SHORT REVIEW AND INTRODUCTION TO THE HUNGARIAN NONPROFIT LAW

Civic and philantrophic activities played an important role in Hungarian economic and social life before World War II, but their development was stopped by the 40 years long socialist-communist regime. The re-emergence of the nonprofit sector started in the 1980s, when the changes in international and internal conditions revealed the necessity for the transformation of the social structure. Civil organisations played a major part in this process. Several associations dealing with environmental issues, community development and civil rights were created during this period. They drew the attention of citizens to problems that had been given little publicity before, such as poverty, pollution, minority rights, etc. In many instances civil organisations provided a forum and an opportunity for alternative thinking, that is, for the expression of opinions different from the official position. In the late 1980s new political parties grew out of former civil organisations.

From 1987 the law allowed the establishment of foundations and by the end of the decade civil initiatives turned into political parties, various associations, professional and advocacy organisations.

Radical changes in the development of self-organisation were finally brought by the political transformation in 1989-90 and by the Law on Association, which created legal guarantees for the right of association in accordance with the principles of democracy.

After the legalisation of nonprofit organisations, several factors contributed to their spreading:

• First, the state failed to accomplish some of its duties and it became obvious that certain services, products and roles can be undertaken by the nonprofit sector in a more efficient and more effective way. Nonprofit organisations are capable of responding to people's real needs because they are more flexible, less bureaucratic, and operate closer to the people they serve than their public counterparts.
• Second, in recent years the process of the state's withdrawal from economic and social life accelerated along with the process of re-division of labour concerning certain social tasks among different sectors. In addition, the state started to get rid of certain duties which could be pursued by civil institutions with equal efficiency.
• Third, the previously oppressed dignity of citizens came to light and the freedom to make use of people's 'civic energy' resulted in the mushrooming of nonprofit organisations.
• Fourth, many 'citizens' took advantage of the imperfection of the early regulatory system by establishing and operating nonprofit organisations not to meet social needs but only to serve their own interests.

The strengthening influence and role of the nonprofit organisations in the current Hungarian social and economic life is not an opportunity or favourable tendency any longer but a fact. More than 50,000 organisations are registered, and last year their aggregate income amounted to 240 billion HUF.

In addition to its development in terms of quantity and size in recent years the nonprofit sector has been undergoing significant structural and quality changes. The management and operation of nonprofit organisations became increasingly professional; in certain social segments nonprofit entities started to play not only a complementary but a leading role (e.g. in education, culture, sports, recreation, etc.); new nonprofit support centres and umbrella organisations, representing the nonprofit sector as a whole appeared on the scene; the research on the nonprofit sector gained an international reputation, etc. Moreover, several institutions were established within the framework of public administration to coordinate the relationship between the public and the nonprofit sector.

This short review clearly reflects that the development of the Hungarian nonprofit sector is linked to international trends in many respects, while it has its own characteristics deriving from the country's particular socio-economic situation.

On the one hand, the following international trends can be discerned:

• Growing need for civic participation.
• Increasing influence of the nonprofit sector on the economic and social life, which reflects the growing need of citizens for self-government and self-organisation. The nonprofit sector seeks not only ways to represent civic interests but also to establish and operate service providing organisations.

On the other hand, elements characteristic of the Hungarian situation can be depicted:

• The centrally initiated and strengthened process of state withdrawal pushes citizens towards setting up alternative organisations to meet citizens' needs.
• The frequent misuse of nonprofit organisations, which was made possible mainly by the imperfection of the regulatory system.
• The amateurish management of nonprofit organisations due to lack of experience.
• The ambiguous relationship between political parties and nonprofit organisations deriving from the role civic organisation played in the political transformation.

Legal regulation was continuously trying to follow, and to reflect, changes in the nonprofit sector. The 'following-type' of regulatory practice is due to the fact that the development of nonprofit sector related regulation had been interrupted after World War II, and after the revival of the third sector, the regulatory practice was characterised by the lack of expertise and was shaped by continuously changing and social and economic conditions.

At the beginning the regulation of voluntary associations and foundations was relatively accommodating. It was easy to establish a nonprofit organisation, and they nearly automatically benefitted from the numerous and very generous allowances. Little attention was paid to the supervision of nonprofit organisations and to the audit of their public benefit activities. In recent years, however, the regulation became more and more strict and coherent with the development of the nonprofit sector. Nowadays more than 100 rules and provisions have relevance to nonprofit activities and organisations.

