Businesses generally have the potential, capital and efficiency to impact greatly on the society in positive ways; while some corporate entities have assumed prominence and have come to be seen as major actors in the promotion of development, others have made efforts to contribute towards societal development in their own little way. One factor that could be attributed to this could be the decline in the role of the nation-state especially in the context of developing nations. Many corporate entities have adopted various corporate social responsibility policies in an attempt to give back to the society in which they operate. Activities of foundations established by corporate organisations have been beneficial to the public in a variety of ways ranging from tackling abuse of various forms to developmental issues, healthcare, environmental and socio-cultural challenges.
Corporate entities and not-for-profit organisations in Nigeria and beyond have continued to support and engage in charitable causes, which have met the yearnings and aspirations of individuals, groups and the society at large.
This piece, therefore, seeks to provide a general overview on the legal framework for the establishment of corporate foundations in Nigeria. It also highlights governance structures for corporate foundations, dissolution, winding up and liquidation of assets, tax considerations, compliance and corporate social responsibility reporting.
Legal Framework for Establishment of Not-for-Profit Organisations
The legal framework for non-governmental organizations in Nigeria stems from the provision of the Constitution of the Federal Republic of Nigeria 1999 which recognizes the right to peaceful assembly and association.1 The Companies and Allied Matters Act, Cap C20, Laws of the Federal Republic of Nigeria 2004 ("CAMA"), is the principal legislation that regulates corporate entities registered in Nigeria and the Corporate Affairs Commission (the "Commission" or "CAC") is the supervisory regulatory body for registered corporate entities. There are other federal laws and state laws which also regulate specialized organizations such as trade unions2, co-operative societies and political parties3.
Available Corporate Structures
Under CAMA, the commonly used structures for incorporating not-for-profit organisations are companies limited by guarantee and incorporated trustees and the procedures for registration are provided for under CAMA.
Registration of a not-for-profit organisation in the form of a company limited by guarantee is provided for under Section 26(1) of CAMA. It provides that:
"where a company is to be formed for promoting commerce, art, science, religion, sports, culture, education, research, charity or other similar objects, and the income and property of the company are to be applied solely towards the promotion of its objects and no portion thereof is to be paid or transferred directly or indirectly to the members of the company except as permitted by this Act, the company shall not be registered as a company limited by shares, but may be registered as a company limited by guarantee".
Furthermore, CAMA prohibits a company limited by guarantee from carrying on its business for the purpose of making profits for distribution to its members. Whilst the company can be set up by both Nigerians and foreigners, nothing precludes a corporate entity from becoming a member of such company.
One of the distinct requirements for the registration of a company limited by guarantee is the consent of the Attorney General of the Federation sanctioning the memorandum of association of the company before the company can be incorporated. This requirement most often, discourages promoters from going through the bureaucratic nature of applying for consent of the Attorney General who may in his absolute discretion withhold consent.
On the other hand, Part C of CAMA provides for registration of incorporated trustees. Section 590(1) of CAMA provides thus:
"where one or more trustees are appointed by any community of persons bound together by customs, religion, kinship or nationality or by any body or association of persons established for any religious, educational, literary, scientific, social, development, cultural, sporting or charitable purpose, he or they may if so authorized by the community, body or association...apply to the Commission in the manner hereafter provided for registration...as a corporate body."
Once the association or organisation is registered by the Commission as an incorporated trustee, the trustees jointly become a body corporate with perpetual succession and have the power to sue and be sued. It is pertinent to state that the registration of an incorporated trustee confers the corporate status on the trustees rather than on the organisation itself unlike a company limited by guarantee which confers the status of a corporate body on the company itself. The significance of this fact is that, where an organisation has incorporated trustees registered under CAMA, the trustees on behalf of the organisation are empowered to contract in the same form and manner as an individual. This includes the power to hold, acquire and transfer any property on behalf of the association. A company limited by guarantee in its own right, has a corporate legal personality to do all lawful acts in its own name.
Can a Nigerian company set up a charitable foundation or donate to charities?
A search through the provisions of CAMA reveals that there is no restriction on the powers of a company to donate to charities, except the provision of Section 38(2) which expressly prohibits a company from making direct or indirect donation, gift, gift of property or funds to a political party or association or for any political purpose. Therefore, under CAMA any donation made by a corporate entity to a political party is absolutely null and void. Where there is a breach of Section 38(2) the officers in default and any member who voted for the breach shall be jointly and severally liable to refund to the company the sum or value of the donation or gift and in addition, the company and every such officer or member shall be guilty of an offence and liable to a fine equal to the amount or value of the donation.
