Does Croatia Need a New Law on Foundations?

15 May 2006

The National Foundation for Development of Civil Society, GONG, USAID, European Centre for Nonprofit Law and AED, in cooperation with the Central State Administrative Bureau, organized a gathering last Monday, May 8, to discuss the topic "Croatian Foundation Legal System: Do we need new Law on Foundations?" If the gathering was to answer that question, the answer would, undoubtedly, be yes.

Foundations are probably the weakest segment of the non-profit sector in Croatia. At this moment, there are about 90 registered foundations, compared to the 25,000 associations. In comparison, in Hungary there are about 20,000 foundations who account for one third of the total non-governmental sector. This situation, which proves as a restricting factor for the development of the civil society in the country, is largely a result of the legal framework that discourages the work of foundations.

The existing Law on Foundations was adopted in 1995 and reflects a rather conservative, traditionalist and even suspicious view of then ruling parties towards this form of private non-profit initiatives. Mihajlo Dika, professor at the Zagreb School of Law and member of the working group that prepared, in the early 1990s, the first draft that served as the basis for this Law, briefly presented its basic its defects.

The Law on Foundations, according to Dika, introduced a strong concessions system for establishment of foundations. It means that to establish a foundation, it doesn't suffice to simply fulfil all legal criteria, but the control, supervision and evaluation by the state authorities shall decide, for any individual case, whether its establishment shall be allowed.

Furthermore, the Law demands that the establishment of a foundation is based on significant innitial assets, i.e. funds that are big enoght to provide for lasting activities of the foundation only through interest on that funds � without the possibility to exhaust the initial capital. According to Dika, this requirement is difficult to satisfy in Croatia, and the daily practice has shown that this requirement was rarely adhered to.

The third important defect of the Law on Foundations is the demanding and prolonged registration procedure, with the body of registry needing to adopt no less then six different decisions in order for the foundation to start working.

Finally, the existing Law prescribes for rather big obligations of the state in terms of supervision of foundations' work, including the possibility to intervene in their work, even placing the foundations under direct tutelage. In addition, the state enjoys great authority in terms of appointments for governing bodies and management of foundations. Dika claims that this is, above all, a political issue: shall we leave the foundations to the autonomy of civil society and mark them as an institute of private law, or shall we maintain the features of public law institute?

Mladen Ivanovic, from UNDP Office in Croatia, presented the main elements of the pre-Draft of the New Law on Foundations he prepared in 2004, together with a team of legal experts in the field. Some of the key differences of this pre-Draft, compared to the existing Law, include:

Changes in the legal definition of foundations. The foundations are no longer defined in terms of property, but as legal person without membership, that needs to to fulfil two requirements connected to the purpose for which it is established: the purpose must be legally allowed and must not relate to material property. The purpose may be of use to general public or not. This, claims Ivanovic, leaves enough space to establish fully private foundations, which is rather unclearly defined in the current Law. The draft, naturally, proposes privileges and benefits for founcations that work for public good.

Shortening and simplification of registration procedure. In the place of the six decisions under the currently Law, the registration body will have to adopt a single decision.

Change of the legal rationale for dismissal of request for entry into the foundation registry. The existing Law lists a great number of possible reasons that the registration body may use to dismiss a request for registration, including evaluation of whether the purpose and the goals of the foundation are achievable, morally acceptable and sensible, i.e. serious. The authors of the pre-Draft believe that this was not the best direction for the criteria, having in mind that foundations clearly fall into the the field of private initaitive, therefore, there is no reason why they shouldn't be established to pursue "unserious" goals. Therefore, the pre-Draft proposes that the request for registration may be dismissed for two reasons only: (1) its statute is in colision with the Law; (2) failure to comply to the technical requirements in the legal deadline. This would replace the existing concessions system with a purely normative system.

Changes related to the internal structure of the foundation. According to the current Law, everything is decided by the registration body: it approves the Statut, apponts the interim management and members of the foundation body. Under certain conditions, the registration body may even replace members of the managing bodies, thus introducing state tutelage over the foundation. The pre-Draft moves all these decisions into the space of founders' free will, and only minimal obligatory bodies of the foundation are required: the Director and the Board of Managers.

Changes related to the obligatory assets of the foundation. The pre-Draft dismisses the requirement of obligatory assets needed to establish and register a foundation. A foundation may start working regardless of whether the founder designated some property or assets specifically as assets of the foundation, including collection of assets (through donations or other approved activities).

The work on the pre-Draft included the Central State Administrative Bureau, designated as the registration body for foundations in Croatia. It demonstrates that there is willingness on the behalf of the state institutions to regulate foundation law in Croatia in accordance with the contemporary, flexible principles. The pre-draft, according to Ivanovic, shouldn't be seen as a complete text, but rather as basis for debate that could produce a quolity solution.

Apart from Dika and Ivanovic, the debate gathered several international experts in the field of foundation law: Tymen van der Ploeg from Amsterdam Free University, who provided a comparative overview of legislative framework in Western European countries; Monika Granja from the Czech Donors Foruma, presented the legal system for foundations in the Czech Republic; and Nilda Bullain from the ECNL, who presented the legal system and experiences in Hungary.

Having in mind the dynamics of the system, it is difficult to predict when would this proposed (or maybe some other proposal) Law on Foundations see the light of the day. However, if promotion of philanthropy and engagement of private funds for public good falls even on the very margins of public policies' priorities, the adoption of new law is more than necessary.