AKIPRESS.COM - Under the conditions of limitedness of allocated means from public budget for many social and economic goals, issues on self-sufficiency with financial resources are quite urgent. Creation and operation of target capital funds or so-called “endowment funds”, as it accepted in many countries, can make contributions for this work. This issue was examined by several experts upon the initiative of the National Institute for Strategic Studies (NISS).

Is it possible to create and develop endowment funds in Kyrgyzstan?

By Talant Sultanov, Director of NISS; Jamilya Irsakova, research fellow; Ainash Sydygaliyeva, external expert

Endowment fund is a new occurrence for Kyrgyzstan, but at the same time it is very interesting and gives ample opportunities within implementation of many social and other tasks. As world experience has shown, endowment funds are dynamic method for formation and utilization of finance resources. Many of world-famous universities as Harvard, Oxford, Yale and others made significant amounts of their capital and it lets them finance various charity events without heavy burden for university budget. Annually paid bonuses for Nobel prizes not only support laureates of this award but also contribute to attain socially useful aims as they are paid for high achievements in science, culture, literature, etc.

From the mid-2000s, endowment funds have developed in the post-Soviet space. Thus, such target funds have become to be created in Russia in compliance with the law of on procedure of formation and utilization of target capital of non-commercial organizations signed 30 December 2006. At the same time, along with above-mentioned law amendments for the Tax Code of Russia, these amendments allowed incomes of target capitals to be exempted from income taxes.

There are some attempts in Kyrgyzstan to create endowment funds. Today universities voice their readiness to create and use endowment funds. Thus, according to the interviews, 5 out of 5 top largest universities covered in the study voiced their definite positive response, that they would want to create their own endowment fund.

 These results indicate the long-felt need for operation of such funds in the country. It is especially urgent under conditions of limited budgetary funds allocated for social-cultural events. Both universities and other spheres of budget system (culture, sports, youth politics and others) are institutions. In accordance with the Section 164 of the Civil Code of Kyrgyzstan, institution is a non-commercial organization and thereafter it is potentially enable to create endowment funds.

As subject says and as world practice shows, endowment fund is an investment fund formed thanks to donations of individuals and juridical entities, as well as it has goal-oriented nature; donations are invested for profit earning, and earned profit of endowment fund has to be used for charity activities. At the same time, endowment fund is one of forms of financial support of non-commercial organizations. Thus, social-cultural entities of Kyrgyzstan – education, public health, culture, sports, youth politics, libraries, museums and so on – will have vast possibilities to create additional financial resources for pointed financing of socially-significant tasks.

In accordance with the Russian legislation, management of assets of target capital funds is implemented by a management company – joint stock company or limited (additional) liability company established in accordance with the legislation and holding a license for administration of securities or license for administration of investment funds, unit trusts and non-government pension funds.

Russian model of functioning of the target capital

As for Kyrgyzstan, the experts think that it is rather complicated procedure for management of assets because institutions need to find those companies that would operate assets effectively and transparently. So, internal control is reasonable, which will be formed by supreme administration body of non-commercial organization, for example, board of trustees which might contain donor representatives. Also, such internal control is observed in world practice too: competent implementation led to growth of benefits in comparison with external control.

Also, the experts necessitated introduction of limitations on work with properties of endowment fund on legislative level, as it is provided in the Russian legislation. In our opinion, placement of limitations will reduce the risks of loss of fund assets and create conditions for highest possible growth of the incomes from their use. In this case, limitations are drawing up the legal list of objectives for investment of endowment funds; state and municipal securities of Kyrgyzstan; shares of public corporations; investment and coop share funds; bank deposits; real estate facilities must be added to this list by all means.

As mentioned above, incomes of endowment funds are to be used for charity activities only. NCOs are able to be admitted as charity organizations on conditions that they will achieve a status of charity organization. Currently, the law of Kyrgyzstan on sponsorship and charity activities in force does not include stimulating mechanisms for direct charity activities because it provides quite tough conditions for achieving this status. Thus, Section 9 of this law specifies that NCO is able to be admitted as charitable if 98% of incomes and properties of organization are used for charitable purposes, and only 2% for administration expenses, and they are practically unfeasible terms.

According to background statement of the draft law on charity organizations and charity activities by MPs Nataliya Nikitenko and Dastan Bekeshev, there is no any charity organization in the county, although taxation preferences are provided for them regarding to income taxes.

Under the existing percentage of redistribution of properties, it is still a long way off when charity organizations will be established. The NISS experts noted the law of Russia on charity activities and charity organizations provides charity organization with the right to use no more than 20% of financial resources spent by this organization during one financial year, for remuneration of labor of administrative personnel. Similar requirement is provided in the law on procedure of formation and use of target capital of non-commercial organizations.

Meanwhile, the draft law on charity organizations and charity activities in Kyrgyzstan provides optimum mechanism of formation and use of assets of charity organizations, and there is no doubt that it is applicable for incomes from use of target capital funds. Thus, in accordance with Section 20 of the draft law, charity organization is obliged to direct for charitable purposes no less than 2/3 of its incomes.

Target capital is formed for development of education, public health, science, culture and other social projects, thereby it encourages charity activity. Also, chief source of formation of target capital is donations of citizens and juridical entities; and target capital funds invested to the objects of entrepreneurial activity and earning income in the form of profit are directed for charitable purposes. These all corresponds with the draft law on charity organizations and charity activities, which provides maximum transparency and control of this activity.

In addition, the experts of NISS suggested to make some amendments to the Tax Code:

- make an addition to Article 231: transfer of cash assets or real estate for formation or replenishment of target capital of non-commercial organization;

- make an addition to Article 189: “transfer of cash assets or other property to non-commercial organizations for formation of endowment fund (target capital);

- make an addition to Article 212: non-commercial organizations from use of target capital funds.

Comparative-legal analysis of the legislation currently in force shows that it is possible to regulate relations on formation and use of endowment funds (target capitals) on the basis of legislation through making amendments and additions into it.