documents – resolutions, declarations, conventions – have been adopted by international and regional organizations for the purpose of providing legal protection of the right to freedom of association. The most important international law documents that are relevant for the civic sector are the UN Universal Declaration of Human Rights of 1948, the European Convention on the Protection of Human Rights and Fundamental Freedoms of 1953, and the International Covenant on Civil and Political Rights of 1976. Of paramount importance in this context is the establishment of the European Court of Human Rights under the European Convention. This is a truly international court with special mandate to interpret the rules governing the freedom of association. During the course of its functioning the Court has set forth clear and strict standards that must be satisfied before any interference with the freedom of association can be justified.
The Universal Declaration provides that everyone has the right to freedom of opinion and expression, and of peaceful assembly and association. Further, it states that no one may be compelled to belong to an association. Although not an international treaty, but merely a resolution/declaration, it has nevertheless come to have normative effect by influencing subsequent international treaties on human rights, and by influencing domestic legislation in the field of human rights and freedoms.
The European Convention, ratified by over 40 member-countries of the Council of Europe, provided the right of freedom of expression (Article 10), association, and peaceful assembly (Article 11). The complaint procedure under the Convention has been regulated and the European Court of Human Rights established. Recent decisions of the court make it clear that there is a right protected under international law to found a civic organization, and that once established, that organization is fully protected from any restrictive acts from the state that would impede the rights of individuals to freedom of association.
The most important international human rights treaty providing the freedom of association and assembly in connection to the freedom of association internationally is the International Covenant on Civil and Political Rights, Article 22 (ICCPR) (1976). Over 140 countries have ratified it. The ICCPR provides that: everyone shall have the right of freedom of association with others including joining trade unions, and no restriction may be imposed on the exercise of this right other then those prescribed by law.
These three documents are of major importance, since they provide strong and effective international law protection for the right to establish legally recognized NPOs, and once established, to operate with a minimum of state-imposed limitations and restrictions.
The freedom of association may be limited – according to both ECHR and ICCPR -- only for the reasons of: (1) national security and public safety, (2) prevention of disorder or crime, (3) protection of health or morals, and (4) protection of rights of freedoms of others. These restrictions must be prescribed by domestic laws of any particular country wishing to impose limitations to the right of freedom of association. It is obvious that international law has imposed very strict rules on interfering or restricting the freedom of association.
The right of individuals to form associations has also been recently confirmed by an important resolution of the General Assembly of the UN: Declaration on the Right and Responsibility of Individuals, Groups and Organs of Society to Promote and Protect Universally Recognized Human Rights and Fundamental Freedoms.
The Constitution. The Macedonian Constitution of 1991 guarantees the freedom of association of citizens for the realization and protection of their economic, social, cultural and other rights and convictions (Art.20). The constitutional guarantee of freedom of association reflects both the international covenants that the Macedonian government committed itself to, by ratifying all major international treaties and acceding to conventions (specifically the Stability Pact and the Stabilization and Association Agreement with the European Union), but also the determination to strive for a democratic open society. The Macedonian Constitution has been the legal flagship of true liberal and free civil society in the Republic of Macedonia.
The freedom of association of NPOs, under the Constitution and the Law on Associations of Citizens and Foundations of 1998 (LCAF), may be interfered with only under the following circumstances: if their program or activities call for “violent overthrow of legitimately elected government or if the NPOs are pursuing military aggression, and stirring national, racial or religious hatred and intolerance. (Art.4 LCAF). Military and quasi-military associations apart from the Macedonian national army are also forbidden. The Constitution Court of Republic of Macedonia (RM) has a mandate to render final decisions on these issues. A decision of the Constitutional Court has the effect of terminating the existence of those NPOs that act contrary to the constitutional rules. It is evident that the rules enabling interference, per se, are an expression of the justified interference causes of national security and public safety, preventing disorder, protection of freedoms and rights of others set out in the European Convention. It is interesting to note that any citizen may initiate court action for the purpose of termination of an NPO if there is reasonable suspicion that its activities are contrary to the Constitution (so called actio popularis).
Subconstitutional laws. The present Law on Associations of Citizens and Foundations (LCAF) is not the first law to regulate the civic sector in Macedonia. LCAF actually superceded the former Law on Social Organizations and Associations of Citizens dating back from Socialist Federative Republic of Yugoslavia (SFRY) era, which remained in force after the establishment of sovereign and independent Republic of Macedonia.
