Comparing the Systems of Public Welfare Foundations and Charitable Trusts to See the Diversified Charitable Activity Models in China

LABEL： Family wealth security and inheritance ,

introduction

Chinese traditional culture has a long and rich history, and the establishment and pursuit of goodness have always been its important spiritual core. Confucianism advocates "benevolence" and "love", Taoism advocates "accumulating goodness", and Mohism advocates "universal love". The rich ideas of charity have also nurtured the moral practice of charity passed down from generation to generation in the Chinese nation. As early as the Song Dynasty, Fan Zhongyan's "Yizhuang" and Zhu Xi's "Shecang" pioneered folk charity.

To this day, family charity and corporate charity remain indispensable forces in the modern charity industry. The report of the 20th National Congress of the Communist Party of China in 2022 also emphasizes the need to guide and support enterprises, social organizations, and individuals with the willingness and ability to actively participate in public welfare and charity activities, in order to explore effective forms of implementing public welfare and charity activities. In fact, we have seen the philanthropic power of Chinese society advancing one after another and forging ahead. A large number of forward thinking and mission oriented private entrepreneurs such as Niu Gensheng, Cao Dewang, He Xiangjian, and Lu Guanqiu have donated their personal wealth and resources to the public interest through various charitable models, laying the foundation for China's philanthropic blueprint and promoting philanthropic legislation through their own actions; There are many new generation enterprise founders in the Internet era who advocate business for good, and take fulfilling social responsibilities and exploring diversified charity models as their own responsibilities.

In terms of institutional environment, charitable activities in China are mainly regulated by a series of laws such as the Charity Law, the Public Welfare Donation Law, the Regulations on Foundation Management, and the Trust Law. Among them, the Charity Law, which serves as the fundamental law in the field of charity, was promulgated on March 16, 2016, laying a legal foundation for the development of charity in China; On December 29, 2023, the seventh meeting of the 14th National People's Congress Standing Committee voted to pass the decision on amending the Charity Law, and the amended Charity Law has officially come into force on September 5, 2024. The amendment of the Charity Law and the subsequent adjustment and formulation of supporting regulations by relevant departments mark the further improvement of China's charity legal system.

Under the framework of China's charitable legal system, the modes of charitable activities have gradually shown a trend of diversification in recent years. This article will mainly introduce two typical models of non direct donations to beneficiaries: (1) establishing a public welfare foundation and (2) establishing a charitable trust, and compare the two models horizontally to help donors or trustees tailor their charitable activity structure. From the cases we have recently handled, it can be seen that more and more entrepreneurs are standing at the height of "strategic charity", designing and planning charity structures for family or corporate charity in advance, using various charity models to flexibly carry out charitable activities, while achieving the inheritance of family and corporate charity culture.
1、 Overview of Major Charitable Activity Models under Current Laws in China

As mentioned above, within the framework of China's charity legal system, in addition to making charitable donations directly to beneficiaries, the most common mode of charitable activities in practice is to establish foundations or charitable trusts. In addition, there is an increasing number of international charitable donation models, such as the Donor Advisory Fund (DAF), established under existing public welfare foundations, where donors have the right to provide continuous advice on public welfare projects.

Different charity activity models have their unique advantages in response to the different needs of donors or clients. Due to space limitations, the following text will mainly introduce two typical models of non direct donations to beneficiaries: (1) establishing a public welfare foundation and (2) establishing a charitable trust, and compare the two models horizontally to help donors or trustees tailor their charitable activity structure.
1. Establish charitable organizations such as public welfare foundations to operate and donate charitable projects

In recent years, it is not uncommon for Chinese entrepreneurs and high net worth individuals to choose to establish foundations for family wealth management and charitable activities. This approach is more in line with the charitable goals of entrepreneurs and high net worth individuals who have a large amount of charitable assets and hope to give back to society in the long run. It should be noted that these foundations are different from "public funds" or "private funds" regulated by the Securities Investment Fund Law and other regulations in the financial investment field. Although there are also differences between public and non-public funds, according to the Regulations on the Administration of Foundations, their purpose of establishment is limited to engaging in public welfare undertakings. Their organizational form is a non-profit legal person, and the ownership of related assets will be transferred based on donations, rather than fund investors subscribing to fund shares. The donor can first donate the property in their own name to the established foundation, and then the foundation will invest the funds in batches according to the articles of association to carry out charitable activities such as supporting specific groups of people and organizing charitable services. At the same time, investment activities can be carried out in accordance with the law to achieve the preservation and appreciation of charitable property. For example, as early as 2004, Niu Gensheng, the founder of Mengniu Dairy Group, donated all of his shares and most of the dividends to establish the Inner Mongolia Lao Niu Charity Foundation with his family; According to the work report of the foundation, since 2016, it has not received any domestic or foreign donations, and the expenses for charitable activities come from its investment income and other income. At present, the foundation is still carrying out 11 public welfare and charity projects.

