Many Hong Kong businesses have come to see corporate giving as an important activity, and as a key component of their corporate social responsibility activities.
While for some businesses it will be satisfactory for their giving to be directly to philanthropic causes, many businesses, particularly larger companies, will wish to form their own private charitable foundations, and to fund all giving through that charity.
Rationale for a company forming its own charity
There are a number of benefits to a company in the formation of its own charitable foundation:
With a company charitable foundation, a company's staff can be involved in its management and administration. This allows for staff to be fully engaged in the projects and the charitable giving.
The formation and funding of a charitable foundation can be used in the company's CSR material. The causes supported by the charitable foundation can be monitored to ensure that these are appropriate and will not cause reputational harm to the company.
The timing of direct giving can be difficult as causes may not be readily identifiable; also, profits can fluctuate. A company charitable foundation can hold, invest and accumulate funds while projects are being identified. With retained funds, the foundation will be able to support projects as and when need arises (for example, responding to natural disasters and emergencies).
A charitable foundation can accumulate reserves. This can allow a company to continue its charitable giving strategy even in years in which profits are lower than usual.
e) Tax relief
If a Hong Kong charity is formed, a Hong Kong corporate donor would obtain relief from Hong Kong Profits Tax. A business donor can claim a deduction for the aggregate of its approved charitable gifts of up to 35% of its taxable profits. In practice, a business may quickly cover the costs of forming its own charity through the tax relief it obtains when it comes to make gifts. If employees give to the charity, they will also obtain tax relief.
Formation of a Hong Kong charitable foundation
Hong Kong law allows for a wide definition of charitable purpose: activities relating to health and education and which are socially beneficial may be considered charitable. In most cases, a Hong Kong charity can support causes outside of Hong Kong if that is desired.
A preliminary issue to be determined is whether a charitable foundation should be formed as a trust or a company. Either structure is possible, with the choice depending on a number of factors such as the activities to be undertaken:
a) use of a company might be consistent with the governance mechanism of a corporate donor, with the board of directors concept facilitating proper management of a charity; while
b) a trust might be appropriate with a professional trustee involved to help safeguard the charity's assets.
With both types of vehicles, governance and operating arrangements need to be considered in the preparation of the charity's constitutional documentation.
Once the charity has been formed, an application to the Hong Kong Inland Revenue Department for tax exempt status would be made. While this application is being made, practical steps can be taken such as the opening of bank accounts and initial meetings of the board.