However, the law was inadequate for the “newly-born free democracy” era, which led to the adoption of LCAF, a law that regulates the creation, membership, functioning, management, assets and property, and the termination of NPOs in Macedonia.
We now turn to the basic legal features of NPOs, as regulated by the Law on Citizens’ Associations and Foundations of 1998.
NPOs gain legal personality status by entering into the register of CAs and Fs at the competent court. Once duly registered, NPOs have perpetual legal existence, meaning there is no need for periodical renewal of their legal status. Legal personality status encompasses powers, rights and privileges, immunities and liabilities generally applicable to all legal persons. However, NPOs cannot be transformed into any other type of legal entity.
Two issues are not adequately treated in the LCAF – in my view – which have a major impact on the tax treatment of NPOs in RM. Firstly, there is no clear legal distinction between member benefit organizations and public benefit organizations. More precisely, the law makes an attempt to overcome the lack of genuine, internationally recognizable PBO concept, by introducing an original concept of Citizens’ Association with Public Authorization. (Article 12) The core element of such organizations is a delegation of power to perform certain activities, by the relevant government Ministry to the CA. The Ministry must take into account the character and the domain of CA activities; the professional purposes and objectives; the public need for the activities and the services rendered by the CA; its institutional capacity and permanency of existence. The public authorization may be revoked at any time, on grounds of misconduct or poor performance. The law does not elaborate further the concept of “Public Citizens’ Associations”. In this respect, secondary regulation appears to be necessary, or amendments to the Law.
Secondly, in the following article, Article 13, one encounters the only brief provision in the LCAF dealing with fiscal treatment of NPOs. With respect to that provision, CAs and Fs may obtain tax and customs benefits, according to law. No mention is made of the relationship between the citizens’ associations with public authorization and the ordinary CA. Thus the issue of which associations may be entitled to tax benefits is not clarified in the LCAF.
It is evident that de lege lata the regulation appears to be insufficient since it fails to provide adequate and detailed provisions regulating public benefit organizations. Furthermore, this type of NPO – in contrast to an ordinary NPO -- ought be granted more favorable fiscal treatment, thus securing the long-term financial sustainability and growth of PBOs. The arguments in favor of such tax privileges are well-known and widely accepted as good international practice. In this occasion I will mention only one: loss of tax revenue resulting from extended tax preferences is balanced, if not out-weighed/surpassed by numerous benefits from services and activities provided by the civic sector. Why? Because the modern state – given the funding and other limitations occurring over the past several decades – has reduced capabilities to successfully cope with such numerous and diverse needs, interests and goals, in short, activities that the citizens may find worth-while.
Once duly registered with a competent court register, NPOs gain legal personality. Thus, they automatically are subject to all fiscal instruments applicable to legal persons in general, with the exceptions regulated by applicable tax law. NPOs are liable for profit tax at the entity level, personal income tax and social contributions for their staff (except for volunteers), property tax, gift and inheritance tax, VAT on purchases of goods and services, customs and other import duties, as prescribed by tax and customs laws and secondary regulations.
Under the present income tax laws NPOs are generally not treated differently from business organizations or any other legal entities. In addition, there are no tax incentives for the individual philanthropist. One of the reasons for such inadequate tax treatment of NPOs could be that the tax reform in the field of income/profits taxation was completed 5 years before the LCAF was enacted. Not having in place a clear legislative profile of NPOs in all relevant aspects made it impossible for the parliament to prescribe fiscal incentives in a sufficiently detailed and consistent manner. Rather, tax laws followed the rationale of the neutrality principle, meaning that the system provides as little deviation from the basic tax rule as possible, thus broadening the tax base and combining it with moderate and low tax rates. As a result of this attitude, the tax laws have up until now contained but a few provisions – tax incentives -- applicable to NPOs.
Law on Personal Income Tax (LPIT).
One should in addition be aware of the presence of the Law on Real Estate Taxes, which regulates the property tax on immovable and movable property, taxation of gifts and inheritance, and finally, the sales tax on disposing of immovable (real) property. The law on social security contributions also affects NPOs. Although this is not a tax law strictu sensu, it comes very close to being one, primarily as a result of the compulsory nature of the “contributions”, the withholding collection method and the relatively high rates.
