Economic activities of religious organisations
As the majority of religious organisations are legal entities, they tend to enter into relations with other entities: they conclude contracts, make payments, open production, pay taxes, submit reports. This publication will elaborate on the specifics of religious organisations in civil relations, their production and economic activities, which in the most general form are enshrined in Article 17 “On Freedom of Religion and Religious Organisations in the Kyrgyz Republic” (hereinafter - the Law on Freedom of Religion).
- 1. The right of religious organisations to establish business entities
- 2. Participation in civil relations
- 3. Taxation of profits of a religious organisation
- 4. Financing the activities of religious organisations
- 5. Financial and accounting records of religious organisations
- 6. Control over the activities of religious organisations
1. The right of religious organisations to establish business entities
The main purpose of religious organisations is to unite citizens for the joint practice of faith and to meet the spiritual needs of citizens. As a non-profit organisation with special legal capacity (Article 84 of the Civil Code), all activities of a religious organisation must be subordinated to its main goal. Even profit-making is a means for a religious organisation to pursue its statutory goal.
Article 17 of the Law on Freedom of Religion grants religious organisations the right to engage in economic, including production, activities in order to achieve their statutory goals. Therefore, the statutes / charters of religious organisations must clearly state the purpose of their activities.
This is confirmed by the general rule established by Article 87 (4) of the Civil Code for all non-profit organisations:
“The constituent documents of non-profit organisations […] must define the subject matter and objectives of the activity of a legal entity”.
This provision is further developed in Article 85 (3) of the Civil Code:
“Non-profit organisations may engage in entrepreneurial activities only insofar as it is necessary for their statutory purposes”.
The profit received from such activities cannot be distributed among the participants of a religious organisation (Article 85 (1) of the Civil Code).
A religious organisation that plans to engage in entrepreneurial activity must clearly specify it in its Charter as a source of financial resources and other assets of the organisation (Article 9 (2) of the Law on Freedom of Religion).
If a religious organisation carries out activities that contradict its Charter, the state body in charge of religious affairs may issue a written warning to such a religious organisation (Article 27 (1) of the Law on Freedom of Religion). If the violations have not been eliminated within 3 months or have occurred repeatedly within a year, the organisation may be liquidated by a court decision (Article 27 (2) of the Law on Freedom of Religion).
For the implementation of other purposes - production, educational, charitable activity - a religious organisation shall have the right to establish an independent legal entity. This is indicated by Article 17 (1) of the Law on Freedom of Religion, which provides for the right of religious organisations, as full-fledged subjects of legal relations, to carry out production and economic activities, establish business entities, charitable institutions, and the media.
A religious organisation, being a non-profit organisation, when establishing a new legal entity, will face restrictions on the establishment of those legal entities where participants can only be entrepreneurs (for example, general partnerships, limited partnerships), citizens (for example, public associations) or the State (for example, state and municipal enterprises). For most other organisations, there are no restrictions.
State registration of legal entities established by a religious organisation will be carried out in accordance with the Regulations approved by the Resolution of the Cabinet of Ministers of the Kyrgyz Republic of March 31, 2023 No. 178.
To sum up: religious organisations must enshrine the goals of their activities in their Charters. In order to achieve its statutory goals, a religious organisation shall have the right to engage in economic activities, make payments to the budget, state extra-budgetary funds from such activities, make settlements under concluded civil contracts, hire employees, and bear responsibility, including for compensation for harm caused by their actions.
Most often, for these purposes, religious organisations open bakeries, carpentry workshops, shops for the sale of religious paraphernalia, since such activities are fully consistent with the statutory goals. If a religious organisation systematically receives profit from the specified economic activities, the latter shall be used for the purpose of the establishment of a religious organisation.
In the event that a religious organisation intends to engage in other activities (beyond those enshrined in the Charter), it must establish a separate legal entity.
All of the above applies only to those religious organisations that are registered as legal entities. If a religious organisation has been registered only with the state body in charge of religious affairs, it shall not have legal personality in economic relations. All economic transactions in its interests will be carried out by its head as an individual or the main (central) religious organisation.
2. Participation in civil relations
Participation of religious organisations in civil relations by and large is subject to general rules: they carry out transactions, make settlements, bear responsibility, act as a claimant or defendant in court.