Establishing a corporate foundation is one of the options available to a company which intends to donate to charity, perhaps, as a fulfillment of part of its corporate social responsibility. It is therefore very important that companies evaluate whether there is a need to set up a corporate foundation in the first instance, or would continue to make direct donations to such individuals, groups or organisations whilst maintaining its profit-making venture.
Where a corporate entity is desirous of setting up a foundation, it is important that the foundation be seen to be established exclusively for charitable purposes. Where the purpose for setting up the foundation is to promote the interest of the company, for example as a public relation exercise, the organization in the strict sense cannot be said to be a charity. Whilst there is no objection to the company's corporate social responsibility policy and the purpose of the charity coinciding, the overriding philosophy should be the establishment of a wholly independent charitable foundation for charitable causes and the trustees must act in the interest of the foundation and not that of the company.
Some of the practical considerations which such a company may consider are:
a. Name: Most often, a corporate foundation obtains its name from the founding company. The use of the founding company's logo, could also be adopted. The use of the founding company's name and logo can be beneficial as it would help attract interest in the charity and its activities especially where it is a well known brand. This may also enhance the reputation of the founding company. The corporate foundations should be mindful of legal implications that may arise, such as; intellectual property right and reputation that could arise from the use of shared name, amongst others. In selecting a name, the trustees must act in the best interest of the foundation.
b. Appointment of Trustees: The company may seek to include the right to appoint trustees to the corporate foundation and to maintain this right throughout its existence under the governing documents of the foundation. In principle this is most desirable to enable the company exercise and maintain control in order to achieve the purpose for which the foundation was incorporated. The company may be well-placed to identify individuals who would make positive contributions to the foundation. However, care must be exercised to ensure that those appointed are best suited to carry out the responsibilities of trusteeship.
c. Funding: The main source of income for a corporate foundation is often provided by the founding company. The sources of income could be regular donations from the company, an endowment linked to a company's profits, a gift of shares or in kind, funds raised by the company's customers or employees and other services. It is the responsibility of the trustees to ensure that the funds are applied in furtherance of the corporate foundation's charitable purposes. It is very important that the trustees put in place strategy through which funds can be raised and diversifies the foundation's income sources as far as possible to mitigate the risk of a single corporate donor.
Other considerations would involve several agreements which would be entered into by the company and the foundation. It is pertinent that there is a clear understanding of the terms of such agreements which should be properly documented to keep the charity abreast of its entitlements and responsibilities. For instance, trustees should be clear about the conditions upon which funds received would be disbursed, whether it is a donation or a loan. Also, the founding company may provide employees seconded to the foundation for the purpose of monitoring adherence. The agreement should clearly set out the terms of engagement and who has the contractual responsibility for seconded employees.
At the moment, there is no robust framework for charity regulations in Nigeria which can help to uphold high level of public trust and confidence in not-for-profit organisations. It is only through a properly structured framework, that not-for-profit organisations may receive the necessary attention and support especially for a sector which plays such a crucial role in the society.
In the case of a corporate foundation registered as company limited by guarantee, the general rules of company law together with the provisions of the articles of association of the Company would apply as the appropriate guide for its corporate governance structure. The organization being a separate legal entity has the capacity to employ and remunerate staff, and the right to remunerate directors. Directors however, have far-reaching fiduciary duties and are expected to avoid conflict of duties and other interests.
For incorporated trustees, CAMA provides that the organization may appoint a council or governing body which shall include the trustees and may assign to it such administrative and management functions as it deems expedient4. It also provides that the powers of the trustees shall be exercised subject to the directions of the association, or of the council or governing body5. It is obvious that this provision as contained in the CAMA subordinates the authority of the trustees not only to the direction of the association itself but also to the council or governing body or members who appear to be lower in status to the trustees.
Furthermore , a foundation with incorporated trustees may employ salaried staff as affirmed under Section 603(2) which provides that: "(a) with the exception of ex-officio members of the governing council, no member of a council of management or governing body shall be appointed to any salaried office of the body or any office of the body paid by fees; and (b) no remuneration or other benefit in money or money's worth shall be given by the body to any member of such council or governing body except repayment of out of pocket expenses or reasonable and proper rent for premises demised, or let to the body or reasonable services."