LPT – Tax exemption. As it was already mentioned, NPOs are liable under the provisions of the Law on Profit Tax similarly to any other legal person. Apart from the explicit statutory tax exemption for entities employing disabled individuals (discussed below), the law provides only one possible legal relief from taxation for NPO income derived from membership fees. Under the LPT, any type of income that is strictly designated for carrying on the activities of the taxpayer from budgets, funds, etc., is considered to be exempt from tax. That type of income would not included in the NPO tax base for the purposes of the profit tax. In my view, although the LPT failed explicitly to mention membership fees as being within this category, they, by their innate nature, obviously should fall within the category of “designated” income, and ought to be treated as tax exempt. This is the result under the amended law, as discussed below.
According to the provisions of the Law on Profit Tax, companies that are organized for the purpose of professional rehabilitation and companies that employ handicapped individuals to work under special conditions (both in manufacturing and in the area of services) are fully exempt from the tax. The exemption status may be obtained from the authorized government Ministry, based on screening the submitted documentation (Art. 36 of the Law). There are periodical reviews of the tax exempt status of these companies, should significant changes occur regarding the profile of the employees, and such a review may lead to the loss of tax exempt status.
LPT – Tax Deduction. Article 20 of the LPT regulates the beneficial tax treatment of funds donated for public interest purposes from business entities to organizations that provide such activities and/or services. Initially, the reading of this article was as follows, (..) expenses incurred for the purpose of donations and grants for cultural, scientific, health-care and international sport, under the conditions set forth by authorized ministry, are treated as regular business expenses not to exceed 10% of reported pre-tax profits.
This provision indicates changes of the political attitude towards the third sector and its financial sustainability, and it is neither favorable to nor designed to stimulate NPO activity. On the contrary, the tax incentive for potential corporate donors has been minimized.
The Law on Profit Tax does not recognize special tax exempt status for not-for-profit public benefit organizations. The above-mentioned exemption reserved for companies that are organized to provide professional rehabilitation and companies that employ handicapped individuals to work under special conditions (both in manufacturing and in the area of services) by no means reflects the complexity and the diversity of activities performed by PBOs that serve the public interest. Thus, at present, all legal persons that are registered and have their seat within the territory of RMand realize profits are liable for profit tax. Needless to say the scope of “legal personality” encompasses the commercial, business sector, government and public administration institutions, and the not-for-profit sector, thus creating an unprecedented practice of equal tax treatment of distinctly different segments of society. The LPT has ignored a decisive legal fact in determining who is liable for profit tax, which is that elements of society that are not business entities ordinarily do not ordinarily pay tax. In RM, for example, the State Faculty of Law in Skopje is liable for profit tax! This failure to distinguish among legally distinct entities is not in accord with international practice.
The Law on Personal Income Tax (LPIT) regulates the tax liability of natural persons (individuals). The major principle of the law is global taxation of income from whatever source during an annual accounting period corresponding to the calendar year or a fiscal year. A citizen of RM is taxed on income originating from Macedonia or from abroad (global taxation), realized in-cash, in-kind and in any other way. Non-residents are liable only for income generated within the territory of Macedonia. Taxable income is computed in a way that all income – except tax-exempt income -- is aggregated, and then a personal allowance is deducted as well as social security contributions and other taxes, and progressive tax rates are applied to the resulting tax base. Initially (1993) three rates existed, ranging from 23% to 35%, a slightly progressive rate structure.
This past year significant changes occurred concerning the level of tax rates as well as the method for determining the schedules/brackets of the progressive rate structure. Instead of three brackets with corresponding rates of 23%, 27% and 35%, as of February 2001 there are only two rates: 15% on monthly income not in excess of 30 000 MK denars and a higher rate of 18% levied on income increments over 30 000 MK denar plus 4500 MK denars. On an annual basis, PIT is levied at the same two rates: the basic 15% rate on yearly taxable income not in excess of 360.000 MK denars, and for income higher then the statutory threshold, 54.000 MK denars and 18% of the portion in excess of 360.000 MK denars.
Tax rates have been lowered and progression narrowed down to two rather than three brackets, and it is obvious that the tax burden has almost been cut in half. It is thought that this could spur employment. In addition, the computation of the personal allowance was changed rather radically: instead of former 1/4 of average annual wage at national level tax exempt income, at present the personal allowance is only 30 000 MK denars on an annual basis. This to a large extent diminishes the positive effects of the lowered nominal rates, since the tax base, due to insignificant exemption of income by the personal allowance, is substantially broader.
