The 2015 article began as follows.
NPO corporations have become a term we hear often these days, and I imagine everyone has heard it at least once.
I think many people picture them as volunteer organizations? I did too.
Volunteer organizations sometimes operate as NPO corporations.
In fact, many companies operate as NPO corporations, generating substantial profits and making money.
This time, I would like to explain NPOs.
What are NPOs, NPO corporations, provisionally certified NPO corporations, and certified NPO corporations?
What is an NPO?
It is an abbreviation of Non-Profit Organization, meaning a "nonprofit organization." Here, a nonprofit organization refers to an organization that does not aim to make a profit, such as a volunteer organization, neighborhood association, or residents' association.
What is an NPO corporation?
Among NPOs, this refers to a corporation that has received authentication from the prefectural governor or other competent authority under the Act on Promotion of Specified Non-profit Activities (the NPO Act). To receive this authentication, it must meet certain requirements, including conducting specified nonprofit activities.
There are certain requirements, but of course it is permitted to earn revenue.
There can be limits to work done without compensation, so even when an organization is nonprofit or volunteer-based, what it can do changes depending on whether it has money or not.
It is only natural that an NPO can earn revenue and put it to work in its activities. Incidentally, even activities done without compensation require money; someone makes a donation, and that is how the organization keeps running.
What is a certified NPO corporation?
This refers to an NPO corporation whose management structure and business activities are appropriate and which has received certification from the competent authority as an organization that contributes to the advancement of the public interest.
A certified NPO corporation can receive preferential tax treatment itself, and because people who donate to a certified NPO corporation can also receive preferential tax treatment, it becomes easier to collect donations.
What is a provisionally certified NPO corporation?
This refers to an NPO corporation established within the previous five years whose management structure and business activities are appropriate and which has received provisional certification from the competent authority as an organization expected to contribute to the advancement of the public interest.
The requirements for becoming a certified NPO corporation are quite stringent, and the certified NPO corporation system did not spread easily, so this system was established. It provides a provisional-certification period (three years). During that period, donors to a provisionally certified NPO corporation are eligible for preferential tax treatment, while the deemed donation system does not apply to provisionally certified NPO corporations. After developing into an organization that can collect donations and the like, it then applies anew to become a certified NPO corporation.
You might picture it as giving an NPO corporation a provisional license before it becomes a certified NPO corporation.
What are specified nonprofit activities?
The NPO Act provides an exhaustive list of specified nonprofit activities, and to establish an NPO corporation, at least one of them must apply.
Specifically, specified nonprofit activities are activities that fall under one of the following 20 categories and also aim to contribute to the advancement of the interests of an unspecified and broad group of people.
- Activities to promote health, medical care, or welfare
- Activities to promote social education
- Activities to promote community development
- Activities to promote tourism
- Activities to promote rural, mountain, fishing-village, or intermediate and mountainous areas
- Activities to promote scholarship, culture, the arts, or sports
- Activities to conserve the environment
- Disaster-relief activities
- Community-safety activities
- Activities to protect human rights or promote peace
- International-cooperation activities
- Activities to promote the formation of a gender-equal society
- Activities to promote the sound development of children
- Activities to advance the information society
- Activities to promote science and technology
- Activities to vitalize economic activity
- Activities that support the development of vocational abilities or the expansion of employment opportunities
- Activities to protect consumers
- Activities that provide liaison, advice, or assistance concerning the operation or activities of organizations conducting the activities listed in the preceding items
- Activities prescribed by prefectural or designated-city ordinances as activities equivalent to those listed in the preceding items
Looking at this list, quite a few companies may fall under, for example, item 14, activities to advance the information society, or item 16, activities to vitalize economic activity.
It is also possible to conduct other businesses, but because an NPO corporation must make the specified nonprofit activities above its principal purpose, specified nonprofit activities must account for 50% or more of its business activities.
Advantages and disadvantages of incorporating an NPO as an NPO corporation
Advantages
- Because it acquires legal personality, it can enter into various contracts in its corporate name
- Having legal personality makes it easier to earn social trust
- There are tax advantages
Disadvantages
- An annual business report is required
- Profits earned through its activities cannot be distributed
Tax treatment of NPO corporations
For NPO corporations, corporate tax applies only to income arising from revenue-generating businesses (in other words, corporate tax is not imposed on income arising from activities other than revenue-generating businesses under the Corporation Tax Act). Local-tax treatment differs by the local government where the corporation is located. In Tokyo, even when it does not conduct a revenue-generating business, an NPO corporation must file and pay the per-capita levy of the corporate metropolitan residents tax; however, it will be exempt if it files a per-capita levy return and an exemption application by April 30 each year. Note that even a specified nonprofit activity is taxable if it falls under a revenue-generating business under the Corporation Tax Act, so care is required. For details on whether an activity constitutes a revenue-generating business, please consult a professional, such as a tax accountant.
Further, an NPO corporation that does not conduct a revenue-generating business is not required to submit a final corporate-tax return, but within four months from the day after the end of each business year, it must submit a profit-and-loss statement or an income-and-expenditure statement to the tax office having jurisdiction over its tax domicile (provided that, if annual revenue is ¥80 million or less, submission of a profit-and-loss statement or income-and-expenditure statement is also not required).
In addition, once it becomes a certified NPO corporation, the deemed donation system applies.
What is the deemed donation system that applies to certified NPO corporations?
Under the deemed donation system, when profits earned from a revenue-generating business are used for specified nonprofit activities, that amount is treated as a donation from the revenue-generating business to the specified nonprofit activities, and a certain amount may be recorded as an expense (deducted for tax purposes).
Wouldn't this deemed donation system be the greatest advantage of becoming a "certified" NPO corporation?
How was that?
The 2015 article then offered the following guidance.
NPO corporations are not very familiar to many people, but with volunteer activities actively carried out these days, there may be room to consider one depending on the type of business.
The number of professionals (such as tax accountants) who can handle NPO corporations is limited, so if you wish to establish an NPO corporation, please contact our firm, which has a proven track record.