In addition, charitable donations are not limited to using monetary assets for donations. Other tangible and intangible assets such as equity, securities, houses, intellectual property, and physical goods can theoretically also be used for donations. Among them, equity and share donations may be concerned about the impact of charitable donations on their control due to changes in the shareholders of the target company. However, we have seen examples such as the share donation of Hong Kong listed company Country Garden Services Holdings Limited, which shows that even if the company's equity or shares are donated to a foundation, the donor's shareholders can still enjoy voting rights in the company through separate agreements. In July 2023, according to the announcement of Hong Kong listed company Country Garden Services Holdings Limited ("Country Garden Services"), Yang Huiyan, the controlling shareholder, non-executive director, and chairman of the board of directors of Country Garden Services, donated her 20% of Country Garden Services shares (approximately 675 million shares) to the Guoqiang Public Welfare Foundation (Hong Kong) for charitable and public welfare purposes. According to the clever structural arrangement of the donation, the Guoqiang Public Welfare Foundation (Hong Kong) can only enjoy the income rights such as dividend income and physical distribution from the donated shares, and the organizational rights such as voting rights are still exercised by Ms. Yang. This design allows Ms. Yang to enjoy tax exemption policies related to charitable activities while still retaining control over the company, achieving the dual goals of conducting charitable activities and participating in corporate governance.

In the mode of donors donating to charitable organizations, if donors do not want to establish their own foundations due to high thresholds, cumbersome procedures, and heavy compliance obligations, they can also jointly establish a special fund with the foundation to achieve the dedicated use of donated funds. This type of special fund does not have independent legal personality, and its essence is a fund under the foundation dedicated to supporting a certain cause within the scope of the foundation's business, which is managed by the foundation. Donators can participate in the management and utilization of charitable assets by signing establishment agreements with the foundation and dispatching personnel to the special fund management committee based on the relevant internal rules and regulations of the foundation. In addition, donors often have naming rights for the names of special funds to achieve a certain degree of publicity effect. For example, KFC established a special fund called "China KFC Catering Health Fund" in 2007 under the Chinese Red Cross Foundation to promote the improvement of dining habits among urban residents in China.
2. Establish a charitable trust

With the promulgation of the Charity Law in 2016, the supporting system of charitable trusts has become more mature compared to the original Trust Law, and charitable trusts have become an emerging form of charitable activity. For example, in December 2022, the listed company Bull Group initiated the establishment of the "CITIC Trust · Bull Group Charity Trust" with a total asset size of 200 million yuan, which has been successfully registered with the Civil Affairs Bureau of Cixi City. Its trust purpose is to "promote the development of education, science, culture, health, sports and other undertakings, poverty alleviation and relief, promote rural revitalization and common prosperity, and commit to other public welfare activities that comply with the provisions of the Charity Law". As the largest charitable trust implemented that year, it has attracted much attention.

According to Article 44 of the Charity Law, a charitable trust refers to the act of a principal entrusting their property to a trustee for charitable purposes, and the trustee managing and disposing of it in their own name according to their wishes, while using the property to carry out charitable activities. In the "Notice of the China Banking and Insurance Regulatory Commission on Standardizing the Classification of Trust Business of Trust Companies" released in 2023, "Public Welfare Charity Trust" is also listed alongside "Asset Service Trust" and "Asset Management Trust", and has become one of the three major categories of trust business. From this, it can be seen that as one of the ways for high net worth clients and enterprises aspiring to engage in charitable activities to implement corporate social responsibility and establish long-term mechanisms for public welfare and charity, charitable trusts have already played an important role in the trust business. In the future, we can also look forward to further policy implementation to ensure the sustainable development of charitable trusts.

