The original title of the following article is Cause-related Marketing: Another Way of Corporate Charitable Donation in China.

Authors
Giana Lin, giana.lin@fuguanlaw.com, Partner, The FUGUAN Law Firm (B Corp Certified)
Yifei Li, yifei.li@fuguanlaw.com, Lawyer, The FUGUAN Law Firm (B Corp Certified)

Introduction

Charitable donation is one of the most common ways for enterprises, both in China and abroad, to participate in charitable causes and fulfill their social responsibilities. In China’s charity legal system and corporate donation practice, enterprises can make donations through cause-related marketing in addition to directly providing donations to charitable organizations.

What Is Cause-related Marketing？

Cause-related marketing (also known as “cause marketing” and “public welfare-related marketing”) generally refers to the marketing behavior of enterprises with specific meanings, in which the enterprises claim that they will donate a certain amount of revenue from marketing to charitable causes in order to stimulate public consumption, which has combined the realization of business objectives and the support for charitable causes.

From the perspective of charitable organizations, cause-related marketing can help them obtain more funds, contribute to the public’s awareness of their establishment and purposes, and expand their reputation. From a business perspective, cause-related marketing is undoubtedly a marketing method enterprises adopt to create profits. In many countries, it is included in the category of charity law because it includes charitable donation, charitable organization brand, public charity psychology, and other charitable factors, as in the cases of “commercial participator” under the Charities Act 1992 in the United Kingdom, and “Commercial Co-venture (CCV)” in some states in the United States.
Under PRC Charity Law, cause-related marketing is not a legal term clearly defined; instead, it refers to the circumstances stipulated in Article 37 of PRC Charity Law, that is, “Natural persons, legal persons and other organizations that organize income-generating activities, such as performances, competitions, sales, auctions or other commercial activities, and that promise to use all or part of the proceeds for the purpose of charity”. Chinese law further requires that, “the purpose of charity” shall be realized by donating to “charitable organizations or other beneficiaries”, therefore, the sponsors of cause-related marketing like enterprises shall “sign a donation agreement with charitable organizations and other beneficiaries” before the business event and “fulfill their obligations after the event in accordance with the donation agreement, and make public the status of the donation”.
It should be noted that “charitable donations” under Chinese law, as long as they are designed for charity, include both donations to charitable organizations and direct donations to beneficiaries, and one of the significant differences between the two is that only donations to charitable organizations are eligible for tax benefits. Regarding the practical needs of corporate donation, this thesis will only discuss the cause-related marketing of corporate donation to charitable organizations.

Legal Relation in Cause-related Marketing

As can be seen from the previous description of cause-related marketing under China’s Charity Law, typical cause-related marketing includes enterprises, charitable organizations, and the public (consumers), and the legal relationship between them is as follows:

1 The relationship between enterprises and the public (consumers)

As cause-related marketing is in essence still a business behavior carried out by enterprises, therefore, the legal relationship between enterprises and the public (consumers), such as sales contract relationship and service contract relationship, is based on the nature of marketing, which does not fall under the regulatory scope of the Charity Law, but is subject to the Civil Code that regulates contractual relations, the Consumer Law that protects the rights and interests of consumers, the legal norms that regulate product quality, and the Advertising Law if it involves advertising. Advertisers shall be responsible for the authenticity of advertising content and shall not deceive or mislead consumers with false or misleading advertisements. For example, a typical violation of the Advertising Law is when the actual performance of a donation does not match the advertised performance.

2 The relationship between enterprises and charitable organizations

In cause-related marketing, the relationship between enterprises and charitable organizations is complicated. Such a relationship includes not only the contractual donation relationship regulated by charity law but also the authorization and licensing relationship of relevant intellectual property rights established by enterprises and charitable organizations due to their cooperation in cause-related marketing. Other relationships include contractual relationships that require cooperation between the two parties in cause-related marketing.

As donors of charitable donations, enterprises enjoy rights and obligations. The rights of a donor include determining, inquiring about, and supervising the use of donated properties by charitable organizations. The obligations of a donor include 1) delivering donated properties in accordance with the agreement with the charitable organizations; 2) not attaching unreasonable requirements for the charitable organizations to publicize their products or services, and 3) not appointing an interested person as the beneficiary of the charitable donation. As a sponsor of marketing activities, an enterprise needs to use the name, logo, and trademark of a charitable organization or the name and trademark of a charity project in its cause-related marketing. The charitable organization also needs to cooperate with other matters in the cause-related marketing. Therefore, an enterprise needs to enter into an agreement with a charitable organization on issues beyond the donation.