Some restrictions may be related to the non-commercial status of religious organisations. For example, certain contracts, due to their nature, may only be concluded by commercial organisations professionally engaged in entrepreneurial activities in a particular area (for example, a professional loan (Article 724 of the Civil Code), a complex entrepreneurial licence (franchising) (Article 866 of the Civil Code).
On the other hand, the non-commercial status of religious organisations in some cases provides preferences in the form of a derogation from the general legal regime. For example, the provision of state or municipally owned land plots for the use to religious organisations for the construction of religious facilities, contrary to general rules, is in practice performed without a tender and without charging a fee for use pursuant to Articles 32 and 34 of the Land Code.
Religious organisations have a special procedure for concluding labour contracts with their employees (Chapter 37 of the Labour Code) and special rates (17% from a religious organisation and 10% from an employee) and rules for the payment of insurance premiums on the salaries of employees (Articles 4 and 13 of the Law of the Kyrgyz Republic “On rates of insurance premiums for state social insurance).
3. Taxation of profits of a religious organisation
Religious organisations are subject to taxation.
While income from the provision of religious rites, rituals, ceremonies, services for organising and conducting pilgrimages are non-taxable income of religious organisations and are not subject to income tax (subparagraph 6 of paragraph 1 of Article 213 of the Tax Code), VAT (Article 296 of the Tax Code), sales tax (subparagraph 8 of paragraph 1 of Article 364 of the Tax Code), profits from production activities and other incomes of religious organisations shall be taxed in accordance with the general procedure established by the legislation of the Kyrgyz Republic.
Therefore, a religious organisation is exempt from paying income tax on funds received from worship activities, production and sale of religious items (for example, profits from the sale of candles), however, it must pay these taxes on entrepreneurial activities (for example, from the sale of bread in its bakery).
An important aspect: voluntary donations are non-taxable income of religious organisations only in relation to income tax (subparagraph 6 of paragraph 1 of Article 213 of the Tax Code). There are no such exceptions for other types of taxes.
Religious organisations shall provide information on their activities to the tax authorities. The tax authorities shall exercise control over the compliance of the activities of a religious organisation with the statutory goals and the legislation of the Kyrgyz Republic. For this purpose, the tax authorities have a wide range of powers. Thus, they have the right to request information, administrative and financial documents from religious organisations; send their representatives to participate in events held by a religious organisation; check the compliance of the activities of a religious organisation with the goals provided for by its charter; issue written warnings (Article 26 (2) of the Law on Freedom of Religion).
4. Financing the activities of religious organisations
The sources of funding for a religious organisation can be very diverse: voluntary financial and other donations (Article 15 (3) of the Law), income from securities, from own production, interest on bank deposits, etc.
As mentioned above, the Law on Freedom of Religion requires that the Charter of a religious organisation and the mission (representative office) of a foreign religious organisation must include information on the sources of financial resources and other property of the organisation (Articles 9 and 11 of the Law on Freedom of Religion). At the same time, this law establishes certain restrictions on the financing of religious organisations, including:
- the principle of secularism of the Kyrgyz Republic shall prohibit state financing of the activities of religious organisations (Article 5 (5) of the Law);
- religious educational institutions established by a religious organisation shall be financed from the own funds of such a religious organisation, using their own premises for this purpose (Article 6 (3) of the Law).
Article 17 (4) of the Law on Freedom of Religion establishes that incoming financial resources, donations, humanitarian aid and other property must be accounted for in the accounting documents of a religious organisation.
5. Financial and accounting records of religious organisations
The Law on Freedom of Religion does not contain any peculiarities of the financial and accounting records of religious organisations. It is carried out in accordance with the legislation of the Kyrgyz Republic.
The main regulatory act that establishes the legal and methodological basis for the organisation and maintenance of accounting in the Kyrgyz Republic, defines the procedure for state regulation of accounting and financial reporting, the rights and obligations of persons involved in the organisation, maintenance of accounting, compilation and submission of financial statements is the Law of the Kyrgyz Republic “On Accounting” of April 29, 2002 No. 76. The Law is of a general nature and applies, inter alia, to non-profit organisations (Article 1-1 of the Law).
Accounting, as defined by Article 1 of this Law, is a system for collecting, measuring by means of recording data, processing and reporting information on assets, liabilities, equity, income and expenses of a legal entity, through financial reports on a particular entity for the purpose of making informed decisions.
