Typical structures
Amuta
PBC
PBF
Public endowments


This article is the first in a series on various corporate aspects pertaining to the establishment of non-profit organisations (NPOs) that are engaged in charitable activities in Israel.

Typical structures

The following are the four principal types of NPOs in Israel:

  • associations ("Amutot", singular "Amuta"), governed by the Law of Associations 1980 (the Amutot Law);
  • public benefit companies (PBCs), governed by the Companies Law 1999 (the Companies Law);
  • public benefit foundations (PBFs), governed by the Companies Law; and
  • public endowments, governed by the Trusts Law 1979 (the Trusts Law).

Amuta

The most common type of Israeli NPO is an Amuta. In recent years, there has been an effort to advance a more sophisticated governance structure for MPOs. Therefore, amendments have been made to the Companies Law creating PBFs and amending the provisions applying to PBCs.

The Amutot Law provides that an Amuta has the legal rights and benefits of an incorporated legal entity.

An Amuta is formed upon registration. When seeking registration, a prospective Amuta may submit tailor-made articles of association. Alternatively, by default, the model articles appended to the Amutot Law will serve as the Amuta's articles of association.

To register an Amuta the following conditions need to be satisfied:

  • The Amuta must have two or more members, whether individuals or corporate entities (membership is non-transferable).
  • The purposes of the Amuta must be legal. Nearly all purposes will be deemed legal, other than those that undermine the state and its democratic nature or that provide a safe haven for illegal activity. Apart from this, the Amutot Law does not provide further guidance regarding permissible public purposes.
  • The primary purpose of the Amuta must not make profits.
  • The earnings of an Amuta should not be distributed.
  • The name of the Amuta may not be misleading or prejudicial to the public and may not be the same or similar to other registered Amutot or Israeli companies.

An Amuta must have:

  • a general assembly of members;
  • a management committee (which has powers similar to a board of directors); and
  • an audit committee or an audit body.

In addition, where the overall income of the Amuta exceeds 1 million new Israeli shekel (approximately £225,000), it is necessary to appoint an external auditor.

An Amuta is required to submit the following reports to the registrar at the relevant times:

  • annual financial statements;
  • an annual director's report;
  • an annual report on the Amuta' five highest wage-earners;
  • reports indicating changes in the membership of the board, audit committee or external auditor (CPA) and their respective addresses;
  • reports indicating changes to the articles of association adopted by the Amuta's general assembly and approved by the registrar; and
  • reports on any legal claims made against the Amuta or any of its board members in their capacity as a board member.

PBC

The second most common form of NPOs, especially in recent years, is a PBC. The PBC is a private company governed by the Companies Law. A PBC's purpose must fall within certain established categories, which include advocating or promoting:

  • environmental matters;
  • health;
  • religion;
  • heritage;
  • memorial;
  • animal welfare;
  • human rights;
  • education;
  • professional training;
  • culture;
  • research;
  • higher education;
  • Aliya (moving to Israel);
  • absorption;
  • settling on the land;
  • sport;
  • charity;
  • communal assistance;
  • social activities;
  • national activities;
  • the rule of law; and
  • public administration.

The companies registrar is responsible for ensuring that the PBC complies with all the conditions of the law (subject to judiciary oversight). The companies registrar shall not register a PBC or change the registration of its articles of association unless the registrar of endowments has approved such registration.

A PBC must have:

  • a general assembly of shareholders;
  • a board of directors;
  • a CEO (however, in the event that no CEO has been appointed, the board of directors will manage the affairs of the PBC);
  • an audit committee; and
  • an external auditor.

The Companies Law does not specify a minimum number of members for a PBC. Accordingly, a PBC may be formed with only one member.

The name of the PBC must not be misleading or contrary to the public order. A PBC must indicate its status by including, at the end of its name, "Public Benefit Company" or PBC (written in Hebrew). In addition, it must include the "Non-Distribution Constraint" in its constitutive documents.

A PBC is required to appoint an audit committee, whose members must not include any of the company's officers. The duties and responsibilities of the PBC's audit committee members must be identical to those of a director in the company. The audit committee's responsibilities include:

  • examining whether the acts of the company and of its institutions are in order and whether the company's acts accord with its purposes;
  • examining whether the company's objectives are achieved efficiently and economically;
  • following up on the implementation of decisions by the general meeting and the board of directors;
  • proposing to the board of directors different means of correcting shortcomings in the manner in which the company is managed;
  • checking the company's monetary affairs, its account books and its wage payments, including the allocation of the company's money to the advancement of its purposes;
  • examining any other matter connected to the company's activities; and
  • bringing the audit committee's conclusions before the board of directors and the general meeting.

A PBC must appoint an internal auditor if its turnover exceeds 10 million new Israeli shekel (approximately £2,250,900).

Once the company is registered and has received its certificate of incorporation, it becomes an independent legal entity. A PBC is required to submit the following reports to the registrar at the relevant times:

  • annual financial statements;
  • an annual director's report;
  • an annual report on its five highest wage-earners;
  • changes to the membership of the CPA;
  • changes to the articles of association adopted by the organisation's general assembly; and
  • legal claims made against the company or one of its board members in their capacity as a board member.