In otherwords, members of the governing council are prohibited from being paid any salary or fees for appointment as a staff of the foundation. However, a member may be paid a reasonable fee for services rendered.
Other issues such as membership, rights, duties and powers of the trustees, other officers, internal relationship with other officers and organs, proceedings at meetings and, voting are generally as prescribed by the organisation in its governing documents.
Role of the Trustees
Just like any charity, the trustees of a corporate foundation must accept ultimate responsibility for directing the affairs and ensuring that it is solvent, well-run and delivering the charitable outcomes for which it has been set up. Trustees acting prudently, lawfully and in accordance with the governing documents can normally use the foundation's resources to meet any liabilities. However, if the trustees act imprudently, or are otherwise in breach of the law or the governing document, they may be personally responsible for liabilities incurred by the foundation, or for making good any loss to the foundation.
The Commission regulates registered non-profit organisations, whether it is organised as a company limited by guarantee or an incorporated trustee. A company limited by guarantee like other companies, is obliged to submit annual returns each year to the Commission. The annual returns shall be as prescribed in the Tenth Schedule6 to the CAMA or as near to it as circumstances admit. Also, the returns shall be accompanied with a statement containing particulars of the total amount of the indebtedness of the company in respect of all mortgages and charges which are required to be registered with CAC under CAMA. The annual returns is expected to be filed forty-two (42) days after the annual general meeting for the year. Failure to file the returns within the stipulated period is punishable by a fine as may be prescribed by the CAC.
Trustees of incorporated trustees are also required to submit to the CAC returns showing amongst other things, the name of the corporation, the names, addresses and occupation of the trustees, and members of the council or governing body, particulars of any land held by the corporate body during the year, and of any changes which have taken place in the constitution of the association during the preceding year. This filing shall not be earlier than 30th June or later than 31st December each year.
Money Laundering & Terrorism Financing
Corruption has come to be universally recognised as one of the greatest obstacles to development around the world. Non-profit organisation sector in Nigeria, until recent times, have not been under the serious radar of the anti-corruption regulatory agencies with respect to compliance with extant laws on money laundering, bribery, corruption and terrorism financing.
Shifting its attention to this sector, the Special Control Unit Against Money Laundering (SCUML)7 noted that as a common trend, non-profit organisations are being used as a conduit for money laundering, therefore, it is now mandatory that non-profit organisations register with the SCUML in order to monitor their business transactions against money laundering. Following this, a certificate to indicate that organisation's operations have been subjected to anti-money laundering and combating financing of terrorism regime would be issued. The Certificate is required to be displayed at a conspicuous location in the place of business.
Under the Money Laundering (Prohibition) Act 2011 (As amended) ("MLA"), non-profit organisations (such as religious, charitable, cultural, educational organisations and any other legal arrangement that primarily engages in raising or disbursing funds for social or fraternal purposes or for the purpose of carrying out other type of "good works") are now classified as Designated Non-Financial Businesses8 ("DNFB").
To this end, SCMUL's regulations9 now require that all DNFBs must comply with the requirement of the MLA, Prevention of Terrorism Act 2011 ("PTA") and other extant laws on bribery and corruption in Nigeria.
DNFBs also have reporting requirements under the MLA10 and PTA11 in respect of currency transactions and suspicious transactions. DNFBs, such as non-profit organisations are now required to identify and report any proceeds of crime derived from crime, terrorism, racketeering, bribery, corruption, fraud, illegal trafficking and any other criminal act specified in the AML, PTA and other laws on bribery and corruption in Nigeria.
Companies wishing to establish corporate foundations would have to comply with the above requirements and ensure that anti-corruption compliance processes and measures are integrated into the operational routines of the foundations. In addition, a comprehensive approach to managing governance processes should be institutionalized. Non-compliance could have far reaching negative implications for the company if such foundation is caught in a web of scandals.
Generally, registered non-profit organisations are exempt from tax. The Companies Income Tax Act (CITA)12 provides for tax exemption on the profits (so long as such profits are not derived from a trade or business) of any statutory or friendly society, co-operative society registered under any law, a company engaged in ecclesiastical, charitable, or educational activities of a public character, a company formed for the purpose of promoting sporting activities of a public character and trade union.
