Legal Framework

Different Legal Status of Nonprofit Organizations in Japan

The term “NPO” entered the Japanese vocabulary around the time of the enactment of Law to Promote Specified Nonprofit Activities in 1998, which is now known as the “NPO law.” The corporate entities created by this law – Specified Nonprofit Corporations – are generally referred to as “NPO corporations.” Needless to say, “NPO” is made up of the initials of the English words Non-Profit Organization, or Not-for-Profit Organization.

Narrow and Broad Definitions of NPO

Because of these origins, the word “NPO” is equated with “NPO corporations” for many Japanese people, but this is only the narrowest understanding. A broader definition of “NPO” refers to civil society organizations and to different kinds of private, voluntary activities which take many corporate forms. On the one hand, it includes unincorporated citizen organizations that lack corporate status and often carry out activities at the grassroots level, as well as neighborhood and village associations, which have long existed in rural areas. On the other hand, it also includes Public Interest Corporations (Public Interest Foundations and Public Interest Associations), which usually have a longer history and a larger regional scope than NPO Corporations, as well as Social Welfare Corporations, Private School Corporations, Medical Corporations, and Religious Corporations.

All these corporate categories may be classified as 501(c)(3) corporations, the most widely known type of nonprofit corporation in the United States. Moreover, if the definition of a private nonprofit is expanded from public interest to mutual interest organizations, then nonprofit organizations that work for a common interest, such as consumers’ cooperative societies and labor unions, can also be counted as a type of “NPO.” These layers of NPOs make up the civic sector in Japan.

NPO Corporations and Certified NPO Corporations

An NPO Corporation (or Specified Nonprofit Corporation) is under the jurisdiction of either the prefecture where its main office is located, or a city designated by government decree. Once an organization has completed the necessary procedures and turned in the necessary documents to the jurisdiction office, the jurisdiction office “authenticates” that organization as an NPO Corporation as long as it fulfills the requirements. As of the end of March 2015, the number of NPO Corporations was just under 50,000.

NPO corporations that have cleared the standard conditions and received approval from the director of the National Tax Administration Agency become Certified Specified Nonprofit Corporations. Donors who donate to Certified Specified Nonprofit Corporations are able to receive income tax deductions under the tax system. It is hoped that an increase in Certified Specified Nonprofit Corporations will lead to an increase in donations to NPOs, but Certified Specified Nonprofit Organizations make up less than 2% of all NPOs (as of March 2015).

Background of NPO Corporations

Before the establishment of the NPO Law, when an organization in Japan gained corporate status with no intention to distribute profit, it usually became a Public Interest Corporation, such as a Public Interest Association or Public Interest Foundation, as prescribed by Article 34 of the Civil Code of 1896. In order to become a Public Interest Corporation, however, the group had to allow its activities to be regulated through a top-down system of government supervision, as well as adhere to strict establishment conditions, and this was unsuitable for many citizen organizations. For this reason, many groups remained as private, unincorporated organizations. When a formal corporate entity was needed, these organizations often became joint stock companies and limited liability companies, despite the fact that profit was not their goal. For these reasons, from the 1980s, citizen groups began to advocate the need for a nonprofit corporation system that would clarify the lack of profit motivation and allow a greater degree of freedom by reducing government oversight.

Public Interest Corporations

Public Interest Corporations (Public Interest Associations and Public Interest Foundations) are organizations that carry out government-sanctioned public interest projects and receive approval to establish themselves based on the regulations of the Civil Code (Article 34), which was enacted in 1896. In 2008, Public Interest Corporation reforms took place. Today, in accordance with Reform Law 3, there are public interest approval councils (which correspond to British charity commissions) that make public interest approval judgments based on whether an organization fulfills criteria, such as having public interest projects as its primary goal. Afterwards, the organizations that have received public interest approval from their administrative office (Cabinet Office or prefectural government) become Public Interest Associations or Public Interest Foundations. These Public Interest Corporations are able to receive preferential treatment under the tax system.

General Corporations

When the Public Interest Corporation reforms took place in 2008, a new set of corporate forms called General Corporations was established. As long as the criteria of corporate law are fulfilled, it is possible to establish a General Association or General Foundation through registration alone, making it easy to obtain corporate status. After the Great East Japan Earthquake of 2011, many groups working on relief activities opted to become General Associations due to the ease of incorporation, rather than NPO corporations, which still require several “authentication” hurdles in order to incorporate.

There is now an equivalence between NPO Corporations obtaining Certified NPO Corporation status and General Corporations obtaining Public Interest Corporation status, the privilege of the latter being that their donors can enjoy tax deductions. This can be depicted as follows.

Two-Stage System of Obtaining Donor Tax Deductions

Social Welfare Corporations

Social Welfare Corporations carry out social welfare programs and are founded in accordance with the Social Welfare Law of 1951. They include organizations which manage social welfare facilities and daycare centers for disabled and elderly people. This category also includes social welfare councils that are organized by prefecture or municipality with the goals of popularizing and promoting community-based social services and supporting and promoting volunteer activities, as well as charity collections that raise funds for the purpose of promoting and teaching about welfare activities. There are about 19,500 Social Welfare Organizations in Japan (as of 2014).

Medical Corporations

Medical Corporations are corporations founded in 1950 through the Medical Law of 1948. The establishment of the corporation needs prefectural (governor) approval and for its judgement getting opinions from prefectural Council on Medical Service Facilities is needed. There are about 48,000 Medical Corporations (as of 2012); about 60% of hospitals, about 30% of clinics, and 13% of dental clinics in Japan are Medical Corporations.

Private School Corporations

Private School Corporations are corporations founded through the Private School Law of 1949 for the purpose of setting up private schools. There are approximately 5,500 of these corporations (as of 2014). They are classified in the same category as Public Interest Corporations under the tax law, and are under the jurisdiction of the Ministry of Education.

Religious Corporations

Religious Corporations are religious organizations based on the Religious Corporation Law of 1951, and the main purpose of these organizations is “spreading religious doctrine, conducting ceremonial events, and working toward the enlightenment and cultivation of believers.” Their corporate approval process is under the jurisdiction of the Ministry of Education, but once they have been approved, Religious Corporations have no government oversight. These corporations number over 180,000 (as of 2014), and they are the most numerous type of nonprofit corporation.