PBF

On 23 December 2013, the Knesset passed Amendment 23 to the Companies Law, which establishes PBFs. A PBF is essentially a PBC or an Amuta used to finance other PBCs and other NPOs, and recognised as such by the registrar of endowments, subject to the satisfaction of certain legal requirements.

A PBC or an Amuta may apply to be recognised as a PBF, provided that it complies with all terms and conditions set forth in the Companies Law. The intention of the amendment is to regulate and facilitate the inspection of PBFs to make sure that the funds donated by the donors are used for the designated purpose.

There are three types of PBFs:

  • family foundations – a family foundation is designed to create a framework for the activities of one or several families, which are the source of its funding. Therefore, it can be controlled by the individual, and, as a rule, its funding sources are limited to 20 donors throughout the life of the foundation. The minimum financial capital of a family foundation is 5 million new Israeli shekel (approximately £1,126,000);
  • privately managed foundations – a privately managed foundation is intended to allow large donors to contribute to a fund they know and the management of which they trust. The assumption is that these donors can test and monitor the fund. In such a fund there could be a controlling shareholder (which may be a corporation) and the number of donors can reach up to 20 donors per year, with the minimum donation being greater than 20,000 new Israeli shekel (approximately £4000). The minimum financial capital of a family managed foundation is 5 million new Israeli shekel; and
  • publicly managed foundations – a publicly managed foundation does not have a controlling shareholder and the donors are unable to affect the management of the foundation or the actual distribution of the foundation's money. The foundation may raise funds from the public without restrictions on the number of donors or the amount of the contributions. As such, increased duties apply to it regarding regulations and transparency. The minimum financial capital of a publicly managed foundation is 5 million new Israeli shekel.

Several mechanisms are designated to regulate the activity of the PBFs and ensure transparency, including the following:

  • The PBF must note its status as a PBF and the type of PBF that it is.
  • The PBF is obligated to appoint an auditor.
  • The board of directors must include at least two independent directors who are unrelated to the controlling shareholders and major donors (except in a family foundation, which does not require any independent directors).
  • The board of directors of a PBF must, from time to time, establish the criteria for the distribution of the PBF's funds by providing grants, loans or through other means. The board of directors must appoint a distribution committee in which at least two of the independent directors decide upon the manner of the distribution of the PBF's funds in accordance with the criteria established by the board of directors (other than a family foundation).
  • The PBF must appoint an audit committee comprised of at least three members, the majority of which are "independent" (this does not apply to a family foundation).

The PBF must file annual reports on the distribution criteria (in addition to regular reporting of the Amuta or PBC, as applicable). Such annual reports must be made public (this does not apply to a family foundation).

A PBF's surplus funds must be in accordance with the solid rules and methods in the third addition of the Companies Law, in which there are detailed rules regarding the composition of the investment committee, work policies and the methods of investment. A family foundation is excluded from this, provided that it invests its funds in a prudent manner.

The minister of justice may determine the PBF's maximum management expenses on an annual basis. The proposed law included provisions on the maximum amount, but the minister has already formally approved these provisions. The proposed law provided that the management expenses must not exceed the greater of 2% of the value of the PBF's assets in the prior fiscal year or of the fund's liquid equity at the time it was recognised as a PBF. To encourage the foundation to monitor the use of funds by the funded entities, the proposed law provides that if the fund had engaged in inspections of the funded entities, it would be able to spend up to 5% of the greater of the two parameters set forth above as management expenses (including such supervision).

A PBF must distribute a certain percentage of grants each year, which will not be less than the highest of the following:

  • 5% of the value of the PBF's assets at the end of the prior fiscal year;
  • The value of management and supervision expenses of the PBF in the previous fiscal year (if there was no supervision, twice the management expenses for the prior year); and
  • 400,000 new Israeli shekel (approximately £90,000) for a privately managed foundation or a family foundation, and 200,000 new Israeli shekel (approximately £45,000)for a publicly managed foundation.

To encourage PBFs to support NPOs, it is proposed not to limit the methods of support and financing assistance that PBFs can provide to these organisations. Thus, in addition to the distribution of the grants, the PBFs may issue loans under beneficial terms and provide guarantees and other forms of assistance to NPOs.

Public endowments

The Trusts Law governs the formation of public endowments. A public endowment is a type of trust in which the assets are set aside to benefit a specific public community or to accomplish a particular public aim. Public endowments and are not independent legal entities.

To establish a public endowment, three steps must be taken:

  • The endowment must be created through a deed of endowment. This document sets forth the creator's public interest aims and intention to create an endowment.
  • A trustee must be appointed, and the control of the assets is transferred from the creator to the trustee.
  • The endowment must be registered.

After the trustee is appointed, they must notify the registrar of endowments within three months of appointment and provide details of the endowment, its assets, the creator and the trustee.

For further information on this topic please contact Anat Shavit at Fischer Behar Chen Well Orion & Co by telephone (+972 3 694 4111) or email ([email protected]). The Fischer Behar Chen Well Orion & Co website can be accessed at www.fbclawyers.com.