The Process for Enterprises to Carry Out Cause-related Marketing

Step1 Selecting a charitable organization
In order to achieve good results in marketing activities, enterprises should select charitable enterprises and cooperative charitable organizations that are related to the characteristics of the goods or services they operate, the brand images of the enterprises, and the values of the enterprises. Under Chinese law, a charitable organization is an identity attribute recognized by law, including the three types of NGOs, being the foundation, social service organization, and social group. Therefore, not all NGOs have the attributes of a charity organization. Enterprises should verify whether the NGO they intend to cooperate with has the attributes of a charitable organization by requiring it to provide the registration certificate with the identity of a charity organization or inquiring through the official channels of the Chinese government(https://cszg.mca.gov.cn/).

Step 2 Entering into an appropriate agreement with the charitable organization
Prior to cause-related marketing, it is required by Chinese law to enter into donation agreements with charitable organizations, which means that enterprises should fulfill their obligation to enter into donation agreements with charitable organizations in advance before they can use the names and other charitable resources of charitable organizations to carry out case marketing. In addition to matters involved in donation, matters that need cooperation between enterprises and charitable organizations must also be determined through agreements. Therefore, a “cooperation agreement” between an enterprise and a charitable organization specifying the content of donations is a more appropriate approach. Such an agreement should include:

• The duration of the cause-related marketing;
• The specific proportion or calculation method of corporate donation in operating income;
• Delivery time and method of donated property;
• Specific use of donated property;
• Issuance of donation notes;
• Authorization of the use of the names, trademarks, logos, etc. of the charitable organizations or charity projects;
• Specific matters requiring cooperation from charitable organizations: providing information on charity projects, assisting in information disclosure, etc.

Step 3 Performance of cause-related marketing and donation
Enterprises need to promote their goods or services and make donations under agreements with charitable organizations. Special care should be taken to align the content of marketing campaigns with agreements entered into with charitable organizations.

Step 4 Information disclosure
Under Chinese law, it is required for enterprises to disclose their donations after a cause-related marketing campaign. At present, there is no officially designated platform for enterprises to disclose information about donations. We suggest that enterprises disclose their donations through the same media, official websites, and we-media platforms with the marketing campaign.

Compliance Risk Matters in Cause-related Marketing

Content of market campaign

There is no clear regulation in Chinese law on the specific contents that enterprises need to publicize in cause-related marketing. It is recommended that at least the following shall be indicated in the contents:
The enterprise is the donor;
The specific proportion of corporate donation in operating income;
The specific charitable organization receiving the donation;
Introduction of the basic information of the specific charity project supported.

The obligations and precautions of an enterprise as an advertiser

Enterprises shall comply with the legal requirements for advertisements and advertisers under Chinese law when promoting their products or services through cause-related marketing. It should be noted that such promotion of enterprises is still commercial advertising, other than public service advertising, due to the existence of charitable factors. Under Chinese law, public service advertising only refers to non-profit advertising.
As advertisers, enterprises shall be responsible for the authenticity of the advertisements involved in cause-related marketing, avoiding advertisements containing false or misleading content without deceiving or misleading consumers. Enterprises with their cause-related marketing violating the foregoing provisions may not only bear civil liability to the consumers whose rights and interests are infringed but also face a fine from the market supervision administration.

Cause-related marketing by multinational companies worldwide

Multinational companies tend to lay out their CSR practices globally. When any element of the corporate marketing or charitable organization involved is not in China, the application of cause-related marketing under Chinese law can be classified as follows:
Cause-related marketing that carries out business activities in China and makes donations within China is the one under Chinese law;

Cause-related marketing that carries out business activities in China and makes donations outside China is not the one under Chinese law. This is because charitable organizations in cause-related marketing only refer to foundations, social service organizations, and social groups registered in China, excluding organizations of any nature outside China. However, if the beneficiary is an overseas NGO, it may constitute that the overseas NGO carries out activities in China. The legal analysis of cause-related marketing here is based on the fact that the State does not extend the definition of “other beneficiaries” in Article 37 of the Charity Law.