Unfortunately, individual philanthropists are not entitled to any kind of tax incentive on the income that they donate for charitable and other not-for-profit purposes, to registered NPOs. The Law on Personal Income Tax regulates over twenty items that are exempt from income taxation, but not a mention is made of tax-exempt donations. The situation is identical with respect to the deductions allowed. No deduction from income subject to tax is allowed for the portion of income donated to NPOs.
“Income from receipts that are strictly designated for performance of the activities of the legal person – tax-payer (budgets, funds) are not included in his tax base for the purposes of profit tax”.
“Monies strictly designated for performance of activities are considered monies from special accounts, receipts from designated donations, membership fees, and other monies that are not designated for performance of activities, but exclusively for the purpose of collection and distribution for specific goals”.
This could prove to be a very important tax relief for the civic sector in RM as a whole, and especially for organizations which are largely financed by donations, grants, etc. The law has devised a legal mechanism against possible abuses of such an important tax relief, by binding the CAs and Fs, to submit documented proof of the purposes for which such monies have been used, on an annual basis. Failure to comply with this requirement will result in the loss of this tax benefit in the future, and an obligation for the particular NPO to pay all taxes due in the past period, adjusted for the official inflation rate for the period.
Notwithstanding the value of the latest fiscal improvements, one cannot escape the impression that the overall legal framework in RM does not correspond to international good practices, and moreover is burdened with a number of weaknesses (unclear, incomplete, imprecise, inconsistent), the result of which is a unfavorable legal and fiscal climate for the growth of the civil society in Macedonia.
Income from economic activity must be reinvested in the NPO and used solely for its statutory and legitimate purposes, contained in the statute or charter. The moment income is used for other purposes or distributed to anyone, the NPO loses its not-for-profit character, a fact that may lead to dissolution of the entity.
Macedonian NPOs are not allowed to engage in economic activities directly, but only through a separately established commercial subsidiary company. The company has all the attributes of a regular business entity governed by commercial law, and it consequently is taxed like all business organizations. Sporadic or occasional economic activity related to the principal goal of the NPO is allowed within the NPO, which is taxed unless the proceeds from such activity are used for the not-for-profit purposes. On the whole, this is a rather rigorous legal approach, given that the majority of countries in Central and Eastern Europe allow some tax benefits, at least for a portion of that income under terms and conditions prescribed by law.
While we are at the comparative issue, it is worth mentioning that profit tax rate in Macedonia is the lowest in the region, and in the European Union member-countries as well, presently set at 15%. This fact that may partially off-set the negative effects of taxing income derived from economic activities of NPOs.
Business income does not include income from portfolio investments. Portfolio investments are considered to be passive investments. NPOs may earn income from investments directly, because they have unlimited access to purchasing, holding and trading all financial products that are available at the capital market in Macedonia. Dividends from a subsidiary company are taxed at the level of that company and are then received by the recipient NPO and treated as passive income. Of course, NPOs may invest in stocks of various companies and generate income which will not be included in the tax base, if it has been taxed once at company level and if that company is a resident of RM. Dividends from non-resident companies may not enjoy this incentive, and will be taxed twice (second time at the recipient level) unless a Double-Taxation Treaty between the countries is in place. Macedonia has signed and ratified 11 tax treaties, where dividend income on non-residents is taxed in most cases at a 15% rate, in some cases at a lower rate of 10% and even 5 %. Interest and royalties are generally taxed by 10% withholding tax, or are tax exempt.
NPO’s may receive interest from bank deposits and other debt instruments (government bonds, treasury notes, etc.) that are taxable as ordinary business income. Interest from government bonds is tax exempt. The latest amendments of the Personal Income Tax Law (8/01) provide for exemption from taxation of several types of interest: from government loans, a vista bank deposits, savings deposits, bonds issued by central government and municipalities. This benefit is in favor of individual resident taxpayers, and it is unclear whether the same treatment is extended to legal juridical persons (NPOs inclusive), since the LPT is not explicit on the same issue.
Capital gains from sale of securities and immovable property are included in tax base in the amount of 70% and taxed as ordinary income. Capital loss may be off-set by capital gain and the remaining loss may be carried forward up to three years.
tax on disposition of immovables and rights.