As for the establishment process, legal framework, and practical operation of charitable trusts, we have already provided detailed introductions in our previous articles "A Preliminary Study on Charitable Trusts with a Loving Heart" and "Reflections on the Charitable Trust Property System and Model brought by the Implementation of the First Real Estate Property Rights Charitable Trust in China - From" Guangxia Millions "to" Juhuanyan ". Due to space limitations, we will not elaborate further.
2、 Comparison between Foundations and Charitable Trusts

Foundations and charitable trusts, as two mainstream charity models favored by high net worth individuals and entrepreneurs, each have their own institutional characteristics. The specific mode of conducting charitable activities needs to be comprehensively considered based on the charitable purposes of the donor or client, the scale of the charitable property, and the operational and management needs of the charitable property. The following will make a horizontal comparison between foundations and charitable trusts from different perspectives, including (1) the main models and establishment processes, (2) the placement and use of charitable assets, and (3) tax incentives, in order to better understand the differences between the two.
1. Main modes and establishment process

Compared with charitable trusts, foundations have independent legal status and a more complex establishment process, including pre-approval, registration, and other requirements for the size, personnel, and venue of charitable assets. Charitable trusts, on the other hand, have a simpler process and lower threshold for establishment. Apart from the difficulty in registering trust assets for certain special properties, there are no obvious obstacles to their establishment.

According to the Civil Code and the Regulations on the Administration of Foundations, foundations are non-profit legal entities. The basic process of establishing a foundation for charitable activities is as follows: donors donate their assets to the foundation, which manages and uses the assets; Establish a board of directors within the foundation as the decision-making body, exercising the powers stipulated in the foundation's articles of association. Due to the dual responsibility system of registration management authorities and business supervisory units adopted in the establishment of most foundations, multiple administrative approvals are required. Therefore, it often takes more than six months from preparation to final establishment (some foundations may be exempt from the prior review of business supervisory units). And as an independent legal entity, the foundation needs to be equipped with articles of association, organizational structure, full-time staff, fixed residence, etc. After registration is completed, it also needs to handle tax registration and complete a series of procedures such as carving seals and opening bank accounts. The establishment process is relatively complicated.

Compared with the foundation model, charitable trusts do not have independent legal status and rely mainly on charitable trust documents for agreement, making their establishment process simpler. In the charitable trust model, the settlor entrusts their property to a trustee (usually a charitable organization or trust company), who manages and disposes of it in the name of the settlor according to the settlor's wishes; In addition, a decision-making committee can be established, with law firms serving as supervisors of the trust. In terms of the establishment process, the trustee needs to file trust documents, and some trust assets should also go through trust property registration (for the practical difficulty of how to achieve trust property registration for special trust assets such as real estate, please refer to the introduction of "Reflections on the Charitable Trust Property System and Model brought by the Implementation of the First Real Estate Property Rights Charitable Trust in China - From" Guangxia Millions "to" Juhuanyan "), but the overall time required is shorter compared to the foundation model.
2. Placement and utilization of charitable assets

Both foundations and charitable trusts can achieve customized requirements for charitable activities through agreements in relevant documents, and reflect the will of donors or trustees by setting up decision-making bodies internally, so as to systematically and properly utilize charitable assets. However, compared to charitable trusts, foundations have higher daily operating costs and require long-term financial support to meet legal requirements; The cost of charitable trusts is relatively controllable, and the trust structure is also relatively flexible, providing more options for principals to reasonably allocate charitable assets.

According to current laws and regulations such as the Regulations on the Administration of Foundations, the original fund of a foundation must be in the form of received monetary funds, and the original fund must not be less than 2 million RMB; For national or local public funds, higher initial fund amount requirements have also been established. After the establishment of the foundation, additional charitable assets can be added through organizing fundraising and accepting donations. At the same time, foundations still have legal requirements for the proportion of annual charitable activity expenditures and annual management expenses. Many foundations have been warned, ordered to stop activities within a specified period, and have their registration certificates revoked by local civil affairs bureaus due to insufficient charitable activity expenditures over the years. In addition, in terms of the appreciation and preservation of charitable assets, foundations may engage in some investment activities allowed by laws and regulations to achieve the appreciation and preservation of assets, but are not allowed to directly buy and sell stocks, directly purchase goods and financial derivative products, or engage in other investment activities prohibited by law, and the use of the income obtained from their investments is also limited.

Compared with foundations, the flexibility of charitable trusts lies in the fact that they do not have special requirements for the types and amounts of charitable assets placed, and can also add trust assets by signing a written document with the trustee regarding the addition of assets or applying to the competent civil affairs department for registration changes. In terms of the expenditure of charitable property, the settlor in a charitable trust may agree with the trustee on the management method of the trust property, the proportion or amount of annual charitable expenditure, and other matters in the charitable trust documents, such as retaining the principal of the trust property and only investing its income into charitable causes. However, it should be noted that although there is currently no statutory requirement for the expenditure ratio of charitable trust assets, the revised Charity Law in 2023 has added a new provision in Article 61, which states that "the annual expenditure and management fee standards for charitable trusts shall be formulated by the civil affairs department of the State Council in conjunction with the finance, taxation, and financial supervision and management departments." Therefore, it is necessary to closely monitor the introduction of subsequent policies. In addition, in terms of the appreciation and preservation of charitable assets, charitable trust assets can also be used for low-risk assets such as bank deposits and government bonds to achieve appreciation and preservation. At this time, depending on the trustee, their investment management methods and abilities may also vary to some extent.
3. Tax preferential policies