Sales outside China and donations within China are generally not subject to the compulsory jurisdiction of Chinese law unless a relevant contract between the enterprise and the domestic charity organization stipulates that Chinese law shall apply. This is an overseas donation, which is a donation directly from a foreign enterprise and is subject to the provisions on overseas donation under Chinese law.

Evaluating whether it constitutes a public fundraising

Public fundraising by charitable organizations is strictly controlled under Chinese law and requires compliance with a series of legal norms, among which the main legal requirements include: Charitable organizations need to qualify for public fundraising, file public fundraising records in advance, and disclose detailed information about public fundraising. An organization that is not qualified for public fundraising shall be subject to administrative punishment by relevant administrative departments if it raises funds publicly without authorization. Suppose an enterprise chooses to conduct a cause-related marketing campaign that is not a public fundraising activity. In that case, it should avoid constituting a public fundraising activity and take the following actions during cause-related marketing:
Receiving payments from the public (consumers) only by selling goods or services to them;

Avoiding claiming that payments paid by the public (consumers) will be donated directly to charitable organizations;

Avoiding misleading the consumers that they are donating instead of buying;

Only publicizing the enterprise itself as a donor and avoiding claiming that the public

(consumers) are donors.

Consequences and defense basis of enterprises not fulfilling donation obligations

The public announcement of donation and the conclusion of donation agreement by enterprises in cause-related marketing are all donation commitments. Charities can apply for a payment order or file a lawsuit requiring the enterprise to make the donation if it violates its donation commitments. However, there is an exception that an enterprise can use as a basis for defense: When “the economic situation of the enterprise has significantly deteriorated, seriously affecting its production and operation”, the enterprise can cease to perform its donation obligation, conditioned that it first report to relevant civil affairs administration responsible for charity in the place where the agreement is concluded and explain the situation to the society.

Tax Preferences

Charitable donations made by enterprises through cause-related marketing can enjoy a tax preference if they comply with the provisions of Chinese laws.

Such a tax preference is reflected in the preferential treatment for corporate income tax, that is, donations made by enterprises to charitable organizations within 12% of their total annual profits are allowed to be excluded from the calculation of taxable income. Conditions for enterprises to enjoy such as tax preference include:

1 Charitable organizations receiving donations are eligible for pre-tax deductions for public welfare donations

The central or local departments of finance, taxation, and civil affairs will regularly issue the Announcement on the List of Pre-tax Deduction Qualifications for Public Welfare Social Organizations, which can be used to verify the qualification of the charitable organization. In addition, as the charitable organization’s pre-tax deduction qualification for public welfare donation is valid for three years, it is necessary to also verify whether the pre-tax deduction qualification for public welfare donation of the charitable organization is valid.

2 Obtaining of the public welfare donation notes issues by the charitable organizations

An enterprise that donates to a charitable organization shall require the charitable organization to issue a public welfare donation note corresponding to the donation amount. The public welfare donation notes affixed with the seal of the financial department at or above the provincial (inclusive) level and the official seal of the donor are the legal public welfare donation notes. Operational receipts issued by charitable organizations cannot be used as evidence of pre-tax deduction of donations, and the donation expenditure incurred cannot be with a pre-tax deduction from corporate income tax.

3 The carry-over period does not exceed three years

Enterprises shall promptly declare the donation to the tax department for the pre-tax deduction. In normal circumstances, such a declaration shall be made in the year of the donation. If a tax deduction is not made in the year the donation is made, it is allowed to be carried forward to a later year, but the carry-forward time shall not exceed three years from the year following the donation is made.

Summary and Suggestions

China’s legal regulations on cause-related marketing aim to protect the legitimate rights and interests of charitable organizations and the public participating in charity and regulate charitable activities. Meanwhile, enterprises gain profits and improve the corporate image from cause-related marketing. Any violation of the law by enterprises in cause-related marketing may cause greater damage to the reputation of enterprises or charitable organizations than other marketing. Therefore, enterprises should ensure that they facilitate planning and compliance audits before launching cause-related marketing to meet the requirements of the law.