According to the Law, there are several exemptions from the tax on immovables: (.) buildings and land that are used for educational, cultural, scientific, social, health-care, humanitarian, sports purposes, except buildings and parts of buildings that are in economic exploitation or are rented; and, business buildings where so called “protective workshops” (companies that employ disabled, invalids etc.) are situated Art.6 (2,11).
This exemption is available for gifts and inheritances consisting of immovable and movable property, in cash and in receivables.
Real Estate Sales Tax. The tax on disposition of immovables and rights is levied in cases of transfer of property for a price, exchange of immovables and any other case of acquiring immovables and rights between natural and judicial persons, for remuneration. There is no exemption from this tax for NPOs.
4.6 Indirect Taxation -- Value Added Taxes.
VAT was made effective in Macedonia as of 1999, to supercede the long-lasting single-stage retail sales tax. VAT is structured according to the major principles and rules recommended by the EU’s Sixth Directive on VAT.  VAT is applied on all transactions and imports of goods and services – except the ones that are VAT exempt -- at a single rate of 19%. An additional lower rate of 5% is applicable on selected items. There is no zero rate, which has a negative effect on the organizations in the not-for-profit sector. This means that NPOs are not in a position to seek VAT rebate for their purchases. VAT rebate is possible only for entities which are registered VAT taxpayers. It is tricky whether a purchase should be done by a separate company or directly by an NPO. In case of a direct purchase, there will be no VAT rebate. It may, however, be possible to set up a separate commercial company that is registered for VAT (has annual turnover in excess of 1.000.000 MK denars) and to do purchasing through such a company, which can then seek a VAT rebate. These are tricky planning issues and would only be available infrequently.
goods in question ought to be transferred abroad and utilized for humanitarian, charitable and/or educational purposes.
The Minister of Finance is required to issue regulations for more detailed regulation of the procedure of VAT rebate, in such cases.
imports directly utilized in social services and education, etc.
Furthermore, customs incentives in a form of exemptions are provided for goods imported by registered humanitarian and charitable organizations, for the purpose of distribution to victims of natural disasters and other catastrophes. (Art. 181, 9).
The most recent comparative surveys of the tax laws and regulations relating to NPOs in CEE countries show substantial variety of concepts and solutions to major issues in this area. According to the World Bank’s Handbook on Good Practices for Law Relating to NPOs, NPOs should be exempt from income taxation on most kinds of income. This recommendation is a logical consequence from the inherent nature of an NPO that precludes the possibility of personal benefit or the distribution of profits. Even income derived from so-called economic activity – although similar to profits of a business company – is generally reinvested and spent on appropriate not-for-profit activities.
In CEE countries there is a general practice that every NPO should be exempt from income/profit taxation on contributions, grants or donations, proceeds from contracts with governments, and membership dues or fees.
Macedonian tax law does not include an exemption for NPOs as legal entities – with one exception discussed in p.4 – but only implies that particular sources of income, under certain conditions, shall be exempt from tax. They are: proceeds from budgets, funds, contributions, grants or donations strictly designated and used for the legitimate purposes of the legal entity, as well as membership dues or fees. This is a very limited approach to tax exemption, according to international and regional standards.
Income from economic activity is a very controversial issue with regard to tax liability of NPOs when they engage in for-profit activities for the purpose of gaining additional financing. Various tests are being implemented in different countries for determining whether the entity should be taxed on income from economic activities. These include, for example, the question of whether the organization is established and operated primarily for public benefit purposes (“principle purpose” test). According to this test an NPO that consistently spent more than fifty percent of its funds or resources for for-profit purposes would be required to reregister as a for-profit entity. A second test looks to whether all income from economic activities is spent solely for pursuing the statutory public benefit purposes of the NPO, irrespective of the fact that the income is earned by the NPO directly, or is generated by another organization, a subsidiary or affiliate (the destination of income test / no limitation on type of economic activity). A third looks to whether the particular economic activity is related to the primary purpose and/or objective of the NPO (relatedness test / possible limitations on level of earnings).