At the same time, the size and structure of the income of a religious organisation, as well as information on the size and composition of the property of a religious organisation, its expenses, the number and composition of employees, their remuneration, the use of unpaid labour of citizens in the activities of a religious organisation cannot be the subject of a commercial secret (Article 26 (3) of the Law on Freedom of Religion).
The head of the entity, who, in accordance with the constituent documents, has the right to act on behalf of the entity, shall be responsible for the organisation of accounting in the entity, compliance with the law when performing business operations. (Article 7 of the Law on Accounting). He/she shall ensure the system of internal accounting, reporting and control, the procedure for controlling business operations, the preparation of a financial report for external users, the preparation of tax reports and other financial documents and the timely settlement of accounts.
At the same time, accounting can be entrusted to the accounting service (accountant) of an organisation or specialised organisations on the principle of outsourcing.
Documents serving as the basis for receiving and handing out money, inventories and other valuables, credit and settlement obligations of the organisation, as well as financial reports shall be signed by the head of the organisation or persons designated by him/her.
In case of disagreement between the head of a religious organisation and the person in charge of accounting on the implementation of certain business operations, documents thereon can be accepted for processing with a written permission of the head, who shall bear full responsibility for the consequences of the implementation of such operations.
The reporting year for financial statements is the period from January 1 to December 31 of the calendar year inclusive (Article 13 of the Law on Accounting).
Primary accounting documents, accounting and financial reporting registers shall be kept in the organisation, for which the head of the organisation shall be responsible.
6. Control over the activities of religious organisations
Article 17 (6) of the Law on Freedom of Religion establishes that control over the financial and economic activities of religious organisations shall be carried out in accordance with the legislation of the Kyrgyz Republic. A religious organisation, like other non-profit organisations, shall be registered with the tax authorities, statistics authorities, and social fund authorities. In this case, it does not matter whether or not the organisation is a payer of taxes, fees and contributions.
Control over the activities of a religious organisation, in accordance with Article 26 of the Law on Freedom of Religion, can be carried out on the basis of:
- accounting and statistical reporting data;
- a request by the supervisory authorities of documents and information from a religious organisation;
- participation in events held by a religious organisation;
- inspections of activities, expenditure of funds and use of property by a religious organisation.
Control over the activity of a religious organisation is carried out by statistical bodies, the prosecutor's office, and tax authorities. At the same time, the authorised body in charge of religious affairs is the central body that carries out work on the development and implementation of state policy in the sphere of religion and coordinates the activities of state bodies in the field of religions. Based on this, the authorised body in charge of religious affairs monitors and inspects religious organisations, religious facilities (mosques, churches, temples, prayer houses, etc.), missions of foreign religious organisations and foreign citizens, religious educational institutions for compliance with the legislation of the Kyrgyz Republic. In addition, the said agency analyses the activities of religious organisations on the basis of their annual reports. According to the order of the State Commission for Religious Affairs, religious organisations shall provide information that specifies the amount of funds received by the religious organisation (including from abroad), and the purposes they were spent for. When a religious organisation receives humanitarian aid, the description of such aid, volume and time of receipt, where and to whom the received humanitarian aid was transferred shall be indicated.
In case of violations committed by a religious organisation, the following measures can be taken against it:
- suspension of activities;
- compulsory liquidation.
The grounds for issuing a warning shall be violations of the legislation of the Kyrgyz Republic identified during the control or the commission by a religious organisation of actions that contradict the statutory goals. A warning may be issued by the prosecutor's office, the state body in charge of religious affairs and its territorial bodies, tax authorities. The written warning shall specify the substance of the committed violation and the period for its elimination, which shall not be less than one month. A warning may be appealed by the religious organisation to a superior authority or court.
If a religious organisation systematically fails to provide the necessary information, this shall serve as grounds for the prosecutor's office, the state body in charge of religious affairs or its territorial body to apply to the court with a request for the liquidation of this religious organisation. Failure to eliminate non-statutory activities within three months or a repeated violation within a year may also serve as grounds for compulsory liquidation.
At the same time, the state body in charge of religious affairs shall have the right to make a decision on suspension of the activities of a religious organisation until a court decision is made (Article 27 of the Law on Freedom of Religion). During this period, a religious organisation may not carry out any religious or any other activities, except for making payments to the budget, state non-budgetary funds and other obligatory payments, settlements under previously concluded civil and labour contracts, compensation for damage caused by the actions of a religious organisation (Article 28 of the Law on Freedom of Religion).