Under the current laws in our country, there are relatively clear tax incentives for public welfare donations. Therefore, in general, donors who donate to eligible foundations can receive pre tax deductions in accordance with the law (specific cases need to be determined based on the type of donor and the type of donated property); However, as the legal positioning of establishing charitable trusts is not yet clear, the specific tax incentives that principals can enjoy still need to wait for further detailed regulations to be issued.

For foundations that have obtained the qualification for pre tax deduction of public welfare donations, donors can obtain public welfare donation receipts in accordance with the Announcement on Relevant Matters Concerning Pre tax Deduction of Public Welfare Donations issued by the Ministry of Finance, the State Administration of Taxation, and the Ministry of Civil Affairs in 2020, and make corresponding deductions for the portion of donation expenses in calculating taxable income in accordance with tax laws. From the perspective of a foundation, if the foundation applies for tax exemption qualification to the local tax authority in accordance with the law and obtains tax exemption qualification for non-profit organizations, the donated property can also be used as tax exempt income.

Compared to foundations, the tax benefits that can be enjoyed by establishing charitable trusts are somewhat vague. Although Article 44 of the "Regulations on the Administration of Charitable Trusts" stipulates that the settlor, trustee, and beneficiary of charitable trusts shall enjoy tax incentives in accordance with relevant national regulations, according to the relevant requirements for obtaining pre tax deductions for public welfare donations as stipulated in the "Announcement on Pre tax Deductions for Public Welfare Donations", if only the trust company serves as the trustee, it is generally difficult to deduct the settlor's donation expenses before tax. Even in cases where the trustee includes charitable organizations, there is still controversy over whether the nature of the act of establishing a trust can be recognized as a donation in practice, so there is also uncertainty about whether the settlor can receive deductions.

But we also noticed that the revised Charity Law in 2023 added a new provision in Article 85, which stipulates that the state shall implement tax preferential policies for charitable causes. The specific measures shall be formulated by the finance and taxation departments of the State Council in conjunction with the civil affairs departments in accordance with tax laws and administrative regulations; The person in charge also clearly stated in response to a reporter's question that this move aims to improve the regulations on preferential policies for charitable causes, and relevant departments need to accelerate the formulation of supporting regulations based on authorization. Therefore, further tax incentives for charitable trusts may be expected to be introduced.
epilogue

The establishment of a foundation and the establishment of a charitable trust are not naturally opposed to each other. In practice, there are also dual layered models such as "foundation+charitable trust" (where the donor first donates a portion of their assets to the foundation, and then jointly establishes a charitable trust with the foundation as the principal), or "charitable trust+foundation" (where the assets managed by the charitable trust are used as the source of the foundation's assets). Compared with the single model, these models have some institutional advantages in tax preference, asset management, etc., but the effect and compliance of their operation in practice need further observation.

Whether establishing foundations or charitable trusts, or adopting more complex models of charitable activities, while considering tax incentives and the appreciation and preservation of charitable assets, it is also necessary to pay attention to the many compliance requirements of charitable activities, especially ensuring the non-profit purpose of charitable activities. The donor or principal should balance their various needs and make a proper layout for the overall structure of the charitable activities they intend to engage in within the current legal framework, in order to avoid the entire structure being recognized by regulatory agencies as a tool for tax avoidance, savings, or even investment profits, thereby facing unnecessary compliance risks. Especially in complex situations such as corporate IPOs, it is particularly necessary to make overall plans and strategic layouts for future charity models in advance at the beginning of initiating charitable activities, so that self-interest and altruism can coexist.

Throughout domestic and international practice, charitable assets and activities have played a positive role in supporting technological progress, promoting the prosperity and development of cultural and artistic undertakings, and other aspects; With a series of market-oriented explorations such as enterprise retention funds, the "projectization" of charitable assistance, and the development and utilization of online resources, the disclosure of information related to charitable activities is gradually becoming more transparent, and the credibility of China's charitable cause is also gradually increasing. Against the backdrop of the continuous improvement of China's charity legal system, we look forward to more and more social entities adhering to the consensus of wealth for good, and jointly exploring the sustainable development of charity architecture and mechanisms with us.