Authors

Giana Lin, giana.lin@fuguanlaw.com, Partner, The FUGUAN Law Firm (B Corp Certified)
Daisy Ying, daisy.ying@fuguanlaw.com, Lawyer, The FUGUAN Law Firm (B Corp Certified)

Introduction

Participation in public welfare and charitable activities is a kind of value creation of enterprises, with a positive impact on the brand reputation, market share, goodwill and employee satisfaction of enterprises.

In the global information age, enterprises have gradually evolved from the traditional supply chain of “supplier-enterprise-customer” into a more complex enterprise ecosystem consisting of suppliers, enterprises, customers, governments, stakeholders and even the whole society. In this connection, the business philosophy of enterprises needs to change from the traditional pure pursuit of profit maximization to the pursuit of common value maximization, assuming responsibility for consumers, communities and the environment.

For every enterprise, engaging in the public welfare and charity activities is not only a simple charitable behavior, but also a manifestation of social responsibility. Only by committing to charity can the enterprise maintain a high degree of humanistic feelings in its development and bind its business development with social progress while enhancing its internal cohesion. Only in this way can enterprises accumulate more popularity and development momentum and achieve greater future development.

With the opening-up of the Chinese market, more and more enterprises are doing business and projects in China, but they are not so smooth with public welfare and charity activities in China as they are with their business. Since February 25, 2021, when China declared comprehensive victory in the battle against poverty, China is no longer a land of “absolute poverty”, posing a question as to whether funding for poverty alleviation is needed. The fact is, however, other than a simple financial support, modern public welfare has long engaged with new areas such as education, culture, innovation, environmental protection and sustainable consumption, and cause-related marketing that combines a product with a cause may lead to both commercial success and good brand goodwill.

Public welfare and charity law is a kind of social law, with strong regional characteristics and differences in regulations between the countries. The absence of understanding of China’s public welfare laws and regulations has made many enterprises hesitate to engage in the public welfare and charity activities for worrying about failure and backfire due to non-compliance with relevant regulations.

At present, there are already quite a few practical cases of foreign invested enterprises initiating and establishing non-profit organizations in China. Below is an overview of common patterns for Foreign Invested Enterprises to participate in public welfare and charity practice within the territory of China:

Based on the author’s understanding of the charity laws and practices in China, this article will introduce three common models to public welfare and charity activities engagement in China:

Model 1 Direct funding of projects by enterprises

Enterprises can combine their products with public welfare activities and fund Chinese charitable organizations to carry out public welfare projects. For example, a foreign bank has invested funds to carry out public welfare financial education activities, which are closely related to the bank’s business and can leverage its professional ability in the financial field.

Furthermore, enterprises can select public welfare projects and fund multiple projects. For example, in 2000, a U.S. Motor (China) Co., Ltd. established the “Car Environmental Protection Award” in China, funding a total of 471 outstanding environmental protection projects or organizations with a total amount of RMB 28.6 million by the end of 2020.

In general, due to the limited staffing of the public relations departments or social responsibility departments of the enterprises responsible for public welfare and charity activities, enterprises do not invest their own staffing in carrying out public welfare and charity projects. Instead, they often choose to fund other NGOs (i.e., the executor of public welfare activities) to do the job. In this process, enterprises need to find excellent project plans as well as NGOs that are open, transparent, and with standardized internal governance. This is, however, not easy. Compared with the nearly perfect procurement system of enterprises, the funding system of enterprises is still rudimentary. Based on our years of experience serving foreign enterprises, we have learned that when enterprises directly fund projects, it is vital to fund projects effectively and find local NGOs to implement them efficiently.

We have assisted many enterprises in setting up funding systems, establishing a compliant funding system framework, and providing detailed and executable SOP. Under our services, many enterprises have established funding systems and organically combined their products with public welfare activities, realizing the integration of commercial and public welfare values.

Modul 2 Establishing special funds or charitable trusts

Individual and sporadic public welfare project funding may be achieved through the enterprises’ public relations departments or social responsibility departments. However, if the staffing is insufficient for multiple public welfare projects, many enterprises will establish special funds or charitable trusts under Chinese philanthropic foundations.

