(I) What is a charity?
(A) Charity must be established exclusively for charitable purposes
For an institution or a trust to be a charity, it must be established for purposes which are exclusively charitable as defined in law.
The definition of “charity” was given in the judgment of Lord MacNaghten in the case of Income Tax Special Purposes Commissioners v. Pemsel [1891-1894] All ER Rep 28.
In the judgment, it was held that the following purposes may be accepted as “charitable”:-
- relief of poverty;
- advancement of education;
- advancement of religion; and
- other purposes of a charitable nature beneficial to the community not falling under any of the preceding heads.
For the purpose of obtaining profits tax exemption under Section 88 of the Inland Revenue Ordinance only, while the purposes under the first three heads may apply to activities carried on in any part of the world, those under head (d) will only be regarded as charitable if they are of benefit to the Hong Kong community.
- Examples of purposes which the court had held to be charitable purposes include:-
- relief of poor people;
- relief of victims of a particular disaster;
- relief of sickness;
- relief of physically and mentally disabled;
- establishment or maintenance of non-profit-making schools;
- provision of scholarships;
- diffusion of knowledge of particular academic subjects;
- establishment or maintenance of a church;
- establishment of religious institutions of a public character;
- prevention of cruelty to animals;
- protection and safeguarding of the environment or countryside.
- Examples of purposes which the courts had held to be non-charitable purposes include:-
- attainment of a political object;
- promotion of the benefits of the founders or subscribers;
- provision of a playing field, recreation ground or scholarship fund for employees of a particular company or industry;
- encouragement of a particular sport such as angling or cricket.
(B) Charity must be established for public benefit
A purpose is not charitable unless it is directed to the public or a sufficient section of it. An institution cannot generally be charitable if it is in principle established for the benefit of specific individuals.
(II) How to set up a charity?
(A) The structure of a charity
The most common types of structures of charities are:-
- a trust;
- a society established under the Societies Ordinance (Cap 151) excluding, among others, an unincorporated trust of a public character established solely for charitable purposes (see Section 2(2) and Schedule of the Societies Ordinance);
- a company incorporated under the Companies Ordinance (Cap 622) (usually a company limited by guarantee); and
- a statutory body established by the Hong Kong legislature.
(B) The governing instrument of a charity
The governing instrument of a charity should contain the followings:-
- stating precisely and clearly its objects (This also applies to companies incorporated under the Companies Ordinance on and after 10 February 1997 and not required to state their objects in their Memorandum of Association);
- limiting the application of its funds towards the attainment of its stated objects;
- prohibiting distribution of its incomes and properties amongst its members;
- prohibiting members of its governing body (e.g. directors, trustees, etc) from receiving remuneration;
- specifying how the assets should be dealt with upon its dissolution (The remaining assets should normally be donated to other charities);
- requiring the keeping of sufficient records of income and expenditure (including donation receipts), proper accounting books and compilation of annual financial statements;
(III) Tax Exemption
A charity, subject to the approval of the Inland Revenue Department, is exempted from profits tax under Section 88 of the Inland Revenue Ordinance and is also exempted from obtaining a Business Registration Certificate (unless a trade or business is carried on).