Linklaters report labels global regulations as pro bono thorn

Linklaters report labels global regulations as pro bono thorn” />Linklaters has published a report on the ways in which global pro bono initiatives are hampered by legal and regulatory systems.

The research, presented at the World Economic Forum 2006, held in Davos, Switzerland last month, identifies obstacles facing social entrepreneurs and is the result of a project completed with the Schwab Foundation for Social Entrepreneurship.

The firm claims the report aims to pinpoint “the legal, regulatory and taxation obstacles that are hindering social entrepreneurship” in six jurisdictions: Brazil, Germany, India, Poland, the UK and the US.

Linklaters senior partner Anthony Cann says the report is the culmination of a year-long project involving more than 50 Linklaters lawyers worldwide. “We hope it will stimulate interest in how governments and companies around the world can engage in this area to promote development and effect change,” he says.

The report states: “One of the challenges to governments wishing to encourage social enterprise is that the legal, regulatory and taxation environment can operate as a restraint on its development. For example, an organisation established for ‘social’ profit can make a financial or accounting profit which may give rise to tax liability, unless a specific exemption (for example, charitable status) applies.”

It is reported that in most countries there is no ‘in between’ legal entity – ie an entity falling somewhere between a fully commercial organisation and a registered charity. Social entrepreneurs can, therefore, be faced with a difficult choice as to the most effective legal vehicle through which to carry out activities.

Another observation of the report is that a wide range of regulations, often designed to protect employees and consumers against unscrupulous businesses, constrain the establishment or development of “imaginative and worthwhile social enterprises”.

The research noted in the US that the Internal Revenue Code allowed not-for-profit organisations to be exempt from taxes on any revenue generated by the business activities related to a not-for-profit public purpose. But the report noted that the distinction between unrelated and related business income was “fairly tricky”.

Within the UK funding, was noted to be the key issue. The report called on all taxes on capital gains to be waived for social enterprises and for a capital gains tax concession to be offered to equity investors in social enterprises. It noted that the new Community Investment Tax Relief rules went “some way to encouraging loan finance, but entrepreneurs understandably often prefer equity financing”.