1 Special Funds

Enterprises that establish special funds will usually cooperate with foundations qualified for public fundraising. The special funds established in this way can either fund public welfare projects or receive public contributions after the projects mature. For example, a cosmetic company launched the Shanghai Foundation cosmetic Gratitude Special Fund in Shanghai, committing to public welfare projects related to education, culture, and health for women and children. Compared with self-funding, selecting special funds can get the assistance of cooperative foundations in the process management and capital supervision of the funded projects so that enterprises can invest less human resources.
Such a type with special funds is similar to DAF funds in the US, which is popular among enterprises in recent years. Generally, cooperative foundations have preferential tax status. Therefore, enterprises can receive certain tax preferences if they donate to foundations, although foundations will also charge certain management fees.

2 Charitable trusts

In addition to establishing special funds, enterprises can also establish charitable trusts. Charitable trusts generally have trust companies and other financial institutions as trustees, who have more professional experience in maintaining and increasing the value of funds with a stricter internal control system for fund allocation. Charitable trusts have only been gradually developed since the promulgation of the Charity Law in 2016; hence, they are still not particularly mature compared with special funds, especially in the absence of preferential tax policies and lack of experience acting as trustees in charitable project management.

Modul 3 Establishing domestic NGOs to donate /implement charitable activities

After years of experience in public welfare activities, enterprises will generally choose to establish public welfare organizations to realize their vision of public welfare better. Enterprises tend to establish corporate foundations, for example, one Beijing coffee Foundation sponsored and established by a famous coffee company in 2020 and committed to giving back to the local community. From the perspective of project operation, corporate foundations established by enterprises can be divided into grant-making foundations and operational foundations. Different operating modes have their advantages and disadvantages regarding professionalism and flexibility.

As the name suggests, a grant-making foundation is a foundation that does not implement projects by itself. Its funds are mainly used to fund some public welfare projects or organizations in line with the foundation’s purpose. For a grant-making foundation, its priorities fall on project approval, selection, evaluation, and supervision. The success of projects funded by a grant-making foundation is, in addition to its strategic management and project management level, primarily affected by the implementation level of external executing agencies.

Unlike a grant-making foundation, an operational foundation tends to have its project implementation team. An operating foundation tends to give little external funding and mainly uses its funds to run its public welfare projects. External implementation agencies rarely influence the success of an operational foundation’s project, and it has sufficient initiative over the project itself. On the other hand, an operating foundation requires a well-structured and well-trained team to run projects, leading to a slightly higher organizational cost. In practice, some operational foundations outsource part of the tasks of their operational teams to professional organizations. In this way, they can save on the cost of team training and cooperation and implement and manage their projects in the most efficient way.

Establishing a foundation requires a higher cost than other types of NGOs, but on the other hand, this model will have more independence than Model 1 and Model 2.

The original title of the following article is A Quick Review of China’s Third Distribution and Roadmap of FDI Participation in China’s Charity.

Authors
Giana Lin, giana.lin@fuguanlaw.com, Partner, The Fuguan Law Firm (B Corp Certified)
Dorothy Tan, dorothy.tan@fuguanlaw.com, Lawyer, The Fuguan Law Firm (B Corp Certified)

Quick Overview of Third Distribution in China

“Third distribution” is a local Chinese concept referring to third distribution under the conditions of market economy, which was first proposed by famous economist Mr. Li Yining in 1994.
The first distribution is conducted by the market according to the principle of efficiency, which refers to the private interests obtained by enterprises and individuals in market economic activities. The second distribution, i.e., government-driven distribution, is carried out by the government within the scope of its functions to solve social problems with due consideration given to equity through methods including taxation, poverty relief, and coordination of social security. Third distribution—social responsibilities-driven distribution—is a secondary distribution through personal income transfer and non-compulsory methods such as individual voluntary contribution (e.g. pro bono activities) and donation. As a social voluntary mechanism, third distribution is characterized by the dominant role played by the private sector and social responsibility.

In November 2021, the Resolution of the Central Committee of the Communist Party of China on the Major Achievements and Historical
Experience of the Party over the Past Century was adopted at the Sixth Plenary Session of the 19th Central Committee of the Communist Party of China. At the subsequent press conference, the spokesman expressed that there are many channels and ways for entrepreneurs to contribute to common prosperity. China encourages and supports the active participation of enterprises and entrepreneurs in public welfare and charity activities within their capabilities on a voluntary basis, which objectively also serves the function of third distribution.
Enterprises and entrepreneurs can participate in third distribution through many channels and ways. For instance, in addition to the most basic compliance operations, there are also diversified ways of active participation in public welfare charity. Not just a distribution of social welfare—it is, more importantly, a major channel for enterprises driven by their social responsibilities to promote joint construction of the society as a key part of social activities.
Besides the concept of third distribution to FDI Ventures in China, this article also intends to introduce the basic paths for enterprises or entrepreneurs to participate in China’s public welfare and charity sector for readers’ reference.

