Government aims to facilitate the establishment and operation of foundations
Government proposes that a new Foundations Act be enacted to replace the current Act from 1930. The purpose is to develop the operating conditions for foundations and to strengthen the civil society so that foundations could operate as effectively, flexibly and predictably as possible. The objective is that the new Act enters into force in 2015.
According to the government proposal, the Act would contain more detailed provisions on operating foundations that produce for example welfare and educational services. This would improve the usability of the foundation form also in the functions of the public sector.
The significance of foundations in financing and producing for example educational, research and social and health care services has recently been on the rise, as some of the obligations previously taken care of by the public sector have been transferred to the third sector.
Stricter prohibition against favouring of related parties
The government proposal includes a more explicit prohibition against the distribution of financial benefits to related parties of a foundation. The purpose of a foundation could no longer even partially be to generate profits to the related parties.
The definition of a related party of a foundation would be clarified and extended. For example a member of the board, a member of the supervisory board, the managing director and an auditor as well as the family members and other close relatives of these persons would be considered related parties. Also legal entities that these persons exercise control over would belong among related parties. In addition, employees in leadership positions of a foundation would be considered related parties. According to the proposed new Act, information on related party transactions would have to be published in the annual report of the foundation. A more extensive obligation to file consolidated annual accounts would also improve transparency in the operations of foundations.
The management's liability for damages would be clarified. The distribution of prohibited financial benefits to related parties would become punishable as unlawful distribution of assets. At the moment, there are no specific penal provisions concerning the operations of foundations in law.
The purpose of the proposed amendments in the provisions concerning related parties is to increase the public's trust in the operations of foundations as promoters of the public benefit. Foundations established before the year 1965 with by-laws that allow distribution of financial benefits to related parties would be covered by the prohibition against this kind of distribution only after a transitional period that ends in 2035.
Clarifications in the operating conditions
The definition of what kind of business activities a foundation is allowed to carry on would be clarified. It would be acceptable to carry on a business in order to implement the purpose of the foundation determined in its by-laws or, if allowed under the by-laws, to finance the activities to execute the objects of the foundation.
The registration process for a foundation would be made simpler. The founders would also be provided with new options as to how to organise the administration and supervision of the foundation. In order to clarify and facilitate the administration of a foundation, the Foundations Act would be made more consistent with the community legislation.
According to the proposal, establishment of a foundation would require a minimum capital of 50,000 euros, which is almost equal to the current value of the amount in Finnish marks determined 30 years ago. Another proposed amendment is that the registration authority would no longer have discretion over whether the capital is sufficient in order for the foundation to carry out its purpose determined in its by-laws. In addition, the founders would be obliged to draw up an action plan, a budget and a financial programme for the first three years of operations.
The operating conditions for foundations would be improved by making certain formal requirements less strict and by removing some of them altogether. Moreover, the founder could in the by-laws of a foundation determine certain supplementary supervisory measures and legal remedies and, on the other hand, deviate from certain restrictions established in the Act concerning for example amendment of the purpose of the foundation, merger and termination. These proposed amendments would facilitate the use of the foundation form without weakening the position of the foundation and its stakeholders.
Improvements proposed in transparency and supervision
Transparency of the operations of a foundation would be increased by requiring that the annual report and the annual accounts must contain more detailed information on the operations of the foundation and related party transactions than nowadays and by extending the obligation to file consolidated annual accounts. Increased transparency would make it easier for both the authorities and stakeholders to supervise the operations of foundations.
The National Board of Patents and Registration of Finland would still be responsible for the supervision of foundations. In order to make the supervision more effective, provisions restricting the exchange of information between authorities would be amended. The expenses for the supervision of foundations would still be covered by a supervisory fee charged from foundations. The amount of the fee would be determined in a separate Act. The position of auditors of foundations would be strengthened.
The authorities would be able to supervise foundations more effectively if their operations and finances were more transparent and if the rules for their administration and operations were more precise than nowadays.
These reforms would make the operations of foundations more effective and could to some extent increase the number of foundations established. Some non-profit limited liability companies could in future choose to conduct their operations in the form of a foundation. On the other hand, the special requirements concerning the foundation form would still restrict the use of the form when the main purpose of an entity is to carry on a business or organisational activities.
The proposed reforms would incur some new expenses for foundations.
Jyrki Jauhiainen, Senior Adviser for Legislative Affairs, tel. 02951 50220
e-mail: [email protected]