According to Macedonian law economic activities of an NPO may be carried out only by a subsidiary company, which is to be taxed as any other for-profit entity. Income from economic activity distributed by the subsidiary to the NPO must be reinvested in the NPO and used solely for the statutory and legitimate purposes, prescribed by its by-laws. The moment income is used for other purposes or is distributed to anyone else, the NPO loses its not-for-profit character, a fact that in effect may lead to dissolution of the entity. Sporadic economic activity (e.g., a sale of baked goods to raise funds) related to the principal goal of the NPO, may be conducted and will not be subject to tax according to the same rule.
When compared to the other CEE countries discussed in ICNL’s regional tax survey the taxation of NPO income from economic activities is stricter than in many countries. A few others tax all the income from economic activities, but many others follow the destination of income test or only tax such income when it comes from unrelated activities or where it exceeds a specific threshold. In view of this fact as well as the most recent and certainly most innovative legal developments in the region (having in mind the much-praised Hungarian “1% Law”, which both Slovakia and Lithuania have followed), one may freely conclude that Macedonia’s approach to tax law reform for NPOs needs to be speeded up.
In my view, the overall legal framework for NPOs in RM does not correspond to international good practices. In addition, it is burdened with a number of weaknesses (unclear, incomplete, imprecise, and inconsistent) the result of which is an unfavorable legal and fiscal climate for the growth of the civil society in Macedonia.
Over the past decade Macedonia has experienced a renaissance of its civil society, which lay dormant for a half century. There are now several thousand registered organizations in RM, mostly CAs and to a considerably minor extent other types of NPOs (primarily foundations). The importance of civil society in a society as diverse as that in RM, in terms of nationalities, cultures, traditions, religions etc., need not be specifically stressed; it is a condition sine qua non. This fact by itself must present a serious challenge for the parliament and the government as a whole, once the impact of the civic sector is recognized, to facilitate and assist its growth. Taxation is a powerful tool in the hands of governments, to induce changes and sustain positions of the taxpayers under its jurisdiction. Taxes may have positive effects over a sector, or an industry; in other instances they may have negative effects (excessive taxation; double and multiple taxation; taxing the poor, etc.). Finally, taxes may simply preserve the situation unchanged – so called neutral taxation. At the present time, the expectation for all CEE governments, including the government of the RM, is to establish favorable tax conditions for the “third sector” and to move away from a principle of neutral taxation.
The third sector /civic sector has enormous diversity, and a distinction is often made between organizations that serve principally the interests of their members (MBOs) from those that serve much wider public interest or public good – so-called public benefit organizations (PBOs). Within each of these large categories there is enormous variety of purposes, sizes and scope, but they all contribute to one identical goal – creation and growth of a vibrant and open society. PBOs are actually the type of civic organizations that attract most attention and enjoy fiscal and other state introduced measures. Accordingly, the parliament and government of RM should consider making several changes in the current legal and fiscal regime affecting NPOs.
Tax Exemption. The analysis of the Law on Associations of Citizens and Foundations (1998) suggests that de lege lata regulation appears to be insufficient concerning this very important issue. By failing to create a special definition and regulatory structure for PBOs, it also fails to establish a way in which the tax regime can be adequately structured to favor PBOs as opposed to other NPOs. In its turn, the Law on Profit Tax does not recognize a special tax exempt status for PBOs. Thus, the fiscal treatment of publicly authorized NPOs is currently being determined on a “case-by-case” basis, led by various Ministries.
PBOs could be dealt with explicitly, in a separate article, regulating their tax exempt status.
Tax deductibility. At present individual donations and gifts to NPOs are not deductible from personal income tax. Only small gifts – not in excess of an average monthly salary on state level -- are exempt from gift tax. There is an urgent necessity to provide for deductions for charitable contributions by individuals to registered, publicly authorized citizens’ associations or to PBOs more generally. Such a tax incentive could be extended automatically to all registered Citizen’s Associations with Public Authorization, and to those who are able to prove that their cause is indeed of broad public interest. In addition, the gift tax exemption should be increased.
Supervision. The Public Revenue Office should carry out regular tax supervision and audits of NPOs and their subsidiaries, with the aim of preventing tax evasion and all other infringements of tax laws. Special attention should be paid to the tax supervision of tax-exempt PBOs. These should be specially regulated in the pending amended version of the Law on Citizens’ Associations and Foundations, and in coordination with the government or an independent body established specifically to deal with issues related to NPOs.