Furthermore, the President may exempt by order or if applied for by any company or organization to be exempted from all the provisions of CITA and from all or any profits from any source.13
The Federal Inland Revenue Service (FIRS) has issued a directive stating that all non-profit organisations are required to register with the nearest integrated tax office of the FIRS close to the place of operation or registered office of the non-profit organisation. Upon registration, a unique Tax Identification Number (TIN) is generated for tax purposes. It is also mandatory for every non-profit organisation to file its tax returns every year in the state where it was registered.
It is pertinent to note that non-profit organisations are required to pay Value Added Tax (VAT) on goods and services consumed except those purchased exclusively for its humanitarian projects or activities.14 VAT is not assessed in respect of persons but on goods and services supplied. However, VAT will not be assessed on the provision of certain goods and services as listed in the VAT Act and schedule, as amended15.
Tax benefits in form of allowable deductions are available to any company which makes a donation to certain Nigerian funds and institutions specified in the fifth schedule.16 The amount of deduction for any year of assessment may not exceed 10% of the total profits for the company during that year.
Also, in Lagos State for example, the Land Use Charge Law17 exempts payment of land use charge on properties which are owned and occupied by a religious body, registered institution or educational institute certified by the commissioner for finance to be non-profit making. The Law goes further to provide that the commissioner for finance may by notice, published in the official gazette, grant partial relief for a property that is occupied by a non-profit making organization used solely for community games, sports, athletics or recreation for the benefit of the general public and also property used for a charitable or benevolent purpose for the benefit of the general public.
The members of the general public are now more informed of business practices around the globe and of their negative or positive impact. It is therefore important that companies should get more involved in the communities in which they operate. Corporate foundation could serve as a structure and focus for corporate giving, an in-road into engaging the informal sector and as well as the opportunity to disseminate and apply expertise in combating challenging social issues. Establishing a corporate foundation can also serve as a veritable tool by companies for carrying out their corporate social responsibilities which could lead to reputational benefits for a company.
1 Section 40.
2 Trade Unions Act Cap T14, Laws of the federation of Nigeria 2004 (as amended by the Trade Unions Amendment Act 2005)
3 Section 15, Part 1 of the Third Schedule of the 1999 Constitution the Federal Republic of Nigeria (As Amended) and Section 2 of the Electoral Act 2010 (As Amended) empowers the Independent National Electoral Commission (INEC) organize elections into various political offices in the country and also register political parties and monitor their activities.
4 Section 601
5 Section 602
6 The information required on the form as prescribed are name of company, registered office of the company, particulars of indebtedness, particulars of directors and secretaries as well as copies of its accounts duly certified by a director and secretary.
7 The Special Control Unit Against Money Laundering (SCUML) a department of the Economic and Financial Crimes Commission currently domiciled in the Federal Ministry of Commerce and Industry with the responsibility under the provisions of Money Laundering (Prohibition) Act 2011 to monitor, supervise and regulate the activities of Designated Non-Financial Businesses and Professions in Nigeria. For further details visit-www.scuml.org
8 This is by virtue of the powers conferred on the Honourable Minister of Commerce to add to the sectors deemed vulnerable to money laundering and financing of terrorism.
9 Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) Regulations for Designated Non-Financial Business and Professions in Nigeria 2013.
10 Currency transaction report under Section 2 & 10 of MLA and suspicious transactions report on money laundering under Section 6 of MLA.
11 Suspicious transaction report on financing of terrorism under Section 14 of PTA
12 Cap C21, Laws of the Federal Republic of Nigeria.
13 CITA Section 23(2)
14 Value Added Tax Act Cap V1, Laws of the Federation of Nigeria 2004
15 Goods and services exempted from VAT are: medical and pharmaceutical products, basic food items, book and educational materials, newspapers and magazines, baby products, commercial vehicle and commercial vehicle spare parts, fertilizer, agricultural and veterinary medicine, farming machinery and farming transportation equipment, plant and machinery imported for use in the Export Processing Zone, plant, machinery and equipment purchased for utilization of gas in downstream petroleum operations; and tractors, ploughs and agricultural equipment and implements purchased for agricultural purposes, medical services, services rendered by community banks, people's bank and mortgage institutions, plays and performances conducted by educational institutions as part of learning.
16 CITA, Section 25. Fifth Schedule to CITA
17 CAP L61, Laws of Lagos State.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.