Entity Form and Basic Concept of Participation in China’s Public Welfare Charity

Due to the complexity of miscellaneous technical terms and a lack of systematicness of relevant laws, policies, and regulations, in many cases, even the practitioners of China’s public welfare charity industry fail to fully understand the legal status of their own organizations and relevant legal concepts. For foreign enterprises in China, often the key priority of developing overseas business is to ensure full compliance operations.
With the development of world trade and economic globalization, the rules of commercial laws of various countries are tending to converge. Nevertheless, considerable divergencies still exist in the field of the public welfare charity industry due to the involvement of different political and social systems. For FDI Ventures in China who are willing to participate in China’s public welfare charity, the first thing they need to know is the basic concepts in China’s laws, regulations, and policies, especially the form of organization to patriciate.

1 International NGO (INGO)

Corresponding to the concept of NGO in China, International NGO (INGO) refers to international non-governmental organizations conducting activities within the territory of China, i.e., translational or cross-border activities.
The Law of the People’s Republic of China on the Administration of Activities of International Non-Governmental Organizations within the Territory of China （PRC INGO Law） (April 2016) endows INGOs with legal status in the form of law and provides unified regulations on their activities within the territory of China, thereby constituting a uniform legal basis for INGO to conduct activities in China.
According to the PRC INGO Law, “INGOs” means non-profit, non-governmental social organizations legally formed abroad, including foundations, social groups, and think tanks.
INGOs have the following characteristics:
First, they are social organizations legally formed abroad, i.e., located at and legally formed in regions other than China.
Second, they are non-profit social organizations. In other words, their profits and property shall not be distributed among contributors.
Third, they are non-governmental social organizations, meaning that their establishment and policy-making are not controlled by the government.
In a non-exhaustive manner, this definition lists the three common forms of INGOs—foundations, social groups, and think tanks.
Some other forms that may be confused with them in practice include: family foundations, corporate foundations, and industry associations and chambers/associations.
For family foundations, it is often believed that their public welfare charity projects are led by important members of the family, because certain family members often attend various events on behalf of their family foundations when conducting activities in China. However, from the perspective of compliance, so long as an activity represents and is funded by a family foundation, such family foundation will be deemed as an overseas non-profit organization conducting activities within the territory of China, and therefore should abide by the PRC INGO Law.
Corporate foundations are often associated with business activities. Some enterprises carry out activities related to public welfare and charity activities in China with corporate foundations as their actual source of funds. Since corporate foundations and enterprises are two legal entities independent of each other, the activities conducted by corporate foundations in China should also meet the requirements of the PRC INGO Law. In practice, some corporate foundations without representative offices in China are currently maintaining their funding activities through other INGOs with representative offices established in China (e.g., United Way Worldwide, GlobalGiving, and Give2Aisa). Nevertheless, such practice is flawed in that the corporation foundation could not publicize its brand in China.
Industry associations and chambers often conduct activities in China to serve business members. Even though their services are provided to commercial entities, they are still governed by the PRC INGO Law since they are registered as non-profit and non-governmental organizations in their country (region) of registration.

2 Social organizations and foundations

Chinese non-profit organizations mainly take the forms of social organizations and public institutions. To be more specific, social organizations include foundations, social service agencies (also known as private non-enterprise entities), and social groups, all of which can accept domestic and overseas donations for conducting activities in compliance with their respective business scope and purpose.
Social organizations qualified for tax exemption as non-profit organizations are entitled to preferential tax treatment including exemption of enterprise income tax on donation income; as for social organizations with qualifications for pre-tax deduction of public welfare donations, their donors are entitled to preferential enterprise income tax and individual income tax treatment with receipts for public welfare donations.
A foundation refers to a non-profit legal person established in accordance with the law by making use of the property donated by natural persons, legal persons, or other organizations with the purpose of pursuing welfare undertakings. According to whether they are entitled to solicit contributions from the public, foundations can be divided into two types: foundations that are prohibited from soliciting contributions from the public; and foundations that are qualified for soliciting contributions from the public.
Foundations should be initiated with willing donations by natural persons, legal persons, or other organizations. Based on the principle of the gratuitousness of public welfare donations, the initiator who established the foundation shall not claim rights from their investment property on the grounds of their contributions. A foundation is a donation-based legal person according to the Civil Code of the People’s Republic of China, which is equivalent to the “incorporated foundation” in traditional civil law. The Chinese law requires a certain minimum amount of the starting fund of a foundation. At present, the minimum amount of starting fund required for establishing a foundation is RMB 2 million. In China, foreign-invested enterprises can also initiate and establish foundations. By establishing its own corporate foundation, an enterprise can better implement its ideas of social value co-creation in the fulfillment of social responsibilities.