Major development in legal regulation of the Hungarian nonprofit sector occurred in the following stages:

The first elements of the legislation secured the freedom of association, and provided legal framework for establishing civic nonprofit organisations. Alongside with the basic regulation complementary elements present in diverse provisions and laws, most importantly tax regulations and laws, provided a generous support for NPOs:

• A government decree modified the Civil Code and restituted the foundation as a legal entity after decades of prohibition, but foundations could be established only with the permission of competent authorities.
• The Law on Association guaranteed the freedom of association.
• An amendment to the Civil Code stated that foundations could be established without special permission from government authorities.
• The tax regulations guaranteed foundations a multitude of privileges and exemptions.

In the next phase the regulatory process was trying to catch up with changing conditions and development. The main features reflected the ongoing process of state withdrawal from social and economic life, and the intention to prevent the misuse of the nonprofit format:

• The tax laws imposed limits on tax exemption and tax deductibility.
• Another amendment to the Civil Code created three new legal forms for 'nonprofit' organisations, namely public foundations, public law associations and public benefit companies. The new organisations represented intermediate forms between nonprofit and purely public institutions.
• Tax advantages were again cut.

In the next phase of the regulating process some of the elements of the tax system were reformed and there were attempts to elaborate a comprehensive nonprofit law.

• Earlier tax deductibility of donations was replaced by a tax credit system, and since 1996 citizens have been allowed to check off one percent of their personal income tax to any nonprofit organisation.
• A research team developed the principles of a comprehensive nonprofit law and formulated alternatives to choose from. A year later a nonprofit bill (based fundamentally on the Charity Commission model) was developed by a group of legal experts hired by the government, but the representatives of the sector rejected this solution.

The imperfections of the former regulatory system were as follows:

• It failed to determine the role nonprofit organisations play in the social division of labour.
• It failed to make a clear distinction between the business and the nonprofit sector, thereby rendering the pursuit of selfish interests possible without any major sanctions.
• It failed to make a clear distinction between political parties, advocacy organisations and nonprofit organisations.
• It failed to provide a comprehensive legal framework for securing transparent and professional management, operation and audit of nonprofit operations.

As can be seen from the chapters above, several events led to the elaboration of a comprehensive nonprofit law.

Conceptually, the major result is that the law makes a clear distinction between public benefit and other types of organisations. It makes clear that the formal establishment of a nonprofit organisation does not automatically involve that the organisation is performing public functions, thus it is not automatically eligible for tax exemptions and allowances. The codifiers paid special attention to incorporating international legal principles into the law:

• The principle of nonprofit operation, which means that the profits realized through the organisation's activities are not distributed but spent on activities defined by the founding document.
• The principle of secure management, which means that the utilisation of wealth has to comply with objectives serving nonprofit purposes.
• The principle of independence, which means that the organisation has to be independent from the direct influence of its founders.
• The principle of transparency and publicity, which means that the operation of the organisation has to be transparent to the public.

These principles are either stated explicitly or are inherent in different chapters.

In conformity with international standards the law intends to address questions arising from specific Hungarian circumstances. Some particularities are as follows:

• Particular attention is paid to settling the relations of nonprofit organisations with the state budget and with their clients. The law favours contractual co-operation and a tender system between supporter and supported.
• The law incorporates public foundations, public law associations and public benefit companies to promote and to fasten the process of re-division of labour in the domain of public services. It extends additional privileges to organisations supplying services which should otherwise be provided by public organisations.
• The act explicitly makes a clear distinction between political parties and nonprofit organisations.
• Chapters defining the various types of public benefit organisations, the conditions of acquiring and winding up the public benefit status, the rules of registration, operation and reporting as well as the utilisation of wealth and legal control intend to ensure professional management of nonprofit organisations and to prevent the misuse or abuse of the nonprofit status.

The Hungarian Nonprofit Law did not intend to incorporate all the relevant legal provisions and regulations into a single act. Its major objective was to create a coherent an comprehensive legal guidance for nonprofit organisations within the framework of already existing legal provisions in accordance with international legal principles.

The Act is a major step in the process of securing legitimacy and recognition for the nonprofit sector. The Law alone would not solve all problems of the nonprofit sector. Nevertheless it can serve as a major legal framework to make the role of the nonprofit sector clear, to prevent the misuse or abuse of nonprofit organisational forms, to make the management and operation of nonprofit organisations more professional - in short, to promote a selective quality-oriented development within the nonprofit sector.

[original version]