A specialized government body, or an independent entity (such as a commission or an agency) should be established, and it should be mandated to monitor, coordinate, screen and conduct various other activities related to the operations and conduct of NPOs. This body would preserve the interests of the government and of the general public, ensuring that the organizations granted fiscal preferences are indeed serving the public benefit, and are not used for personal/group gain. In addition, the bidy would ensure that they are not pursuing goals that may be harmful to other members of society, or that are targeted against government.
Lobbying for change. An aggressive public campaign should be organized for tax reform, and it should be targeted at various segments of the population, especially the young. That would lead to growing awareness and greater concern on issues like charitable giving and volunteer work, on behalf of the new generation. When they gain decision-making power in the economy, the government and in the civic sector, it is likely that we can expect a better understanding of the issues related to NPOs in the Republic of Macedonia.
* Prof. Dr Vesna Pendovska is a member of the Faculty of Law – Skopje University:”Ss Cyril & Methodious” in Skopje, Republic of Macedonia.
 For a general discussion of these issues, see World Bank Handbook .
 In the well-known SIDIROPOULOS decision (1998) the ECHR unanimously held that the refusal by Greek courts to register a Macedonian cultural association was an interference with the applicants’ exercise of their right to freedom of association. Of similar importance is the decision (also 1998) holding that the action by Government of Turkey to dissolve the United Communist Party of Turkey was a violation of Art.11 of the Convention. The third significant decision is Freedom and Democracy Party (OZDEP) v. Turkey, 1999, where the Court held that dissolving of a party before it begun any activities is too radical and presents interference with the right to freedom of association and links it directly to the right of expression, both protected by the European Convention. For a discussion of these cases and their relevance to the interpretation of the European Convention and the ICCPR, see Freedom of Association Recent Decisions on "the Neglected Right" .
 That was only temporary, until a new law would be adopted by Macedonian parliament. The legal grounds for the extension of the Law was the fact that the Law did not contradict substantially the Macedonian constitution, according to the Constitutional Law of 1991 for implementation of the Constitution. The interim character of the former Law dragged on until 1998, the year it was superceded by the LCAF.
 The current rate of social security contribution is much higher than the highest rate of the personal income rate, and is 22 + 8 + 1,5 = 31,5% and the respective tax rate is 18%.
 (Art.17 (2) of the Law on amending the Law on Profit Tax, Off.Gaz. RM , no.11/01).
 See: Art. 26 of the above cited law in fn. 3.
 See: Law on Personal Income Tax (LPIT), Off. Gaz. RM no.80/93 as amended no. 3/94; 70/94; 71/96; 28/98; 8/01 and 50/01.
 ICNL’s Survey on Tax Laws Affecting NPOs in Central and Eastern Europe , International Center for Not-for-Profit-Law, Washington, DC, 2001.
 Investing in foreign stocks, debt-instruments etc. on foreign markets is not permitted according to the current laws and regulations applicable to foreign currency operations and payments. Gradual liberalization of capital outflow – cross-border capital transactions- is to be expected in near future.
 See: Law on VAT, Off.Gazz no 44/99; Decision on Good and Services Taxed at Lower VAT Tax Rate, Off. Gaz no.65/99. Also see: Sixth VAT Directive, (77/388/EEC). A common value added tax system in now applied in all Member States. A transitional VAT system became effective on 1 January 1993. In July 1996 the European Commission presented its programme (COM (96) 328 final) for a gradual move toward definitive VAT system.
 Excellent sources of comparative legislations are: European Tax Handbook 2002, International Bureau of Fiscal Documentation – IBFD Publications BV, Amsterdam, The Netherlands. Specifically on tax incentives for NPOs see in: ICNL’s Survey on Tax Laws Affecting NPOs in Central and Eastern Europe , International Center for Not-for-Profit-Law, Washington, DC, 2001.
 For further explanation of thes and other tests and their use in the CEE region, see the Tax Survey cited above in note 16.
 Hungary enacted a law in 1996, which permits taxpayers to direct 1% of their taxes to be paid to NPOs designated by them. By providing a simple mechanism for directing funds to NPOs, the “1% Law% created significant pool of resources -- $9 million in its first year – to support socially beneficial activities.” For more details, see the Tax Survey, above note 17.
 In order to address these issues for the region, ICNL worked with a group of experts to produce Model Provisions for Laws for Public Benefit Organizations, which include favorable tax provisions.

References: de lege lata
 Art.6
de lege lata
 Art.11
 v. 
 Art. 26