3 Special Fund

A foundation can set up multiple special funds with functions similar to the “donor-advised fund” (DAF) aboard within itself, which can flexibly meet the various donation requirements of donors. However, special funds are not independent legal entities, and therefore not qualified for carrying out fundraising or public welfare projects independent of the foundation, with both its establishment and operation subject to the management of the foundation. In view of the advantages of special funds, including low operating cost, the ability to carry out fundraising and public welfare projects through the foundation, and preferential tax treatment, many foreign-invested enterprises have chosen to establish special funds for carrying out public welfare projects in China.

4 Roles and responsibilities

of the initiator

What are the rights and responsibilities of foreign-invested enterprises as initiators of social organizations such as foundations? The answer is given below with foundation as an example.

Donor and solicitor

Usually, the initiator of a foundation refers to the individual, legal person, or other organization that donated the starting fund or established the foundation. A foreign-invested enterprise as the initiator of a foundation is in fact the donor of its starting fund and is entitled to request the foundation to use the starting fund according to the purpose and business scope specified in its articles of association. After establishing a foundation, a foreign-invested enterprise can continue to donate to the foundation, and demand the foundation to subsidize various public welfare activities following its wishes, under the premise that such activities are carried out in accordance with the foundation’s purpose and business scope. Foreign-invested enterprises who have donated to foundations are entitled to preferential enterprise income tax treatment with donation receipts issued by foundations that are qualified for pre-tax deduction of public welfare donations.
Also, as the initiator of a foundation, a foreign-invested enterprise may also utilize its resources including brand and human resources to assist the fundraising activities of the foundation, to help it raise more funds at home and abroad, so as to subsidize and carry out more public welfare activities.

“Decision-maker”

When initiating and establishing a foundation, a foreign-invested enterprise is entitled to nominate and appoint members of the foundation’s decision-making organ (board of directors) and supervisory organ (board of supervisors) as well as the foundation’s legal representative (council chairperson) and person in charge (secretary-general). Of course, the nomination of all candidates is subject to review and approval by the registration administrative authority and the competent supervisory authority (if any) of the foundation. The initiator itself does not act as a decision-maker in the foundation, nor does it have the right of absolute control over the foundation like a shareholder’s right of control over its enterprise. However, by nominating the foundation’s key managerial staff, drafting the purpose and business scope during its establishment, and continuously donating to and subsidizing the foundation in the future, the initiator can implement its charity philosophy and plans for subsidized projects throughout the operation and management of the foundation.
In terms of legal relationships, a foreign-invested enterprise as an initiator is not the decision-making body of the foundation; it is beyond the organizational structure of the foundation and does not assume unlimited liability towards the foundation. Unless the initiator’s act of donation is somehow illegal (such as capital withdrawal and false contribution), any legal disputes or legal liabilities arising from the operation of the foundation as a result of its own fault will not implicate the foreign-invested enterprise.

Cooperation parter

Besides financial support, foreign-invested enterprises can also cooperate with foundations in the field of public welfare charity, e.g., the common approach to cooperation “cause-related marketing” (see article (III) of this series), and offering staff and clients volunteer service opportunities via public welfare and charity activities of the foundation. Through resource sharing, foundations can promote their own growth and development while satisfying the demand of foreign-invested enterprises for in-depth participation in China’s public welfare charity and undertaking corporate social responsibilities.

Paths to Participation for FDI Ventures in China

At present, there are already quite a few practical cases of foreign-invested enterprises initiating and establishing non-profit organizations in China. Below is an overview of common patterns for FDI Ventures to participate in public welfare practice within the territory of China: